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Analysing The Tea Industry In Sri Lanka Economics Essay

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Published: Mon, 5 Dec 2016

My purpose is to analyse the tea industry in Sri Lanka and identify the global identity of our tea. Sri Lanka is the largest single tea producer in the global market. Determining the production and accepting the market forces is important to us to consider as an exporter. Identifying the market structures and how government intervening to this industry is crucial in the global market. I have included in this article how can Sri Lanka can gain a competitive position through capturing the advantages from natural endowments and what our global scenario for tea industry.

2.0 FORTUNES OF SRI LANKA’S TEA INDUSTRY

Sri Lanka is privileged with the cooler, mistier climate and appropriate soil and slops which suited the tea industry. Ceylon received the first tea plant from Assam in the 1939 in British times where they brought more economical, social, political and cultural changes to Sri Lanka. Not until 1867 tea could be grown commercially and it’s James Taylor who acquired basic knowledge from North India and proved on Loolecondera plantations. It is true tea crops were grown in the graveyard of coffee; where until 1860 the main crop from Ceylon was coffee. Ceylon chamber of the commerce 1839 was created the private sector to enter the economical growth in Ceylon. From thereon the private sector prominence to the coffee and tea plantations with Worms Brothers and Ceylon Company. By 1875 tea cultivation accelerated all over Ceylon. Most of the tea plantations were owned by the British, Ceylon planters bought their lands to cultivate their tea from coffee. When coffee lost its value in commercial, colonial administrators concentrated on tea cultivation. Tea substituted the use of coffee, plantations geared to grow their crops and once again Ceylon relied on their own economical status.

Resources were properly utilized where in the ‘Native Era’ (1900-1920) Ceylon directed converting the fast track lands such as Gampola. Galle, Pussallawa and Matara to tea lands. Tea crops increased in correct weather in steep angled slops. To satisfy the unlimited need these resources converted as a factor of production. Scarcity of the world tea plantations, allocation of these resource and opportunity cost of coffee was feverish to Ceylon. Initial stage of tea planting hammered for some extent to the scarcity of tea seeds. Overcoming the situation Sri Lanka was the most valuable exporter around the world. Now we are the 3rd largest tea producers in the world market and have captured 9% as a producer.

3.0 GOVERNMENT INTERVENING TO THE INDUSTRY

Mixed economy of Sri Lanka is serving to the basic need of the economic standards of the country. The resources of tea industry were properly utilized in the country with the support of private enterprises and state of plantations. Government intervention on this industry is high with the authority. Most of the productive resources are owned by the government, but as the capitalistic system the plantations and productivity is owned by the private sector. The demand for Sri Lankan tea has increased; motivating the private sector can meet the supply for them.

Nattukottei chettiars were forerunners of the finance companies now. They played the middle man character to the enterprises in Sri Lanka until 1925, but by 1930 government compelled to take the financial sector. State Mortgage bank 1937 followed by the Bank of Ceylon 1947 took place in the country providing all the financial option given from the middleman. The majority of labours were imported from India and the colonialism was spread around the plantations. Separate laws were established for constitutional and labour rights protections.

Sri Lanka Tea Board (SLTB) is the only regulatory body providing services to tea planters, exporters and manufacturers. Colombo Tea Traders Association (CTTA) and chamber of commerce hold tea auctions weekly. The government intervention to auctions of teas from the Sri Lanka tea board was an excellent work to build confidence of the buyers. Auctions at the chamber of commerce have shown a higher price in 2010 than the last year’s auction. This proves the stability and the recovery after the sink of the industry in 2008. According to ‘Mahinda Chinthanaya’ we highlight the young entrepreneurs to enter the global market. Also we stated the investment GDP rates should be increased in 10 percent. Question is how can we increase the GDP rates in the country? Encouraging the private sector is useful and likely to be increased. Sri Lanka tried to tighten the monetary policy from 2007 to face the recession but the sterilization in outflow of the Central bank high interest rates helped to decrease in the inflation and contributed to loosen the monetary policy. Loosening the fiscal policy can increase the credit demand of private sector and can invest on credits, saying that having an exit policy to government will contribute to the growth of private sector. SLTB will proceed with the direct consistence of the monetary policy to maintain the availability and economic growth.

