Sustainability of the tea sector:

Cost of production, a critical issue

The Planters' Association of Ceylon (PAC), which represents 22 Regional Plantation Companies (RPCs) collectively employing nearly 200,000 workers, said that with Employees' Provident Fund (EPF) and Employees' Trust Fund (ETF) obligations, the daily cost borne by a plantation company in employing an estate worker is approximately Rs. 700 (excluding other commitments such as gratuity, holiday pay and attendance bonuses).

In a bid to facilitate open discussion on the critical issue of cost of production (CoP) of tea and affordability of estate sector wages, PAC shares the relevant calculations in a media release.

The daily plucking average of an estate worker in the country is around 18 kg (based on annual figures) which is usually the upper limit when climatic conditions are most conducive. The actual average is often lower; particularly in the case of male pluckers. During the dry season and amidst extremely wet weather, the daily plucking average often drops to 14 kg to 12 kg. The 18 kg of tea leaves plucked converts to 3.8 7kg of made black tea, also referred to as Plucking Labour Output (PLO).

With regard to gender division of plantation sector workers, around 52% are female and nearly all women are engaged in harvesting and plucking, while 48% of the workers are male.

Output

Therefore, only around 55% of workers employed by the Regional Plantation Companies (RPCs) are pluckers as workers are needed for other agricultural activities such as weeding, fertilising, upkeep of plants and other agronomic activities - without which plucking cannot be carried out - and factory work. Thus, the actual output per worker (including pluckers and other agricultural and factory workers employed) is only 2.12 kg of made tea ((3.87/100) x 55). This is referred to as Revenue Labour Output (RLO).

The labour component of the cost of production of tea can, therefore, be arrived at by dividing the Rs. 700 (borne by a plantation company per plucker per working day) by the Revenue Labour output, which amounts to Rs. 330 (Rs. 700/2.12).

However, the labour cost is only approximately 67% - 70% of the cost of production of one kilo of tea as additional expenses are incurred on other inputs including chemicals, material, fertiliser, fuel and on staff providing support services relating to health, welfare and childcare in the estates - which primarily benefit the pluckers themselves. Thus the total cost of production amounts to Rs. 471 (Rs. 330/70)x100).

External factors

At the Colombo Tea Auction however, the monthly auction average for April 2015 was only Rs. 408, thus representing a loss of Rs. 63 per kilogram of tea sold by Regional Plantation Companies.

These calculations indicate that to break even (assuming there is no change in other variables), the daily total cost per plucker incurred by a company at the price which prevailed in April 2015 at the Colombo Tea Auction, should be approximately Rs. 580, despite the figure actually being above Rs. 700. Alternatively, at the present level of output, for companies to breakeven the average at the Colombo Tea Auction should be in the region of Rs. 470.

"Simple calculations, which can be worked out by anyone, clearly show the conundrum faced by the plantation companies at present, following the drastic reduction in the price of Ceylon Tea due to external factors - including the global downturn in commodity prices and volatility in our key export markets," Chairman of the Planters' Association of Ceylon, Roshan Rajadurai said.

"The revenue earned by the plantation companies is far below costs and with estate sector wages too being determined externally by politically-motivated negotiations which take no account of ground realities, the industry's sustainability is at stake," he said.

"It can also be seen that apart from wages, a substantial component of the cost of production relates to benefits and services provided to the estate workers themselves, including the cost of staff employed to provide health and welfare-related services in the estates," Rajadurai said.

An increase in labour productivity (reflected in the daily plucking average of tea) in particular could assist in at least partially offsetting losses faced by plantation companies.

Not taking into account biological revaluation of assets - which only represents accounting/book profits and arise as a result of plantation companies having to comply with International Financial Reporting Standards (IFRS) - 19 Regional Plantation Companies (RPCs) represented by the Planters' Association collectively made a loss of Rs. 2,850 million on tea and rubber in 2014.

"While it is acknowledged that naturally there are expectations, it is critical that all stakeholders including the trade unions and the government work with the plantation companies in the spirit of partnership with the long-term sustainability and survival of the industry in mind, rather than merely adopting a short-term focus, which would be detrimental," the Planters' Association Chairman said.