Tea firms work out hedging mechanism

Tea companies in the Dooars-Assam area have proposed hedging in tea auctions.

The proposal, which is yet to be placed before the Tea Board of India, allows sellers and buyers to set prices in auction centres. If the price falls below that set by the producer, a swap broker will sell the tea and pay the differential to the estate owner. 

If the price is higher than the producer’s listed price, the garden will have to pay the differential to the broker.

According to the Indian Tea Association (ITA), this will help mitigate market volatility and help tea producers as well as swap brokers to make profits. 

On the other hand, buyers can pre-plan their purchase requirements and will know exactly how much they need to pay for a future order.

“In the current auction system, the selling price is often lower than the cost of production. In the export market also, owing to currency volatility, a similar thing might happen. The swap option will eliminate this,” said Azam Monem, chairman of the ITA.

Tea prices rose by one per cent between January and October to $3.01 a kg but fell by 1.6 per cent in rupee terms to Rs 196.35 a kg.  Tea prices in auction centres are now hovering around Rs 134 a kg, which barely makes up for production costs. Around 60-65 per cent of India’s annual 1,200 million kg tea output is routed through auction centres.

Industry executives said some tea companies had experimented with futures trading. However, it was not successful because tea was “too complicated a commodity”. 

Unlike coffee, which has only two grades at the farm gate, tea has three grades and several sub-grades, which make futures trading nearly impossible. Forward contracts also fail owing to the seasonality of the produce. “In tea, futures trading can work for between 3 and 12 months against the norm of 3-5 years,” an estate owner said.

ITA has appointed a consultant to draw up the methodology for the swap option and it will be put to the test in Kolkata, India’s largest auction centre.

The ITA has approached brokers in the Multi Commodity Exchange (MCX) to play the role of swap brokers. 

Big buyers like Tata Global Beverages and Hindustan Unilever are interested in the proposed swap option.

Tea companies have also approached the Tea Board, asking it to share auction data to be used for writing the software program for the swap trade.

The idea for this form of hedging came up in the Mombasa auction centre last April. Tea companies in India, Kenya and Sri Lanka are eager to take the concept forward.

TACKLING VOLATILITY

• Indian Tea Association will help mitigate the volatility in the market and help tea producers as well as swap brokers to make profit
• The association has appointed a consultant to draw up the methodology for the swap option
• The swap option will be put up for test in the Kolkata auctions, India’s largest auction centre
• Tea companies have approached the Tea Board to share auction data, which will be useful in drawing up a software program for the mechanism