‘‘Jack and Jill went up the hill to fetch a pail of water. Jack fell down and broke his bucket, and Jill had none to offer.” So begins the popular 18th century nursery rhyme. Well, maybe not, but somewhere close. Reason for my intentional twist is to highlight the need for a contingency plan, a hedge and a cover.
Consider this: According to the latest Leading Economic Indicators report, tea prices have fallen 30 percent to Sh214 per kilo in the 13 months ending March 2019, coffee prices have lost some 40 percent in the same period to Sh298 per kilo, equity prices have also lost a fifth of their value (according to the NSE 20 Share Index) to 2,846 points, and so on.
The point is, if all these markets had some kind of a tradable hedging instrument, some of these losses would have been averted. Fair to say, some government progress is being made, nonetheless, delays and market demand have necessitated other players to hop in.
Enter the Tea-Swap Project. This UK Department for International Development and “Forum for the Future” Tea2030-backed initiative seeks to support the East African tea sector via tea swap hedging contracts.
Essentially, these over the counter (OTC) swaps – meaning the swaps are privately negotiated and traded between two parties, without going through a securities exchange – will offer buyers and sellers a way to hedge against tea price volatility.
Effectively, the swaps will have a fixed price (referencing the weekly Mombasa Tea Auction Average Price) and a floating price and will pay out the difference between the two on a weekly basis. Glad to know that already 23 regional tea companies are taking part in a trial. Soon after, the idea is to launch a live market. What a concept! And for these three reasons, here’s why we need to support such an initiative. One, the potential socio-economic impact is huge. According to the Kenya Tea Growers Association, more than 250,000 smallholder farmers work on tea plantations across the country, in turn supporting over 1.5 million family members.
Further, it’s estimated that multinational tea companies employ more than 40 percent of the agricultural sector’s labour force. So to have both small-holding tea factories and the large estates “locking prices,” has the potential of stacking up a whole raft of positives; much-needed wage stability, profitability, poverty alleviation and so on.
Two, tea exporters and packers also stand to benefit from price certainty, which makes it easier for them to offer fixed prices to their clients for longer periods. The good art is that swaps are well suited to tea because of their flexibility. A swap can easily be customised to account for the many different trades, regions and quantities of tea.
Kenya has over 50 varieties of tea coming mostly from the west and east side of the Rift Valley. In addition, being a ‘cash-only’ instrument, the tea swap is much more suitable for the SME tea company which typically does not trade forwards with local banks.
Three, one of our fiercest competitor in the global tea market (Sri-Lanka) is already utilising this new innovation. Why not us? Kenya is Africa’s leading tea producer and fourth in the world behind India, China and Sri Lanka.
Final comment — tea swaps to the rescue.