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Sri Lanka Tea Industry 2016 and beyond

Many experts and so called Gurus from the tea industry, directly or indirectly involved time to time come up with common tune of productivity increase. They maintain, the main criterion factor, for sustainability, for the sustainability of tea industry as productivity increases. The regional plantation companies have arrived at the door step of calling it a day. They are experimenting with various out grower models as a last resort for their ills. Their annual contributions for the tea exports have come down to 26% of the total volume exported. If not for the active small holders, the tea industry would have succumbed to it’s death by now, to a non significant  tea producer to the world. Due to drastic weather conditions annual export target has come short of 3m kilos compared to 2011 volumes of exports. The cost of production in Regional Plantation Companies is reaching Rs. 330 per kg or above while national average auction price is below Rs.391 per kg, where the high grown and mid grown prices are below Rs.360 per kg.    

In the value addition market Ceylon tea has not achieved at least 50% of the export market where it should be strategically over 75%.  Sometime back certain consultants said nothing can be done as the international markets are controlled by bigger players such as Unilevers. Therefore we have to grind our teeth and go in search of productivity drives to reduce cost of production. As it is the tea industry is a highly labor intensive industry. The main productivity increases can only be achieved by the reduction of the utilization of man power. 33% of the field cost is in the operation of plucking. This can only be eliminated by automated sheering or use of robotics. In the manufacturing we have to look at the opportunities of automation of machinery with no human handling, and energy management, which may reduce up to 30 – 40 percent in the cost of production. We have to investigate these two areas deeply which might have minute effect on the quality, specialy when manufacturing orthodox tea. The Japanese tea industry has achieved this without compromising on quality. Kenya has adopted mechanical plucking to reduce field production cost. They can afford this as they are in the CTC market. We have to look deeply at our competitors if we are to survive.
The current status quo of the tea industry is that Sri Lanka is responsible for 8% of the world tea production, and claims for 17% of the global tea exports. This industry also provides livelihood for nearly 10% of the Sri Lankan population, mainly supporting rural economy. Still we have not achieved the re-plantation levels or 2% a year as targeted. Government incentives such as increased replanting subsidy, have not given the required results because of the escalating replanting cost. It seems RPC s is looking at short term returns due to high cost of funds.
Tea vs fertilizer
Our tea bushes are now acclimatized for high dosage of fertilizer  compared to our neighbor India. Probably because they have opted  for hybrid seedlings instead of vegitatively propagated cuttings which has a deep root system capable of sustaining severe drought and a root system which is, widely spread to a deeper level  enabling them to absorb nutrients opposed to shallow root system in V.P tea. Our natural crop levels are averaging to less than 600kilos per acre while Indian National crop level is above 1000 kilos per acre. Our inputs are very high in spite of subsidized fertilizer by the government. For this hand out by the state someone has to pay, i.e the public at large in Sri Lanka. It really tantamounts to having to import fertilizer at high cost utilizing public funds and sell our tea at a cost less than the production cost, for the foreign tea drinkers to have second cheapest beverage, water being the first. The Tea Research Institute coming up with new mixtures of fertilizer has not been so beneficial in increasing the crop.  In short, exporters and buyers in the tea drinking nations are getting Sri Lankan public funds for their well being and sustenance.
Cost of energy and transport
Due to dependence on thermal energy for electricity generation at a level more than 70% of our energy cost, we have not been cost effective in utilizing energy. The actual generating cost is subsidized, by public funds  making the tea drinkers in foreign lands getting more advantage at our cost.  The same scenario prevails for fuel needed for collecting and transporting green leaf, heavy fuel for the industry, and transportation of finished tea to warehouses of exporters. The experts are only critical of labor wages of the workers whose toil and sweat is exploited. The next wage increase agreement negotiations are to commence on March 2013, the outcome of which is anybody’s guess.
Per capita income target
 Sri Lanka proudly announced that we are enjoying US$ 2000 per capita presently which means the average income per person should be in the range of Rs.21,500 while maximum wage an estate worker receives monthly,  is less than Rs. 15,000. This means 30 percent less than the present per capita.. The real scenario is when and if Sri Lanka achieves US$ 4000 per capita by 2016, maintaining the same rupee to dollar exchange rate, and 30% lower the per capita, the labor wage of an estate laborer should be Rs.29400 per month. The question is, can the present average auction price of Rs. 391 per kilo (US$3.09) will suffice for the industry to be in business in 2016.  Will the industry survive and if it does what would be the auction price that one kilo of tea should fetch.
The experts and gurus are clamoring for a productivity drive. No doubt this must happen. However the productivity alone would not reduce the COP to match the affluence of US$ 4000 per capita, or else we have to call it a day and say “the tea industry is not for Sri Lanka but for poor countries like African states. This has happened in South Africa, only due to sociological pressure in certain communities in South Africa, which is maintaining the tea industry with the aid of its central government. Though the auction prices are at a level of Rs.391 per kilo, the FOB price leaving Sri Lanka, is Rs.563 per kilo. i.e  Rs 170 per kilo more than auction price. It is presumed to be the cream taken by the brokers, blenders and packers, amounting to 30% of the FOB price.
Have we got the act right?
The real thrust needed is in the value addition, and in international marketing. Recently The Sri Lanka Tea Board called for tenders, for promoting ‘out of the box’ tea promoting campaign. All four tenders were rejected as they were not innovative enough promoting our tea in foreign lands. The promotion cost estimated at US$ 10m per year by deducting Rs. 3.50 per kilo for every export of one kilo of tea for 5 years. The question is who will be the main benefactor, will it be the local or the foreign buyers, or the poor produces at this end. This type of money is not small by any international standards. With this type of money the government of Sri Lanka can bury, 1 or 2  established foreign brands but we leave this to the gurus and the so called experts and watch. Recently Elpitiya Plantation - a holding company of Aitken Spence Ltd has signed a joint venture company with China’s up market black tea Company (Yunnan Dianhang group).  This joint venture expects to manufacture and market black tea to the Chinese upmarket. These are welcoming new vistas- ‘Join them if you cannot beat them’ and exploit this huge market. The Watawala Plantation with the controlling interest of Sunshine holdings of which  the majority holding is by Tata Tea Exports have taken over the Tetleys brand - U.K. Tata has increased their margins and unfortunately these margins are only helping the Indian economy and not the Sri Lankan Tea industry. The traditional markets are shrinking, with high competition. The GDP growth rates in the developed world are at a very low level (as low as 2%).
Certain experts opines that we are not fully in the tea business, then we have to ask where we have been for the past century manufacturing tea. We have even produced tea to suit the Royalties of the western world. Where we have failed is to remove our colonial hat and have the good old auction system which can be exploited by the foreign tea buyers with the co-operation of the local brokers, blenders and packers. In a vigorously changing world, we have to take the option of taking tea out of the commodity market. For this perception the policy makers and the stake holders together have to come up with a new road map. We have to empty our brains from old ideology so that new brain waves could enter. If we have the will and courage we can do it. We must have the mindset accordingly. A 30 year old war was eradicated in 3 years when all the experts through out the world said we cannot do so.  But we did it. That is what is needed.
(Source: The Nation)

Yunnan Dianhang group