Ceylon Today Editorial

NEW look at Tea

20 January 2017

Plantation Industries Minister Navin Dissanayake speaking at a function in Colombo yesterday said that the Government of Sri Lanka (GoSL) will launch a US$ 50 million global tea promotion campaign, this year.

The occasion was to celebrate the 150th anniversary of the introduction of tea to Sri Lanka, by James Taylor, a Scotchman. He started a plantation in Loolecondera estate in Kandy on 19 acres of land in 1867, according to Wikipedia. This was on a then coffee plantation, said Sri Lanka Tea Board Chairman Rohan Pethiyagoda. Coffee was the plantation crop then, not tea.

But, since then, seemingly as a key foreign exchange (FX) earner, there has been no turning back for tea. According to Pethiyagoda, the tea industry benefits a million Sri Lankans. Tea is currently Sri Lanka's fourth largest FX earner, being led by remittances, garments and tourism, in that order. Not so long ago, i.e. prior to the opening up of the economy in 1977, tea was the island's number one FX earner.

But with a drought gripping the country, affecting supply, confirmed by Dissanayake and Pethiyagoda at this function, there is a question mark in regard to launching this promotional campaign at this time of the year. With Sri Lanka tea or 'Ceylon Tea' as this local beverage is branded and with supply seemingly unable to meet demand because of the drought, it may be folly to create more demand by undertaking a promotional campaign, now.

A man in the industry told this newspaper, the drought has not only affected Ceylon Tea supplies, but it was a global phenomenon, thereby causing a worldwide shortage of tea.

In economics, when demand is greater than supply, it's then ripe for supply to fetch the 'highest' price, which is seemingly happening now, compared to what existed when Dissanayake took office two years ago in 2015, when commodity prices, led by oil, were collapsing globally, a fact which the Minister admitted to. But the new problem now, in his own words, was, 'supply.'

One may argue, that first, the GoSL, or more appropriately the industry should fix the 'supply' problem and then think of promotions. On the other hand, if such a promotion leads to tea prices getting a premium over the so-called, current, 'premium' it already fetches, then a promotional campaign may be justifiable at this juncture.

Sri Lanka's main tea markets are the CIS States led by Russia and the Middle East (ME). Russia is the 'jewel in the crown' among the CIS States which formerly comprised the Soviet Union. Both of these regions/States, namely Russia and the ME are oil economies.

As Vish Govindsamy, CEO of Watawala Plantations, a tea producer and exporter told this newspaper in 2015 when commodity prices led by oil, had then collapsed, he said that the fortunes of tea are intrinsically linked to the fortunes of oil.

That is, when oil prices crash, other commodity prices, not least tea, also crash. Similarly, when oil prices rise, tea also rises.

Currently oil prices are looking up, led by the recovery of the global economy. But oil prices are not only dependent on the fortunes of the global economy. Its prices are also determined by the performance of the US dollar, the world's currency and also that of the shale oil industry.

Currently, the dollar is on an ascent due to the rise in US interest rates, creating demand for the greenback, back at its home country. A rising dollar hits oil prices, and, as a knock on effect, on tea as well. In simplistic terms, when one could export one unit for the price of a dollar previously, now, a stronger dollar may buy as much as two of such units. Therefore, it may be a case of increasing productivity and efficiency, to keep pace with a rising dollar so that a supplier is not left behind and not necessarily promotions.

Secondly, when oil prices increase, the nascent shale oil industry gets activated, therewith impacting on oil, and, as a result, oil dependent economies such as Russia and the ME as well, which is Ceylon Tea's main markets. So, it may be a case of back to square one for Ceylon Tea under these circumstances.

Dissanayake said that there is a need for new markets for Ceylon Tea. He said that the UK, once, a major market for Ceylon Tea, has, however, since lost out to CTC teas, a predominant player of which is Kenya, as opposed to Sri Lanka's orthodox tea production.

Probably, a better bet may be to convert from orthodox to CTC teas, or, as the Minister said, to find new or virginal markets. A possible shot may be the USA and the continent, avid coffee drinkers, a crop that Sri Lanka gave up for tea in the 1850s due to the crash of coffee, then, said Pethiyagoda.

Dissanayake also said that the industry will have to brace up to changes. This may well mean allowing tea imports for the purpose of blending and re-exporting, a move, strongly opposed to, by the industry.