Sri Lanka has maintained to hold the power of the tea market in the tea industry to overcome the market failures while maintaining the poverty. An allocate efficiency has seen in this industry and shown the world the public-private-people approach by providing the highest auction price. Assimilate in a tremendous pace with the private sector; government can grow profitability absorbing innovations in technology and knowledge. From the direct guidance of SLTB countries monetary policy and fiscal policy will highlight the stake holders such as dealers, importers, exporters and plantations. Bureaucratic hurdles of the industry from import restrictions, protective tariffs, taxations, will distortion by intervening of the government. Capitalistic of the private and public enterprises and blending both economies can guide Sri Lanka to a significant growth with the modern economies.

4.0 IDENTIFYING THE MARKET STRUCTURES

Our tea industry demonstrates the number of sellers of tea is comparatively less and entry barriers are also high because of the government regulations and taxations. SLTB will provide the authority and the auctions will decide the price. Practically there the price makers where government regulatory body of SLTB has given the exporters the stabilize quality ISO 3720 level to maintain the global quality and standards of Ceylon tea. This leads to an Oligopoly market globally for Sri Lanka’s tea industry where we have a close substitute coffee. Nevertheless to enter to the firm countries should have the natural endowment for tea industry. With few sellers and many buyers, natural resources in the producing countries lead to this market structure.

Also sellers are earning super significant profit in the long run if we consider from the view of oligopolistic market. But also when India supplies were reduced on 2009 Sri Lanka increased their supply to the world market to capture more shares and profit which contributed the countries economy. Exchange of knowledge in tea industry is processing when our plantation Minister Mahinda Samarasinghe visited Kenya and compared the both systems of the countries with the agriculture minister Dr. Sally Kosgei of Kenya. Where we can think there can be exchanges of knowledge in this industry in future with the result of joint venture of free lands for coconut cultivation from Sri Lanka in change of buying back the crops. High amount of exporters globally like Kenya, India, China and Indonesia shows the amount of firms for this structure.

Global tea production up to February compared with 2010/2009

(Table 01)

Even though we can say in the global market Sri Lanka’s tea industry will take consists of monopolistic market structure. Because Market forces will deliberate these form of structures. Industry contradicts a perfect competition market because it is the price takers in the market. Differentiation from black tea, green tea and many brands highlights it. With only few barriers to entry in the industry such as legal factors, government regulations and natural barriers it will focus on product differentiation. Supply will be relatively high contrasting the demand in the market will show a high elastic demand. The demand for Ceylon tea has increased rapidly where the net profit US$ 1.37 billion from export tea. Meanwhile the prices will only change fairly in the global market.

We can conclude tea has a mixed structure but more in to the oligopolistic market because of the less main exporters and high entry barriers especially because of natural endowments.

5.0 SRI LANKA SEES A STRONG DEMAND

Till the end of 2010 Sri Lanka has a strong demand for Ceylon tea in the global market. We can say the shortage of crops in India and Assam in July 2010 benefited us to perform well in the global market. The demand has increased in the Colombo auctions for the drop of crops in both countries. Also Sri Lanka’s auctions price will usually go high when the demand of the market is high meanwhile when the supply is high the price will be increased too. Especially the buyers will be increase when the demand is high. Increasing auction prices will have a strong stable demand in the world market. Also the demand of Ceylon tea in the world market has increased, even though china tried to match the taste of Ceylon tea we were enabled to keep the standards of our tea in the global market. Supply of all the plantations increased the demand for Ceylon tea. Also CTC packet tea has a high demand for the drop of Assam tea. If Sri Lanka can maintain the same quality and taste, the amount of importing countries will increase rapidly. But the quality of the product should be maintained even in the erratic climate of weather. Colombo auctions help the SLTB to maintain the equilibrium of the market by exporting the market surplus of tea. Also Sri Lanka can promote more in the world market and improvements of technology can increase the demand in the global market as well as the changes on the weather and seasons can fluctuate the supply. Sri Lanka is expecting high demand in the Ramadan in July and in winter where else the supply of plantations should be high too. All the stakeholders’ plantations, brokers, SLTB, manufacturers will be looking forward and expecting the boom of this industry. Brook-bond Lipton Ltd (Unilever), Lyons Tetley, Dilmah and premier brands has the demand in the market where they keep up with the supply. New technology, fluctuating price, innovations can decline the demand. Country will always equilibrate the demand and supply with getting the highest price paid in auctions.

