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Misconception of tea auction and export prices

Misconception of tea auction and export prices

The sustainability of Ceylon Tea or Sri Lanka tea industry depends on how efficiently and effectively it can adapt to match the changing global consumer preferences and consumption patterns.

The tea industry needs to be competitive in production, marketing, logistics, product form and more. It must face the market realities and redefine its business strategies and reposition the product lines to achieve this task.

The global tea market is highly fragmented with several players occupying the market share. At present, about 35 countries produce and export tea, allowing the international buyers a wide range of selection of products.

According to available data, in 2017 the world tea production reached 5.69 million metric-tons, registering a growth of 124 million kg over 2016, but the world tea exports recorded a decline of nine million kg.

The growth in world tea production continued in 2018 as well and registered at 5.89 million metric-tons, an increase of 134 million kg over 2017, but exports increased only by 63 million kg. As a result, the year 2019 commenced with a surplus of about 200 million kg in the world tea market, making a huge challenge to the tea producing countries to adapt to the global tea market situation.

Currently, Sri Lanka tea is sold through the Colombo Tea Auction that brings many buyers and sellers to a single platform leading to a very transparent price discovery. The free interplay of supply and demand in the auction system creates a competitive environment and determines the correct price. The tea prices are also influenced by the quality and product reliability. The auction system ensures that the highest bidder is awarded the tea and there is no squeezing of prices as claimed by some producer members. The average tea prices realised at some world tea auction centres during the last three years reveal that Colombo Tea Auction always gets better prices than its competitors (Table 1 – Prices in US$/Kg).

By imposing a minimum price for tea at the auction will drive away the demand which is currently experienced. The producer has all the liberty to withdraw any tea from the auction if it does not fetch a reasonable price. Whilst all other producing countries are liberalising the sale of tea, we are trying to impose more restrictions. It’s globally accepted that, the market forces will determine the best price for any product or service.

The low grown elevation contributes about 64 percent to the annual Sri Lanka tea production while the contributions from high and medium grown elevations are about 21 percent and 15 percent respectively. The bulk tea shipments contain either high grown tea, low grown tea or blends of all three elevation teas. Therefore, comparing average FOB prices of bulk tea with average auction prices of high grown tea gives a distorted picture on the tea auction and export prices (Table 2).

Comparison of Colombo Tea Auction Prices of Three Elevations and their share of FOB Prices of Bulk Tea (Rs./Kg)
The above data reveals that, the cost of tea or producers share in the average FOB price of bulk tea is between 75-80 percent, leaving only about 20-25 percent to the exporter. It should be noted that the share of export price received by the exporter is not his profit but the available portion of the export price to meet all his expenses.

The Colombo Tea Auction by law requires that buyers settle the full cost of tea to the producer within seven days after purchase of tea from the auction compared to 14 days in Kenya. The exporters of bulk tea are compelled to offer 60 – 120 days of credit to foreign buyers due to the heavy competition in the world tea market.

In respect of markets like Iran, Syria, Russia, longer credit periods are offered as the buyers need more time to pay the suppliers due to international sanctions on their banking systems. However, the exporters are expected to operate at the tea auction every week to procure their tea requirements and also to support the producers with borrowed money from banks at high interest rates.

Hence the finance cost is a major element in the cost structure of tea exporting companies. The other costs of company overheads, storage, transport, freight, tea flavour, CESS and Tea Promotion Levy and others are also to be met within the 20-25 percent share of the export price. The export CESS and Promotional Levy account for approximately two percent of tea auction price and payable in advance. The tea producers are a fortunate group to receive the payment within a very short period of seven days compared to other producers/suppliers in the country.

The tea exporters expect a guaranteed product from the tea producers when they purchase tea at the auction. The compliance with ISO 3720 minimum standard, free from any extraneous matters and compliance with international food safety standards are some of the quality parameters expected by the tea exporters.

However, most tea producers do not strictly adhere to such requirements and as a result, the tea exporters have been compelled to invest in tea cleaning machinery also for cleaning of tea before shipping to foreign buyers. The exporters bear additional expenses to ensure the purity of tea to foreign buyers when it should have been done by the producer before teas are offered for sale.

The decline in tea production in Sri Lanka during the last six years has led to an unethical competition for green leaf.