Financial Times

Tea producers struggle with rising costs, stagnant dollar prices
Regional plantation companies are bracing for difficult times ahead as they face the prospect of rising costs driven by higher fuel prices and the anticipated wage hike coupled with new taxes that they fear could push them into the red.

"A whole heap of financial burdens appear imminent which will put us into a much worse situation," declared Malin Goonetileke, Secretary General of the Planters' Association which represents the regional plantations companies (RPCs).

The biggest worry is the wage increase on which the RPCs represented by the Employers Federation of Ceylon and estate labour unions are currently having talks.

Both sides have been tight-lipped about the current status of the talks having reached agreement not to prematurely divulge figures or specific details of a wage increase being discussed in order not to raise the hopes of workers too much.

"The unions have been extremely understanding about the ability of RPCs to give a wage hike," Goonetileke said. Goonetileke said that every one-rupee increase in wages would collectively cost the 20 RPCs an extra Rs 55 million given that they have to provide a budgeted 55 million man-days per year. The RPCs have to offer a minimum of 25 days of work a month.

The impact of a one-rupee wage increase on other statutory payments such as EPF, ETF, holiday and gratuity, which would also increase as wages go up, would be another Rs 44 million extra in costs for the companies.

"This means RPCs would have to collectively pay Rs 99 million extra for every one-rupee increase in wages," said Goonetileke. Goonetileke acknowledged that right now RPCs were enjoying good prices for tea and rubber in rupee terms but pointed to the cyclical nature of the commodities industry.

"What we're trying to say is that we will pay the workers better when we can afford to but not when we can't," he stressed.

He pointed to the example of rubber workers who are now enjoying higher pay because of sharply higher rubber prices and said RPCs hope to replicate this in the case of tea. This is based on a formula agreed upon with the unions under which workers are paid extra if rubber prices rise beyond a certain level.

"This time in our negotiations on tea we are trying something like it - tie it up to prices." Industry experts pointed out that big firms like John Keells Holdings are getting out of plantations because they may not see it as part of their core business and returns on investment is of a long term nature.

"Returns on bank deposits are much faster," said one official. "Other investment like hotels offer much faster returns." Many big companies continue to have at least one block of plantations for historical reasons as it is the mainstay of the economy and they wanted to be a part of it.

The two plantations firms divested by JKH are reputed to be the best in their respective sectors - Maskeliya Plantations in the case of tea and Kegalle Plantations which had the best yields and profits for rubber.

Despite the difficulties faced by regional plantations companies, some owners remain committed to the producers, given their involvement in the tea business. "Tea is our core business, we're very committed to it and we intend staying the course," declared Malik J. Fernando, director of the MJF Group.Their Dilmah is now the No 3 global brand.

"But the fact is the economics of growing tea are very poor since Ceylon tea is not uniformly marketed as the premium product it is. So auction prices are too low and have not grown in dollar terms."

Fernando pointed out that "costs inevitably go up" and that the way to mitigate that is to get a higher price, which RPCs have difficulty in doing because of the way tea is sold. "Buyers at the Colombo auctions cannot afford to pay a better price for tea to RPCs because of the way the supply chain works. It is no fault of the auction system. But it is the way the system is structured with middle men overseas and local firms low down in the value chain, competing with each other”.

Fernando acknowledged that it is not easy to go higher up the value chain and that it requires effort and persistence."If we had strong internationally selling brands and were closer to the consumer , we could capture more of the value chain within Sri Lanka and could afford to pay more for tea."

Fernando pointed out that the growing dominance of retailers overseas, demanding higher margins, also makes it difficult for primary producers to get better prices for their produce as retailer price pressure gets pushed down the value chain.

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