Bachelor of Commerce (Special) Degree Program

2nd Year

Research Proposal
For
Tea Production in Sri Lanaka.

International Economics

Prepared by

D.M.N.S.W. DISSANAYAKE
CM/2006/033

Faculty of Commerce and Management

Department of Commerce and Financial Management
University of Kelaniya
1. INTRODUCTION

Tea production in Sri Lanka, formally Ceylon, is of high importance to the Sri Lankan
economy and the world market. The country is the world's third largest producer of tea and the
industry is one of the country's main sources of foreign exchange and a significant source of
income for laborers, with tea accounting for 15% of the GDP, generating roughly $700 million
annually. Sri Lanka was the world's leading exporter of tea (rather than producer) with 23% of
the total world export in 1995 but has since been surpassed by Kenya. The tea sector employs,
directly or indirectly over 1 million people in Sri Lanka and in 1995 directly employed 215,338
on tea plantations and estates. The central highlands of the country, low temperature climate
throughout the year, annual rainfall and the level of humidity are more favorable geographical
factors for production in high quality tea. The industry was introduced to the country in 1867 by
James Taylor, the British planter who arrived in 1852.

Pre-Tea era

Cinnamon was the first crop to receive government sponsorship in Ceylon, while the island was
under Dutch control.During the administration of Dutch governor Iman Willem Falck, cinnamon
plantations were planted in Colombo, Maradana, and Cinnamon Gardens in 1769. The first
British governor Frederick North prohibited private cinnamon plantations, thereby securing
monopoly of the cinnamon plantation for the East India Company. However, an economic slump
in the 1830s in England and elsewhere in Europe affected the cinnamon plantations in Ceylon.
This resulted in them being decommissioned by William Colebrooke in 1833. Finding cinnamon
unprofitable, the British turned to coffee.

By 1825 the Ceylonese already had knowledge of coffee. They started planting coffee as a
garden crop and the first coffee plantation was started in Baddegama in Galle District. Although
this venture failed due unsuitability of area to the crop, George Bird became first to start planting
coffee on a commercial scale. After Bird begun his coffee plantation in Singhapitiya, Gampola
governor Edward Barnes also started a plantation in Gannoruwa. The demand and high price in
European market for coffee fueled the rush of coffee planting. Investors flocked to Ceylon from
overseas and around 100,000 ha of rain forest was cleared to pave the way for coffee plantations.
The term, "Coffee rush", was coined to describe this developing situation in 1840.In 1869 the
coffee industry was still thriving in Ceylon but shortly afterwards, coffee plantations were
devastated by a fungal disease called Hemileia vastatrix or coffee rust, better known as "coffee
leaf disease" or ‘coffee blight’.The planters nicknamed the disease "devastating Emily"when it
was first identified in the Madolsima area in 1869. Production dipped rapidly as the disease set in
and every effort failed to revive the coffee. Of 1700 coffee planters only 400 remained in the
island as the rest left for their home countries. The coffee crop died and marked an end of an era
when most of the plantations on the island were dedicated towards producing coffee beans.
Cocoa and Cinchona were experimented as alternative crops but failed due to a bug, Heloplice
antonie. In the 1870s virtually all the remaining coffee planters in Ceylon had switched to the
production and cultivation of tea because of the devastating Hemileia vastatrix fungus.By the
year 1900, only 11,392 acres were still under coffee cultivation.

Foundation of tea plantations

In 1824 a tea plant was brought to Ceylon by the British from China and was planted in the
Royal Botanical Gardens in Peradeniya for non-commercial purposes. Further experimental with
tea plants brought from Assam and Calcutta in India were brought to Peradeniya in 1839 through
the East India Company and over the years that followed. In 1839 the Ceylon Chamber of
Commerce was also established followed by the Planters' Association of Ceylon in 1854.In 1867,
James Taylor marked the birth of the tea industry in Ceylon by starting a tea plantation in
Loolecondera estate Kandy in 1867. He began the tea plantation an estate of just 19 acres
(77,000 m2). In 1872 he started a fully equipped tea factory in the same Loolecondera estate and
that year the first sale of Loolecondra tea was made in Kandy. In 1873, the first shipment of
Ceylon tea, a consignment of some 23 lbs, arrived in London. Sir Arthur Conan Doyle remarked
on the establishment of the tea plantations, “…the tea fields of Ceylon are as true a monument to
courage as is the lion at Waterloo”.

Soon enough plantations surrounding Loolecondera such as Hope, Rookwood and Mooloya
situated to the east and Le Vallon and Stellenberg to the south began transforming into tea
plantations and were amongst the first tea estates to be established on the island.
2. PROBLEM CONTEXT
• Extreme political, industrial, and economic problems over the past years have meant that Sri
Lanka has fallen from the position of number one producer in the world to number eight in
1993.
• Producers have to face major decisions regarding production methods, product range, and
export markets. Although the U.K was once Sri Lanka’s biggest customer, almost 70 percent
of production now goes to Russia, the Middle East, and North Africa.
• The Arab market used to prefer orthodox teas but consumers there are steadily moving
towards European tastes and are demanding more tea in tea bags. Sri Lanka’s fine orthodox
teas, considered by many to be among the best tea in the world, are not suitable for tea bags.
• Decision making was centralized and inflexible, and political considerations took precedence
over economic factors.
• Wage increases were unrelated to productivity, labor was politicized and productivity
declined.
• Costs increased and heavy financial losses were increased.
• Investment was low.
• Management efficiency in the plantation owned by the SLSPC (The Sri Lanka State
Plantation Corporation) and JEDB (The Janatha State Development Bureau) deteriorated.

