Business Guest Column

Tea industry survives due to low grown teas

Jayampathy Molligoda

The plantation in- dustry in all its aspects is undoubtedly one of the most important for Sri Lankan economy since independence.

For more than half a century it has been one of the biggest providers of employment and export earnings.

Export of Value added teas      (Mn Kgs)

Period	Total exports	Value added	Value added
			Teas		Teas as a % of
					total exports
			
		Annual Avg.	Annual Avg.
1983-1992		204.8		70.5		34.4%
1993-2003		262.7		94.0		35.8%

In view of the diversification of exports from agriculture to industrial exports during the last two to three decades, the tea sub sector contributes only 13% of the total export earnings in the year 2005 from the corresponding figure of 42% in the year 1984.

However one can argue that in terms of net foreign exchange earnings, the tea becomes the number one export earner.

The management of tea estates has undergone several changes during its 135 year long history of tea plantations in Sri Lanka.

Prior to 1970’s tea plantations were owned and managed by the private sector (both foreign and local).

The sector was nationalised following land reforms in 1972 when land ownership was restricted to 50 acres. In 1992, the management of approximately 400 state owned plantations was handed over to twenty-two private sector companies, and under the second phase of privatisation, the controlling interest of twenty plantation companies was entrusted with the private sector.

According to Tea Board statistics for 2006, the annual tea exports and the total annual production have increased to 315 mn kgs and 310 mn kgs respectively. In the year 1991 just before the privatization of state owned plantations, the corresponding figures of exports and annual production stood at 211 mn kgs and 240 mn. kgs. respectively.

With regard to the tea export data the table shows that share of value added teas as a percentage of total tea exports have increased by only 1.4% from 34.4% to 35.8% during the second 10 year period 1993 - 2003 as opposed the first ten year period of 1983 - 1992.

From the above statistics it can be seen that there has been some positive growth both in the total production as well as total tea exports during the last 20 year period. However, the growth figures recorded above are mainly due to the performance shown in the low grown tea sector by the tea small holders and not necessarily by the privatised companies.

In the 80’s the low grown production was only 37% of the total production whereas in the 2000’s the low grown teas have increased up to 57% of the total tea production.

There has been a significant growth in production in the low grown sector that contributes to the increase in total tea production.

The up/mid country tea production has stagnated during the 20-25 year period. Not only the production, even the tea prices at the auctions remained static. In 1990, the auction price in real terms for high grown teas was US $ 1.70 per kg and 15 years later in 2005 also it was the same 1/70 US$ per kg.

Hence both in terms of production as well as prices in real terms, the high/mid grown teas’ performance is stagnating.

On the other hand due to exchange gains the auction prices in rupees may go up but the increases would not sufficient to break-even due to cost increases.

One of the problems faced by the tea estates in the up country is the relatively fixed nature of wage costs, which make up approximately 55 per cent of the total COP.

Labour is highly unionised and very influential especially in the mainstream political system. At present, the daily wage for a tea plantation worker is around Rs 195/ (excluding daily attendance incentive).

In real terms, the current daily wage is US $ 1/76 as against US $ 1/20 in the year 1990. In short the high grown tea price per kg is even less than the daily wage rate in real terms thus reversing the trend over a period of 15 years.

Further, the global over supply of tea would continue to exert a downward pressure on tea prices. The stagnated tea prices in real terms coupled with increasing COP would render a significant proportion of the up country tea estates unprofitable in the near future, especially with the next round of wage negotiations due in 2008.

In view of the prevailing cost of living hikes, the plantation companies will be reluctantly compelled to give in to the union demands for higher wage increases at the future wage negotiations as well.

In view of the above, it has become necessary that a proper national policy must be formulated for low grown tea and high/ mid tea sub sectors separately and some winning strategies be crafted for the above two sub sectors separately in order to achieve desired results.