2: Value-Added Tea and the Position Sri Lankan Tea
In the tea industry, prices are determined at two market transactions: one at the Colombo Tea Auctions and the other at the point of export. Tea is traded as a commodity at the Colombo Tea Auctions but the exports can be either in the form of a commodity or as value-added. Since the V AT producers act as intermediaries between the auction and the consumer, both prices play an important role in influencing V AT production and their profitability. Almost all the V AT producers buy tea at the auction - therefore, the price of tea at the auction acts as input price. These auction prices are greatly influenced by the cost of production of primarily processed tea, the internal economic environment and by the global tea industry.
According to the World Bank ( 1986) Sri Lanka had considerable scope for influencing the world prices for tea in the early 1 960s. The main reasons were the high proportion contributed by its exports (which comprised nearly 33 per cent of world exports) and its long established niche in the market. However, with time the other major tea-producing countries have increased their proportion of exports due to implementation of favourable policies and comparative advantages which they possessed. At present, Sri Lanka shows a price taker situation in the world market - unlike in the past. Therefore, tea marketing as a commodity has been greatly influenced by dwindling prices and pressures from other tea producing countries. The overall influences on the commodity trade are clearly evident from the Colombo Tea Auction prices.
The Colombo Auction average tea prices demonstrated a very similar pattern of change in prices for teas coming from all three regions (Figure 2.4). During the 1 960s, high grown teas used to achieve high prices - whereas low-grown teas achieved the lowest. But at present, low-grown teas are fetching comparatively higher prices than the teas from the other two regions. Up until the mid-1 970s, prices demonstrated a declining pattern - the main reason being the nationalisation concept of the tea industry. In 1 978, prices went up due to a significant devaluation of the Rupee against the US$. The highest prices were achieved in 1 984, since then there has been a declining trend. This appreciable increase in prices was recorded mainly due to supply shortages in international markets, (Central Bank of Sri Lanka, 1984). Later, the improvements in production by other countries decreased the local prices to a significantly low level. In
2: Value-Added Tea and the Position the Sri Lankan Tea
1988, the improvement in tea prices was due mainly to the depreciation of the Rupee (Central Bank of Sri Lanka, 1989). Again in 1 992, prices were increased due to the severe drought which prevailed in most of the producing countries, especially in Kenya. Therefore, the increase in the Colombo Auction prices are masked by the devaluation of the Rupee against the US$ and changes in the international environment. A similar change in auction prices demonstrated that the impact of all these issues is common to teas from all of the regions.
The FOB prices of different tea types also revealed fluctuations similar to those of the auction prices (Figure 2.5). Even though the price changes demonstrate some similarities, the level of value-addition has enhanced the achievement of a higher unit price. Bulk tea has fetched the lowest price over the years, followed by packeted tea. Instant tea is the highest priced tea type followed by tea bags. The other types of tea are also performing well in the market by showing an increasing trend in their prices. Table 2. 1 illustrates tea prices converted to US$ (current dollar terms) by using the relevant exchange rates. This conversion is important in eliminating the distortions created by the devaluation of the Rupee. It clearly demonstrates that V AT is fetching a higher price than bulk tea, and that it has increased nearly three times more than the price of bulk tea. Although the prices of packeted tea are higher than those of bulk tea, it revealed a relatively lower growth rate compared to all the other types of tea. For tea bags and instant tea, prices have risen significantly during the period 1977- 1 997.
Table 2.1
Tea Export Prices (US$)
1977 1987 1997 Growth Rate 1977-1997 (%) Bulk tea 2.03 1 .70 2.39 1 5 .06 Packeted tea 2.50 1 .88 2.57 2.72 Tea 3 . 1 9 3.54 5.76 44. 1 2 Instant tea 4.80 5.87 7.77 3 8.22
All value-added teas 1 .85 2.80 3.90 52.56
Source: Calculated based on the ITC (Various years) and Sri Lanka Tea Board Statistics ( 1 999)
2: Value-Added Tea and the Position Sri Lankan Tea
Figure 2.4 Colombo Tea Auction Average Prices (in 1961 Prices) 1 4 1 2 8 6 4 2 - � � 0 � � � � � 00 - � � � � � � � � � 00 00 00 � � � � High-grown --Low-grown Year - Mid-grown � All Elevations
00
2: Value-Added Tea and the Position the Sri Lankan Tea
Figure 2.5 Tea Prices by Type (in 1961 Prices) 60.00 50.00 40.00 � � 30.00 en 0::: 20.00 1 0.00 Year
--+-Bulk Tea - Packeted Tea --.- Tea Bags - Instant Tea -Green tea � Other Tea
2: Value-Added Tea and the Position Sri Lankan Tea
Devaluation of the Rupee is advantageous for exporters in that it makes their exports more competitive against those of their rivals, and thereby exports can be enhanced. But the impact of devaluation is common to both auction prices and prices of VAT. Therefore, the VAT producers have to buy primarily processed tea at higher prices from the auction for further value-addition, leaving them to gain less. But overall, the export prices clearly demonstrate that V AT producers could obtain better prices by adding more value to tea as opposed to exporting tea as a commodity. The higher growth of export prices of V AT over bulk tea also demonstrates better prospects for V AT producers in the country.