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Cablegate: Sri Lanka's Tea Sector: "A Gift From God"

VZCZCXRO2326
PP RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHLM #1075/01 3310633
ZNR UUUUU ZZH
P 270633Z NOV 09 ZDK
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 0842
INFO RUEHKA/AMEMBASSY DHAKA 2098
RUEHIL/AMEMBASSY ISLAMABAD 9126
RUEHKT/AMEMBASSY KATHMANDU 7372
RUEHNE/AMEMBASSY NEW DELHI 3524
RUEHPF/AMEMBASSY PHNOM PENH 0098
RUEHCG/AMCONSUL CHENNAI 9687
RUEHKP/AMCONSUL KARACHI 2589
RUEHCI/AMCONSUL KOLKATA 0466
RUEHLH/AMCONSUL LAHORE 0099
RUEHBI/AMCONSUL MUMBAI 6981
RUEHPW/AMCONSUL PESHAWAR 0382
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 COLOMBO 001075

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EAGR ETRD CE
SUBJECT: SRI LANKA'S TEA SECTOR: "A GIFT FROM GOD"

REF: COLOMBO 1015

COLOMBO 00001075 001.3 OF 002


1. (U) SUMMARY: Long Sri Lanka's top export, tea remains one
of the country's most valuable foreign currency earners
despite being supplanted by the textile sector in the top
slot. The country's highly sought-after "orthodox" teas
remain global favorites, particularly in the Middle East and
the countries of the former Soviet Union. Despite years of
civil strife, alternating nationalization and
semi-privatization schemes, and commodity price fluctuations,
the Sri Lankan tea industry remains competitive and the
country today ranks as the fourth-largest tea producer in the
world. Sri Lanka's tea growers remain confident that thmet with Mr. Vish Govindasamy, Managing
Director, and Mr. Dushy Ratnasingham, Chief Operating
Officer, of Watawala Plantations -- one of the largest tea
producing companies in Sri Lanka with nearly 30,000 acres of
tea -- on November 18. Govindasamy noted that Sri Lanka is
known as the best place to grow orthodox tea (vice CTC, or
"cut, tear, curl" teas produced more cheaply elsewhere).
With "orthodox" tea production, the withered leaf is rolled,
thereby breaking the leaf's veins and releasing the enzymes.
Govindasmay emphasized that Sri Lanka's climate and soil in
the growing regions are "a gift from God" -- "perfect for
growing rich, aromatic teas." Sri Lanka's export-oriented
tea production is highly conscious of protecting the quality
of its tea, and the industry maintains self-imposed standards
which must be met to receive the "Lion Logo" for Sri Lankan
tea. Still, over 55 percent of Sri Lankan tea exports are
sold in bulk. Many business leaders think Sri Lanka should
move to upgrade their tea exports to branded teas to increase
their earnings.

3. (U) According to the Food and Agriculture Organization,
Sri Lankan tea is categorized as the "cleanest tea" in the
world, a direct result of the restrictions on fertilizer and
pesticide usage which limits chemical residue on the leaves.
Further, the country's tea tasters insist that the CTC tea
produced in Kenya, India, and Indonesia simply cannot match
the taste, aroma, and quality of Sri Lanka's orthodox teas.
Only Vietnam has been able to produce orthodox tea of the
same leaf standard as Sri Lanka, however, as Govindasamy
emphasized, they "cannot match our taste." Indeed, Sri Lanka
historically get some of the highest prices for teas in the
world.

4. (U) Sri Lanka is currently the fourth-largest tea producer
in the world after China, India, and Kenya. It's annual tea
production in 2008 amounted to approximately 318,000 metric
tons, which accounts for roughly ten percent of the global
tea crop. However, Sri Lanka exports the majority of its
tea, roughly 300,000 metric tons last year, making it the
world's second largest tea exporter (about 18 percent of the
global tea market). Sri Lanka exports most of its tea to
former Soviet republics, the Gulf states, other Middle
Eastern countries, and as a blend to Europe and the United
States. In 2008, Sri Lanka's tea industry earned over $1.2
billion, or approximately 16 percent of export earnings.

GROWERS HIT BY RECESSION BUT REMAIN STRONG

5. (U) The small tea growers, with plots smaller than 50. Still,
growers large and small have suffered in 2008-2009 as global
commodity prices crashed. In addition, a drought in early
2009 also resulted in a significant drop in production, with
cumulative production for January-October 2009 amounting to
only 234,000 metric tons -- the lowest level since 1999. Due
to a world wide crop shortage, tea prices at Colombo tea

COLOMBO 00001075 002 OF 002


auctions recovered recently -- hitting an all-time high of
over $3.70/kilo in September (versus $2.22/kilo in October
2008 and $2.93/kilo in 2007). A kilo of tea is currently
fetching around $4.45.

6. (SBU) Sri Lanka,s large tea plantations -- those once
owned by English and Scottish operators -- are run by
regional plantation companies (RPCs) and contribute about 40
percent of tea production. The government nationalized these
large tea plantations in the early 1970,s and tried to
manage them (without success). In 1996, the GSL privatized
the management of the plantations by signing five-year
management agreements. Now-a-days, the privately-owned RPCs
manage the plantations under 53-year lease agreements. The
land remains under government ownership, however. This may
limit the amount of money the RPCs (themselves listed on the
Colombo Stock Exchange) are willing to invest in
infrastructure and production improvements, especially as the
end of the lease draws near.

LABOR INCENTIVES AND GOVERNMENT ASSISTANCE EXPECTED TO HELP

7. (SBU) Labor relations in the tea sector can be thorny as
union leaders are often members of Parliament and Cabinet,
creating a highly politicized environment. Plantation
workers are descendants of Indian Tamils brought to Sri Lanka
by the British in the late 1800s. The workers have jobs for
life on the large plantations, but Ratnasingham lamented that
wages and productivity were traditionally not linked. (NOTE:
Small plantations are not covered by the same labor
regulations. END NOTE.) To rectify this, a productivity
component was included for the first time in the October 2009
collective bargaining agreement with plantation workers.
Wages were increased to SLR 405/day up from SLR 290/day, and
includes a SLR 285 basic wage, SLR 30 productivity incentive,
and SLR 90 attendance incentive. If these incentives result
in higher productivity, the wage increase should not
negatively affect the bottom line. However, insiders
indicate profitability could be hit should production or
prices drop. On top of their wage, companies also provide
workers with health, maternity and child care benefits, along
with basic housing. Unfortunately, alcoholism-caused truancy
remains a serious social and economic problem on the
plantations, and poverty rates among tea plantation workers
are the highest in the country.

8. (SBU) The conflict in the North and East with the Tamil
Tigers had little effect on the tea plantations. (NOTE: The
plantation Tamils arrived centuries later than the Tamils in
the North, are considered a separate ethnic group, and were
not Tamil Tiger members. END NOTE.) The conflict negatively
affected resources for ancillary institutes like the Tea
Board (which used to successfully market Sri Lankan tea but
is today nearly defunct), and the Tea Research Institute
(which used to provide top R&D to the industry but is today
underfunded). Still, despite the government's need to fund
the war, it did not raise export duties and collects just SLR
4/kg cess on exports, and tea machinery -- a high-value
imported input -- also remains duty-free. In fact, Sri Lanka
has the highest amount of tea bagging machinery in one
country. With the war over, and the possible EU withdrawal
of GSP Plus (reftel), tea insiders expect the GSL to focus
increased resources on the tea industry to ensure Sri Lanka's
tea exporters maintain their envious market position.
FOWLER

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