Determinants of Value Added Production in Cinnamon Industry

DETERMINANTS OF VALUE ADDED PRODUCTION IN
CINNAMON INDUSTRY
A dissertation submitted to the
Faculty of Animal Science and Export Agriculture
Uva Wellassa University
In partial fulfillment of the requirements for the award of
Bachelor of Science in Export Agriculture
By
W.S.P. JAYATHILAKA
BACHELOR OF SCIENCE IN EXPORT AGRICULTURE
FACULTY OF ANIMAL SCIENCE AND EXPORT AGRICULTURE
UVA WELLASSA UNIVERSITY OF SRI LANKA
2015

ii
DECLARATION
I do hereby declare that the work reported in this dissertation was exclusively carried
out by me under the supervision of Dr. L.M.H.R. Alwis and Ms. Thamari D.
Batuwantudawa. It describes the results of my own independent research except
where due reference has been made in the text. No part of this dissertation has been
submitted earlier or concurrently for the same or any other degree.
Date : …………………… …..……………………….
Signature of the Candidate
We endorse the declaration by the candidate.
…………………………………………..
Dr. L.M.H.R. Alwis,
Head,
Department of Export Agriculture,
Uva Wellassa University,
Badulla.
Date …………………..
……………………………………………
Ms. Thamari D. Batuwantudawa
BA (Econ), BSc (Econ), MAAT
Deputy Director
Board of Investment of Sri Lanka
Investment Appraisal Department
World Trade Centre
Colombo 01.
Date: ……………………………
……………………………………….
Ms. Ganga Palakatiya
BSc. (sp.) (statistics), MBS. (Business Studies)
Assistant Director
Board of Investment of Sri Lanka
Research & Policy Advocacy Department
World Trade Centre
Colombo 01.
Date: ..............................................

iii
ABSTRACT
Value addition is currently becoming an important topic in agriculture sector,
especially for increase the economic value of agricultural products and to reduce
wastage. Value addition has the ability to create employment, absorb excess labour
from agriculture, enable rural residents to capture more margins from agriculture,
hence raising rural income levels. Spice is one of key agricultural sub sector of Sri
Lanka. True cinnamon is unique and most economically valuable indigenous crop
among all other spices in Sri Lanka known as Ceylon cinnamon. “Ceylon Cinnamon’
achieves recognition as an international brand synonymous with the country’s unique
identity. Regardless of the unique benefits associated with true cinnamon
(Cinnamomum zeylanicum), there is limited value added cinnamon products range
hence cinnamon manufacturers receive less return from cinnamon industry. Using
survey data from 83 cinnamon processors from Galle and Colombo Districts this
study analyzes factors affecting on value added production in cinnamon industry, an
economic activity with a potential to improve household livelihoods but whose
development has remained rudimentary. Data were analyzed using descriptive
methods and binary logistic regression model. The results revealed that value addition
was positively and significantly influenced by attitude, technology, labour, credit
access and cost of production. In line with findings, the study recommended that
cinnamon manufacturers should be informed of the benefits of adding value to their
agricultural commodities before marketing, and government and private agencies that
intend to encourage rural entrepreneurship should provide marketing facilities and
micro-finance linkages in order that beneficiaries adhere to appropriate agribusiness
practices. There is need to review and strengthen policies that will improve access to
and use of credit and inform the players in cinnamon industry on the importance of
value addition as a tool for poverty reduction, employment creation and economic
development.
Key words: True cinnamon, Cinnamon industry, Value addition, Binary logistic
regression

iv
First of all, I would like to express my sincere gratitude to Dr. G. Chandrasena, Vice
Chancellor, Uva Wellassa University of Sri Lanka, Dr. S.C Jayamanne, Dean, Faculty
of Animal Science and Export Agriculture, Uva Wellassa University of Sri Lanka, Dr.
L. M. H. R. Alwis, Head, Department of Export Agriculture, Faculty of Animal
Science and Export Agriculture, Uva Wellassa University of Sri Lanka and all the
members of the staff of the Uva Wellassa University for organizing and facilitating
this research project.
I convey my special thanks to my internal supervisor, Dr. L. M. H. R. Alwis, Head,
Department of Export Agriculture, Uva Wellassa University of Sri Lanka, for giving me
tremendous support and constructive advices to guide me to the proper path. And core
supervisor, Ms. A.M.C. Amarakoon, Temporary Lecture, Department of Export
Agriculture for giving me the support for the progression of the work. Moreover, I am
grateful to Mr. R.A.P.I.S. Dharmadasa, Lecturer and all the academic staff of the Faculty
of Animal Science and Export Agriculture for the guidance provided.
My heartiest gratitude to my external supervisors Ms. T.D Batuwantudawa, Deputy
Director, Investment Appraisal Department, Board of Investment of Sri Lanka, Ms.
Ganga Palakatiya, Assistant Director, Research and Policy Advocacy Department,
Board of Investment of Sri Lanka for the great support given. Also I thankful to Mr.
R.C. Watawala, Assistant Director, Education promotion, Ministry of Minor Export Crop
Promotion, Ms. N. Wanasinghe, Assistant Director, Export Development Board and Ms.
D. Piyadigama, Research and Development Assistant, Department of Export Agriculture.
My family, all the friends and everybody who gave me their supportive hand to make this
effort flourishing are offered the deepest appreciation.

