Special Feature

Tea - the beverage for the century

The Sunday Times Business takes a look at the tea industry and its future - five to 10 years down the road. 

The reporting team of Chanakya Dissanayake, Hiran Senewiratne and Feizal Samath spoke to a cross-section of an industry that is at a point of major change and no return to the days of the British Raj. It is however not a comprehensive review as the team was unable to include the voices of the plantation workers of Indian origin - who form the backbone of the tea economy – as to how they see the industry and their lifestyles evolving in the future.

Nevertheless the views and comments, on current development and future prospects, in this report provide food for thought for industry experts and the government on the direction the industry should take.

Some of the issues confronting the industry in the short and long term are the need for long-term financing to develop estates and social infrastructure and concern that Colombo would "miss the bus" as other non-producing countries set up regional trading centres.

On the positive side, the survey found that the planned computerization or automation of the Colombo tea auction and an end to traditional open-cry trading would reduce transaction costs and speed up sales.

A proposal to conduct the auction in the US dollar currency is being considered which if approved would be a bonus to the tea industry though there is some apprehension from small buyers who fear the move would squeeze them out of business.

The politicisation of the plantations on the other hand casts a shadow over an industry that in 10 to 20 years would continue to drive Sri Lanka's economy in terms of development and socio-economic aspects.

Wages are rising annually though to some extent the demands of the workforce seem reasonable if not considering the fact that trade union pressures and threats follow these demands. Sri Lanka's wage structure is the highest in the tea world. Industry efforts to link productivity to wages may succeed if workers are allowed to make a choice instead of unions deciding what is best for them.

Take the latest wage hike. Industry experts say the settlement which was forced on the industry by the government for political reasons provides for a reduction in the incentive component between the normal wage and the attendance payment. Under this, workers who are very productive and come daily to work will receive the same amount as others who are habitual absentees. 

It is a classic case of rewarding the unproductive worker though the unions are bound to view it in a different light.

Finally as the industry and government "huff and puff" over the need for a global tea centre in Colombo, cities like Dubai and Karachi are already setting up trading/blending centres and taking away a position that Sri Lanka is ideally placed to fill after the demise of the London tea auction. 

-The Business Editor

Minister says

On social conditions.

The social conditions of workers haven't improved since privatization. Some companies may say they have improved facilities but one just needs to go to the plantations and see their living status and then decide who is fooling whom.

Workers still live in linerooms in 12x10 foot houses with two or three families in one place. Conditions are cramped. That hasn't changed under privatization. At least under state control, there was some infrastructure development that benefited the workers.

Good factory environment.

What use is it in having a good factory and providing a neat uniform? This is just a showcase for buyers and other important people who visit estates.

Workers leave their dismal conditions at home and walk into so-called luxury. Does it change the life of the worker or does it improve the status of the factory? 

It is essential to uplift the worker and his home environment before changing the work culture. A happy and contended worker will be more productive and be proud to be part of the company. ISO standards and quality assurance are good for the management; it does not improve the life of the worker.

Infrastructure

The ministry is planning to implement a programme where we would provide 30,000 houses a year in single or twin-cottage type units for workers. 

A financial package is being worked out where workers would be asked to pay back the cost of the house under a 15-20 year loan scheme. Workers will not be asked to provide any guarantees

Wages

All what we did under the recent agreement was to ask for something that other segments of the Sri Lanka workforce had got. We were not and will not be unreasonable. Our workers should be entitled to what others get.

The industry says the wage structure is the highest in the world but has anybody asked the question why? It's simply because the cost of living in this country is much higher than in other producing countries. You can't compare this with that. That's not a fair comparison.

Collective bargaining

We need to include clauses - when the next collective agreement comes up for negotiations next year – that would take into account unseen wage hikes like the one currently concluded. In the last agreement we were flexible and accommodating.

Future

The conditions of workers must change in the future otherwise they would not remain on estates and we would have a huge labour crisis. Currently they have no stake, no future and nothing to look forward to like any other citizen.

They are like nomads, uncared for. The moment they don't have a job they are forced out of their homes and have no place to go. The government, the plantation companies should look at workers in a humanitarian way and treat them equally.

If the workers continue to be pushed around, they would resist and may want to do the pushing themselves.

Planters say…

Competitive edge

Sri Lanka exports 20% of the world tea requirement. This is mostly made up of orthodox teas (90-92 percent) and CTCs (8-9 percent). CTCs are preferred by consumers who like a strong tea. This is mostly used for tea bags for mass consumption. 

CTC tea is usually cheaper to produce than orthodox tea. Coarser leaves could be used and the overall processing is also cheaper. Kenya, a close competitor of Sri Lanka, produces entirely CTC teas. 

However, orthodox tea is preferred by high-end consumers and the tea connoisseur. Sri Lanka's orthodox tea is still perceived to be the world's best. That is our competitive edge in the world market.

Global tea consumption grows by about two percent annually. But, most of the growth comes from the CTC customers. 

Productivity

Sri Lanka's productivity is low compared to its main competitors, Kenya and India. At the time of privatisation of the tea estates in 1992, Sri Lanka's productivity stood at 1,268 kg per hectare. This is very low compared to India's 2,000 kg per hectare and Kenya's 2,500 kg per hectare. 

Labour vs Productivity 

In 1992 Sri Lanka had a ratio of 3-3 1/2 labour per hectare which is also too high compared to Kenya's ratio of 2 workers per hectare and India's 2.5 per hectare. 

The government in 1992 privatised the highest cost-lowest productivity tea estates in the world. 

After the privatization ... 

The companies invested heavily in improving the soil productivity. The soils were tested and custom-made fertiliser was used to improve yields. Excess staff was reduced through gratuity payment schemes and other retirement benefits. 

As a result, during the last nine years, yields have increased from 1,268 kg per hectare in 1992 to 1,500 kg per hectare in 2000.

Since 1994 yields have been going up. 

The recent wage hike 

We gave in under duress from both the government and the trade unions. The satyagraha and go-slow campaign were meant to be non violent. But the workers blocked the tea lorries, cut the utility supplies to the estate bungalows and carried out various destructive activities. 

The government also implied that if we do not give in to wage demands, they would gazette the wage hike and make it mandatory. 

Under these circumstances we had to give in. The trade unions always base their demands on the previous year's tea performance. True, we made big profits due to global conditions last year. But, this year the situation is different — the competition is strong and buyers are discounting the prices according to the rupee depreciation. This year the profits will not be as good and we will be burdened with the wage hike. 

Forbes says…

Output 

Sri Lanka has consistently broken all-time records for the past six years since the privatization of estates in 1992. The records started coming in from 1994 onwards. 

Last year Sri Lanka did well to exceed 300 million kg but Kenya is bouncing back from a bad production year. In this context we would do well if we hold production at 300 million kg. 

January was a good production month at 27.2 million kg which is an all time high and 4.5 million kg more than January 2000, but the go-slow and satyagraha are a setback to output. 

We can make a more accurate prediction by around June on production trends this year. 

Globally production will rise from last year as Kenya is expected to increase output. In 2000, Kenyan output fell to 250 million kg from an average of 280-300 million kg. This led to a 50 million kg fall in global output last year. 

On the normal supply/demand equation, 50 million kg is not a lot from the global production of 2.5 billion kg. It matches the normal annual increase in consumption. 

If all factors are equal and if prices hold this year, I don't think there would be an oversupply situation in the market. 

On the negative side, there could be some hiccups if major importing countries like Russia and the CIS have a financial crisis and oil prices in the Middle East weaken, which would then lower demand. 

Barring these, I see the supply and demand position well balanced. Last year was a good year for both tea globally and Sri Lanka in particular. 

Dollar equivalent

The rupee average of teas at the Colombo auction last year was the highest ever at 135.53 rupees per kg. Significantly, the US dollar equivalent was only $ 1.76. Though this is higher than $ 1.64 in 1999, it is lower that 1998 rates when the auction average was $ 2.08. 