(Table 02)

Tea industry of Sri Lanka has a century old history. Exporting poor quality tea can be proceed of the world market if they demanding them, to maintain the standards of the tea exports in Sri Lanka SLTB has implemented ISO 3720 to restrict the export of poor quality. Even though we have restricted exporting but not importing poor tea to the country. Somalia, Ethiopia is some countries who buy them for blending purposes. Sri Lanka will also have a chance of meeting their demand as well if we can export the poor qualities which are produced in the country. Russia and former Soviet Republics are the largest buyers of Sri Lanka tea followed by Middle East and North Africa. Also reduce in oil prices can effect the demand for our tea from the Middle East countries. Moreover the global economy can affect the demand and the supply of tea. The world’s first ozone friendly tea is produced by Sri Lanka, promoting for healthy conscious beverage can increase the demand and benefit us.

6.0 GLOBAL SCENARIO FOR OUR TEA

Propagation of tea crops pioneered with British and fairy spread of plantations helped the growth of the cultivations. Other than the Black and Green tea Silver Tips tea, Golden Tips tea, Instant tea, Packet teas are some of the products we export. China, India, Sri Lanka, Bangladesh, Kenya, Tanzania, Zimbabwe are some significant tea producer countries. International trade can benefit us in the long run to the industry. European Fair Trade Organizations have 17 partners in Asia and Africa to import tea including Sri Lanka. Fair trade among the countries in the trade can benefit us in fair pricing where we can reduce the cost of production. Also countries will have a long last trusted relationship in trading. Tea fair was held in Hong Kong, china in 2009 where more of the buyers from all over the world has taken place. Sri Lanka grabbed a huge demand for Ceylon tea by attending the Tea Fair by promoting the tea exports. These are some advantages we capture from international trades.

Sri Lanka is currently under negotiation with the Iraq to increase exports in packet tea. Economic integrations with many countries will be advantage for main exporters like us to have a significant develop. Iranians are currently getting Ceylon tea in an unofficial way where this negotiation will grant the good quality tea to enter the market and the middle men will prevent from the two countries. Collaboration with the World Bank to support Sri Lanka as a middle income earned country can beneficial to us to build a firm relationship and establish, utilize the resources. I’m glad to mention even Sri Lanka is eligible for IBRD financing with the World Bank. Also Sri Lanka and Kenya had a discussion when our plantation ministry visited there and understood about the importance of the small manufacturers in both countries comparing their systems. Ministry was interested in this integration of the proposal for a joint venture with free lands for coconut cultivations in our country in change of buying the crops.

7.0 ECONOMIC INTERGRATIONS

As a member of South Asian Associations for Regional Cooperation (SAARC) the conflict between Pakistan and India influenced our Tea industry with India too. Indo Lanka free trade agreement helped to emerge new turns to the industry where TATA tea Ltd spread their plantation to Sri Lanka and industry suggested it will cater the Sri Lankan market. Economic integrations will aid us to eliminate the barriers to trade among the intergovernmental agreements. The trade blocs can be as free trade areas or preferential trade systems. The tariffs and non tariff barriers will be decreased by the countries’ free movement or goods. Sri Lanka brought employees from India to the plantations, where now we have a separate category called ‘Teas Tamils’ and spread of colonies around plantations. Sri Lanka will always seek for new friends in the world market now after the end of war to build to raise the economy of the country. End of terrorism after 43 years the attention of the world increased for us. Many exports and imports took place with no fear. Boom in the tourism sector helped us to increase the investments. The new port is being built in the Hambanthota by the Chinese government to help Sri Lanka. This will facilitate our government to ease the congestion of the ports. World Trade Organization (WTO) has the jurisdiction over tea exports. Which usually regulate commodities in the market. Also Food and Agriculture Organization (FAO) of United Nations will play a huge role in the tea industry of Sri Lanka as an exporter. Exports aid the raise the foreign currency for us. The Ethical trading Initiative (ETI) a partnership of NGO’s is mainly concerning about setting standards of labours internationally recognised. Ethical trading aims on the labour rights in the plantation and enjoy commodities. Also Tea Sourcing Partnership (TSP) formed 1997 to understand the fluctuate conditions of the plantations and validate the continues audits in the UK based Companies including R. Twining& Company Ltd. Integrations with many countries can help us to raise the economy of the country. Sri Lanka should take the full access of FTA’s from integrations.

