World commodity prices forecasted to reduce further in 2015 with no respite in sight
The drastic fall in local tea and rubber prices – which has led to major losses for Regional Plantation Companies (RPCs) – is part of a broader global trend of decline in commodity prices, which is not expected to reverse in the near future, the Planters’ Association of Ceylon points out.
The association – which represents 22 RPCs, collectively employing nearly 200,000 workers – explaining that prices are depressed at present due to external reasons, notes that global forecasts reflect a bleak future in the medium term for commodity prices in general.
In its ‘Commodity Market Outlook’ earlier this year, the World Bank forecasted a decline in all the nine key commodity price indices in 2015. Indicating a prolonged slump, the report said, “By 2016, a recovery in the prices of some commodities is likely to be underway, although the increases will be small compared to the depths already reached.”
More worryingly, the report indicates that the prices of agricultural raw materials, which fell by more than 35 percent between early 2011 and the end of 2014, will continue to contract this year.
Similar to other commodities, the prices of tea and rubber have dropped substantially in the world market. According to World Bank data, on average, the global price of tea in 2014 was only US $ 2.72 – which is lower than in 2013 and 2012 – during which prices were US $ 2.86 and US $ 2.9, respectively. Due to other reasons such as turmoil in key export markets including Russia and the Middle East, the price of Ceylon tea has dipped more sharply. By the first week of April 2015 (on a ‘to-date’ basis) the average price of tea was Rs.66 (or 13.7 percent) less than it was a year before at the Colombo tea auction.
The fall in price of rubber in the world market has been far more dramatic. From US $ 3.38 a kilogramme in 2012, rubber (RSS3) has fallen by over 40 percent to US $ 1.96 a kilogramme in 2014. In the local market too rubber (RSS3) has declined from Rs.295 per kilogramme in March 2014 to Rs.217.50 per kilogramme in March 2015.
“The sharp decline in commodity prices have been highly unfavourable to the Regional Plantation Companies (RPCs) not only directly, but indirectly as well, since many of the major buyers of Ceylon tea including Russia and the Middle East are major exporters of commodities themselves and the fall in commodity prices reduce their purchasing ability,” Planters’ Association (PA) of Ceylon Chairman Roshan Rajadurai explained.
“The situation has become more challenging as the fall in prices comes at a time in which the key markets of Russia, the Middle East and Ukraine that account for over 70 percent of exports of Ceylon tea, are facing turmoil due to economic sanctions, currency depreciation and military conflict. Buyers have thus switched to lower quality tea available at lower prices and large quantities of teas remain unsold at the weekly Colombo tea auctions. The RPCs are forced to increase their borrowings in order to pay the wages and other commitments to the workers and to keep the cash flow intact,” Rajadurai added, noting that in this scenario reducing costs through improved productivity is the only viable solution.
Due to massive losses in both tea and rubber, with production costs at present exceeding prices received at auctions, 19 RPCs collectively made a loss of nearly Rs.2,850 million on rubber and tea in 2014.
Late last year it was reported that even the tea growers in South India were facing a crisis situation amidst falling prices, despite the wages of pluckers there being substantially less than in Sri Lanka and the commitment of the companies to the welfare of their worker families also being significantly less than in the case of Sri Lanka. It was reported that the Indian rubber plantations were making a loss for the first time in 80 years, reflecting that the global downturn in commodity prices, both in tea and rubber, has significantly impacted the viability of not only plantations in Sri Lanka but those in the neighbouring countries as well.
There are about 400,000 tea smallholders and about 200,000 smallholders in the rubber sector in Sri Lanka. Reflecting the severe fall in commodity prices, the Government of Sri Lanka has introduced guaranteed prices of Rs.80 per kilogramme for tea green leaf and Rs.350 per kilogramme for rubber (RSS 1) for the smallholder sector, thus justifying and acknowledging that the prices realised at the Colombo auctions are not remunerative and are below the cost of production, Rajadurai said further.
“However, it is a matter of regret that the RPCs, which are also producers of tea and rubber, have been exempt from these beneficial schemes while the commitments and liabilities of the RPCs towards their workers and the resident population in their plantations numbering close to one million is far in excess and are incomparable to that of the smallholders,” he said.
The PA Chairman noted that RPCs have to meet all the statutory requirements such as EPF, ETF, gratuity, 20 days paid holidays, paid sick leave, attendance bonus, maternity benefits, statutory maternity leave, free maternal and childcare on the estates itself, allowances, free issue of medicines/drugs/vaccinations/medicines, total custodian childcare up to five years and guaranteed 300 days of work irrespective of the level of production or the general trading conditions prevailing. In addition to these facilities, health, sanitation, housing, water, social services, welfare, community facilities and amenities are provided free-of-charge to the whole population resident in the plantations, Rajadurai reminded.
“While the PA appreciates the magnanimity of the government towards the smallholders, likewise the RPCs, which are very significant in the whole supply chain of commodities from production to sale, should also be considered even-handedly. Any disruption or dislocation to the formal sector of the plantation industry would have far-reaching and long-lasting adverse repercussions because of the million or so people who are dependent on the industry and are resident in the RPC estates,” he cautioned.