1984 was a boom year when the auction average at 62.79 rupees per kg was equivalent to $ 2.47. 

We get a totally distorted picture when looking at the rupee versus dollar earnings. One of the psychological advantages in the tea trade is selling it through an internationally accepted currency. We are in a devaluation mode all the time. 

Regional strengths

Two years ago four countries in South Asia - India, Sri Lanka, Pakistan and Bangladesh which collectively account for 40 percent of global output and 40 percent of consumption - got together to form the Tea Association of South Asia (TASA). 

But that doesn't seem to have made any headway mainly because of conflicts between India and Pakistan. We need to work together in South Asia and come up with a common strategy. Tea would ultimately be the winner. 

Future of tea

The future of tea as a beverage is very encouraging provided the players in the industry, locally and abroad, combine their strategies in a spirit of mutual cooperation. 

The global consumption of tea is 2.5 billion kg out of a global population of 5 billion people. The tea consumption per capita is still very insignificant at 1/2 a kg per head per year. There is tremendous potential to increase this amount. 

Labour

The politicization of the poor worker is totally detrimental to the industry and the worker. The recent settlement of the labour dispute has reduced the incentive component between the normal wage and the attendance payment. Under this, workers who are very productive and come daily will receive the same amount as others who are not as regular. 

We have created a disincentive for efficiency. The good worker is the loser. 

Worker relations

The collective agreement between companies and the workers last year was the first in the history of the plantations and brought workers and plantation companies closer. 

We need to build on this process of collective bargaining without government or political interference. This is the key to the success of the plantations.

Yields

Yields average 1,500 kg per hectare with 190,000 to 200,000 hectares under tea production across the country. We need to increase yields. 

Focus

To increase yields we need some government support. It is unfortunate that the ADB funding mechanism (US $100 million over a five year period) has come to an end.

Plantation companies need some long-term funding to improve estate and social infrastructure and develop the plantations. We need to continue the momentum of development 

Year 2010

We should see continuous development of the fields and factories and diversification. There will be better use of lands with forestry and other agriculture. 

Most estates would have uplifted living conditions of the workers, build better homes and provided facilities. 

Many factories have achieved the Japanese 5S concept and obtained ISO standards.

Voice of the small holders

At present, little over 50 percent of tea production comes from low country plantations owned mostly by smallholders, signifying the importance of their contribution to the tea economy. 

"Tea smallholders along with tea factory owners would in the next 20 years increase production and sales by 100 percent," Chairman of the Tea Factory Owners Association, Ratna Gamage told The Sunday Times Business. 

He said with Sri Lanka being one of the best tea producing countries in the world "we have to maintain this standard at any cost." 

Today many small growers have less than five acres and face many difficulties due to increasing labour costs and fertilizer prices. 

D. Gajanayake, a smalltime tea grower in the tea-growing region of Matugama in southern Sri Lanka, said he was unable to bore the cost of labour and fertilizer for his 1- 1/2 acre land and make profits. 

"My income is very uncertain due to fluctuating tea prices though at present prices are good. If the government could subsidise fertilizer prices it would be some consolation for us." 

L. Ariyaratne, who also owns a 1 1/2 acre land at the same village in Matugama, said high fertilizer costs affected income levels. 

He said green leaf prices were good at present and hoped this trend would continue though a labour shortage and high fertiliser prices could impede growth.

Ariyapala's monthly income is 7,500 rupees. "This fluctuates from time to time and when this happens the income levels are not enough to keep pace with the rising cost of living." 

One of the biggest problems in the future would be a worker shortage as younger people are reluctant to work on tea lands as it is not a dignified job, Ariyapala added. 

"The future would be bleak if the government does not address these challenges faced by tea smallholders," he said. 

Ariyapala noted that the government should subsidise fertiliser prices and establish more green tea leaf collection centres in the area. 

M. Somapala, another small tea grower, said that they were not getting what he called the "certified price" for green leaf. 

