COLOMBO (EconomyNext) – Falling international commodity prices due to an underlying strengthening of the US dollars has hit Sri Lanka’s plantations firms which has lost 2.8 billion rupees in the past year on tea and rubber.
By the end of 2014, 19 regional plantations companies said they lost an average of 30 rupees per kilogram of tea sold with an average cost of 455 rupees and a net sales average of 455 rupees.
The loss on a kilogramme of rubber was 35 rupees, with average cost of production at 327 rupees and net sales average of 292 rupees, they said.
Classical economists have forecasted earlier that a ‘Great Moderation 2.0’ of low commodity prices could be emerging with the end of excessive money printing by the US Federal Reserve which sent gold, oil, steel, copper, and food commodities zooming despite the bursting of a credit bubble in 2009. (Great Moderation 2.0: The Russian ruble, Sri Lanka’s tea and rubber: Bellwether)
Great Moderation 1.0 occurred in the 1980s with monetary tightening by then US Fed Chief Paul Volcker in 1980 with gold at 250 dollars and oil below 20 dollars a barrel.
It lasted until the 2000, when the US Fed created the ‘mother of all liquidity bubbles’ which burst in 2009 generating the Great Recession.
But instead of slipping immediately into a period of low inflation from 2009, quantity easing programs of the US Fed again fed a commodity bubble and inflation, which some economists say ended the possibility of a ‘v shaped recovery’ and delayed an overall recovery.
But now quantity easing programs have been ended and tighter banking sector rules and capital requirements have made credit tighter, though the effects of EU monetary loosening remains unclear.
A stronger dollar has set off a chain reaction, reducing the disposable incomes of countries with mining and oil interests and increasing the disposal incomes of other nations. Farming incomes are also falling in all countries.
Due to wage rigidities organized businesses find adjustments difficult, though food and fuel prices fall, increasing the disposal incomes of workers. In modern settings, where cutting wages is politically not feasible, currency depreciation tends to be the option.
Roshan Rajadurai, Chairman of the Planters’ Association of Ceylon – which represents the Regional Plantation Companies (RPCs) said large quantities of tea remain unsold at auctions and companies had to borrow to pay wages.
The auction average in Colombo in February 2015 has fallen 64 rupees from a year earlier to 418 rupees, the regional plantations companies said.
Sri Lankan tea prices were still higher and ranges around 3 dollars a kilo compared to 2.0 dollars for countries such as Kenya, the RPC said.
In Sri Lanka labour accounted for 67 to 70 percent of total costs. The RPCs said a worker plucked about 18 kilograms a day in Sri Lanka, compared to 38 kilograms in India and 48 for a Kenyan plucker. However the codditions of the fields, steepness of tea fields and the degree of mechanization could impact plucking averages.
Sri Lanka’s government which has promised guaranteed prices for tea and rubber though it is not clear how this will be financed.