Kenya mulls introducing world’s first tea futures contracts

Bloomberg

Kenya, the world’s biggest exporter of black tea, is considering introducing the world’s first futures contracts for the leaves to help stabilize prices and enable growers to guarantee income from their production.
INTL FCStone Inc., based in New York, has held talks with industry representatives in the East African nation about introducing the derivatives, Stuart Ponder, senior vice president for emerging markets, said in an interview June 13 in the capital, Nairobi. The company has prepared a report for clients in Kenya on the securities’ potential, he said. The Nairobi Securities Exchange is already planning to start trading equity-index and currency futures in the second half of the year and supports the proposal.
Tea is the world’s most widely consumed beverage, after water, according to the Food and Agriculture Organization. Kenya ranks as the world’s third-largest producer of the leaves, behind India and China, and hosts the biggest auction of the crop, in the port city of Mombasa. While there are futures contracts for commodities such as coffee and orange juice, there aren’t for tea because of the difficulty in standardizing the plant given differences in types and quality over seasons and harvests, the FAO says.

Price Swings
Volatility in prices coupled with increasing production costs have made the sector increasingly unattractive, subjecting farmers to diminishing returns, according to the Kenya Tea Development Agency. The average auction price of tea sold in Mombasa has fallen 22 percent this year to $2.25 per kilogram (2.2 pounds), after surging 34 percent last year, according to Tea Brokers of East Africa Ltd., a Mombasa-based trader.
INTL FCStone, which offers advisory services on commodities, was hired by a client in Kenya that Ponder declined to identify to conduct a study on the feasibility of tea derivatives, he said.

Foreign Exchange
Kenya generated $1.2 billion from tea exports last year, the second-biggest source of foreign-currency earnings after remittances by citizens living abroad. The crop is mainly grown by 560,000 small-scale farmers who supplied 399,000 metric tons of tea last year, according to the statistics office. There are seven main production regions, including Mt. Kenya and the Aberdare mountain ranges, according to the Kenya Tea Development Agency.
The Nairobi exchange would need to get approval from the Capital Markets Authority to start trading tea futures, Adembesa said.
The Dubai Gold and Commodity Exchange last year held talks with growers in India about the possibility of introducing
futures, the Economic Times reported on Sept. 16. The FAO
proposes either offering a limited number of contracts on
specific baskets of grades, which are sufficiently distinct from each other, or having an index-based futures contract where
the index could be the average auction price for a defined
category of tea.