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'Labour: plantations' expensive component in tea production'

The Planters' Association of Ceylon (PA), the representative body of the Regional Plantation Companies (RPCs), said in a press release this week, that labour costs accounted for the largest component of the steadily rising cost of production of tea in Sri Lanka and called for higher productivity to sustain the industry. The PA noted that the cost of production of a kilo of tea had increased from Rs 124.06 in 2002 to Rs 350 by 2011 and is now outpacing tea sales revenues.


Tea pluckers at work

The PA warned that if this trend was to continue, Sri Lanka's tea industry would become unsustainable in the near future, as companies have been steadily losing money in their tea production and unable to cope with shouldering labour expenses, such as accommodation, medical facilities, childcare.

The PA noted that while services and materials accounted for 6% and 16% of the total production costs respectively, labour costs accounted for about 63% - 68% of the total manufacturing costs, making this the largest fixed cost faced by RPCs. Staff and executive salaries, from estate supervisor level to company, CEO account for only 10% of total cost of production. Therefore, plantation field employee salaries and welfare measures account for close to 70% of the plantation company costs.

The PA also noted that unlike the smallholder sector, RPCs were unable to cut back on wages and welfare facilities in response to the reduction in income. RPCs, despite cash flow difficulties, have abided by the collective agreement and continued to accommodate the current daily wage and incentives, including EPF and ETF contributions and a host of welfare measures for its work force and also resident estate families. Currently, around 220,000 people have been employed by RPCs as registered workers. However, RPCs support a resident estate community of around 1 million persons that include families of estate employees. This large estate population benefits from essential services, such as free water, medical facilities, housing and other amenities.

The PA said the tea industry production costs have increased sharply in 2012, as the industry is forced to absorb high fixed costs, mainly labour costs. Tea output from RPCs reduced by 12% in the 1st half of the year, because of adverse weather conditions caused by a prolonged drought, reducing incomes of RPCs. In addition, instability in the Middle East has reduced Ceylon Tea purchases by Middle Eastern countries, which has again, reduced incomes of the plantation sector. Current auction prices of Ceylon Tea have been unable to compensate for the large drop in revenues, said the PA. As a result, the average cost of production of tea was now higher than the average sales revenues from tea.

Currently, Sri Lanka's cost of production have been averaging at around Rs 400 to Rs 410 per kilo of tea, while the average selling price per kilo of tea, for the period January to September 2012, has been around Rs 385.66 (US$ 3.05).

The PA also noted another development in international tea markets that has raised a red flag regarding Sri Lanka's tea industry. Kenyan teas are currently fetching US$ 3.20 per kilo, raising warning signals that Ceylon Tea may be ousted from its position as the premium global tea. The PA said Kenyan teas may be generating higher prices due to an 11% drop in production and also due to heavy marketing and promotion by the Kenyan authorities.

The PA maintained that Ceylon Tea, with its lowest pesticide residues and environmentally friendly manufacturing, ensures the highest quality of tea, but the Ceylon Tea brand may lose its position in the near future, unless this threat was urgently addressed. The PA pointed out that the lack of brand positioning would translate into lower auction prices for Ceylon Tea and lower industry incomes,which in turn, would reduce foreign exchange earnings to the country as a whole.

The PA maintained that the twin problems of unsustainable cost of production and insufficient promotion of the Ceylon Tea brand image, needs to be addressed immediately by all industry stakeholders, to safeguard Sri Lanka's historic tea industry. The cost of production said the PA, could be addressed to a great extent, through a significant increase in labour productivity, as RPCs could not control tea prices that are dependent on external factors, such as the weather and political stability in the Middle East. Given this situation, the PA said that it was extremely important that plantation employees and trade unions urgently collaborate with plantation companies, to increase overall productivity and ensure the survival of the plantation industry.

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