Tea industry calls for higher productivity and market development
Tea industry stakeholders say the industry needs to urgently improve
productivity and generate new markets, as volatility in major Middle
Eastern markets continue to dampen tea export earnings.
While there is strong demand for tea in global markets, price
increases for Ceylon Tea, to compensate for increased cost of
production, is seen as unlikely, as uncertainty in Middle Eastern
countries, that account for a majority of Ceylon Tea exports, continues
to cloud industry earning prospects for the year.
Tea brokers and exporters say that while there is strong demand for
tea in the world, about 55 percent of Sri Lankan tea is going into the
Middle East. Out of this, Iran is the biggest buyer of Ceylon Tea,
followed by Syria. Both countries are under sanctions and sanctions on
Iran are expected to intensify in July.
Libya, another strong Middle Eastern tea market, has still not
recovered from recent political changes. Come July, exporters and
brokers anticipate higher costs and longer payment delays in
exporting to Iran, when US sanctions on Iran intensifies. Meanwhile,
January and February tea prices have averaged about Rs 40 below that of
January - February 2011.
Tea exporters say focus on quality Exporters say the current lower
tea prices for Ceylon Tea, compared to the trend of rising prices from
about 2006 - 2011, is a market correction, and current prices are more
realistic. "The price increases in 2006/7 and 2009/10, was due to supply
reduction of tea in Sri Lanka. So what is happening now, is a price
correction. Which means we cannot expect significantly higher prices for
our tea anytime soon, unless there is a supply shortage in international
markets for some reason," said Chairman of the Tea Exporters Association
of Sri Lanka and the Vice Chairman of the Colombo Tea Traders
Association Niraj de Mel.
To override current market difficulties, exporters suggest improving
quality of Ceylon Tea and industry productivity ."The price we can get
for our tea will depend on the quality of our tea. Unfortunately the
quality of our tea has declined over the years, for a number of reasons.
So the tea producers and tea factories need to look at improving
quality. We also need to ensure higher industry productivity," said de
Mel.
Another option the industry could look is the possibility of
de-regulating the tea market in Sri Lanka, allowing plantation
companies, as well as private tea factory owners, to forward integrate
with exporting companies, ideally those successfully on to brand
marketing, bypassing the auction and entering into long term contracts
with international retailers and supermarkets, said De Mel.
No producer will want to contract at a loss and at the same time be
at the mercy of supply-demand conditions, said de Mel.
Exporters also note that China and India are large emerging markets
that should be tapped as a future market for Ceylon Tea.
Improve productivity
Tea brokers maintain that even at lower prices and with existing
market instability, Sri Lankan tea continues to fetch higher prices than
tea from other countries."Ceylon Tea still gets about 30 - 40 US dollar
cents more than other country teas. So we can't say the tea prices we
get are unsatisfactory," said, the Chairman of the Colombo tea Brokers
Association Sudath Munasinghe. Munsainghe said that the tea sector will
need to control cost of production and improve productivity, to sustain
itself, if external market conditions continue to worsen over the coming
months."If we are to survive this difficult period, that may last only
for a short term, we need to cut our costs and improve outputs.
The only way we can do this is by improving our productivity. Perhaps
plantation companies may have to look at increasing outputs by plucking
more," said Munasinghe.
Income support Tea small holders meanwhile, that account for 76
percent of the national tea output, agree that the tea industry needs to
focus on improving quality but say the cost of production does not allow
for investments in better agricultural practices. "Our production costs
have increased after the latest plantation sector wage increase in 2010.
To remain profitable farmers are cutting down on good agricultural
practices like investing in land development and replanting.
This means we can expect our yields to drop in the future," said
Chairman of the Sri Lanka Federation of Tea SmallHolder Development
Societies Neville Ratnayake.
The government has also recognised the need for replanting to improve
quality of tea and has even introduced a subsidy scheme for replanting.
However, tea small holders say that they cannot afford to replant, as
small holders will be left without any source of income for about three
to five years, until the new tea bushes can be harvested.
To solve the problem, tea smallholders suggest introducing
alternative income generation methods for tea small holders, until tea
bushes can be harvested after replanting. Tea Factory owners say excess
factory capacities are affecting quality. Tea factory owners, that
mainly manufacture green leaf of the small holder sector, say that the
manufacturing sector is squeezed by both cost and quality issues.
"Consequent to the recent hike in fuel prices, the cost of
manufacture has escalated by approximately Rs. 4 to Rs. 5 per kilogram
of made tea.
By statute, on an average, 68 percent of the auction price is paid to
the small holders whilst the manufacturers' revenue is restricted to 32
percent.
The increase enumerated above, has to be borne by the manufacturer
which will further erode revenue making it difficult for the tea
manufacturers to stay afloat." said a past Chairman of the Sri Lanka Tea
Factory Owners Association Anil Perera.
The industry is also facing quality problems due to the excessive
number of tea factories. Sri Lanka currently has over 700 tea factories
that process approximately 328 million kilograms of made tea, annually.
In the low growns (where the factory elevation is below 2,000 ft.)
which is dominated by the tea small holders, there are over 400 tea
factories competing for leaf, resulting in unhealthy, high competition,
leading to a negative impact on the quality of tea."Because of the high
competition for green leaf, the tea manufacturers are compelled to
service the smallholders even when the green leaf quality is poor. When
there is poor
quality raw material, the quality of made tea suffers," said Perera.
Perera says that the Regulatory Authority viz., the Sri Lanka Tea Board
should monitor tea factories that consistently sell at the bottom end of
the market, towards assisting such factories to identify their
weaknesses and take corrective measures.
Tea manufacturers are also affected by the price volatility of tea
due to the unsettled conditions in the Middle East, where Sri Lanka
needs to develop a mechanism to unblock tea export payments from major
Middle Eastern markets like Iran, said Perera.
Nationally, the Colombo Auction Average to end February 2012 vs.
2011, has declined by as much as Rs. 45 per kg which has brought about
immense pressure on the tea industry, said Perera.
New markets
The Planters' Association of Ceylon (PA) that represents the formal
plantation industry through 23 Regional Plantation Companies (RPCs),
says productivity improvement is a prerequisite for industry survival.
"Compared to other tea producing countries our labour productivity is
much lower.
We have been discussing productivity improvements with plantation
industry trade unions, but unfortunately, we have not reached a
consensus.
Plantation sector wages increased by as much as 30 percent after the
last collective agreement and as a result, the RPCs, that account for
large work forces, are struggling with unsustainably high production
costs," said Chairman of the PA Lalith Obeyesekere. The recent increase
in fuel prices has also added another Rs 3.50 per kilo, to the cost of
production of Ceylon Tea. Tea prices at the Colombo auction were on
average, Rs 390 per kilo during the first few weeks of January 2011. By
mid February 2011, prices increased to slightly over Rs 400 per kilo.
However, prices have
now dropped to Rs 360 per kilo, on average.
"The average auction price of Rs 360 per kilo is due mainly to low
grown teas fetching about Rs 370- Rs 380, per kilo. Mid and high grown
tea, where RPCs operate, are only fetching about Rs 330- Rs 340, on
average. Whereas our cost of production, is Rs 390 - Rs 400 per kilo of
tea," said Obeyesekere.
Given the rising costs and uncertain environment in the Middle East,
the PA says Sri Lanka needs to urgently develop new markets for Ceylon
tea.
"We need to counter the rising cost of production through higher
productivity and we must also look at how to tap large, growing markets
such as India and China. This will also reduce dependency on Middle
Eastern markets," said Obeyesekere. |