Crisis in the tea industry: Some possible solutions - I
November 10, 2015, 8:13 pm
By Dr. Janaka Ratnasiri
There have been several media reports recently highlighting a drop in the revenue from tea exports and the resulting low prices paid to green leaf suppliers as well as tea factories. This issue was raised in Parliament the other day and the Prime Minister was heard over the electronic media saying that the government was planning to send ministerial delegations to other countries to explore new tea markets.
Decline in tea prices
Tea smallholders in the Ratnapura District were paid LKR 70 per kilo of green leaf 2 – 1½ years ago and LKR 60 a year ago, but only LKR 50 for the months of August and September this year. In keeping with the proposals made in the government’s interim budget made early this year, the government paid small holders an extra supplement during the months of May to July, but it is not continuing and also it did not make up to LKR 80 per kg as promised. Also, not every factory purchasing green leaf paid this money to smallholders. There has been much public concern about this matter and groups of tea smallholders, particularly in the low country, have been staging public protests, demanding government intervention as reported in electronic media recently.
The declining tea prices have affected the tea factory owners as well. According to the 2012 Annual Report of Sri Lanka Tea Board (SLTB), out of 831 tea factories in the country, only 700 were in operation in 2012 due to various reasons, and the drop in tea prices has made the situation worse. There have been press releases by regional plantation companies (RPC) that under the prevailing prices and productivity of workers, they are unable to operate the factories without incurring losses. They have said that each worker should pluck at least two kilos or more of green leaf a day for the operations to be viable. The Treasury is reported to have given one LKR 1 bn grant to the Sri Lanka Tea Board (SLTB) to provide relief to small holders and factories.
Production of tea in Sri Lanka
Sri Lanka produced 336.6 kt of made-tea in 2014, out of which 317.9 kt (94.4%) was exported. Mostly black tea was manufactured by orthodox process comprising 93%, while about 6% was manufactured by more recent crush-tear-curl (CTC) process and about 1% comprising green tea. Tea manufactured using CTC process is considered to be ideally suited for tea bags and with the use of tea bags getting popular in the West, tea exporting countries in Asia and Africa adopted CTC as their main process. For instance, India manufactures 80% of tea using CTC process (Wikipedia).
Ziad Mohamed, former Director of TRI has said, "Sri Lanka government in the mid-1990s encouraged CTC production by providing subsidies up to 85% of the cost for machinery purchase and installation. In spite of the attractive subsidies offered, there are not many takers, simply because of the heavy demand for Sri Lankan orthodox tea" (Twentieth Century Tea Research in Sri Lanka, TRI, 2003). While tea producing countries are manufacturing CTC tea to meet the markets in the West, the Sri Lankan industry is contended in manufacturing orthodox tea to cater for markets in Russia and ME countries. It may be that characteristic flavour and aroma of Sri Lankan tea, particularly with distinct regional characteristics could be lost in CTC tea.
Prices paid for green leaf and made-tea
Currently, factories pay smallholders for the green leaf they supply at rates based on a formula agreed by all stake holders where 32% the proceeds from auctions is retained by the factory and 68% paid to leaf suppliers. The formula also assumes that 100 kilos of green leaf produces only 21.5 kilos of made tea, which means that 4.65 kilos of green leaf are required to manufacture 1 kilo of made-tea. During the first 10 months of 2015, made-tea amounting to 270,626 t have been sold at the auctions at an average price of LKR 400.72 per kilo (SLTB website). Tea purchased at the auction is exported after blending to suit the destination, contained in small packs of different sizes including tea bags and in bulk packs.
The average export prices earned for black tea, the prices fetched at the auctions and the money paid by factories for purchase of green leaf scaled up by a factor of 4.65 are shown in Fig. 1, for the 9-month period from January to September 2015. The last set of values are based on purchases made by 4 factories from a small holding of the writer at Gilimale in Ratnapura District. The average export price for the first 9 months in 2015 has been LKR 578 per kg, while the average purchase price by factories has been LKR 61.72 per kg of green leaf or 287 per kg of made-tea. The LKR 113 per kg price difference between what a factory receives and disburses covers its overhead and operational expenditure as well as its mark up. It is noteworthy that the export price has increased during September relative to August prices while the auction price and price paid to small holders have declined.
