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 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.
“The ability for farmers to be able to hedge out their pricing risk will be a big win,” Terrence Adembesa, head of derivatives at the bourse, said in an interview. “Another plus is the ability to provide a platform for investors who want exposure to a certain asset class that they currently don’t have.”
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.
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.
“We have handed the report to them and it is up to them to decide what to do with it,” he said. Kenya has “great potential” to roll out the product because of the quality and quantity of the tea produced in the country, Ponder said.
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 a tea futures, Adembesa said. The process of drawing up product specifications and getting approval from the CMA could take “as much as one year.”
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.