Tea industry’s competitiveness in cost and quality need strengthening

Dr. N. YOGARATNAM - Consultant/NIPM

PLANTATION MANAGEMENT: The history of the progress of plantation management efforts in the tea sector in Sri Lanka can be classified into three broad phases over more than a century.

The early phase under the colonial initiatives lasted till the nationalization of estates in 1975, the second phase under the native control, the “post-nationalization phase” was until 1992 and the third phase the “post-privatization phase” is now more than about 15 years with active participation of private sector in the management of State owned tea plantations.

The approach during the colonial past had been for effective price stabilisation strategies for a given Cost of Production (cop). The “post-nationalisation” period had its typical public sector care-free style of management filled with politically acceptable and beurocratic agendas.

Despite differences among the plantation management companies, a common feature since the beginning of the post-privatisation phase has been efforts to capitalize on available opportunities for minimizing unit cost of production and exploring potential outlets for increasing the net income per unit area.

The economic liberalisation of the 1990s, also provided opportunities for changing pattern of production in that the traditional estate model began gradually giving way to smallholdings, a trend that has already become a characteristic feature of the Sri Lankan plantation economy.

Global production

The global tea production is now dominated by four countries, China 970 Mnkg, India 966 Mnkg, Sri Lanka 310.8 Mnkg and Kenya 310.6 Mnkg with Indonesia closely following with a production of 139.8 Mnkg in 2006.

These countries together account for about 75-80% of world tea production. Sri Lanka is ranked as the 3rd leading global producer marginally ahead of Kenya in 2006

Domestic tea

Tea production in the country peaked in 1965 when it hit 228 million kg, a record at that time, which remained intact until 1990 when a crop of 233 million kg was harvested. Since then, production has been rising almost annually to reach the highest level of 317 million kg in 2005.

Despite, the total production if 310.8 million kg recorded in 2006 is a 3-year low, the forecasted increase of 2% with total production expected to reach 322 million kg level, is likely to retain Sri Lanka firmly in the 3rd position in global production in year 2007, although production in January 2007 is down by about 14.4 percent.

The increased demand for the low grown produce, coupled with larger extent and higher productivity, despite frequent droughts, has stimulated higher growth in the low-country region over the last several years.

The low grown’s share of the national production rose from 2.8% in 1970 to 56% in 2001 and to 60% in 2006. The share of mid-grown was 16% and that of high-grown 24% in 2006

Much of the growth boost in low-grown tea production is attributed to the rise of the tea smallholders who are concentrated in the low-country.

It is estimated that the smallholders occupy about 65 to 70% of the tea extent in the country and their contribution to overall production has also now risen to around 65 to 70%.

The estate sector has seen a gradual erosion in its share of production from about 85% in the early 1980s to about 30 to 35% as of now.

Tea crop productivity in Sri Lanka is a different story altogether. It lacks professionalism in approach and continues to be stagnant and below-par in performance, notably in the corporate sector. It is amongst the lowest in global scenario.

The national average of 1415 kg/ha in 1998 was about 65% of that of Kenya, which at 2284 kg/ha was about the highest in the world, at that time.

The current national average is also not significantly different and is around 1520 kg/ha with low country productivity averaging around 1850 kg/ha. South Indian tea productivity is currently in the region of 2,240 kg/ha.

Smallholdings lead

The story of the disparity in yields between the corporate sector and smallholder sector has now been well documented.

Yield among the small holdings now average about 2,450 kg/ha and that of the corporate sector plantation is in the region of 1275 kg/ha which is about 65% of that of the former category. It is heartening to note that smallholder crop productivity is comparable with South Indian and Kenyan levels.

Low productivity of the ageing tea bushes in corporate sector plantations may be one of the major contributory factor besides inconsistent use of crop productivity improvement inputs notably fertilizers.

Tea is known to be very responsive to added fertilizers. Estate sector plantations in smallholder dominated area are known to record yields much lower than the latter category, the differences being in the region of 700 to 750 kg/ha. Obviously, such differences cannot be solely attributed to agro-climate variations.

Replanting

As the economic lifespan of the low yielding seedling tea is known to be around 100 years, it had been the tendency for the corporate sector to delay their replanting programmes.

The rate of replanting is believed to have been less than 1%, despite growing awareness in the past of the differences in yield potential between vegetatively propagated (VP) tea and seedling tea, which is in the region of 100 to 150 percent.

