Financial Daily from THE HINDU group of publications
Wednesday, Jan 01, 2003
Agri-Biz & Commodities
Industry & Economy - Tea
Tea futures marks Upasi bid to be supply chain leader Mr N. Dharmaraj, Chairman of Upasi Tea Committee
Rabindra Nath Sinha
Mr N. Dharmaraj
KOLKATA, Dec. 31
THE United Planters' Association of Southern India (Upasi) is getting ready to launch the country's first tea futures exchange, for which it has been granted a licence by the Forward Markets Commission (FMC).
The feasibility of tea futures was studied at the behest of the Tea Board about two years ago by Dr A.Damodaran, Professor of Economics, Trade and Environment at the Indian Institute of Plantation Management (IIPM), Bangalore. According to informed quarters, Dr Damodaran, who submitted his report to the Tea Board in February 2000, generally showed green signal for tea futures, but prescribed caution and advised application of the tool to only select grades. Certain questions were posed by Business Line to Mr N. Dharmaraj, Chairman of Upasi Tea Committee, for his response, who is also Vice-President (Plantations) in Harrisons Malayalam Ltd. Excerpts :
What prompted Upasi to decide to launch tea futures? Did it carry out a study before formalising the decision?
As a credible and well-run organisation of producers, Upasi has been supporting multiple facets of the tea industry, ranging from production, industrial relations, information and data collection and dissemination and scientific and economic research. As part of Upasi's own re-positioning in the market economy era, we felt it would be necessary and advantageous for us to get involved in the front end of the supply chain. Besides, we felt that Upasi's investment in tea futures would facilitate a more scientific and true price discovery, which is the crying need for this commodity.
Tea is a complex commodity, which is known for its variability of origin, agro-climate seasonality and production practices. Upasi is equipped with sound product knowledge of tea. We had thoroughly analysed and discussed the feasibility study on Tea Futures done by Dr A. Damodaran of IIPM, Bangalore, for the Tea Board.
Is the tea trade and industry in South India enthusiastic about the move? What is the level of participation you expect initially?
Although initially trade and industry was skeptical, there is now widespread enthusiasm in the ability of tea futures to facilitate true price discovery, ensure price stability and act as a price hedging mechanism. Upasi is adopting a multi- stakeholder approach in building up the institution of Futures and by a structured process of education and dialogue, we expect satisfactory levels of participation.
What precautions are being taken up by Upasi to ensure success of tea futures?
We are ensuring that sufficient training is given to all stakeholders so that they are fully conversant with the mechanism of operating tea futures. In fact, a professional body has been entrusted with this job. We will shortly appoint an interim project-in-charge, whose job will also include `marketing' of the tea futures exchange to the various constituents of the industry. Upasi is also planning a two-day training workshop in Kochi in January, where the exchange will be formally launched.
How much support you are expecting from FMC? Will tea futures be subjected to FMC's standard regulations?
FMC has given us the licence to launch tea futures. It has thus reposed faith in us. We will certainly be guided by the Forward Market Commission (Regulation) Act. We will abide by the instructions there under.
How many common grades of tea will the exchange deal with? What happens to grades that are distinctive of certain estates?
We are planning to have a contract each on CTC red dust, CTC pekoe dust and orthodox broken orange pekoe. The quality standardisation will be based on fair average quality plus or minus. This benchmark will be established through analyses of physical and bio-chemical parameters of tea. Upasi's own Tea Research Institute (TRI), which has under it nationally accredited laboratories, will assist in this. In other words, a more scientific and objective analysis will support the existing organoleptic evaluation. TRI is in the processes of acquiring an `Electronic Tongue', an instrument used for sensory evaluation. Based on the success of these contracts, tenderable alternate grades could be traded irrespective of place of origin. In the long run, we hope to standardise grades based on the four universal blend components, namely, brokens, leaf, fannings and dust.
Will the futures in any way weaken the auction system? What are the risks?
As a matter of fact, the presence of a strong spot market such as the auctions, with their attendant infrastructure, will be a boon to tea futures. The spot market should gain by the price discovery and hedging mechanism possible in Futures. In other words, there will be a lot of synergy between the two. Commodity Futures in India have suffered on account of marginalisation of producers and an imbalance in trading rules. If these are taken care of and by soliciting support of speculators from outside the industry, the risk of failure could be minimised.
Do you see any benefit accruing to small growers from the new tool?
Small growers will benefit as much as large growers since, in any case, their produce is sold through large Cooperatives or through bought leaf factories.
What about infrastructure?
Upasi wants to locate the tea futures back office in Kochi with terminals and hubs in Coimbatore, Coonoor and Mumbai. It will be an online trading system. We are now in the process of screening software / hardware providers.
What about funding? What will be the initial investment and how that will be mobilised?
We propose to raise funds from multiple sources, including from our members. A precise estimate of the outlay will be available once the business plan is finalised. The exercise is on.
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