China could be a major importer of Ceylon tea in the future when conflicts in the Middle East and Europe would shift those markets to cheaper and lower quality tea elsewhere, said Tea Exporters Association Chairperson Ganesh Deivanayagam in an interview with The Daily Morning Business, while Ceylon tea is looking for “new markets that are emerging, by way of the population trends and changes within the demographics.”
He said that armed-conflicts in the Middle East and Europe are affecting the demand for Ceylon tea and reduced crops would result in those markets looking for cheaper deals elsewhere. “The worry we always have is that they'll get used to those cheaper or poor-quality teas, and they'll never come back to us; this is the worry that we have.”
Moreover, he said that fertiliser issues, changes in weather patterns and non-availability of labour have impacted the crop yield and the quality of tea leaves while the tea industry is still struggling to recover to the pre-pandemic levels due to continuous changes in the domestic and global environment.
Deivanayagam said that the ranking of Ceylon Black Tea as the third most popular among the non-alcoholic beverages globally by Taste Atlas was a result of the marketing and the push given to Ceylon tea by the exporters and the Tea Board.
Following are excerpts from the interview:
How has Sri Lanka’s tea industry recovered after the tumultuous past few years due to the pandemic, fertiliser shortage and the economic crisis?
We can say that it has still not fully recovered. When an industry which was used to having very reasonably priced (subsidised) fertiliser for a long time, suddenly is completely withdrawn and the price increases 10 times or even 20 times at a particular point, we cannot expect the industry to recover within a short period of 1-2 years from that shock. The prices have come down and now, it is around six times the original price of fertiliser in 2019. Of course, we can't compare that price because it had a subsidy included and it was at a different dollar value as well. But the fact remains that, mentally the tea smallholders are not in a position to fertilise as they used to do. So, this is one reason why our crop is lower, compared to 2019 when we had a production of 300 million kg and thereafter production has come downhill and it is continuing to be. Last year, production was 256 million kg which is a small recovery from the previous year. This year also it is expected to be only around this number.
On the production side, we have not recovered and the reason is mainly the fertiliser situation, caused by ill-advised ad hoc decision-making. The price of fertiliser and the reluctance amongst the tea smallholders is the reason why it's continuing. The plantation companies are much better even though they may not also be fertilising to the extent they did in 2019, they do a much more scientifically based fertilisation. The Tea smallholders just can't afford it due to its current prices. So, they're not doing as much as the crop needs to start the recovery.
The economic crisis increased all costs, and of course, the rupee also drastically depreciated. The rupee has now subsequently appreciated and it's continuing to appreciate the expected we are told can be Rs. 270-280 (per USD). However, our costs have not come down and they remain high. The input costs for example electricity, fuel and fertiliser as well as the general wages. Fertiliser didn't have VAT and now this has also been added to VAT, which is a completely new additional cost. All the other inputs like electricity and also general wages remain high. The appreciation of the rupee is now creating a major strain on the exporters. This is the issue that's continuously being outspoken by all the export-oriented industries. There was a joint communique, and also a joint press conference was being organised.
So, the tea industry has not been given a chance to recover because something or the other is continuously changing, your ground or the goalpost is continuously changing. So, the industry is not able to recover. We can't only blame our country's situation or the Government, globally, the situation is continuing to change, the war situations in two of our most important regions (the Middle East and Eastern Europe) are also affecting our demand and the reduced crop means that these countries are looking for cheaper teas elsewhere. The worry we always have is that these markets and consumers will get used to those cheaper or poor-quality teas, and they may not come back to us. Despite all efforts, the recovery cannot happen because one after the other there are blows to this trade.
We urge the Government to allow some stability with regard to policies, with regard to taxation, exchange rates and interest rates so that the industry has a chance to recover and positively contribute its potential to the economy.
Has the fertiliser shortage the country experienced impacted the quality of the tea leaves in Sri Lanka?
So, the fertiliser issue is not a directly correlatable thing, we are guessing that the fertiliser shortage caused due to the ban and the subsequent high prices, is the main reason. This could also be partially due to weather patterns. Definitely, all we know is it (fertiliser issues) will have a major impact. I think the right question is to ask what are the factors affecting the quality of tea today. What are all the different factors that affect quality? We can list fertiliser as a top reason. There are many other factors, such as the weather and the age of the bushes where the overall replanting situation in our country has not really taken place.
Replanting is taking place, but not to the extent that is scientifically required. The quality from old bushes continues to come down with age, yes putting fertiliser will help to push the quality out for a period of time, but now we are running out of that also. The third most important factor is the availability of labour, so the right plucking rounds can take place. On a shorter plucking round of every 7-8 days the tea production and quality are at its optimum levels. But nowadays, we find (even though there is no exact data) when we go and talk to individual smallholder farmers, because of the lack of labour and the increased cost of labour, they’re doing even two weeks plucking. This means the quality will definitely come down because you're not plucking the best of the leaves and the leaves are getting more mature for quality and also when only once in two weeks, This also means they are plucking the below best kind of leaves.
To counter this the Tea Board is pushing for the B-60 programme, where the best green leaves as defined by the Tea Board and Tea Research Institute (TRI) have to be 60%. This is also a challenge because there is a supply side issue wherein the lack of labour has to be fixed. One cannot just put a regulation and expect things to be followed. The lack of labour needs to be addressed.
How can we address the lack of labour? There are several solutions, whether bringing labour from outside the country, or we should mechanise, there are many options that are being continuously spoken about and worked on by the industry. I would say this is probably the biggest reason for quality, fertiliser would come second to it.
