KOLKATA: Indias tea industry has sought the help of tea swap expert James W Montlake for designing a financial product that would help protect firms against price fluctuations in the commodity on the lines of the hedging mechanism which is gaining popularity in Africa and Sri Lanka, the two major competitors of Indian tea in the world market.
“Tea swap is a type of financial contract that will not be traded on an exchange but will be negotiated and signed bilaterally between the buyer and the seller,” said Sujit Patra, secretary, Indian Tea Association (ITA). “There will be a swap broker who will arrange tea swap deals and always take the other side of the trade, which means that it will be a buyer when its client is a seller and seller when its client is a buyer.” Regulatory approvals from the RBI and Tea Board will be required to put the swap mechanism in place.
Montlake has already developed a tea swap product for Sri Lanka, where the Lanka Tea Swap has come up headed by him. He has experience in the financial services sector, working for major international investment banks and exchange groups on various asset classes, including precious metals, interest rates (LIBOR) and equities. For the past two years, he has been working with the tea industry to develop a tea swap product to help protect firms against price volatility in tea.
In India, Patra said, swap mechanism mock sessions with a select group of producers and auction buyers had entered the eighth week.
A tea swap can enable a producer to maintain a constant cash flow week after week despite price volatility. It also enables the bought leaf factories (which buy teas from small tea growers and process them) to hedge their future sale realisations with green leaf prices. Buyers also benefit as they can lock in prices at the lowest point and buy the physical tea closer to the time of usage, thus saving on inventory and storage costs.
India had produced 1,321million kg of teas in 2017. In the first eight months of 2018, the country produced 780.53 million kg of teas. Generally, about half of the teas produced in the country come to auctions while the rest are sold privately.
While the tea swap mechanism is still being worked out, the industry has approached the Tea Board for allowing ex-estate sales for reducing transaction costs.
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