Plantation companies are feeling the pinch in profits due to restricted cash flows and high input costs, leaving little to plough back into replanting and development.
Most estates have been plagued by high labour costs following a wage increase last June and persistently low prices for tea at the auctions.
Costs of production have grown 26.7 per cent between 1999 and 2002, from Rs 104.71 for all elevations to Rs 132.67 per kilo.
The spiralling input costs, companies say, has forced them to curtail essential replanting of tea bushes, and new development of estates.
Ideally, to reach a 100 percent of replanted estates in 50 years, 2 percent of each estate has to be replanted each year, one analyst said.
That isnt happening. “As far as we know, few companies if any are replanting because there are no funds available”, Secretary General to the Planters Association (PA), Malin Goonetileke said.
This, unfortunately, can have a ripple effect on the industry in the future, dropping yields and compromising on quality.
“The full effects of increases in virtually all production inputs over the past one year, with higher labour costs being a notable contributor, are now reflected in the half year results of several companies”, a PA statement said Thursday.
Tea prices in dollars last peaked in 1984 at US$ 2.47, a marginal US$ 2.07 in 1998, and havent grown since, past US$ 2.00.
Rupee prices from June to July for the past three years have remained virtually static at between Rs.131.00 and Rs.134.00.
The sector has also not quite recovered from recent war jitters in Iraq, where it lost due to cancelled shipments to some of its biggest markets in the Middle East.
Companies with a high exposure to High Growns are also facing heavy monsoon rains at the moment that is dropping yields.
“While revenues have fallen due to the lower prices for high grown teas, the declines in profit growth have been much sharper, and in the case of loss-making companies, these losses have grown substantially”, Goonetileke adds.
But its been argued that plantation companies are not without fault. Critics point to high management fees siphoned off by companies as being a factor in the mediocre results.
The biggest point of contention is that the fees are charged on turnover, irrespective of profits, or by some companies on green leaf intake and tea manufactured.
Plantations analysts say that, over Rs. 900 mn was absorbed in management fees by companies last year.
An attempt to control the arbitrary charging of fees through a governing formula has been drawn up, and tied to a line of US$ 30 mn in Asian Development Bank funding.
Some 13 companies to date have signed up for the funding to be released in October and have agreed also to cap their fees.
“But the Plantation Development Project loan does not focus on replanting but on the upkeep of replanted estates. There are very limited resources for new replanting”, Goonetileke says.
He adds that one definite way out of the trap is in new replanting, but adds that the industry needs support through a state-replanting subsidy to do this effectively.
“Most of the acres of tea we see in the plantations were replanted because a subsidy was often available. We have mentioned the issue to the Minister but we have to still formally put forward a proposal”.
“Companies have been forced to borrow more to keep operating and to implement scheduled programmes for diversification, marketing and worker welfare”.
“The industry is at a crossroads, with long term sustainability a serious concern. It is imperative at this juncture that the issues facing the plantation sector are looked at carefully by all parties involved.”