Why there is no tea futures market
Tea plantation in Vietnam. Photo by Vanessa Facenda
Tea might be the world’s most popular drink, but it does not have its own futures market. Why is that?
Tea is one of the most important products on the planet. The average person will consume 0.9kg of tea in 2021 and it is the most consumed beverage on the planet after water. The tea market was worth more than USD $55 billion in 2019 and is predicted to grow to $68 billion by 2027. Despite this, there is no tea futures market. Why is this?
What is a commodity?
Before diving into tea itself let’s take a step back. From the perspective of financial markets, the definition of a commodity is a basic good used in commerce that is interchangeable with other goods of the same type. They are classified as “hard” commodities, such as gold and oil, and “soft” commodities, such as coffee and grains.
These commodities are normally sold on the futures market. This is where futures are sold — contracts between a buyer and seller for a set price for a product at some point in the future. Successful buyers can use futures to acquire products at a lower price or take advantage of margins to make money on the contract directly.
So, is tea a commodity? In terms of tea, it is a little complicated. There are two broad categories of tea: commodity tea and specialty tea:
- Commodity tea: represents the vast majority of tea sold in the US markets. It is designed to maintain a consistent taste and low cost even when produced in bulk. Unlike most commodities, tea isn’t a raw product. Instead, tea markets standardise specific blends and taste profiles and ship these blends to companies for processing into many products — most notably tea bags.
- Specialty tea: designed to produce a unique flavour and aroma profile. These kinds of tea take advantage of the unique features of different climate and soil conditions in order to create varieties of tea. Specialty teas normally have very different flavour profiles from each other and commodity tea.
As commodities need to be interchangeable, specialty tea is not a commodity. However mass-produced blends will typically be consistent enough to be considered interchangeable. This means that, as the name implies, specific blends of commodity tea can be considered commodities.
If tea is a commodity why aren’t there tea futures?
There are no international tea futures at the moment. In contrast to other commodities, particularly coffee, tea production is very predictable. The tea plant is resistant to variations in weather conditions so tea plantations can be confident in predicting their output. This means that there are unlikely to be major supply-side pressures on tea production.
However, there can be spikes in demand-side pressure. For example, in early 2019 the price of first flush Darjeeling tea saw a spike in demand that caused prices to increase by 43%. However, these events are rare and tea is typically predictable.
Another problem is that futures contracts are standardised. This makes them unsuitable for the tea market, which often has a significant variation between the availability of particular crops. To create viable futures contracts, there would need to be a specific contract per blend. This could lead to low-liquidity markets that would not be attractive to speculators.
However, there are informal futures markets in India for commodity tea. These take the form of forward contracts. A forward contract is a non-standard agreement where a buyer agrees to purchase a set amount of product at a certain point in the future. Forward contracts work well for tea as they can be tailored to each supplier or blend, without needing to be standardised to fit a vast array of products.
A futures market doesn’t make sense for tea
Generally, futures contracts aren’t a good fit for the tea market as there isn’t enough variation in prices. It is also a non-standard product compared to most other commodities, even other soft commodities.
Additionally, the vast array of commodity tea blends would lead to a fractured market that would lack the necessary liquidity to maintain a proper futures market. For the foreseeable future, it is likely that tea trading will remain the preserve of producers and growers, not traders.
- Saul Bowden has worked with a variety of startups, from crypto companies to emerging AR & VR technology companies. He has leveraged his experience to help these companies attract investors and carve out market niches.