ECONOMYNEXT – Sri Lanka’s tea and oil palm farming companies are likely to be hit from a fertilizer ban Fitch Ratings said though prices may rise to compensate, Fitch Ratings said as imports were curtailed after money printing created forex shortages.
“Fitch views the current ban on the importation of chemical fertilisers as a credit negative for rated corporates such as Kotagala Plantations PLC and Sunshine, given their exposure to palm oil plantations,” the rating agency said.
“On 6 May 2021, Sri Lanka banned the importation of chemical agricultural inputs such as fertilisers on health grounds, and the government estimates this will conserve around USD400 million of outflows per annum.”
Sri Lanka has been facing foreign exchange shortages as money was printed (reserve money inflated with the acquisition of domestic assets) in a soft-pegged monetary regime, forcing the central bank to redeem the new rupees against forex reserves to maintain the de facto peg.
Instead of stopping the liquidity injections, authorities have tried to control imports, in a blatantly Mercantilist response.
According to The Colombo Tea Traders Association, local tea output could fall by as much as 40 to 50 percet if the ban continues.
“Industry sources believe the government has sufficient stocks to supply chemical fertilisers for the next 12 months, but there is limited visibility beyond that horizon,” the rating agency said.
“Unlike Kotagala, Sunshine can resort to using readily available organic fertiliser from its dairy operations as an alternative to chemical fertilisers, which should help to mitigate the drop in crop yields to an extent.”
Fitch said local tea prices would rise if the fertilizer ban continues.
“Fitch believes tea plantations may find it challenging to offset the decline in yields via higher tea prices,” the rating agency said.
“We estimate that tea prices of more than USD5 per kg will be required to offset the potential output fall resulting from the inability to use chemical fertiliser in the near term.
“We expect local tea prices to rise if the ban on imported fertiliser remains in place for an extended period due to supply constraints as well as its new organic appeal.
“However, the highest recorded tea price at the Colombo auction historically was USD4.30 per kg in September 2017.”
Sri Lanka’s tea prices have declined in recent months. Industry officials say quality has declined with the ‘succulency’ of teas coming down in some areas, though no scientific research has been published to link fertilizer shortages to the drop in quality. (Colombo/July24/2021)