PA in fresh effort to tackle high cost of production in plantations

The Planters’ Association of Ceylon (PA), the representative body of the Regional Plantation Companies (RPCs), said in a press release this week that labour costs accounted for the largest component of the steadily rising cost of production of tea in Sri Lanka, and called for higher productivity to sustain the industry.

The PA noted that the cost of production of a kilo of tea has increased from Rs. 124.06 in 2002 to Rs. 350 by 2011 and is now outpacing tea sales revenues. The PA warned that if this trend continues, Sri Lanka’s tea industry will become unsustainable in the near future as companies are steadily losing money in tea production and unable to cope with shouldering labour expenses such as accommodation, medical facilities, child care, etc.

The PA noted that while services and materials account for 6% and 16% of total production costs respectively, labour costs account for about 63% to 68% of total manufacturing costs, making this the largest fixed cost faced by RPCs. Staff and executive salaries, from estate supervisor level to company CEO, account for only 10% of total cost of production. Therefore, plantation field employee salaries and welfare measures account for close to 70% of plantation company costs.

The PA also noted that, unlike the smallholder sector, RPCs are not able to cut back on wages and welfare facilities in response to the reduction in income. RPCs, despite cash flow difficulties have abided by the collective agreement and continued to accommodate the current daily wage and incentives, including EPF and ETF contributions and a host of welfare measures for its work force and also resident estate families.

Currently, around 220,000 people are employed by RPCs as registered workers. However, RPCs support a resident estate community of around one million persons that include families of estate employees. This large estate population benefits from essential services such as free water, medical facilities, housing and other amenities. The PA said tea industry production costs have increased sharply in 2012 as the industry is forced to absorb high fixed costs, mainly labour costs. Tea output from RPCs reduced by 12% in the first half of the year because of adverse weather conditions caused by a prolonged drought, reducing incomes of RPCs. In addition, instability in the Middle East has reduced Ceylon Tea purchases by Middle Eastern countries, which has again reduced incomes of the plantation sector.

Current auction prices of Ceylon Tea have not been able to compensate for the large drop in revenues, said the PA. As a result, the average cost of production of tea is now higher than average sales revenues from tea.

Currently, Sri Lanka’s cost of production is averaging at around Rs. 400 to Rs. 410 per kilo of tea, while the average selling price per kilo of tea for the period January to September 2012 was around Rs. 385.66 (US$ 3.05).

The PA also noted another development in international tea markets that has raised a red flag regarding Sri Lanka’s tea industry. Kenyan teas are currently fetching US$ 3.20 per kilo, raising warning signals that Ceylon Tea may be ousted from its position as the premium global tea. The PA said Kenyan teas may be generating higher prices due to an 11% drop in production, and also due to heavy marketing and promotion by the Kenyan authorities.

The PA maintained that Ceylon Tea, with its lowest pesticide residues and environmentally friendly manufacturing, ensures the highest quality of tea, but the Ceylon Tea brand may lose its position in the near future, unless this threat is urgently addressed.

The PA pointed out that the lack of brand positioning would translate into lower auction prices for Ceylon Tea and lower industry incomes, which in turn, would reduce foreign exchange earnings for the country as a whole.

The PA maintained that the twin problems of unsustainable cost of production and insufficient promotion of the Ceylon Tea brand image, needs to be addressed immediately by all industry stakeholders, to safeguard Sri Lanka’s historic tea industry. It said that the cost of production can be addressed to a great extent through a significant increase in labour productivity, as RPCs cannot control tea prices that are dependent on external factors, such as the weather and political stability in the Middle East.

The PA pointed out that the rising cost of production affected not only RPCs but also tea smallholders. During the year, tea small holders too have been adversely affected by lower tea outputs and reduced incomes. Currently there are around 400,000 small holders who together with their families account for one million persons estimated to be dependent on this employed population. Therefore, over 2.5 million people depend on RPCs and the small holder sector for their livelihoods and sustenance.

In addition, the two are also interdependent. While the small holder sector grows around 70% of the green leaf and the RPCs produce about 23% of green leaf, RPC tea factories account for nearly 41% of the manufactured black tea output. This is because RPC tea factories purchase a portion of small holder green leaf, on behalf of a large number of smallholders that do not operate tea factories. Therefore, a financial crisis in the RPC sector would also hurt the smallholder sector, in addition to the overall plantation and tea export industry.

Given this situation, the PA emphasised it is extremely important that plantation employees and trade unions urgently collaborate with plantation companies to increase overall productivity and ensure the survival of the plantation industry.