COLOMBO – Sri Lanka’s tea and oil palm farming companies are likely to be hit from a fertilizer ban Fitch Ratings warned, as imports are curtailed after money printing created forex shortages, but said prices may rise to compensate for the losses.
“Fitch views the current ban on the importation of chemical fertilizers 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.
Fitch noted Sri Lanka had on May 6, 2021, banned the importation of chemical agricultural inputs such as fertilizers on health grounds, with the government estimating this will conserve around US$ 400 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% if the ban continues.
“Industry sources believe the government has sufficient stocks to supply chemical fertilizers for the next 12 months, but there is limited visibility beyond that horizon,” the rating agency said.
It pointed out that, unlike Kotagala, Sunshine can resort to using readily available organic fertilizer from its dairy operations as an alternative to chemical fertilizers, which should help to mitigate the drop in crop yields to an extent. However, it warned that 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, estimating tea prices of more than US$ 5 per kg will be required to offset the potential output fall resulting from the inability to use chemical fertilizer in the near term.
“We expect local tea prices to rise if the ban on imported fertilizer remains in place for an extended period due to supply constraints as well as its new organic appeal,” it said, but noted that the highest recorded tea price at the Colombo auction historically was US$ 4.30 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.
-economynext.com