His income is around 6,000 rupees per month, which is insufficient to maintain his family with rising living costs. Somapala has not fertilized his land due to the high fertilizer costs. 

On the other hand, he says present day chemicals for tea plants have destroyed harmless insects in the soil while not being up to standard. 

K.N.G. Ariyapala, president of the Small Tea Estate Society of Matugama, said that his society's advice to farmers was to face the problems and look for ways of improving income levels. But he agreed that fertiliser prices have doubled and a shortage of labour was affecting smallholders

"Younger people don't want to work in estates. They want white collar jobs. They feel shy and odd to explain to others that they are working on an estate," he added. 

Asia Siyaka says…

Output/outlook 

Production last year at 306 million kg was the highest on record and the first time the industry touched 300 million kg. The increase was mainly due to a rise in low country teas which were up by 12 percent from 1999. 

High and medium could have done better if not for work stoppages and strikes that affected output in 2000. 

Following the Russian rouble crisis, the tea markets crashed in 1999 but picked up substantially in 2000. Russia came back with a vengeance as they were benefitting from good oil prices and had money to buy tea. So was the Middle East. 

Demand from these two regions boosted our prices. In second half 2000, the markets collapsed in South India and coupled with a shortage of teas and high prices in Kenya, those buyers began coming here. 

From a production point of view, 2000 was a good year for tea. It was the perfect setting for a revival following the crisis in 1999.

This year, favourable oil prices will help Russia and the Middle East to continue from 2000 buying trends. But Kenya has resumed normal production since last November and prices there have come down. Buyers who came to Colombo are now moving back. 

Markets

Sri Lanka has been forced to sell to Iraq at 95-100 rupees per kg compared to more than 100 rupees before, under the Oil-for-Food deal. India, which had quoted less, is selling cheaper "third" country teas to Iraq whereas Sri Lanka cannot do it. Our share of the Iraqi tender has been shrinking in the past two years. 

High wages will affect the industry this year. The February and March months have been affected by the go-slow which may result in lower than the 300 million kg in production being achieved this year. 

On the other hand, producers might cut output this year and strike a balance between output and quality. More teas and lower prices means a loss as the wages bill is high and goes up with more production. The averages this year could be inflated due to depreciation. 

Dollar-based Colombo auction

Kenya and Indonesia are both conducting sales in US dollar terms. We feel however, that if we are to do the same thing, there should be sufficient provision to allow domestic trade in local currency for local consumption needs which is around 30 million kg a year.

A dollar-based trading system should treat all buyers and sellers equally and not set up exclusive groups. This is the second time in the past seven to eight years that this proposal is being considered. Computerisation of the Colombo auction 

When we launched this company some years ago, it was done on the basis that the tea industry would one day advance to screen-based trading. We built our systems with this in mind and we are ideally positioned to adapt to the changing environment. 

However we need to ask ourselves - what value does this change bring to the industry? Does it benefit us or some overseas buyer? Do we lose out or gain from change? 

The reality is that we don't have logistics problems similar to China or India and we are geographically better placed to receive teas quickly from estates. Maybe screen-based trading could be used for some segments of teas like private sales or during surpluses. 

We need to use new technology to strengthen the existing auction system. On the other hand we have tremendous expertise that could be marketed overseas. 

For instance in India, the markets are inward looking due to huge domestic needs while we are more outward looking as we produce to mainly export. We think exports all the time. We have expertise in value added exports and we sell all the tea we produce. There are no surpluses unlike other producers. We should take advantage of these marketing skills. 

Regional centre

We should position ourselves as a global trading centre. 

Sadly this is not the case. We are not moving with the times. We need to be setting global standards given our top place in the international market as the world's biggest tea exporter. 

We should be setting the trends and control the market; not let others control us. 

As we argue and debate the issues of a regional centre, others like Dubai and Pakistan are beating us to the creation of international centres. Kenya is adding value to teas while Turkey is becoming a major centre. 

