Financial Times

Tea crisis brews in the south

GALLE - Smallholders and private tea factory owners who produce the low growns that are the mainstay of the Ceylon tea industry are still in difficulty although prices have revived at the Colombo auctions following the end of the Gulf war and renewed demand from Middle Eastern buyers.

The cash flow crisis brought on by the sudden slump in demand in the run-up to the US-led war against Iraq that resulted in large quantities of teas being unsold and a sharp fall in prices is yet to end.

Industry officials fear that some of the effects of the shocks triggered by the war would only be felt towards the end of May and early June when payment is made for leaf supplied in the previous month under the peculiar payment formula governing the sale of green leaf and manufacture of black tea.

Smallholders complain that many bought leaf factories are not accepting or have reduced their intake of green leaf, partly because of the crisis caused by the Gulf war and partly because of rush crops following the April holidays. Private tea factory owners say they are deeply in debt and are struggling to survive.

"Some factories have not been accepting leaf after March and pay only Rs. 15 a kilo for green leaf - less than half that paid in April 2002," said E.G. Ratnapala, a smallholder in Neluwa.
Smallholders were forced to throw leaf on the ground since some factories were not accepting even two leaves and a bud, he said. He charged that green leaf collectors and bought leaf factories cheat smallholders by not weighing the leaf properly and making excessive deductions for moisture, transport costs, and the weight of the gunny bag - a perennial complaint in these parts.

J.P. Weeraratne, a labourer plucking half an acre on land owned by the local temple, said he needs to earn around Rs. 26 a kilo of green leaf to make a profit, given rising costs, especially that of fertiliser. But he is thankful that at least the factories in his area are buying green leaf.

Tea is the mainstay of the economy in the south with small plots of tea in the gardens of homes even in Galle town. Elsewhere in the district, as one travels along narrow winding roads towards the interior and up into the hills bordering the Sinharaja rain forest reserve, one can see homes surrounded by tea bushes - at the front, back, on either side of the pathway leading to the front door.

In the morning smallholders or hired labour - both men and women - can be seen amidst the leech-infested tea bushes, plucking leaf. The plucked leaf is taken to collection centres or factories in the evenings - carried on the shoulder, on motorcycles or in vehicles. Or else, smallholders wait for the trucks or tractor-trailers sent by bought leaf factories to pick up their green leaf.

The money earned is not grand but enough to live on, especially since most villagers also have their own small plots of vegetables and fruit trees.

Victor Kottahachchy of Pelawatte, a town that becomes a hive of activity in the evenings when smallholders bring their leaf for collection, said the factories to which he supplies leaf had not paid him since February because they had been unable to sell their teas at the auctions owing to the Gulf war crisis.

Kottahachchy, a middleman who collects green leaf from smallholders and sells it to factories, said smallholders got only Rs. 15 a kilo in March for leaf supplied in February and that factories which used to accept 40,000 kg now limit their intake to 10,000 kg. Payment for leaf supplied now would only be on June 10. Many smallholders had been throwing away their crop since the New Year because factories were not accepting green leaf. He estimated that up to 80 percent of smallholders in his area had stopped plucking.

"Auction prices may have recovered in the Colombo auctions but the recovery is still not felt in the villages," he said. "The next few weeks are going to be critical unless there is some relief from the government."

Some parts of the district were more badly affected than others. Smallholders supplying leaf to factories that get good prices at the auctions for black tea are better paid. Elsewhere, smallholders are struggling with much lower income and factories not accepting leaf.

Herman Gunaratne, a private tea factory owner who processes mostly his own leaf at the Handunugoda Tea Factory near Dikkumbura, said tea brings a lot of cash into the villages.

"The debt burden of some factory owners is so high that it is barely serviceable," he said. "If banks move to recall their loans the industry will collapse. Some people are so deeply in debt that if they stop manufacturing for a day they're finished."

Part of the problem is the excess manufacturing capacity in the district. There are 160 factories in the Galle district alone and many are not doing more than 40 percent of capacity.

Some factories have already closed while others are being offered for sale.

"Our costs have gone up while the sale averages have come down," Gunaratne said.
Dr. Sarath Samaraweera, chairman of the Private Tea Factory Owners' Association, estimates the industry lost Rs. 600-700 million because fairly big quantities of tea remained unsold or sold for low prices either for lack of orders or bids that were too low.

"A lot of people got into difficulties. Some factories either closed down or cut back production," Samaraweera said.

The government offered to subsidise half the interest cost on working capital loans but many factory owners already indebted to banks were not able to make use of the facility.

Now the market is full of tea and factories are flooded with green leaf especially with the rush crops following the New Year holidays in mid-April when there was no harvest for over a week.

Many factories are not accepting leaf because of the excessive quantities on offer and the poor quality of the leaf.

"Factories also want to be careful," said Samaraweera. "Profit margins are so low that we do not want to buy poor leaf."

The telltale signs of the crisis in the southern tea districts were evident during a recent visit. It is not uncommon to see tea bushes not plucked for weeks growing taller than usual, with uneven tops. Factories are insisting on good quality leaf - only the two leaves and a bud - whereas they might have accepted more leaves previously. As a result, not only are smallholders selling fewer leaves they are getting paid less for better quality leaf.

Ratna Gamage, former chairman of the Tea Smallholdings Development Authority, warned that low prices earned by smallholders could create social problems in the villages.

"The effects will be felt by smallholders only towards the end of May and the first week of June when payment is made for leaf supplied the previous month," he explained.

Unlike rubber trees, which can be abandoned in times of low prices, tea bushes need to be plucked in a regular 5-7 day cycle. If not the bush grows tall and produces fewer buds, becoming less productive.

Gamage, himself a former tea factory owner and exporter, said that many in the industry might find it difficult to recover when the market picks up later on unless government support is immediately made available in the form of working capital loans to factory owners so money can go to smallholders.

If factories are wound up smallholders would not be able to sell their leaf. "Then it would be too late to help them," he said.

Gunaratne complained that the privatised regional plantation companies, which previously did not manufacture bought leaf, were now competing with private tea factory owners. Furthermore, the competition was unequal since the RPCs have access to low cost funds from foreign donor credit lines.

"The industry should be liberated from government controls," he said. "We can sort out the crisis but let us sell in the open market without conditions."

Borrowing costs need to be lower and some degree of subsidy must be provided for smallholders, he added. "The RPCs got aid when they were privatized. So now the government must support smallholders."

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