3. RESEARCH QUATIONS

• What are the current trends in tea industry prevailing at Sri Lanka?
• How does tea affect to maximize the Gross Domestic Production?
• What are the criteria that influence to decline the share of tea in world market?
• How land, labor and other resources utilize for sustainability of the crop?
4. SIGNIFICANE OF THE STUDY.
• Tea prospect for Sri Lanka’s Tea industry in the long run will depend on her international
competiveness. At present, Sri Lanka’ average yield is very low compared to the major Tea
exports. Kenyan yields are over twice those of Sri Lanka, while the Indian yields are and half
times that of Sri Lanka.

• Low yields in Sri Lanka could be attributed to the large extends of tea which are still under
low yielding seeding tea compared to the newly emerging countries such as Kenya, which
has almost the entire extent under VP tea. Though the tea replanting scheme commenced in
the lat 1950s, the process has been very slow.

• As a result of the stagnating yields. The cost of production of Sri Lanka tea has increased
dramatically over its competitors, making the tea industry unviable with slight fluctuations of
the international price of tea.

• The cost of production has been above the net sale average received at the Colombo auction
on most of the years, barring the tea boom years since the late 1970s, culminating in serve
financial crises in most tea plantations.

5. LITERATURE REVIEW
It’s been a roller coaster ride for Sri Lanka’s tea industry for the past 24 months. First there was
an intense labor dispute at the end of 2006 that halted production and led to a serious crop
shortage at the start of 2007. Whilst the dispute was settled with an upward revision of wages the
labor issue cropped up again just 12 months later. This time there was speculation of political
intervention between the government and the Ceylon Workers Congress party and the President
himself directed to bring about a settlement that witnessed a further increase in plantation worker
wages on the grounds of rising costs of living. Nevertheless, 2007 witnessed tea export revenues
topping $1 billion for the first time in history despite the lower production levels.

Needless to note that it was the favorable demand conditions experienced in Sri Lanka’s export
destinations that was the driving factor in the record breaking performance where many teas
fetched all-time high prices. Essentially, sustained increases in the price of oil resulted in a
massive hike in foreign reserves in oil exporting nations which also resulted in an increase in
consumer spending. Particular reference could be made to the Middle East / Gulf region, North
Africa and Russia along with the CIS which together absorbs some 75 per cent of total tea
exports from Sri Lanka.
Consequently, 2008 too started out well with the price of oil sustaining it’s upward trend whilst
tea prices at the Colombo auction also gained. However, trouble was brewing and there were
ominous signs of trouble ahead though few took heed. The only warning sign that did surface
was the momentum building in the US sub-prime mortgage crisis that started in 2006 which then
spread out to all parts of the US economy.

Few if indeed any were able to foresee the monumental collapse in the US finance sector in
September 2008. Moreover, the impact it had on the entire global finance sector was even more
staggering as multinational banks fell, one after another with thousands upon thousands of jobs
lost overnight. Attempts to mitigate these trends with government bail-out plans and interest rate
cuts have been introduced in most of the leading developed and emerging economies and time
will tell on their effectiveness. For the current time period, few deny that Sri Lanka’s exports will
be hit significantly in 2009 by the downturn in the global economy that has had an impact on all
commodities across the board.

Given that 2008 has witnessed a significant shift in fortunes for the island’s tea industry, the
challenge will be to ride out the current crisis and focus on costs in order to survive during the
adjustment period. This report attempts to forecast the short to medium term scenarios for the tea
industry with reference to available information and intelligence on the demand conditions in the
international markets, expected production in Sri Lanka and in other exporting nations, shipping
and logistical factors as well as the impact of government policy and innovation in the industry.
The impact of changing trends in taste are also considered.

6. METHODOLOGY

A complete disclosure of the methods and procedures will be used in the study is highly
significant.

7. DATA GATHERING AND TYPES OF DATA

This research study is based only on secondary data. Secondary data will collected mainly from
TEA institute, custom data, journals, text books, prior research reports and publications. Also it
will be used central bank report of six years (2002 to 2007).
8. DATA ANALYSIS

Descriptive analysis techniques will be used in the study. Furthermore regression analysis will be
used to see the relationship between TEA exports earnings and GDP.

9. DATA PRESENTATION

This study will use the tabular, graphs and charts for data presentation.
10. BIBLIOGRAPY

1. Central Bank of Sri Lanka.2002.Annual Report for 2002.Colombo:Central Bank.

2. Central Bank of Sri Lanka.2003.Annual Report for 2003.Colombo:Central Bank.

3. Central Bank of Sri Lanka.2004.Annual Report for 2004.Colombo:Central Bank.

4. Central Bank of Sri Lanka.2005.Annual Report for 2005.Colombo:Central Bank.

5. Central Bank of Sri Lanka.2006.Annual Report for 2006.Colombo:Central Bank.

6. Central Bank of Sri Lanka.2007.Annual Report for 2007.Colombo:Central Bank.

7. University of Cambridge (Research format for undergraduate studies)

8. Economic progress in independent Sri Lnaka.