A study of tangible trade such as the spice sector gives indicators on how to avoid future economic crises. Parivartan Sharma / Reuters
A study of tangible trade such as the spice sector gives indicators on how to avoid future economic crises. Parivartan Sharma / Reuters

A leaf out of the tea farmers' book can help to avoid a crisis



The important tangibility of commodities first dawned on me a few years ago on a trip to Kerala with my wife.

We had ventured to the tea plantations of Munnar and were stunned by the green beauty of the terraced farms. Women and children of all ages, but curiously few men, worked the fields tirelessly picking the delicate leaves by hand before they were processed and packed for the world to make into its morning cuppa.

One evening we left the plantation for a local hotel, a grand and faded relic of the British colonial era. We had drinks in the billiard room and played a few frames of snooker with the elderly steward who was immaculately turned out in white jacket and black tie.

He was a formidable shot and had an almost paternal relationship with the ancient yet pristeen green baize, so much so that he visibly winced each time I drew back my cue.

Onto this EM Forster scene a young and trendy Indian couple burst. They were clearly celebrating, dressed in clothes that would look more at home on a Bollywood red carpet than in a dusty old billiard room in the farmland mountains of Munnar.

They were spice farmers and were out celebrating. They had reaped a bumper harvest of pepper and cardamom that had been priced at a record high.

They excitedly recounted tales of hedging and arbitraging, but not in stocks and bonds as I had been used to dealing with. No, they were talking about cloves and pepper corns of different grades.

Cardamoms were priced in terms of their fragrance, the value of chilis differed depending on whether they were dried, fresh or milled.

They seemed to me the Keralan equivalent of Wall Street traders given the sophistication of the financial products they dealt with.

But there was a philosophical difference between these successful young farmers and their western trader counterparts.

They were intrinsically linked to the products they dealt in. They had physically touched the earth in which the peppercorns grew. They had inhaled the cardamoms' intoxicating aroma, they had run a thumbnail along the vanilla pods to check the yield before harvest.

Whether or not they were dealing in futures contracts to hedge against price fluctuations months down the line or selling seeds by the tonne, they knew what they were dealing with.

Traders on purely financial markets cannot have, to coin a Wall Street phrase, so much skin in the game. They are largely divorced from what they are trading in. They deal in numbers on a screen, like playing a highly paid video game.

Take house prices. A house is a very tangible thing made of bricks and mortar. It is obvious when a price bubble is inflating. But to wring as much out of the dangerously overvalued market as possible financial traders in the early part of the century created derivatives to disguise the quality of the market. And five years later we are still cleaning up the mess.

That is not to say bubbles do not occur in commodities markets - everyone has heard of the Dutch tulip bubble of 1637. But that crisis was caused by overzealous futures traders who had never seen a tulip bulb in their life, much the same as the Colateralised Debt Obligation dealers had never laid hands on a brick.

The UAE is an important global commodities trading hub. The Dubai Multi Commodities Centre at Jumeirah Lakes Towers has built a thriving business model around the trade in tangible products like tea, sugar, gold, diamonds, pearls and pulses.

The commodities free zone has become the world's number one tea exporting hub, some 20 per cent of all physical gold traded in the world passes through the emirate. Al Khaleej Sugar in Dubai runs the world's biggest sugar refinery.

A solid focus on this type of tangible trade is surely the only way to climb out of the economic depths. Buying and selling things of real value that are honestly priced.

As financial crises turn into recoveries it is very easy to forget how we lost our economic way. The fact we have been dealing with asset bubbles for more than 370 years is testament to that.

But if we are to take a leaf out of the Kerala farmers' book and stay close to the products we invest in, to really understand them and their value, it is much more likely we will be able to foresee and perhaps avoid the next crisis.

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