7.1 FACING THE COMPETITIVE MARKET

Our president Honourable Mahinda Rajapakse mainly emphasis on the young and energetic businesses to enter in the market and encourages in the exports. To maintain the standards of the tea industry and to build a competitive place in the market is a big task we have look in too. Companies like Unilever and Tata will have mass share of the world market and will be supplied from their own plantations. The small manufacturers will have a good demand in this situation where we have to moreover can concentrate on our own exports. Highlighting our value chain to go along with our competitors in the international market, we can concentrate on branding. Acquisition of Tetley gave Tata to capture the UK and European tea markets. Also being the worlds first ozone friendly tea producers we haven’t taken any priorities to promote our Tea and pay a role in the market.

Capturing a niche market to a broad market with tea we can focus on differentiated products to the market. Other than Black and Green tea Sri Lanka has produced Herbal and Dollar fruit Tea where it showed a decline in the demand. But if we can promote and be innovative to build a competitive edge we can target a greater demand for them. Packet tea has a demand in European counties where we are catering them, but making them more innovating and unique can aid us. If main exporters like India or china will continue to capture more market, we will have to be the price taker and them to be price makers. When the supply exceeds the demand we will have to face more unavoidable circumstance so it is important to build a good competitive edge. As the largest single tea producer Sri Lanka has to think about the international demand for our Tea and how much we can meet up the wants and utilize the proper resources in an effective way. Without being in the traditional way we have to step out of the boundaries and make use of the god’s gift to our nation and show the world our unique taste of tea. Sri Lankan entrepreneurs should open up and can diversify from the markets. But rather than capturing a new market it is applicable for us to go concentrate on product differentiation.

(Table 03)

CONCLUSION

Looking at the world market and importance to Tea, which I have mentioned in the above article I Rifna Rajab is planning to start a business ‘Tips Tea Dealers’ in selling Tea to the local market.

Vision

The vision of Tips Tea Dealer is to become the most competitive and sustainable tea producer as a small holder in Sri Lanka.

Mission

Mission is to provide the best quality tea to the market to anticipate their needs and satisfy the stakeholders.

Objectives

Increase profitability by producing quality tea in 25% by 2012.

Increase market share with more distributors by 10% before 2012.

If I want to succeed in the market as seller I have to concentrate on many things before I start up the business. I should have the capital. Inside Sri Lanka, tea market plays a monopolistic market. The entry barriers are very low for a seller or buyer. Also there are many firms in the same industry as sellers and buyers too. Having the appropriate capital and undergoing with rules and regulations will facilitate me to start the business. Also the demand for tea in the global market is increasing as well as the local market. Even poor quality tea which cannot be exported can use within the country. Buyers will buy them for many purposes such as mixing. So I think the demand will be high, even price will fluctuate according to the demand from buyers. Moreover to perfect competition thus there will be no price war. All sellers’ prices will be comparatively same. Also starting my business in Kandy will benefit me with the natural resources, weather where there are many firms that I can sell my products which will facilitate my need.

Government, Sri Lanka Tea Board, Factories are my main stakeholders. I have to cater and make them satisfy is very important. Following SLTB and government rules and make them aware and update them is important. Also if I can build a good relationship with many factories I can buy refused tea in bulk for a cheaper price for mixing purposes. Also differentiating the products such as Dust, Black Peko, Orange Peko, fenis can facilitate my market. Selling quality products in packets and paying the factories on time can satisfy my stakeholders and I should have the capability to face unavoidable circumstances such as natural weather, crops and demand to reach our expectations.

RECOMMENDATION

Increase the brand identity ‘Ceylon Tea’ more to the global market.

Maintain the standards in exporting tea.

Attract more importers of Ceylon tea attending Tea fairs, more economic integrations and free trade zones.

Providing permits to all the sellers and give authority to buy tea in bulk from plantations.


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