Abstract:
Tea industry in Sri Lanka is currently experiencing a decline in tea prices and a high cost
of production along with low productivity. The smallholder tea sector continued to
dominate the overall tea industry contributing over 73 per cent to total tea production
in 2016. Tea prices at the Colombo auctions relatively fluctuate over the time. The
change of the tea prices has greater impact on the performances of the entire economy
and living standard of the people involved with the industry. The primary objective of
this study was to determine the factors that influence the high grown and low grown tea
auction price at Colombo auction and to make suggestion or recommendation to reduce
the price fluctuation in the Colombo auction. The variables used in this study were
auction price of high grown and low grown tea, quantity sold of high grown and low
grown tea at Colombo auction, annual production of high grown and low grown tea and
cost of production of tea. For this study, secondary time series data for the variables
mentioned above were collected from 1998 to 2015 from annual report of Central Bank
of Sri Lanka. Cointegration regression model for high grown and low grown tea were
developed using fully modified Ordinary Lease Square (OLS) method. This study
concluded that there is a long run relationship among the auction price of tea, quantity
traded and cost of production. In order to increase the profitability of tea industry,
modern technology should be used to lower the cost of production and improve the
quality of tea produced. It can be achieved by increasing the yield of tea plantation by
practicing modern agronomic practices and employing efficient technology in tea
processing.
