Tea industry – everyone has problems

Sri Lanka’s tea industry is supported by the industry players themselves through the Cess that is collected at the export point which is expected to finance the industry. Four rupees per kilo of export is all the Cess that the government collects from the exporter.

This is turned over mainly to the three government arms that look after the industry, namely the Sri Lanka Tea Board (SLTB), the Tea Small Holder Development Authority (TSHDA) and the Tea Research Institute (TRI). Although earlier this money came direct to the SLTB to be shared with the other two bodies in some agreed formula, latterly it goes to the Treasury and comes to the three institutions as an allocation from the Treasury.

The industry in general and the three bodies charged with the responsibility of regulating, directing, developing and promoting the industry are unhappy about this arrangement. Firstly it so happens that the Treasury uses part of the cess collection for things other than the tea industry. Secondly the three institutions are being made to run as government departments with all the usual checks and balances applicable to a ministry or a department hindering the developmental efforts, contrary to what is expected of a statutory authority. Thirdly the money is not available to the authorities concerned in the time of need. Especially when it comes to capital expenditure and money for promotional work, it is hard to get the remittance in time.

Very broadly the functions of the SLTB being the premier institution controlling the industry, fall into three main areas. Firstly it is regulatory, secondly promotional and thirdly developmental. In fairness to the institution one has to admit that there has to be a certain administrative machinery to do all this. Almost the total SLTB budget comes from the Cess allocation. The tea Cess which has been at the level of Rs 2.50 per kilo has been raised to Rs 4.00 in April 2006 amidst protests from the industry on the understanding that the increase should be compensated with an equitable benefit to the industry. In 2000 total tea exports had stood at 281million kg and the average rupee price had been 181.69 (US$ 2.39) per kg, whilst the 2006 exports were 315 million kg for which we have received an average price of Rs 274.16 (US$ 2.64) per kg.

From the government’s point of view it is argued that the increased revenue from taxation does not appear to be forthcoming and also not adequate to compensate for the wage and other increases in governmental expenditure. Therefore it appears that the government is taking Cess to be another item of revenue to the Treasury kitty from which it allocates each ministry or department a provision depending on the priorities. Although the Finance Act permits such allocation the industry feels that this practice is not only unjust but also detrimental to the future of the industry as Cess is meant to be ploughed back to the industry.

On the other hand it is a fact that more than 50% of tea Cess allocation given to the institutions connected to tea is mainly going to maintain the institutions by way of paying the salaries and meeting other administrative expenses. For instance a cursory glance at the final accounts of the SLTB would show that out of the Cess allocation of Rs 374 million, 186 million has been spent on staff salaries and other administrative expenses while only 109 million has been spent on promotional activities. Only another 30 million has been spent on capital purchases.

The industry in general is caught up in a situation where it says that the majority of the industry players are unable to plough back sufficient money to improve the industry. The underlying fact is that reportedly the corporate sector has exhausted all possible borrowing capacities and therefore the banks are unable to help them any more. Even the funds coming from the Plantation Development Project by way of loan/grant packages are kept unutilized as the prospective recipients are unable either to raise counterpart funds for the approved projects. In addition an amount of Rs 250 million from the Revolving Fund on soft loan basis earmarked to improve the private tea factories is lying almost untouched as the money cannot be released through banks due either to borrowing capacities of the prospective recipients having been exhausted or for lack of suitable collateral to be offered by those factories for which money is passed as being eligible for funding.

One of the allegations made against the corporate sector (RPCs) is that they tend to take a large portion of the income as management fees thereby leaving very little or nothing for development of the estates and the factories. It is also alleged that they are reluctant to invest due to the fact that the land is on lease and therefore they are not sure of what is going to happen after the lease expires. Such an attitude (if true) – especially when it comes to improving the estate by way of replanting - will have serious repercussions on the future of tea industry.

Considering the present day prices of fertilizer, it would cost the planters as much as a little over Rs 5 billion to apply fertilizer to the total acreage under tea (roughly about Rs 24,000 per hectare).

