Forbes and Walker recaps tea industry’s 2011

The year 2011 commenced in the backdrop of many milestones that were achieved in 2010. If we are to analyse the events that unfolded during the first quarter of 2011 in retrospect and review the performance of the tea industry, it would give a great deal of relief and satisfaction.
The Colombo auction in January had volumes of six m/kgs and above whilst maintaining healthy prices i.e. marginally higher to the corresponding levels. By the end of January 2011 total auction average of Rs. 394.29 recorded a growth of Rs. 4.55 vis-à-vis Rs. 389.74 of 2010.

Development and drawbacks
A significant development during the first quarter was the spate of social unrest that spread across the Arab world and North Africa affecting some of our key consumer countries. Tunisia, Libya and Syria are some of the key destinations that were affected by these developments.  Whilst these developments were unfolding, Japan too was faced with a massive earthquake, which resulted in a tsunami. Needless to say, these destinations are important export destinations for Sri Lankan teas.
These events no doubt created a lot of uncertainty. Yet another drawback was the Western quality season which was a disappointment, particularly in terms of quality, primarily due to the erratic weather that prevailed.
Notwithstanding the above facts, Colombo auction prices steadily gained to record Rs. 404.12 by the last sale of February to show a gain of Rs. 29.50 vis-à-vis Rs. 374.62 of the corresponding sale average in 2010. It is noteworthy to mention that prices from all elevations i.e. High, Medium and Low showed a growth.
This momentum was maintained during March with prices continuing to maintain healthy levels and more importantly higher than the corresponding period. However towards the end of the first quarter, Low Grown prices appeared to lose its momentum, due to the uncertainty/unrest which was evident in some of our key consumer markets, i.e. Libya, Syria and Tunisia.
First quarter
Sri Lanka tea production of 75.6 m/Kgs during the first quarter showed a marginal gain vis-à-vis 74 m/kgs of 2010. It is also noteworthy that during March 2011, national production of 33.2 m/kgs was in fact the highest ever recorded for the month. Sri Lankan tea exports too showed a growth YoY.
Total volume of 77.4 m/kgs showed a growth of 7.2 m/kgs or 10.2% vis-à-vis 70.2 m/kgs recorded in 2010. However, a more significant feature would be the total revenue realised of 40.96 b, which incidentally is the highest-ever for the first quarter, showing a growth of Rs. 6 b, vis-à-vis Rs. 34.95 b of 2010, a gain of 17.1% YoY.
Second quarter
The second quarter commenced with high auction quantities compared to the previous Qtr and significantly higher to the corresponding quarter of 2010. This no doubt had an impact on quality too. Nevertheless during the month of April prices continued to maintain reasonable levels, particularly in the High and Mid Grown category. Low Growns however appeared unsettled and price levels were below the previous year’s levels.
By May 2011, the events that kept on unfolding in our consumer markets, took its toll on the Colombo auction prices. By this time the Medium Grown and High Grown prices too continued to slide with Low Growns clearly below that of the corresponding levels in 2010, although High and Mid Growns were able to sustain its price levels and were comparable with the price achieved during the corresponding period of 2010.
When analysing the Sri Lankan production during the second quarter a total of 89.3 m/kgs were harvested vis-à-vis 95.3 m/kgs recorded during the corresponding period of 2010. Although the production seems low in comparison to 2010, it could be considered acceptable as the 2010 second quarter production of 95.3 m/kgs was the highest on record.
Exports too continued to maintain and a total of 72.2 m/kgs were exported which resulted in realising Rs. 36.7 b vis-à-vis 36.4 b achieved during the corresponding period of 2010 after having exported 73.1 m/kgs.
On cumulative basis total exports of 149.6 m/kgs showed a growth of 6.4 m/kgs over the previous high of 143.2 m/kgs achieved during the corresponding period of 2010. In value terms too Rs. 77.6 b recorded for the period established yet another milestone being the highest surpassing the previous high of 71.3 b recorded in 2010 by Rs. 6.3 b.
Third quarter
