The tea industry in Sri Lanka has a history of over 150 years. Commercial tea cultivation began in 1867, when James Taylor (a British planter) established the first tea plantation at Loolecondera Estate in Kandy. Since then, Sri Lankan tea (formerly known as Ceylon tea) has become world renowned for its exceptional quality and flavour. The tea industry has long been a pillar of the national economy, contributing significantly to foreign exchange earnings and providing employment to thousands.In 2023, tea exports accounted for 51percent of total agricultural exports, generating USD 1,309.9 million, a 4.1percent increase from 2022. Despite this revenue growth,the industry faces significant challenges, including declining production volumes, rising production costs, market competition, and climate-related risks, all threatening its long-term sustainability.
Production decline remains a pressing concern. The total tea production (including Orthodox tea, CTC, and green tea) in 2024 was only 262 million metric tonnes.The National People’s Power (NPP) government has set an ambitious target to increase tea production to 400 million metric tons in its policy statement. Many plantation companies still rely on outdated farming techniques with minimal mechanisation, leading to inefficiencies and lower yields. A key barrier to modernisation is the unresolved status of land ownership. Plantation companies only hold a leasehold right to the land for 53 years, granted by the government in 1992, with no decision yet on the continuity of this leasehold. This uncertainty discourages companies from investing in replanting and factory mechanisation.
The rising cost of production further exacerbates the situation. The total cost of producing one kilogram of tea has increased from Rs 483.79 in 2019 to Rs. 885 in 2023. Rising labour costs and frequent disputes over wages have impacted the productivity of this sector. The 2025 Budget Speech proposed raising the daily wage of plantation workers to Rs. 1,700, further increasing labour costs. Additionally, the increasingcosts of fertilisers and agrochemicals have placed morefinancial strain on this industry.
Globally, Sri Lanka faces intense competition from countries such as Kenya, India, and Vietnam, offering lower-priced teas with higher yields. While Sri Lanka’s tea commands a premium price for its unique quality, its reliance on high prices rather than increased export volumesposes risks.Furthermore, economic fluctuations in key export markets, particularly in the Middle East and Russia, have also affected the country’s tea export income.
Another major concern is Sri Lanka’s continued reliance on bulk tea exports instead of value-added tea products. Exporting in bulk limits the potential for premium branding and specialty teas, which could generate higher prices. Despite these challenges, the tea industry remains a crucial part of the national economy. Without strategic reforms such as improved mechanisation, better climate adaptation strategies, and stronger market positioning, the long-term sustainability of this industry remains uncertain.
Background of the study
Tea is one of the most popular beverages worldwide, exceeding milk, coffee, and orange juice consumption. Despite its importance, tea has not evolved into a commodity in financial markets, and no futures contract on tea exists. A futures market plays a vital role in establishing fair prices, creating a liquid secondary market, and providing a risk management tool for price fluctuations. Our research examines the feasibility of introducing a tea futures contract and whether the Sri Lankan tea market is prepared for financialisation.
The factors determining the success of a futures contract can be categorised into three categories: characteristics of the commodity, characteristics of the cash market and the design of a futures market.Wediscuss these factorswith supporting evidence from the Sri Lankan tea industry.
Key Findings
The study evaluates the Colombo Tea Auction’s (CTA) price efficiency using serial correlation and runs teststo determine whether past prices can predict future prices. The results indicate that the cash market is weak-form efficient, meaning historical prices do not predict future prices.Hence, introducing a futures contract is a positive indicator as it supports efficient price discovery.
Price volatilityis crucial in determining the need for a futures contract. Tea prices are highly volatile, comparable to or even higher than other agricultural commodities with existing futures markets. Additionally, the adverse impact of climate change is expected to amplify price instability by affecting tea yields.
Our study also examines the size of Sri Lanka’stea market. Even though domestic production has decreased, Sri Lanka remains one of the world’s leading tea exporters. The continuously growing global demand for black tea strengthens the argument thatthe Sri Lankan tea market is large enough to support financialisation and the introduction of a tea futures contract.
When conducting this study, the CTA operated manually, conducting nearly 50 auctions per year, involving numerous manufacturers, exporters, and brokers. The presence of many active participants reinforces the argument that the tea market has the necessary liquidity to sustain futures trading.We recommended automating the CTA to improve efficiency. Under the pressure fromthe COVID-19 pandemic in 2020, the CTA was successfully automated. This marks a breakthrough in tea auctionthat could further accelerate the industry’s digitisation process.
However, product homogeneity presents a major challenge. Futures contracts require standardised commodities, but tea grading varies significantly, with quality influenced by regional and climatic differences. The lack of a universally accepted grading standard for Orthodox black tea is a significant obstacle to introducing a futures contract.
Our study suggests possible solutions such as implementing a pricing system with discounts or premiums based on different grades or developing a tea price index that does not rely on physical delivery. Without such standardisation, ensuring uniformity in futures trading would be difficult.
Market structure is another key factor examined in the study. A successful futures contract requires a cash market that is not highly integrated and concentrated. However, the Sri Lankan tea market is highly vertically integrated, with the CTA serving as the primary pricing mechanism for bulk tea. The high buyer concentration in the auction means thata few major buyers significantly influence tea prices,limiting the competitiveness in price discovery.
Key Takeaways
Introducing a successful futures contract for tea is viable but challenging under the current market structure. While Sri Lanka’s tea market has the necessary size, activity, and price volatility to support a futures contract, several structural barriers remain. The lack of a universally accepted grading system, high market integration, and buyer concentration pose significant transparency issues in price discovery. Addressing these structural issues is essential to pave the way for the financialisation process of the tea market.
Moving forward, coordinated efforts from government and industry stakeholders are required to ensure the tea sector continues to thrive in an increasingly competitive global market.
The NPP government has pledged to support the tea sector through promoting mechanisation, expanding replanting programs, and investing in value-added products. Additionally, land utilisation reforms and the promotion of cooperative models have been proposedto support small and medium-sized tea growers. Efforts are also being made to strengthen the global presence of the “Ceylon Tea” brand in global markets.
Finally, resolving legal uncertainties surrounding land ownership and raising awareness about futures contracts and their benefits among market participants remain key priorities for policymakers to elevate the tea industry to the next stage of development.
This article is based on the published source of Perera, D., Białkowski, J., & Bohl, M. T. (2020). Does the tea market require a futures contract? Evidence from the Sri Lankan tea market. Research in International Business and Finance, 54, 101290.
Authors:
Dr Devmali Perera, Department of Accounting and Finance, The Open University, United Kingdom.
Professor Jedrzej Bialkowski, Department of Economics and Finance, University of Canterbury, New Zealand.
Professor Martin Bohl, Department of Economics, Westfälische Wilhelms-University Münster, Germany.
