Tea rides out of recession: New strategies required to sustain upturn

The writer was a former Deputy Director General of the Sri Lanka Tea Board.

Tea is the first among the world commodities to ride out of the recession. Several factors contributed to this turnaround.
A shortfall of 75 million kilogrammes in tea production in major tea producing countries as India, Sri Lanka and Kenya. These three countries account for one-half of the world tea exports.
Upturn in crude oil prices. There is a co-relation between the prices of crude oil and tea. The oil producing countries of the Middle East, North Africa, Russia and Gulf Region absorb 75% of the tea exports from Sri Lanka. The increase in the spending power of these countries consequent to higher oil prices is driving up the market for Sri Lanka teas.
Depletion of tea stocks in the wake of the recession in some of the consuming countries, and consequent purchases for replenishments.
The government’s intervention in providing a stimulus in the form of Export Development Rewards to exporters.

The average price at the two Tea Auctions in July have climbed up to an all-time high of Rs. 400/= per Kilogramme. This is in marked contrast to the price of Rs. 200/= recorded at the height of the recession at the end of Nov. 2008. The recent rise in the tea prices is also global evident. The following Table reflects the combined Auction averages of the principal Auction centres of the world:-
Unless the world supply situation changes dramatically to a surplus over demand, the tea prices are likely to remain buoyant for the remaining months of this year as well as into 2010.

New strategies required to sustain the current upturn
How can Sri Lanka sustain remunerative price levels for tea? What strategic shifts in policies are required? Tea, as a primary commodity, is notorious for cyclical movements in its prices. After 150 years of tea trading, Sri Lanka still markets only 45 percent of her teas in the form of consumer packets and teabags. And only 12% of such products are channelled to the world market in Sri Lankan owned Brands. Sri Lanka should make bold decisions to move away from trading in Bulk teas. The government and the Industry should work in partnership to change the current trading pattern. Otherwise, our Tea Industry, particularly the tea producers, will have to face negative returns, when the tea prices dip in the course of its cyclical movements.
New strategies require both fiscal and financial support. Dr. P.B. Jayasundera, former Secretary Ministry of Finance, had the foresight to grant income tax exemption for the local processing and exports of teabags. The Teabag segment thereafter gained momentum. Today, Sri Lanka has developed the technology and expertise required to manufacture and export all forms of sophisticated teabags required by developed countries. Apart from the traditional String & Tag Teabags, Sri Lanka exports Pot teabags, Envelope teabags, Triangular teabags and teabags in Heat sealed Alufoil Envelopes. The foreign exchange generated by the Tea Bag industry has compensated many times over for the minimal financial loss in Government revenue by income tax exemptions.
Sri Lanka needs to take bold steps to discourage the exports of bulk tea from Sri Lanka. At present, the tea Cess levy of Rs.4/= per kilogramme is uniformly applied to all segments of tea exports – bulk teas, packeted teas and teabags. Shouldn’t a higher rate of Cess be levied on bulk teas? If the Cess on bulk teas is increased by Rs.2/= per kilogramme, the extra funds generated would amount to Rs.300 million per annum. This money could be ploughed back to the Tea Industry for marketing of Sri Lanka owned Brands and for the value-addition operations. The benefits to Sri Lanka in the form of additional foreign exchange earnings and employment generation will be significant. Such a levy will also progressively tend to discourage trading in bulk teas. Unless such bold steps are initiated, Sri Lanka cannot achieve, within the next three years, the export target of 65% of her total tea exports to be marketed in the form of consumer tea packets and teabags.