The third quarter commenced with Low Grown prices continuing to slide compared to the corresponding period whilst High and Mid Grown price levels too were lower and more so, during August and September. Yet again the Uva quality season was a disappointment due to the erratic weather conditions that prevailed with the exception of a few invoices which showed some quality, others were plain.
Another significant development was the increase in the wages of the estate workers as per the collective agreement with the trade unions that came into effect during this period impacting on the cost of production. Consequently, the COPs surpassed the net sale averages of most plantations.
In addition to the highly volatile market, around this period, another crisis was in the offing; that being the euro zone debt crisis which too impacted tea prices worldwide. This was primarily due to the currency fluctuations of the euro vis-à-vis the dollar.
Tea production of 71.09 m/kgs (third quarter) 2011 shows a deficit of 7.8 m/kgs vis-à-vis 78.9 m/kgs of 2010; the total cumulative production of 245.1 m/kgs showed a deficit of 3.1 m/kgs vis-à-vis 248.2 m/kgs of 2010. Exports totalled 86.3 m/kgs during the third quarter, realising Rs. 42.63 b in revenue, thus showing a gain of Rs. 0.9 b YoY.
Another noteworthy feature is that January-September 2011 total exports of 236 m/kgs showed a gain of 5.9 m/kgs vis-à-vis 230.1m/Kgs 2010. By the end of the third quarter, revenue totalling 120.3 b was realised, showing an increase of 7.3 vis-à-vis 113 b of 2010. This too is the highest-ever revenue for the period under review.
Fourth quarter
The fourth quarter commenced with no appreciable change as prices continued to be lower than the corresponding level. Low Growns too by this time were significantly lower to the corresponding level and this trend continued well into November with Low Growns in particular showing a substantial decline.
By end November/early December however subsequent to the de-valuation of the rupee, there was a resurgence in prices for Low Growns which showed a positive gain month on month. However High and Medium prices did not show any appreciable change.
At the time of compiling this report, the export/production figures were available only up to end Nov. Hence when analysing the cumulative production for the period Jan-Nov 2011 of 302.1 m/kgs shows only a marginal decrease of 1.9 m/kgs vis-à-vis 304.1 m/kgs of 2010.
Therefore, in the event December crop for 2011 exceeds 29.4 m/kgs, the total production for the year will surpass last year’s figure of 331.4 m/kgs, thus establishing a new record. Exports too for the period Jan-Nov totalled 292.4 m/kgs vis-à-vis 285.9 m/kgs. The total revenue too of Rs. 149.5 b for Jan-Nov 2011 shows a gain of Rs. 8.5 b vis-à-vis Rs. 141 b of 2010. Here again, if the December total revenue exceeds Rs. 5.9 b which is very likely, yet another record in terms of revenue realised will be established.
Sri Lanka macroeconomic
update 2011
Sri Lanka economic growth indicators in 2011 maintained the momentum gained in 2010. The first three quarters of 2011 all showed growth in terms of the GDP. Overall we see a GDP growth of over 8% in 2011. This is despite a 5% decline in the agriculture sector in the first quarter of 2011.
The widening gap in the trade account has to be of significant concern mainly due to the issue of funding the balance of payments. The trade deficit has ballooned from around US$ 3 b a couple of years ago to over US$ 8 b by the year end in 2011.
Remittances by expatriate workers and tourism income are key to maintain the balance of payments at minimal levels which otherwise would be financed by government borrowings either locally or overseas. The inability of international markets to invest due to the global turmoil now stemming from Europe could result in pressure on local borrowing which will contribute to an increase in interest rates which can be detrimental to industry.
The selected economic indicators at the beginning and end of the year tabulated give a fair indication of the general direction of the economy.
The National Budget for 2012 gave significant incentives for companies to invest in agriculture and related industry. Our market report of 22 and 23 November 2011 captured the relevant benefits in detail, which are summarised below:

•  Tax holiday for three years for any venture investing over Rs. 25 m in an agriculture project.
• A grower cum manufacturer who establishes a joint venture with a tea exporter for purposes of exporting pure Ceylon tea with Sri Lankan brand name will be eligible for reduced rate of income tax.
• Qualifying payment benefit for investment of over Rs. 50 m in expanding existing industry.
• Devaluation of the currency by 3%.