Low grown tea, rubber enjoy profits

Ravi Ladduwahetty

A presentation titled: “ The profitability and the productivity of Sri Lanka’s Plantations - Tea and Rubber Sectors and implications for wage determination” was delivered by Dr Ramani Gunatilleke at the Sri Lanka Tea Board auditorium last Tuesday. This was during the news conference held by the Planters Association that day.

Dr Gunatilleke is a Consultant to the World Bank, ILO and ADB.

The context of the presentation was Sri Lanka’s share of the global market in commodities steadily declining which is generally attributed to high costs of production and low levels of productivity compared to competitors.

The growing importance of smallholders in the production of green leaf, especially in the low country, reflects the different cost structures they face relative to the Regional Plantation Companies (RPCs).

The RPCs are challenged to be more competitive.

She said that the objectives of the study has been to inform the wage negotiation process, initiate a stock-take to inform the process of developing long-term strategies for the sector as a whole, by the Regional Plantation Companies themselves.

Another objective of the study was to provide stakeholders, including policy-makers, with a rigorous and independent assessment of the profitability and sustainability of the RPC sector.

Costs of production

One of the burning issues was the high costs of production vis a vis the low levels of productivity compared to competitors.

The growing importance of smallholders in the production of green leaf, especially in the low country, reflects the different cost structures that they face relative to the Regional Plantation Companies (RPCs).

The RPCs are challenged to be more competitive and Sri Lanka’s share of the global market in commodities has been steadily declining, has also been a bone of contention.

Profitability

According to the study done by Dr Gunatilleke, only low grown tea and rubber have been enjoying profits in the recent past. The high grown, mid grown and Uva tea sectors have been posting losses, but the losses have been stable rather than increasing over the years.

Impact of exchange rate movements on profitability was an important issue which merits careful analysis which is beyond the scope of the present paper, she said.

Productivity

She also noted that labour productivity had been stable in all the sectors and so have yields other than in low grown tea where yields have been declining.

Scatter plots of pooled real profits and productivity data of RPCs for the fifteen years of the reference period, strongly suggest that profitability is positively associated with labour productivity in all five sectors.

The results suggest that increasing productivity is fundamental to increasing profitability in the RPC sector.

Losses experienced by the high grown, mid-grown, and Uva sectors were due to the sectors’ inability to increase productivity sufficiently to offset high costs relative to those of competitors.

Costs

Results suggest that profitability of the low grown sector lie in the processing of bought leaf rather than estate production as neither labour productivity nor yields have increased. Tea is a labour-intensive industry, so labour accounts for bulk of production costs.

Labour costs including welfare amount to 46 percent of Nett Sale Average in High Growns, 18 percent in Low Growns if total NSA was taken into account but 31 percent if attributed NSA is taken into account (difference due to the bought leaf component).

“With provisioning for gratuity, labour costs accounted for between 43 to 54 per cent of the NSA in the high grown, mid-grown, Uva and rubber sectors in 2009,” she said.

Low grown has reported a much lower rate of 21 per cent because of the bought leaf component. Long-term share of labour costs in NSA appears relatively stable in all the sectors except rubber.

Management’s and materials’ shares of Net Sale Averages in the Mid Grown sector have not been stable and materials costs in the Low Grown sector have also not reverted to mean in the long-term

Graphical analysis of the share of compensation to labour in value added: High Grown risen slightly, Mid Grown stable, Uva largely stable, Low Grown declined, rose until 2001, declined until 2006, rose again after that.

Productivity

Labour productivity has been stable in all the sectors and so have yields other than in low grown tea where yields have been declining, she said. Scatter plots of pooled real profits and productivity data of RPCs for the fifteen years of the reference period, strongly suggest that profitability is positively associated with labour productivity in all five sectors.

The results suggest that increasing productivity is fundamental to increasing profitability in the RPC sector. Losses experienced by the high grown, mid-grown, and Uva sectors are due to the sectors’ inability to increase productivity sufficiently to offset high costs relative to those of competitors.

Results suggest that profitability of the low grown sector lies in the processing of bought leaf rather than estate production as neither labour productivity nor yields have increased.

Policy issues

Some of the policy issues, she said, range from:

*Should land productivity be increased through replanting, should diversification into more productive activities, or both? Would processing rather than green leaf production make more economic sense?

* How sustainable is the present system of a RPC sector-wide wage determined through a model of centralized wage bargaining?

* Since there is such diversity in the sector, a one-size-fits-all approach to wage bargaining appears not to be the most appropriate for the sector.

* Uniform wage rate has only succeeded in moving workers out of the industry as a whole, while making labour immobile within the industry itself.

* Privatization of the management of the plantations appears not to have entailed a sufficiently positive paradigm shift in the sector’s orientation towards the market.