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Plantation companies with significant extents in high grown tea areas, which produce the cream of the country's teas, are facing acute cash flow shortfalls as a result of spiralling costs of production and low prices, the Planters' Association of Ceylon cautioned this week.

The Association said the full effects of increases in virtually all production inputs over the past one year, with higher labour costs being a notable contributor, are now reflected in the half year results of several companies.

Chairman of the Planters' Association Rohan Fernando told the Daily News yesterday that the prices of the High and the Medium Growns have hit the lowest in the last five years and all the Regional Plantation Companies were affected by severe cashflow problems

Fernando, who is also Managing Director of Aitken Spence Plantations (Pvt) Ltd said that it was the earnest wish of the companies that prices would improve very soon without which the RPCs would have constraints in the repayment of loans and implement capital market development projects.

Drawing attention to financial statements published over the last weekend of August, Planters' Association Secretary General Malin Goonetileke said:

"While revenues have fallen due to the lower prices for high grown teas, the declines in profit growth have been much sharper, and in the case of loss-making companies, these losses have grown substantially."

He cautioned that weekly market reports from tea brokers on the demand for a few selected categories of tea and good prices for a handful of high performing marks could mask the reality of low averages in real terms.

Average prices for Sri Lankan tea have failed to pass US $ 2 per kg for the past 18 years. Moreover, in a significant recent trend, Rupee price averages for high grown teas in the January - July period have remained static for the past three years, notching Rs 134.29 million in 2001, Rs 131.70 million in 2002 and Rs. 132.66 million in 2003. Added to this, high grown production has also declined in the first half of this year due to excessive rains.

Meanwhile, cost of production (COP) at all elevations continues to appreciate. According to industry statistics, COP has grown 26.7 per cent between 1999 and 2002, from Rs 104.71 (average for all elevations) to Rs. 132.67 per kg. In the first six months of this year, average COP has risen even further. With high grown averages for this period being significantly lower than the cost of production, companies have been forced to borrow more to keep operating and to implement scheduled programs for diversification, marketing and worker welfare, the Association said.

As a result, most companies are over-borrowed and have been compelled to curtail capital development and replanting on the estates, the effects of which would be visible several years into the future. "The industry is at crossroads, with long term sustainability a serious concern," Goonetileke said. "It is imperative at this juncture that the issues facing the plantation sector are looked at carefully by all parties involved."

The current difficulties could be attributed to a combination of factors, he said. These include the labour wage increases implemented in July last year, lower prices due to the uncertainties caused by the war in Iraq, the floods in the Sabaragamuwa and Southern Provinces and a delay in the availability of funds under the Asian Development Bank's Plantation Development Project (PDP). These funds which were expected to be available to plantation companies in early 2003 would begin disbursement only in October, but would, in any event, not be available for replanting and field development.

Plantation companies, particularly in the high grown areas, would need time and space and sustained good prices to recover from the current crisis and improve their financial stability, the Association said, adding that the rubber plantations too have not been able to reap the full benefits of improved prices due to heavy rains that reduced the number of tapping days this year.

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