Tea exports - low hanging fruit for forex earnings

Tea exports, which are Sri Lanka’s mainstay in agricultural export topped the US$1 billion mark in 2007 thus showing the sector’s potential after government divested the plantation in 1992. These earnings were a tremendous boost to the industry that also plays a key role in employment generation and social welfare. When the global turmoil was spreading the belief was that Sri Lanka was immune due to its limited connectivity and capital account controls.

However from October, Colombo auction prices began to decline rapidly with huge quantities of tea remaining unsold due to lack of demand. This resulted in a vicious circle of debts from exporter to producer thus sending shockwaves in a industry poised for record earnings. With 60% of the production coming from smallholdings the effect on the rural economy was devastating. The average auction price at the last sale of 2008 was Rs 225/kg as against Rs 340 in the previous year thus losing nearly $1 per kilogram.

New Year brings hope
The New Year seems to have brought some hope to the industry with auction prices showing a steady improvement. The first two auctions lit up a depressed tea sector with significant price gains. The second sale of the year averaged to Rs 274 improving from the Rs 253 recorded in the first. Price gains were recorded from all elevations and the trend has been consistent. The industry should not be complacent and must continue with cautious optimism. During the tough depressed times the industry reacted well by taking certain crucial steps that paid dividends. The authorities decided to restrict private sales and ensured that the auction is stronger and quality was emphasized.

Emphasis on quality
Strict surveillance on quality must be pursued with the Tea Board along with brokers and the auction authorities to ensure poor quality teas doesn’t reach the auctions. During the peak price levels there has been a tendency for quick gains and quality has been the casualty. It is also no secret that thefts and adulteration carried out on a large scale and stealing tea in the highways of Colombo too has been reported. A few years ago the Tea Board was able to initiate legal action and expose such crimes. Since such operators have a tendency to re-emerge every effort must be made to enforce the law to protect the good name of Ceylon Tea. Since independence the industry has weathered many storms to become stronger. During the insurrection periods of 1971 and 1989 many tea industry personnel sacrificed their lives, some factories were burnt and the employees and their families lived in fear. Even though the land reform legislation had good intentions politicization saw great losses to the industry and the economy along with mass exodus of expertise.

New look industry
Price fluctuations in commodities is nothing new and perhaps the tea sector should emerge stronger from the present crisis. Vast improvement made during the last two decades in quality enhancement (ISO, HACCP) improved living conditions for plantations workers, surveillance by the ethical tea sourcing partnership and continuing investments by the companies have given strength and a new look to the industry. Tea smallholders have become a major force with high productivity and lower cost of production.

Minimize negative factors
Declining reserves and the persistent macro economic deficiencies will pose a major problem to the Sri Lanka economy in 2009. These could worsen with a decline in worker remittances. In this situation assisting the export sector is a priority and a necessity for the government, and tea has the potential to enhance foreign exchange earnings than any other source. As agitated by exporters, a competitive exchange rate is more than a necessity in the background of devaluations carried out by our competitors during the last six months - Kenya (19.8%), India (12.1) Vietnam (3.8%) and Indonesia (18.2%). Apart from these, negative factors in taxation in ESC, proposal for a Nation Building levy and the export CESS needs to be reviewed. The tea cess was raised during the peak market conditions and an adjustment is opportune to suit the present needs and increase competitiveness.

Recovery in sight
The price levels of the last two years are unlikely to be repeated due to a decline in petroleum prices and next to CIS our major buyers are from such countries where there are credit limitations due to banking problems. On the positive side increasing consumption in India would lead to curtailment of exports and the rise in black tea consumption. China is another opportunity. Kenya, Sri Lanka’s main competitor, experienced a significant production decline in 2008 as against Sri Lanka’s increase. Demand for black tea could rise due to export shortfalls.Most importantly unlike in most other beverages the share of tea in the disposable income of consumers is not significant to anticipate a cut down. These factors do indicate that tea exports could stage a recovery in 2009.

From The Sunday Times