Tackling tea travails

Industry calls for higher productivity, new market development to

ride out uncertainties

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% 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 Tea Exporters Association of Sri Lanka and the Vice Chairman of the Colombo Tea Traders Association Chairman 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 at, says de Mel, is the possibility of deregulating 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. No producer will want to contract at a loss and at the same time be at the mercy of supply-demand conditions, says de Mel.

Exporters also note that China and India are large emerging markets that should be tapped as a future market for Ceylon Tea.

Tea brokers says 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 Colombo tea Brokers Association Chairman Sudath Munasinghe.

Munsainghe notes that the tea sector will need to control costs 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.

Tea small holders calling for income support    

Tea small holders meanwhile, that account for 76% 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. So 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 Sri Lanka Federation of Tea Small Holder Development Societies Chairman 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 point out 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 get round the problem, tea small holders 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 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% of the auction price is paid to the small holders whilst the manufacturers’ revenue is restricted to 32%. 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 Sri Lanka Tea Factory Owners Association past Chairman 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 small holders even when the green leaf quality is poor.  When there is poor quality raw material, the quality of made tea suffers,” points out Perera, adding 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, says 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.  

RPCs say look for 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% 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 PA Chairman 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 to Rs. 380, per kilo. Mid and high grown tea where RPCs operate, are only fetching about Rs. 330 to Rs. 340, on average. Whereas our cost of production is Rs. 390 to 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 like India and China. This will also reduce dependency on Middle Eastern markets,” said Obeyesekere.

The PA says the establishment of the Tea Promotion Fund by the Government, to promote pure Ceylon Tea, is a step in the right direction and says the funds should be maximised for such market development.