Opportunities, challenges for the Sri Lankan tea industry
The globalization process has offered unlimited opportunities as well as challenges for the tea producing countries.
Technically, although it may be difficult to generalize either the opportunities or challenges for the simple reason that each country is at different stages of development of their tea industry, yet, the opportunities and challenges of the producing countries can be grouped together under a common slogan “ competitiveness in cost and quality” for survival.
Global tea production is now dominated by four countries; China - 970 million kg, India 966 mln, Sri Lanka 310.8 mln and Kenya 310.6 mln with Indonesia closely following with a production of 139.8 mln in 2006.
These countries together account for about 75 - 80% of world tea production. Sri Lanka was ranked as the third leading global producer marginally ahead of Kenya in 2006.
Sri Lanka’s production which remained in the region of 233 million kg in the early 90s has been rising almost annually to reach the highest level of 317 million kg in 2005. Tea production in the first quarter of 2007 has however been very disappointing and is down by more than 20%. It is therefore unlikely that the forecasted increase of 2% in 2007 with total production expected to reach 322 million kg level, could be achieved. Sri Lanka is therefore likely to lose its third position in global production this year.
The increased demand for the low grown produce, coupled with larger extent and higher productivity, despite frequent droughts, has stimulated higher growth in the low country region over the last several years. The low grown share of the national production rose from 2.8% in 1970 to 56% in 2001 and to 60% in 2006. The share of mid grown was 16% and that of high-grown 24% in 2006.
Much of the growth boost in low grown tea production is attributed to the rise of the tea smallholders who are concentrated in the low-country. It is estimated that the smallholders occupy about 65 to 70% of the tea extent in the country and their contribution to overall production has also now risen to around 65 to 70%. The estate sector has seen a gradual erosion in it’s share of production from about 85% in the early 1980s to about 30 to 35% as of now.
Tea crop productivity in Sri Lanka is a different story altogether. Strategies lack professionalism notably in the corporate sector. Productivity is amongst the lowest in the global scenario. The current national average is around 1520 kg/ha with low country productivity averaging around 1850 kg/ha. South Indian tea productivity is currently in the region of 2,240 kg/ha and Kenya around 2300 kg/ha.
The story of the disparity in yields between the corporate sector and smallholder sector has now been well documented. Yield among the smallholdings now average about 2,450 kg/ha and that of the corporate sector plantation is in the region of 1275 kg/ha hich is about 65% of that of the former category. It is heartening to note that smallholder crop productivity in Sri Lanka is comparable with South Indian and Kenyan levels.
Low productivity of the ageing tea bushes in corporate sector plantations may be one of the major contributory factor besides inconsistent use of crop productivity improvement inputs notably fertilizers.
Tea is known to be very responsive to added fertilizers. Estate sector plantations in smallholder dominated area are known to record yields much lower than the latter category, the differences being in the region of 700 to 750 kg/ha. Obviously, such differences cannot be solely attributed to agro-climate variations.
The rate of replanting in the corporate sector is believed to have been less than 1%, despite growing awareness in the past of the differences in yield potential between vegetatively propagated (VP) tea and seedling tea, which is in the region of 100 to 150 percent
. The estate sector had not been very enthusiastic to replant. Nevertheless, during the post-privatization period some efforts have been made to rectify this anomaly. A replanting rate of 2% is expected to provide the desired results.
Smallholdings are known to have a very high proportion of VP tea, which account for the yield differences between the two sectors. This sector supported by the state and International Development Agencies has been able to incorporate a very high proportion of VP tea besides other latest agro-technologies and inputs.
Skilled worker deficit / productivity
Skilled worker out-migration in plantations is another challenge to the corporate sector, as highlighted earlier. This is continuing to cause serious crisis in terms of productivity improvement.
Harvesting technology, a skilled operation, is known to play a key role in determining production, productivity and quality standards. In order to mitigate the situation, the corporate sector has been attempting to introduce partial mechanization of some field operations and other labour saving and incentive measures. But, it appears that the entire plantation system needs re-vamping to eliminate this deep-rooted perennial problem. The labour situation in the plantation has gone from one of surplus to deficit with an annual decline at the rate of 10 – 20% of the workforce.
Labour accounts for more than 60 percent of the production cost in tea. Worker productivity is therefore a major component of plantation production efficiency. It is known to be linked to three factors in tea plantation scenario; wages, incentives and social-economic considerations.
The extent to which the additional cost of such factors can be neutralized through corresponding gains in productivity will constitute and important element in labour management. A combination of better skills, improved knowledge (that is the underlying reasons behind the various skilled operations), positive attitudes (eg : the urge for achievement motivation) and enablers will go a long way to upgrade an average worker into a top performer.
Cost of production / profitability
The profitability of Sri Lanka tea industry like any other plantation industry rests heavily on the movement of global market and production costs.
With cost of production in Sri Lanka being very much higher than it’s competitors and international tea prices being increasingly competitive with the emergence of low cost global producers like Kenya, India, Vietnam, etc. domestic producers and the corporate sector in particular with uncontrollable overheads may find it difficult to make ends meet.
Sri Lanka’s COP has been recording steady increases and is now around U$ 1.75 per kg, which is well above that of Bangladesh with U$ 1.35, India with U$ 1.25 Kenya around U$ 1.00 and Vietnam, the lowest around U$ 0.75 per kg.
Three possible ways available for the producer to enhance profitability are to fetch attractive prices for their produce, increase their productivity level and to reduce the COP. The potential for the corporate sector to rise even above the levels of the smallholdings in terms of crop and worker productivity is substantial. Additionally, consistency in the quality of tea for which this sector has the technologies and resources would fetch higher prices.
There are several avenues open to improve profit margins even in the face of increasing costs, through wage hikes being granted in response to workforce agitations, which is unavoidable.
Costs of imported materials are also bound to rise.Although tea prices increased significantly in January/March 2007 due to global shortage of volume in the region of 15 million kg and in the domestic scenario, the aftermath of the plantation strike, drought effects and depreciation of the rupee, the market is expected to stabilize by end-April with more volumes available for sale in Sri Lanka. Kenyan tea has already recorded increased output.
In the final analysis, one way to shield against global “boom and bust” cycles and enhance bottom lines is to increase value-addition. One only has to look at the price differentials as the value addition scales move up.
The corporate sector has been steadily progressing into value-addition, yet much remains to be done, besides improvements in the marketing system for which the smallholdings lack the expertise, capital and other related resources.
From a long-term policy perspective it is imperative to highlight the need for management efforts focused on maximizing net income per unit area through integrated farm management and crop diversification approaches.
To a large extent, the effects of these initiatives are expected to mitigate the challenges arising from uncertain market for tea.