Humanity loves a cup of tea. So where’s the futures market?
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
To quote the avuncular, ’roided out Iroh, former Fire Nation General and tea aficionado from Avatar: The Last Airbender, “the key to wisdom and tea is proper ageing.”
So he would be disappointed to learn that, in our world, tea has no future…s market.
Commodity traders champ at the bit for the latest data on sugar harvests in Brazil, or the precipitation figures for rice-paddy laden regions of Vietnam — but can largely ignore similar signs for tea, the second most popular drink on the planet after water.
In a futures market, creditors and investors agree to buy a generic commodity at a future price, and thereby incur either the risk or reward of the commodity, upon delivery, selling below or above the price they agreed to pay.
Futures markets are of course crucial to both the agricultural and finance sectors — they allow farmers to guarantee compensation even if they have a bad growing season, and enable investors to diversify their portfolios with countercyclical assets.
As a result, futures markets exist for almost all food and mineral commodities, including steel, gold, coffee, sugar, orange juice, and wheat. But not tea (or onions or box office tickets, for different reasons).
To understand why, we must delve into the world of tea.
Tea, as we know it in the Western hemisphere, involves all varieties of flowers, weeds, fruit, and leaves stuffed in a paper or plastic bag (mmm… delicious microplastics), steeped into hot water, and sipped, preferably with a messy, crumbly cookie. (Ed: Or a biscuit — this is as good a time as any to acknowledge that we’ve naively allowed an American to write this piece.)
But as a commodity, tea is defined only as the dried leaf of Camellia sinensis, the plant from which both black tea and green tea are derived (as well as other teas like oolong, white, dark, matcha… but we will get to those in a minute). This excludes all herbal teas as well as mate, the popular Argentine drink made from the caffeine-rich leaves of Ilex paraguariensis (lo siento, Argentina).
Camellia sinensis is a wundercrop, able to grow across the world in a variety of seasons, climates, and conditions. Piggybacking on international trade and colonialism, distinct tea cultures and strains of tea now stretch across six continents.
China dominates green tea production, but black tea is a major crop for India, China, and Sri Lanka.
Consumption is similarly widespread, with both black and green tea enjoyed the world over.
Tea’s popularity increased on the back of Covid-19 and the wellness movement — one can now go to any café in the developed world and ask for a matcha, chai latte (or a “chai tea,” to the horror of many Indian readers), or any other esoteric blend you might fancy. Industry experts predict both production and consumption will accelerate in the next 10 years.
But that brings us to the first general reason why there is no futures market for tea: it’s too good of a crop.
Look at tea’s longtime caffeinated nemesis, coffee. It’s seasonal, there are only a few climates where coffee crops can grow, and it can be difficult for farmers to predict annual output given uncertainty over rainfall, temperature, and humidity on a yearly basis.
Tea has no such issue. It grows year round and thrives in multiple altitudes and climates. It’s therefore relatively easy for farmers to predict their annual output, and even if there are circumstances that destroy a farmer’s yield, volatility is shortlived as tea can be reharvested almost immediately.
The second core reason is its variability. Tea is a heterodox product, with a range of “colours” (white, red, dark) and varieties of tea able to be produced using the same basic leaf. But in order for a futures product to be viable, the underlying commodity needs to be uniform and tradeable (for example, consumers do not distinguish between Ukrainian or American wheat). Coffee does this by segmenting similar strains of coffee into two “reference varieties”: robusta and arabica (java does not have its own futures market). It uses the reference varieties as the price basis for the whole market, and premiums on the standard price index can be added on for futures contracts in fancier coffees.
Despite these hurdles, there are good reasons to start a tea futures market and many have advocated for it, including tea farmers who fear the effects of climate change and geopolitics on the tea industry. The UN Food and Agriculture Organization has even held summits and put out reports on the possibility of futures markets in Indian and Chinese tea.
Some 70 per cent of the world’s tea comes from small farmers in what we’ll call the Global South. Additional price certainty through a futures market would help shield these inherently more fragile businesses, especially as climate change threatens to further disrupt tea yields and prices.
Coffee prices have historically moved similarly to tea, although the coffee price surge in 2021 was a reminder of how volatile prices can become. Tea remained stable — but that may not last for ever:
Despite the multitudes the “tea” label contains, a reference variety could be created for the generic black and green tea sold en masse to companies like Lipton and Twinings, which are mixed and put into bags for Western consumers. Premiums like Oolong or more rare black and green varieties could then be classified using a similar premium system to speciality coffees.
Essentially, a “reference variety” is a state of mind. Take this statement from a UN FAO report on the creation of a tea futures market from 2018:
The coffee itself is not standardised: individual quality differences, even as they differ from lot to lot, are clearly recognized and valued. However, coffee sector participants have become used to thinking of their product in relation to a somewhat abstract “standard contract”, rather than existing in isolation. While it will require a change of mind-set, a similar mechanism could be feasible for a tea futures contract.
And some markets have already become somewhat standardised and swappable. In India, most major tea packagers require tea to be crushed into uniform pieces to reduce the volume of tea bags, what is known as CTC tea (crush, tear, curl). CTC teas make up 90 per cent of the Indian tea market and 64 per cent of the global tea market and are mostly interchangeable, as opposed to the more “artisan” brands like darjeeling or white tea which are held up as the reason that a futures market cannot be created.
And even for artisan teas, there already exists a grading system in certain countries, similar to standardised premiums on other commodities. Depending on the size of the leaf and the maturity at which it is harvested, tea in India and Sri Lanka is graded on a scale from “dust” to the premium “orange pekoe” (a fancy name that essentially just means big fancy leaves).
For a tea futures market to emerge, a few things need to happen. Auctions, in which producers and packagers determine the daily prices for tea brought to the market, need to be standardised and transparent, rather than one-off agreements between farmers and producers.
According to economist El Mamoun Amrouk of the UN FAO, there has been some development in this direction. “Some countries have opted for the development of electronic auctions for trading teas.”
Then there would need to be interest and financial contracts made available to farmers, which also appears to be under way. Sparsh Agarwal, owner of Selim Hill Tea Garden in India, is one producer experimenting with novel contracts:
We have started selling our products on futures contracts with our packagers and buyers, and it is the best business we have had. It’s not like a futures market and it’s at a much smaller scale, but I could imagine it becoming more common.
Afterwards, an intermediary would need to set up an exchange, and investors could start buying futures contracts.
But there‘s another barrier. While tea is a globally popular product, it has strikingly domestic dynamics.
Unlike coffee, which has a global supply chain with farmed products from developing countries being roasted and consumed primarily in Europe and North America, tea consumption is apparently best done at home: only 37 per cent of tea is exported, versus 72 per cent for pre-roasted coffee. Instead, the tea of large producers like China, India, and Turkey serves their own large domestic markets. Only Kenya, Sri Lanka, and a few smaller producers export the majority of their tea to OECD countries.
So, while tea is becoming more popular in developed countries, it would need to become even more so for a futures market to emerge.
In Avatar: The Last Airbender [SPOILER], Uncle Iroh eventually chooses to eschew the successful tea shop he runs in a working class neighbourhood to open a fancy tea joint in the more expensive part of the city.
While the class implications of his decision may have perturbed some viewers, perhaps Iroh had a point. To guarantee the future(s) of tea, perhaps it needs to be more popular in the centres of finance.
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