World Black Tea price volatility, Market Linkages among global tea auction markets

Abstract

The primary determinant of the growth of the global tea economy is demand for the commodity. Tea auction markets refer to market leaders to discover prices and market behaviour. The purpose of the study was to evaluate the degree of integration between the world markets price measured by FAO composite price index and black tea auction markets around the world. The study captures tea price dynamics and evolution of tea prices at the major tea auction markets around the world. The study utilizes monthly tea auction data from 2003 to 2009 to investigate tea price dynamics in order to capture price evolution and volatility .The study found that multivariate cointegration test suggests one common stochastic trend driving all the tea prices, indicating volatility in the prices. Granger causality interestingly shows that most of the tea auction prices have a significant trend and cyclical components. Volatility seems to spill across all tea markets with markets experiencing common shocks, rather than being isolated from each other. The findings of the study indicate that tea agribusiness firms refer to Sri -Lanka prices to make decisions on markets behaviour and are likely to incorporate world price information into planting decisions which will create significant challenges whose implications will lead to oversupply if world consumption of tea does not improve in tandem with increased production. The study uses the current novel methods of testing price cointegration on commodity markets