Based on this calculation the industry stake holders, mainly planters, make a strong case for a fertilizer subsidy. Studies have shown that a loss of production of 5% due to non application of fertilizer can result in a loss of nearly 15 million kgs of tea which calculated at a modest US$ 2.50 can be $37.5 million (Rs 4 billion).

That is the loss to the national income. It is argued therefore that even if the government agrees to give 50% of this amount as a subsidy still it would gain by way of the higher contribution to the national income in foreign exchange.

In addition, the non application of fertilizer can be disastrous to the industry in the future. The yield per bush will be lesser and lesser and the quality poorer and poorer. Apart from the poor quality of leaf from a week and withered bush resulting in lesser volume of poor quality tea being produced, the tea bush can become more vulnerable to decease. That has to be avoided at any cost.

With the introduction of chemical fertilizers, the planters whether it is the big estates or the small farmers have over the years neglected the nitrogen supplement from rich sources like grilicidia. The sector has now taken steps to reintroduce the traditional methods of fertilizing to supplement the requirements. It has now been realized that grilicidia wood is a valuable alternative source of energy too. The Tea Research Institute is helping in the promotion of these practices.

Even though there is a fertilizer subsidy scheme which is supposed to be operative, due to various reasons the scheme is not benefiting the farmer as it is expected. The small farmer with less than five acres of land who is supposed to be benefited by this scheme has other competing priorities for the subsidy money. Unfortunately even though the subsidy is most welcome, the scheme designed for the distribution of the subsidy has itself led to so much abuse being encouraged. It is even alleged that subsidy coupons have been found with illicit liquor vendors!

Among the many reasons that contribute to the higher cost of production of tea by most of the factories is the underutilization of installed capacity in the factory.

The blame for this situation should partly come to the SLTB itself for indiscriminately allowing more and more factories to come up. But on the other hand the SLTB cannot by law or regulation as it stands now prevent a new factory being set up. Even though Kenya produces the same volume of tea as Sri Lanka with only 80 factories we have 681 factories! In addition to the increase in COP this situation has given rise to abuses in the green leaf management resulting in low quality production.

In short it is known that rejected green leaf from one factory finds its way to another. Also it is said that some buyers in defiance of all regulations, buy leaves for ready cash just like buying vegetables in the open market!

There are enough instances where some factories have closed down resulting in the poor green leaf suppliers left unpaid. On the other hand there are other instances where some factories which are reportedly running but actually closed. Such factories are suspected to be illegal gateways through which teas of other origins find their way to the market as Ceylon Tea! If this suspicion is correct it has to be admitted that our policies (import for re-export) are wrong and/or the monitoring system of the SLTB is lacking. Consumers all over the world are not only getting more and more conscious of the health benefits of what they consume, but also like to have a certificate and a guarantee as to what they consume is non injurious to their health. This is where Good Agricultural Practices (GAP) and Good Manufacturing Practices (GMP) come to play. The Plantation Industries Ministry has through the Plantation Development Project in collaboration with the Sri Lanka Standards Institute taken steps to implement such a Code of Conduct. This is in addition to the encouragement given to the industry to have the Hazard Analysis and Critical Control Point (HACCP) Certification and strict adherence to ISO 3720 standard quality especially when it comes to export.

Countries like Japan and European Union are almost obsessed with the emphasis they lay on the adherence to standards and certifications. While in fairness to the consumers we agree that health standards in food and beverages have to be maintained at high levels, we have to admit that producers and exporters have to incur additional costs to obtain such certification thus making the products less and less competitive. It has also to be mentioned that while the industry is confused as to the number of agencies who scout round for certification, it is sometimes annoyed about the numerous certificates that one has to obtain. On the other hand in fairness it has to be said that there are other areas like warehousing into which some standards have to be introduced.

