MCX starts preparing tea for futures listing

Kolkata: Getting tea to be traded on the derivatives market is not going to be an easy task given its hetero g eneous nature.

Nevertheless, initial attempts to launch futures trading in tea are being made by the Multi Commodity Exchange (MCX) which has initiated talks with all stakeholders in the tea trade ­­ brokers, buyers and producers.The move comes after the government notified that futures trading could be initiated in tea, industry officials said.

A senior official of Calcutta Tea Traders Association (CTTA) said MCX officials have held a round of talks with the trade members.

“The exchange will have to come up with a tea index for benchmarking every lot of tea. The exchange will have to frame the contract spec ifications, trading pa rame ters, de livery and settlement procedures for futures trading in tea,“ the CTTA official said.

The official said that initially a particular grade of CTC and dust varieties of tea can be put up for futures trading.

Tea prices show both random and cyclical variability. Theoretically, futures trading in tea would be a useful hedging instrument for producers to insure themselves against price risk. But the catch is that, there are already informal systems of entering into forward contracts with reputed buyers of bulk tea existing in the Indian market now.So, for futures contracts to perform the role of a hedge, they would have to offer superior cover compared to the existing forward booking contracts.

Tea is heterogeneous as some tea are based on season and some on the region from which it is grown. As a result, it would be impossible to define a quality for delivery or even square off one's position.“Tea may not conform to this criterion and contracts may have to be tailor-made for individual gardens.

“The multiplicity of contracts will confound the market and prevent secondary trading,“ commodity experts said. The alternative would be to have an index-based futures contract where the index could be an auction average price for a defined category of tea. The success of the futures market will depend on selecting the correct index.