Tea remains a vital agricultural asset and contributor to Sri Lanka's economy

As Sri Lanka’s largest export earner after textiles and its most significant agricultural commodity, tea remains a major economic growth contributor, despite struggling to maintain profits in a time of falling global commodities prices and rising international competition. Home to the internationally recognised and sought-after Ceylon tea, Sri Lanka has benefitted from high-quality black tea exports for nearly 150 years, with production now dominated by some 400,000 small-scale farmers, making the industry a key employer. As farmers, factories and traders grapple with depressed international prices, the industry is looking to value addition and branding for the next phase of its evolution, creating opportunities for private investment, although an ongoing movement to open the country to low-cost imports and permit blending for export could have an impact on employment and Sri Lankan tea’s reputation.

Beans To Leaves

Sri Lanka’s tea industry began almost by accident during colonial rule in the 1820s. British rulers were looking for ways to develop agricultural industries to pay for Britain’s military presence and infrastructure development. By 1824 Ceylon’s colonial governor Edward Barnes had identified coffee cultivation as a solution to the financial shortfalls. Coffee already grew in the central hills, and the authorities moved to sell this land cheaply, incentivising the sector for merchants and planters. By the mid-1870s the country was the world’s largest producer, with industry revenues used to finance railways, roads and port infrastructure. However, a plant disease called coffee rust had appeared by the late 1860s, and in just over a decade wiped out the country’s coffee industry.

Early Tea Growth

By the 1880s Ceylon’s economy had nearly collapsed as a result of coffee rust. Tea cultivation first began at a single plantation in 1867, when Scottish planter James Taylor began experimenting with the crop on his estate, Loolecondera, using methods employed by tea planters in India. Over the following two decades, planters from across the country visited to learn Taylor’s methods, and in the subsequent years, over 120,000 ha of land was stripped of coffee bushes and replanted with tea. By the early 20th century, Sri Lanka had rebuilt its plantation economy with high-quality Ceylon tea, which remains prized globally for its flavour, aroma and colour to this day.


Grown at both large-scale estate plantations and smallholder farms, Ceylon tea is split into three basic classifications: low-grown, cultivated at elevations of 2000 feet and lower; mid-grown (2000-4000 feet); and premium high-grown (4000 feet and above). The majority of tea in the country is grown at elevations of 2000 feet or lower, and cultivated across seven distinct agro-climactic zones including low-, mid- and up-country wet and intermediate zones, and the low-country wet zone. Orthodox tea, meaning tea which is largely manufactured using traditional methods rather than tea processed using cut-tear-curl (CTC) methods, is Sri Lanka’s greatest export strength. The country is the world’s largest exporter of this tea, which is divided into 24 classifications, compared to six for CTC tea. Within the orthodox segment, leafy and tippy are the two most valued classifications — tippy being tea with more buds or whites than leafy tea — and these earn between LKR600 ($4.32) and LKR1000 ($7.20) per kg at auction, while flowery, silvertip and golden-tip tea are the highest-quality and fetch the highest prices. Premium tea can earn as more than LKR1000($7.20), while silvertip and goldentip tea, composed entirely of buds, may be priced between LKR14,000 ($101) and LKR24,000 ($173) per kg.


Green leaf or unprocessed tea is sold by farmers, known as pluckers, to 720 factories across the country, a third of which are owned by the 20 Regional Plantation companies, which manage government-owned tea properties, and often grow their own tea. The Sri Lanka Tea Board (SLTB), the government agency tasked with tea marketing, regulation and policy advisory, reports that smallholder plantations supplied 57% of total tea production in the first half of 2015, or 99m kg, compared to corporate plantation companies, with 66.2m kg, or 38% of the total, while the Colombo Tea Traders’ Association (CTTA) reports that smallholder farmers represent 72% of the tea sector. There are 400,000 registered farmers active in tea cultivation nationwide and 221,000 ha of land registered as tea fields, though production is limited to 181,000 ha.