India is also creating the environment with liberal policies towards packing and blending plants.

Tea traders say…

Production/Yields 

Privatisation has paid off rich dividends. Prior to 1992, production was more or less stagnant but since estates came under private ownership, output has seen a sharp rise. 

Before privatization, the plantation sector has been underperforming and still does in terms of production and yields. While estates owned by companies have a long way to go in terms of increasing yields, smallholders in Sri Lanka have achieved yields that are comparable with other producers like Kenya for instance. 

Our yields are among the lowest in the world. For instance in 1975, Sri Lanka was on par with Kenya in terms of yields per hectare. Since then Kenyan output has increased to 4,000 kg per hectare whereas yields in Sri Lanka, on company-run estates, are at a low 1,300 kg per hectare. 

There is a lot of scope to increase yields and this is gradually taking place. Maybe by the year 2010, we may achieve 2,000 kg per hectare. 

Markets

After privatization, the industry has been a market-driven one compared to during state-controlled times when it was inward looking. 

Sri Lanka has many advantages as it is blessed with nature and a mountainous range where high quality teas can be produced. We can't compete with the bottom end of the market with producers like Argentina. 

But we are able to produce top quality and attract buyers at the top end of the market. 

We see tea at the top of the beverage market and there are growing indications that the beverage has medicinal properties and is good for one's health. We need to cash in on this. 

Prices

Last year we re-launched the Ceylon Tea image as the industry is moving towards specialized teas. There are niche markets we have to tap. Earlier local teas were all bundled into one brand called Ceylon tea. Now we need to and will create segments like Ceylon Uvas or Ceylon Udapusellawas, etc. 

The image campaign is being done systematically and last year's launch was at the US tea convention. Two weeks ago it was in Japan. We are tackling specialized markets in this campaign which would be spread over a couple of years. 

Later this year, the Ceylon brand would be promoted at the Tea and Coffee convention in Amsterdam. We need to slowly build up our image. 

Computerisation/developments

A committee is studying the process of automation of the Colombo Tea Auction. The auction is more than 100 years old and we can't change the system overnight. We need to come up with a comprehensive plan which should add value to the current system. 

The need for automation arose a couple of years ago when the number of lots particularly for orthodox teas at the auction began growing. Earlier the two-day auction had two sales per day. Now it has three per day and these are being held at the same time. 

It is almost bursting at its seams and something has to be done about it. Either we need extra rooms or we need to expand to three days from a two-day auction. The number of lots has increased to 10,000 from 6,000 lots about 5-6 years ago. 

This is mainly due to more special teas being produced. 

We should not change the whole structure. We have an auction centre that is the envy of all tea producing countries. It is the largest in the world, very efficient and very effective. 

We would like to retain the basic features like brokers and buyers converging at one place like today and maybe pressing the button on a computer to complete a sale. We will however replace the OPEN CRY system with computers but retain some key features. 

There is no opposition to the proposal but some apprehension on the part of small buyers. We need to demonstrate to them that it would benefit all sectors. 

It would be the first automated system. It was tried earlier in Britain and India but failed as the project was controlled by IT experts and not tea industry specialists. 

We need to get it right and for that reason the committee, which called for tenders late last year, are making specifications as they study the proposals. What the committee is basically doing is asking companies that have offered to computerize the auction to come up with the plan after speaking to all stakeholders. There have been some interesting proposals.

Some of the advantages of automation is that it would reduce transaction costs and enable us to trade in larger volumes. 

US Dollar-trade

This is being looked at by a chamber of commerce committee. 

Future 

10 years ago, most of the plantation workers had little work and did odd jobs like painting stones. That has changed and there is a lot of work as yields improve. We have created a partnership between management and the workers. 

We see both sides complementing each other. There is no discrimination. We want workers to be part of the company. 

We need to change the culture and make the job of a plantation worker more dignified than before. 

In Japan for instance workers come in Vespa scooters and don smart uniforms. Things are changing and we may see some vast improvements in social conditions in the near future. 

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