"Tea has the potential to be a 'hero crop'"

Sensemaking / "Tea has the potential to be a 'hero crop'"

Ann-Marie Brouder explores ways to strengthen the market for tea

By Ann-Marie Brouder / 06 Feb 2015

 The tea sector has seen more price volatility in the last few years than for some time, and the growing impact of climate change means we are likely to see even more volatility ahead. Tea is one of the few commodities not traded on the futures market, where growers can secure a guaranteed price ahead of harvests and limit their exposure to price volatility. [1] Instead, it is largely traded in auctions, where producers – the people who grow it – are effectively the price-takers of the market. Within this system, small growers are the most vulnerable in the marketplace.

Moreover, these growers come from some of the poorest regions in the world, and are heavily reliant on tea for their livelihoods.

Players across the chain recognise that the whole industry will benefit if growers gain more control over their product and a greater share of its value. This will give them the opportunity and motive to develop their agronomy and business skills, improve productivity and professionalism, and ultimately make the sector more resilient and able to cope with changes that lie ahead.

As part of Tea 2030, Forum for the Future is leading a collaborative platform to explore a range of market mechanisms that the tea sector can adopt to manage price volatility and improve the distribution of value across the sector. [2] Forum is engaging with traders, buyers (both brands and retailers) and importantly the tea growers themselves, to understand the various perspectives on whether, for example, a futures market for tea is desirable or needed, and if so, in what form.

The team will assess a range of market mechanisms, and aims to make recommendations to the tea industry in spring 2015. The market mechanisms being examined fall into two broad categories: direct management of contracts to protect against volatility, on the one hand, and improved access to investment finance on the other.

The first option includes the possibility of setting up a new futures market for tea, or adjusting existing practices. For instance, direct forward contracts between buyers and producers could be reformed, setting guidelines for payment terms and floor prices, and building in the flexibility for short-, medium- or long-term contracts. [3] Another option is to introduce insurance schemes at a micro level, which transfer price risk to private insurance companies.

The second option would aim to attract value into the sector by directing finance towards specific sustainability problems in the tea industry, especially on the production end. Examples include improving the use of carbon markets and impact investment to access funding for sustainability initiatives in tea.

At the heart of these proposed market mechanisms is the call for players across the tea industry to collaboratively address sustainability risks within the tea supply chain. The work of the market mechanisms group is just one of three that Tea 2030 is working on currently. [4] Tea has the potential to be a 'hero crop' – something which delivers not only a cuppa but also benefits the millions of people involved in the sector, helping to sustain their economies and ecosystems.

Ann-Marie Brouder, Principal Sustainability Advisor at Forum for the Future, was in conversation with Jie Hui Kia

Image credit: JD Hancock

Sources

[1] A futures market is a central financial exchange where parties can enter into standardised futures contracts to buy specific quantities of a commodity at a specified price with delivery set at a specified time in the future.

[2] Tea 2030 is a multi-stakeholder project exploring the challenges facing the tea sector's future. Find out more at http://forumforthefuture.org/tea2030

[3] Forward contracts are similar to futures contracts, except that they are not traded on a public exchange, so prices are not transparent. The terms of the deal can be customised to fit the needs of the buyer and the seller

[4] The others are sustainable landscapes and engaging consumers


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