On the other hand, there is a price difference of LKR 178 per kg between the auction price and the export price. The total amount of black tea exported during the first nine months has been 217 kt and extrapolated linearly to 12 months, it will be 288.5 kt. With a unit price difference of LKR 178, the total profit earned by exporters will be LKR 51 billion annually, and this is shared, I believe among a few exporters and brokers only, after paying whatever taxes due to the government.
Short term measure
Currently, the government levies a cess on tea exports computed at 2.5% of the average auction price or LKR 10 per kg whichever is higher (Ministry of Finance website). In 2013, the cess levy collected from tea exports was LKR 700 million which was 1.36% of the exporters’ profit of LKR 51 billion. As a short term measure, if this could be raised to say 20%, an additional amount of LKR 9,570 million could be generated, and this could be made available to pay higher rates to leaf suppliers and factories.
The Performance Report of the Ministry of Plantations for 2012 has reported that a decision has been taken "to establish a Fund of Rs. 5 billion for a period of 5 years as Rs. 1 billion per annum through charging the exporters a duty of LKR 3.50 per kg of tea exported. In this context, necessary actions are being taken to launch a broad global and local marketing and promotional campaign". However, the Annual Report of the Ministry of Finance for 2014 does not make reference to such an export duty on tea exports. According to this report, the export duty collected from all exports in 2014 has been only LKR 24 million. If the proposal has not been implemented, it should be revived on a priority basis. Many good proposals get left out when high officials in ministries change whenever the ministers chang. This is something unique to Sri Lanka!
It is important to ensure that this additional levy or the duty is not passed on to the importer, but should be taken off the exporters’ profits. The additional revenue is nearly 10 times the special grant the Treasury has agreed to give the plantation sector to tide over the crisis period. The exporters will naturally object but it is the government duty to be fair by the growers and factories as the industry runs solely on their efforts.
Export prices of tea
In 2014, Sri Lanka exported 327.3 Kt of made-tea earning LKR 212.6 billion (Central Bank Annual Report for 2014). Out of this amount comprising 98% black tea, about 50% was exported in small packets below 10 kg, having a unit price of LKR 600 per kg on an average. About 39% was exported in bulk packs having a unit price of LKR 578, while about 9% was exported as tea bags having a unit price of LKR 1,084. About 1.6% is exported as green tea having a unit price of LKR 1,210 for small packets (comprising 0.6%) and LKR 1953 for tea bags (comprising 0.6%). The balance (comprising 0.7%) comprises instant tea having a unit price of LKR 1,102.
The SLTB website gives the export quantities and unit prices for these categories. Fig. 2 shows the variation of the unit prices of black bulk, black packets, black bags, green packets and green bags over the 9 month period from January to September 2015 (SLTB website).
It is noteworthy that export unit price of green tea bags is more than double that of black tea bags reaching over LKR 2500 in September, while there is little difference between prices of the two varieties in bulk and packets. The other interesting factor is that unit prices of both varieties in bags have increased during the last few months while that of bulk tea has declined.
Mid-term measures
The strategy to be adopted to increase the revenue from tea exports becomes obvious if one examines the above Figure. The highest unit export price is in respect of green tea bags which has reached LKR 2500 per kg. The next highest prices are for black tea bags and green tea packets, which are in the range LKR 1100 – 1300 per kg. On the other hand, black tea in bulk and in packets which comprise nearly 90% of all tea exported fetch prices of only around LKR 500 per kg on an average, varying between LKR 400 and 600 per kg during the 9 month period. Hence, the strategy for enhancing the revenue from tea exports is to increase the share of tea-bags and green tea in the tea that is exported and explore new markets for these items.
For example, if the share of black tea bags is increased to 50% and the green tea share is increased by 5 times while eliminating the bulk exports altogether, the total revenue from export of the same amount of tea that was exported in 2014 could be enhanced to almost LKR 300 billion instead of LKR 212.6 billion earned in 2014.The government has to set a mid-term target to increase the share of black tea bags as well as green tea and provide whatever assistance to the industry to achieve these targets. The additional revenue earned could be then used to pay the workers increased wages enabling them to move away from poverty they are in now. However, the implementation of such a strategy needs the co-operation of all concerned – factory owners, policy makers, brokers, exporters and researchers – to achieve the set targets.
If the policy makers accept this strategy, the industry has to first draw up plans for the manufacture of products which are in demand in new markets. The industry and the government jointly will then have to explore the markets. Once the markets are found, their manufacture could commence. Sending ministerial delegations will not help in capturing markets. It should be left to the professionals in the field.
(Part II will appear tomorrow)
No comments:
Post a Comment