Here again is a strong case for branding one’s products. Establishing a brand is costly. It is even more costly to keep the brand on the shelf. Whether it is tea or any other product brand image is fundamental to the success of a product. But in the present day context it is almost imperative that one not only establishes a brand but also strives to keep the allegiance of the consumer to the brand so established if one wishes to stay in the market. With the fierce competition faced by tea in the global market, exporters of tea have to be more vigilant about this hard fact.

Even though the benefits of value addition are well known, not many of our producers have ventured into vertical diversion and taken up to directly exporting a product of their own brand. It may be because for one thing the marketing abilities are not within them to embark on such a venture.

On the other hand it is much less troublesome to sell the product as bulk tea and realize the value faster. The result is that the one who is adding value buys the tea in the auction as any other foreign buyer does and he adds value to it.

The fact remains that he has paid for some intermediate expenses which he could have very well avoided if he was the producer who added value to the product.

The option is available for him to bypass the auction and convert 100% of his production and sell direct as a value added product. The SLTB always welcomes and encourages such entrepreneurship in value addition.

Promotion goes hand in hand with value addition.

The bulk tea that is sold out at the auctions to outside buyers go into the hands of those who add value to this tea by various means and ending in the supermarkets in brands controlled by supermarket giants. These supermarket giants are capable of spending in one country alone as much or even more that we spend to promote the Lion Logo all over the world! This speaks loudly for the need to step up our promotional efforts.

Value addition in the field of services is something for which the SLTB has given its thoughts to. The exporters have now the facility of online transmission of documents and receiving required approvals for their exports. Through a joint arrangement with the Ministry of Trade and the Department of Customs in collaboration with the SLTB a project has been established to help reduce the time wasted by the exporters in filing papers and getting them processed for export of the product.

Gaining by the experience that other tea producing and exporting countries have achieved, a chamber of exporters is now trying to venture into automation of the tea auction. Such a venture would not only be most timely as the volumes of teas and the various grades between the time we started the auction system and now have increased tremendously that if one wants to be efficient and also minimize/eliminate alleged corruption one has to go for automation even at considerable costs. This would be most welcome to exporters.

Machinery and equipment required for value addition are expensive. Finance is expensive too. A case in point is a tea bagging machine. The present day trend in consumer demand is to have tea bags rather than loose tea for brewing. On the one hand converting a production line from orthodox to CTC, which is a required raw material for tea bags, is expensive. On the other hand bagging machinery itself is expensive. So the entrepreneur is compelled to be satisfied with selling the bulk orthodox tea rather than venturing into the more profitable option.

The TRI is taking all steps to see that the planters use only those weedicides and pesticides that are recommended by the TRI so that they avoid using chemicals that are not acceptable in the consumer countries. Even the ones that are acceptable have to be used in the recommended dosages and strictly following the dosage regimes that are recommended by TRI so that Maximum Residue Levels (MRLs) can be adhered to in the field and by monitoring quality of the end product in the factory floor.
Current tea prices are attractive. The government hopes for tea exports in value added form. In fact it wants the bulk to value added ratio to be reversed from 65:35. This is not a tall order. But there is another school of thought that believes that an increase in prices can drive away buyers to other countries. Especially when it comes to low grown teas, it is statistically proved that the supply of this quality is too low as against its demand and it is only because of that the prices are kept high, the buyers being mostly from the Middle Eastern region who have developed a taste for this tea.

Therefore, theoretically if the same quality is found in another country the buyer could get attracted there. Although the argument cannot be dismissed when it comes from buyers who would like to buy tea cheap one has to go deeper into the merits and demerits of this argument.

Against the backdrop of predicted global consumption/demand being lower than the predicted rise in supply, one has to be extremely cautious of encouraging new plantations even though higher yields can be encouraged to lower the COP. What is basically required is higher yields and better quality in order to optimize profit.

Industry players themselves are experimenting quite successfully, certain newer technologies that help reduce the energy costs in tea production/manufacture.

The efforts made by the SLTB to encourage both the growers and the manufacturers to reduce the percentage of refuse tea by having better quality leaf and following good manufacturing practices through awareness campaigns and award schemes are well received by the industry. But there is still a long way to go.