The estate sector had not been very enthusiastic to replant. Nevertheless, during the post-privatization period some efforts have been made to rectify this anomaly. A replanting rate of 2% is expected to provide the desired results.

Smallholdings are known to have a very high proportion of VP tea, which account for the yield differences between the two-sectors. This sector supported by the state and International development agencies have been able to incorporate a very high proportion of VP tea besides other latest agro-technologies and inputs.

Skilled worker deficit/productivity

Skilled worker out-migration in plantations, another challenge to the corporate sector, as highlighted in some of the previous articles. This is continuing to cause serious crisis in terms of productivity improvement.

Harvesting technology, a skilled operation, is known to play a key role in determining production, productivity and quality standards. In order to mitigate the situation, the corporate sector has been attempting to introduce partial mechanization of some field operations and other labour saving and incentive measures.

The entire plantation systems needs re-vamping to eliminate this deep-rooted perennial problem. The labour situation in the plantation has gone from one of surplus to deficit with an annual decline at the rate of 10-20% of the workforce.

Labour accounts for more than 60 percent of the production cost in tea. Worker productivity is therefore a major component of plantation production efficiency. It is known to be linked to three factors in tea plantation scenario; wages, incentives and social-economic considerations.

The extent to which the additional cost of such factors can be neutralized through corresponding gains in productivity will constitute and important element in labour management.

A combination of better skills, improved knowledge ( that is the underlying reasons behind the various skilled operations), positive attitudes ( eg : the urge for achievement motivation) and enablers will go a long way to upgrade an average worker into a top performer.

Cost of production/ profitability

The profitability of Sri Lanka tea industry like any other plantation industry, rests heavily on the movement of global market and production costs.

With cost of production in Sri Lanka being very much higher than its competitors and international tea prices being increasingly competitive with the emergence of low-cost global producers like Kenya, India, Vietnam etc. domestic producers and the corporate sector in particular with un controllable overheads may find it difficult to make ends meet.

Sri Lanka’s COP has been recording steady increases and is now around U$ 1.75 per kg, which is well above that of Bangladesh with U$ 1.35, India with U$ 1.25 Kenya around U$ 1.00 and Vietnam, the lowest around U$ 0.75 per kg.

Three possible ways available for the producer to enhance profitability are, to fetch attractive prices for their produce, increase their productivity level and to reduce the COP.

The potential for corporate sector to rise even above the levels of the smallholdings in terms of crop and worker productivity is substantial.

Additionally, consistency in the quality of tea for which this sector has the technologies and resources, would fetch higher prices.

There are several avenues open to improve profit margins even in the face of increasing costs, through wage hikes being granted in response to workforce agitations, which is unavoidable. Costs of imported materials are also bound to rise.

Although tea prices increased significantly in January / March 2007 due to global shortage of volume in the region of 15 Mnkg and in the domestic scenario, the aftermath of the plantation strike, drought effects and depreciation of SLR, But the market is expected to stabilize by mid-April with more volume available for sale in Sri Lanka. Kenyan tea has already recorded increased output.

In the final analysis, one way to shield against global “boon and bust” cycles and enhance bottom lines is to increase value-addition. One only has to look at the price differentials as the value addition scales move-up.

The corporate sector has been steadily progressing into value-addition, yet much remains to be done, besides improvements in the marketing system for which the smallholdings lack the expertise, capital and other related resources.

Out-grower systems

Given the current scenario, the sustainability of the conventional plantation structure as a large scale corporate enterprise will be increasingly questioned.

An examination of this scenario has a political as well as economic and social dimensions. Field technology being neutral to size, the preferred strategy is for a shift to small holdings/out grower cultivation/ownership systems.

The emergence of bought leaf and co-operative tea factories have displaced the rationale for proximity to the central processing facility. The introduction of out-grower systems within plantations as is being attempted in some plantations seems to be a promising system worth expanding.

The general belief empirically demonstrated, is that both land and labour productivity is higher in such systems of management/ownership. Growing proliferation of smallholdings has now become a common feature in global plantation scenario.

Opportunities and challenges

The globalisation process has offered unlimited opportunities as well as challenges for the tea producing countries.

Technically, although it may be difficult to generalize either the opportunities or challenges for the simple reason that each country is at different stages of development of their tea industry, yet, the opportunities and challenges of the producing countries can be grouped together under a common slogan “ competitiveness in cost and quality” for survival.

If we fail, the tea industry will get back into the wilderness and will move into the fourth phase of its management cycle.