Ceylon tea gets the best per kg value across all our competitors, so the dollar value is growing (see table) and we are only next to possibly China in terms of best value obtained for tea in the global market. Given the unclear data available from China, we probably are the number one in terms of price we achieve in the world market per kg. This is due to the continuous marketing efforts of the exporters as well as the value addition that our country does and also the higher quality of the teas our producers make. Even though we say that quality is poor, quality is not there, but we are getting better prices also. So it's not a black-and-white situation. I can say that the quality has dropped by that much or this much. These are problems and issues the industry is continuing to work together with all the stakeholders as well as the Government.
We have the Tea board and all the stakeholder's associations have a seat on the board, so, we all have to continue to work with the Government and influence the decision-making towards the improvement of the industry which is a) quality b) quantity and c) better marketing of Ceylon teas.
The Government stepped in for the fertiliser issue, where the Minister of Agriculture pushed for a subsidy to be given using the Tea Board promotional funds, which has been already implemented. However, it can be, of course, done better, but a good effort has been made already. So that push means that the smallholders will get the fertiliser at a guaranteed lower price than the general market price, so those efforts will continue to make small changes. So these improvements have to continue to happen, but at the same time, we have to protect the industry from any major debacle decisions such as the fertiliser.
One other similar thereatenting decision we fear from the Government is the imposition of VAT on tea and the potential removal of the SVAT mechanism which makes sure we have a cashless refund mechanism that is currently in operation.
How has VAT impacted the tea industry?
VAT on tea is a major intervention or interference. Tea is a commodity that is primarily exported, actually 84% of the tea produced in this country is exported but they want to put a VAT on it, and we are expected to fund this and expected to get a refund. With 84% of a commodity that is sold at the auction, we will have to pay the VAT, we all know that 84% is going to be exported anyway. So the Government is going to collect all that money and they're going to keep it in their system then and the industry is expected to go through so much of administration and paperwork to get that VAT back. Currently, we have this SVAT system which avoids the cash going in and out. It also definitely has all the robust checks and balances needed to make sure nobody misuses this. But the Government as advised by the IMF is adamant on removing the SVAT. Come next March, the possible removal of SVAT will be once again a major disturbance in the industry.
Has Ceylon Tea found new market destinations for its products? Or are there any new destinations we would like to enter in the coming years?
We have more than 360 active exporters in the country, there are more than 600 exporters registered. And they all go around the world trying to look for market business and to market Ceylon globally taking enormous risks. Continuously, these exporters go to various trade fairs. It's a very hard piece of work to go out in the world and offer the product and push it in, especially tea, which is a very old and culturally ingrained product. Let's say a country that is drinking green tea for all, for most of their requirements for many centuries, is not going to suddenly decide to drink the Ceylon orthodox black tea, However, now we find that the younger generation across the world, Gen Alpha, they seek out and try new products, new experiences. So Ceylon tea is a new experience that is an opportunity that we can sell to this generation. However, this marketing will not be on a massive scale with huge volumes, it will have to be done on a different scale and at different levels. So new exporters are coming continuously to address these markets.
China is another important market where a lot of development has taken place for Ceylon Tea and that's a tea-appreciating country. So the future is quite bright and we can look forward to China being a major importer of Ceylon tea, again, that leads to being at a higher value, more niche products and so on. That's the way that industry is now transforming and evolving. New markets are definitely not just markets in terms of geographical markets, it's just we would have exhausted almost every possible way of reaching out to every market by now.
So we are not talking about new markets in terms of just geographical countries, we are talking about new markets that are emerging, by way of the population trends and changes within the demographics. That's happening and Ceylon Tea is right on the forefront. trying to capitalise on this.
On 24 April, Ceylon Tea Board will be announcing the Colombo International Tea Convention, an event that will be held in July. This is an effort to bring the tea industry across the world to Colombo to talk about the global tea industry. We are going to get almost 200 foreign delegates coming to Colombo for three days, to discuss, experience and enjoy what Ceylon Tea does and gives to the world. So, these are how new markets are found and new demographics are attracted towards Ceylon tea.
Recently Ceylon Black Tea was ranked as the 3rd best non-alcoholic beverage in the world. How can this positively impact our tea industry? Is there an opportunity for us?
Tea is the next most popular beverage after water in any case and Ceylon tea is most popular because it comes with a kind of a story and something genuine and true to nature with Ceylon tea, the taste that we provide and the qualities that are given it is unmatched by other countries. When you take a cup of Ceylon tea in the same category, our teas perform much better in terms of quality. So that's the reason people who are rating or listing these kinds of recognitions. This is something that is actually a result of the marketing and the push that has been continuing to be given to Ceylon tea, whether it is by the tea board or exporters, and the continued qualities that are being produced by the producers, this recognition is a result of that work. We can definitely leverage this recognition, it will be used in our tea convention, and the Tea Board will use it in the material that they put out regularly and on social media promoting Ceylon tea. So that's definitely a positive thing. It's a positive recognition.
What are the potential export targets the industry can reach in 2024 and the medium-term targets and what are the challenges that should be addressed to achieve these objectives?
We are already achieving the best prices and every tea variety that is produced is sold. The only way that we can increase the income from the exports is by increasing production, and also maintaining and improving the quality. The focus now has to be on fertiliser and quality, to make sure that the production is increased and brought back to about 300 million kg we had before. So that we don't lose the market share. Until that is done, we cannot set ourselves new targets. But we can set new targets in terms of reaching out to this new generation, Gen Alpha, and so on, by marketing our products in a more effective way to this generation, which will increase the overall value of the teas that we export.
Last year's export revenue was more than $ 1.3 billion, there is the there is no particular number in terms of targets that can be given based on the kind of issues that the industry is facing but by continuing to work on all these qualitative targets, the numbers will ultimately improve and it is entirely dependent on how much quantity we are able to make and how we are maintaining and improving quality. The tea industry has an overall $ 1.5 billion export revenue target in the short term and a $ 2.5 billion target in the medium term.