As far back as 1890, the Ceylon Planters’ Association had made arrangements with Thomas Lipton to sell Ceylon Tea in Britain and USA; he was paid a commission of 1 sterling pound on every 1,000 pounds of tea sold in the US. He, however, refused to sell tea on commission and bought about 6,000 acres of tea in the island. His marketing tag line was: “Middleman increases profit; from the tea garden to tea pot.” Ceylon had, in fact, earned a nick-name of “Lipton’s Tea Garden.”
A good 121 year period has lapsed since then and where does the tea industry stand now, in the context of the global tea market?
The Sri Lankan tea production was 330 million kgs in 2010 against world production of 4 billion kgs. Sri Lanka exported 314 million kgs in 2010 compared with 289 million in 2009. From the demand side, the market has witnessed consumption growth taking place not only in India, the Middle East, Pakistan, Egypt, but also in mature markets like the United Kingdom and Russia. Ceylon teas were fetching an average auction price of US$3.28 per kg in 2010 well above the global average price of US$ 2.44. The continued commitment demonstrated by the companies by investing in the product quality improvements and upgrading tea factories has also contributed to make Ceylon tea the most sought-after in the world market.
Until recently, the beverage market was divided simply between alcoholic and non-alcoholic beverages. As consumers' tastes grew more sophisticated and demand surged for a variety of beverage options catering to lifestyle changes, the beverages industry has responded with many options to choose from. The global beverages markets is made up of: 1) alcoholic beverages - wines, beers and spirits; 2) non-alcoholic beverages - bottled water and milk; 3) brewed beverages - coffees and teas; 4) carbonated beverages - sodas and soft drinks; 5) non-carbonated juice products both fresh and pre-packaged; and 6) energy drinks which are generally caffeinated beverages in both carbonated and non-carbonated forms.
According to Joseph P. Simrany, President,Tea Association of the USA,when walking through the supermarket, a noticeable new development is the significant amount of space now being devoted to ready-to-drink teas. What they see is that Ready-to-drink tea will continue to grow in popularity with annual dollar increases in the range of 12 to 15%. Additionally, Specialty Teas have also found their way into supermarkets in a greater variety than ever before.
Tea industry players would obviously view these changes positively because they want to make tea more readily available and convenient to millions of potential consumers. Given the experience of the last several years, the intrinsic qualities of tea, the lifestyle and consumption trends, only one logical conclusion seems possible; Joseph P. Simrany says; the future for tea in the US looks very hot indeed!
Are we fooling ourselves?
Nevertheless, the problem faced by Sri Lankan tea marketers would be to source that kind of teas in such big volumes to cater to these emerging markets. My own view is that time is right for the Sri Lankan tea industry players to deliberate and come up with a shared vision as to whether we should look for hitherto untapped markets and obtain increased market share or narrow the focus in its own category i.e.; premium Ceylon tea category or adopt both strategies.
The Sri Lankan auction prices are the highest in the world as the world auction average tea price in 2010 was $2.44 per kg and the corresponding figure for Colombo auction was $3.28. Even in 2009 the situation remained the same with Sri Lankan auction average being $3.13 whereas the world average was $2.23. Whether we should get carried way with the high prices prevailing at present is the question to be answered.
It is true that the cost of production of tea has been a concern for many years. However do we pay enough attention strategically to address this critical issue? The high cost is mainly due to low land productivity measured in terms of yield per hectare and the high cost of labour in the tea estates. The national average yield per hectare of tea recorded a figure of 1,484 kgs per hectare in 2010, considered low when compared with higher productivity levels from Kenya and India. The cost of production of black tea has increased from Rs. 269.01 in 2009 to Rs. 313.17 per kg of tea in 2010.
Need to plough back money
As we know tea plantations are organized essentially on a labour intensive basis, which require a large work force. Labour costs represent about 50-60% % of the total cost of production in Sri Lanka.At the wage negotiations between the plantation companes and the unions, the companies/estates have to agree to offer higher wage increases than a reasonable wage package negotiated in a typical collective bargaining mechanism held under ideal free labour market conditions.
This has far reaching implications even for the smallholder sector which accounts for 65% of the country’s tea production. It is true that the estates would have to increase their yields by undertaking desired level of field development activities. One of the reasons for the low yields was due to degradation of certain upcountry tea lands. According to technical experts, the organic carbon content of soil decreases fast if not supplemented in every cropping season. As a result we have seen a decline of land productivity and the overall profitability of the tea plantations. Most of plantation soil contains less than 0.5 % organic carbon and unless it is raised to 1 %, the productivity of the soil cannot be optimized.
It has become necessary to undertake tea replanting and also introduce improved agro-forestry systems to the plantation sector in order to improve the soil conditions. Agro Forestry could be simply defined as integrating agriculture, forestry and / or animal husbandry into a synergistic system. The economic viability and financial feasibilities are also greater in any agro-forestry model as opposed to undertaking a mere replanting of tea in marginal tea lands.
From the above, it can be seen that the “high cost of production issue “could be addressed through an integrated field development strategy and adopting a suitable agro-forestry model as opposed to following a mere tea replanting model. Nevertheless, tea replanting plays a significant role in the overall field development strategy. This is where the importance of having adequate internally generated funds come into play in the equation. Do the tea estates currently make that kind of internally generated funds to undertake the desired level of capital development programmes? There are socio/political considerations in fixing wage rates without linking it to productivity. When tea growing becomes non-viable, would the banking sector continue to lend money to the companies and other smallholder sector?
How can tea as a product retain its competitiveness in the global marketplace with this kind of cost increase without any corresponding productivity gains?
Thus we see that the tea industry faces inherent constraints and as a result it is not in a position to increase the total tea production beyond certain norms. From a national economic point of view, the total annual export earnings from tea at present is $1,375 million whereas in 2000 it was around $700 million which works out to only 9% growth per annum. Sri Lanka is now exporting around 314 million kgs annually realizing an average FOB price of 4.37 whereas 10 years ago we used to export 290 million kgs at $2.40. Export earnings from Textile & Garments industry amounted to $3,509 million in 2010 and accounted for 42% of total export earnings, whereas tea export earnings are only 16.5%. Even if we are able to double the earnings within the next 10-year period from now onwards, the maximum we could expect by 2020 would be $2,700 million only (10%+or-). This is mainly due to the high cost of production and inherent constraints faced by the industry in enhancing the Sri Lankan total tea production beyond certain norms.
As stated above, the main reason for the high cost of production of tea is due to higher wages payable to a large workforce in the tea estates without corresponding increases in productivity.
The solution therefore lies in trying to understand each ones needs and wants and work closely with the union leaders. The estate managers must strengthen the dialogue between them and their estate workers and try to understand the aspirations of the workers.
The competitiveness of our tea industry mainly depends on the ability to produce and market quality products as perceived by the overseas customers at the lowest costs through integrated productivity and quality drives.The tea industry has the potential to earn higher foreign exchange figure, say, $3,500 million (similar to Textile & Garments) within the next couple of years if the Sri Lankan tea industry players including the trade unions come up with a shared vision and work towards a win- win situation.
(The writer is a senior management executive in the plantation sector).