The Colombo Tea Auction is the world’s largest auction of its kind, through which 98% of Sri Lankan tea is sold, followed by private trading, forward contracts and ex-factory sales. The country’s top tea exporters by volume in 2015 were Akbar Brothers Group, with 35.6m kg; Anverally & Sons (15.9m k); Jafferjee Brothers (11.6m kg); Unilever Lipton Ceylon (11.2m kg); and Empire Teas (10.1m). Tea exports have shown strong expansion in recent years, rising by 5.43% in 2014 to hit LKR210.2bn ($1.5bn), of which roughly half are bulk exports. However, prices have declined dramatically since mid-2014, in keeping with a broader global trend of depressed commodities prices, with the SLTB reporting that average auction prices fell from $3.56 per kg in 2014, to $2.99 in 2015, a 16% decline. This trend continued throughout 2015 and into 2016. Tea exports were down 17% in 2015, earning $1.32bn.

The board attributed this to both low-quality tea and low demand from Sri Lanka’s major export markets. The government moved to set minimum green leaf prices at LKR80 ($0.58) per kg in April 2015, in a bid to subsidise the industry against a backdrop of falling global tea prices, however the price is not legally binding. It takes 4.65 kg of green leaf tea to make one kg of processed tea, and production costs are relatively high in Sri Lanka compared to India, Kenya and Vietnam. This means the breakeven price at the Colombo Tea Auction is around LKR400 ($2.88) per kg, whereas average tea prices at auction had fallen to a low of LKR350 ($2.52) per kg as of September 2015. The government had to make up the shortfall, which is estimated at LKR6.8bn ($49m), because factories cannot operate under these conditions. Some industry insiders fear that if prices fall any further, factories will close, pluckers will not be able to harvest at the appropriate times and the quality of Ceylon tea could worsen.


An ongoing debate among tea holders has risen to prominence in light of falling global prices. Tea is only considered Ceylon if it is single-origin, sourced solely from Sri Lanka, with the brand and reputation a major competitive strength, similar to grapes from France’s Champagne region. Although the country moved to allow tea imports to be used for blending in 1980, a ban on the import of orthodox tea was introduced in 1994, followed by a ban on the import of low-quality, off-grade teas and filter teas in 2000, in addition to a requirement for a certification of maximum residue limit on all imported teas. In 2003 the government introduced a new 25% levy on all imported teas for blending. CTC tea can be imported and blended with Sri-Lanka-sourced CTC, although orthodox tea imports for blending purposes remain effectively prohibited.

Import Regulations

In recent months factories and traders have increasingly called for a relaxation of import regulations, which would allow traders to blend orthodox Ceylon tea with less-expensive imported orthodox tea, reducing the cost of production and potentially enabling export growth. However, there are concerns that this could dilute the high-value Ceylon tea brand.

Opinions on how to stimulate the sector vary. Vish Govindasamy, the managing director of Sunshine Holdings, told OBG that imports should be allowed but with restrictions and solid controls that protect quality. “You cannot import bad tea, as many pure tea packers want to do in order to reduce costs. Rather, imports should be done to provide variations of high-quality tea. But this kind of liberalisation can only be done when times are good.”

While blending might offer a short-term solution to traders and factories, other stakeholders argue that improved branding and value addition offer the best path forward, with growth in bulk exports of multiple-origin tea expected to negatively affect Sri Lanka’s considerable base of tea farmers, compared to growth of upmarket, bagged, Ceylon-branded single-origin tea, which currently represents just 15% of the total tea market, according to Malik Fernando, director at Dilmah Tea. “If you relax import regulations, traders will start competing on price by reducing the Ceylon tea component. We have 1m people directly employed in the tea industry. It is the biggest employer in the country. Allowing imports for blending would kill our industry,” Fernando told OBG.


You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Sri Lanka 2016

Agriculture chapter from The Report: Sri Lanka 2016

Cover of The Report: Sri Lanka 2016

The Report

This article is from the Agriculture chapter of The Report: Sri Lanka 2016. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart