Government exploring avenues to narrow gap between tea auction and FOB prices

By Nishel Fernando 
The government is exploring avenues to narrow the gap between tea auction prices and FOB prices for the benefit of planters amid persistent low tea prices at the Colombo Tea Auction and rising cost of production. 

“Although, exporters claim that market forces are responsible for auction prices, as per our understating, that is not the case. They are making good money out of these transactions. For example, the current tea auction price of high-grown is around Rs.540, but the FOB price is always in the range of Rs.700-900,” a senior State official told Mirror Business. 

The Secretary to the President, Dr. P.B. Jayasundara, the Treasury and the Ministry of Plantation Industries and Export Agriculture recently have taken up the matter for discussion.    
“We have encouraged Sri Lanka Tea Board (SLTB) to initiate discussions with stakeholders on this matter and in addition, the government is also willing to take this up with relevant parties,’ he revealed. 

The government is of the opinion that even Rs.50 per kilo hike in current auction prices would greatly benefit the planters, which would be supportive to implement the President’s directive to increase plantation workers’ minimum daily wage to Rs.1, 000.

The Regional Plantation Companies (RPCs) have already proposed a productivity-based wage model to the government to implement the announced wage hike for plantation workers from March 1.

Dr. Jayasundara is currently studying the proposal submitted by the RPCs, and he is expected to summon a meeting with RPC representatives to finalise the wage model.

According to Forbes and Walkers Tea brokers, the average auction prices of high-grown tea fell to Rs.547.36 at the end of January from Rs.591.64 a year ago and from Rs.646.77 two years back.  RPCs last year urged the government to set a minimum price at the tea auction amid falling tea auction prices and increasing cost of production fuelled by political interferences in wage negotiations.   

They (RPCs) proposed that SLTB should intervene and commence buying from the auction once tea auction prices fall below the set minimum price.

However, a leading tea exporter pointed out that an earlier attempt to interfere in the Colombo Tea Auction via imposing a minimum price by the government had failed leading to a distraction of auction prices for different varieties of Ceylon tea.  “When this was attempted in the past, the premium prices for high-quality Ceylon tea varieties disappeared,” he said.  Commenting on the low auction prices for high-grown teas, he noted that auction prices for high-grown teas are under pressure due to competition from North Indian teas. 

According to the Tea Exporters Association (TEA), the cost of tea or producer’s share in the average FOB price of bulk tea is between 75-80 percent and the remaining share mostly covers various expenses of the exporters, such as costs of company overheads, storage, transport, freight, tea flavour, Cess and Tea Promotion Levy. 

However, the majority of RPCs are currently making losses except for a handful. The listed RPCs incurred over Rs 1.3 billion in combined losses during first nine months of 2019.
SLTB is currently focusing on enhancing the quality of Ceylon Tea to fetch higher auction prices. It has already issued a circular to tea factories to improve the good leaf count to 60 percent from current average of 45-50 percent with set timelines. 

Sri Lanka tea exports increased slightly by 3.8 percent year-on-year to 292.6 million kilos in 2019, bringing an export revenue of Rs 240.6 billion, compared to Rs. 231.7 billion in 2018, according to Forbes and Walkers Tea brokers.