v
TABLE OF CONTENTS
DECLARATION ...........................................................................................................ii
TABLE OF CONTENTS...............................................................................................v
LIST OF TABLES..................................................................................................... viii
LIST OF FIGURES ......................................................................................................ix
LIST OF ABBREVIATIONS........................................................................................x
CHAPTER 01 ................................................................................................................1
INTRODUCTION......................................................................................................1
1.1 Objectives........................................................................................................4
CHAPTER 02 ................................................................................................................5
LITERATURE REVIEW ..............................................................................................5
2.1 Introduction of Spices .....................................................................................5
2.2 Spice Industry in Sri Lanka.............................................................................6
2.2.1 Quality and Grading Standards................................................................7
2.2.2 Packing.....................................................................................................7
2.2.3 Packaging.................................................................................................8
2.2.4 Market Segmentation...............................................................................8
2.3 Issues, Challenges and Opportunities for Spice Industry................................8
2.3.1 Productivity Based Issues ........................................................................9
2.3.2 Issues Relating to Value Addition ...........................................................9
2.3.3 Domestic Trade Issues ...........................................................................10
2.3.4 World Trade Issues ................................................................................11
2.4 Cinnamon ......................................................................................................12
2.5 Cinnamon Industry in Sri Lanka...................................................................15
2.5.1 Structure of Cinnamon Industry.............................................................18
2.6 Value addition ...............................................................................................19

vi
2.7 Cinnamon Products .......................................................................................23
2.7.1 Quills......................................................................................................23
2.7.2 Quillings.................................................................................................24
2.7.3 Featherings.............................................................................................24
2.7.4 Chips ......................................................................................................24
2.7.5 Essential Oils and Oleoresins.................................................................27
2.8 Current Situation of Sri Lankan Cinnamon Oil Industry..............................29
2.8.1 Introduction............................................................................................29
2.8.2 Extraction of Essential Oils ...................................................................29
2.8.3 Maintenance of Quality Standards.........................................................30
2.9 World supply and Demand Trends................................................................31
2.9.1 Markets ..................................................................................................31
2.9.2 Quality and prices ..................................................................................32
CHAPTER 03 ..............................................................................................................34
3.1 Conceptual Framework .................................................................................34
3.2 Population......................................................................................................34
3.3 Data Collection..............................................................................................35
3.4 Data analysis .................................................................................................36
3.4.1 Empirical Model for The Econometric Analysis...................................36
3.4.2 Binary Logistic Regression....................................................................36
CHAPTER 04 ..............................................................................................................39
RESULT AND DISCUSSION ....................................................................................39
4.1 Summary Statistics........................................................................................39
4.2 Distribution of Variables...............................................................................40
4.3 Determinants of Value Added Production in Cinnamon Industry................41
4.3.1 Participation in Value Added Production ..............................................42

vii
4.3.2 Availability of Technology....................................................................43
4.3.3 Attitude Towards Value Addition..........................................................46
4.3.4 Cost of Production .................................................................................49
4.3.5 Labour Availability................................................................................51
4.3.6 Access to Credit .....................................................................................52
4.3.7 Education Level .....................................................................................55
4.3.8 Age.........................................................................................................57
4.3.9 Experience in Cinnamon Industry .........................................................58
4.3.10 Support Services ....................................................................................60
4.3.11 Other INCOME......................................................................................62
4.4 Possible Reasons for Lack of Value addition................................................64
4.5 SWOT Analysis for Cinnamon Industry.......................................................65
Strengths ......................................................................................................................65
Weaknesses..................................................................................................................66
Opportunities ........................................................................................................67
CHAPTER 05 ..............................................................................................................69
CONCLUSION............................................................................................................69
5.1 Recommendations.........................................................................................71
5.2 Suggestions for Future Research...................................................................72
REFERENCES ............................................................................................................73
APPENDIX I ...............................................................................................................78
APPENDIX II..............................................................................................................85

viii
LIST OF TABLES
Table 2.1 Grades of Ceylon cinnamon ISO 6539 : 1997 (E)......................................26
Table 3.1 Description of independent variables ..........................................................38
Table 4.1 Descriptive statistics of independent variables............................................39
Table 4.3 Estimation of Binary logistic model for the sample ....................................41

ix
LIST OF FIGURES
Figure 1.1: Cinnamon export statistics from Customs recods .......................................4
Figure 4.1: Participation in value added production....................................................43
Figure 4.2: Availability of Technology .......................................................................43
Figure 4.3: Attitude towards Value addition................................................................47
Figure 4.4: Cost of Production.....................................................................................49
Figure 4.5: Labour Availbilty ......................................................................................51
Figure 4.6: Access to Credit.........................................................................................52
Figure 4.7: Education level..........................................................................................55
Figure 4.8: Age ............................................................................................................57
Figure 4.9: Experience in Cinnamon Industry.............................................................59
Figure 4.10: Support services ......................................................................................60
Figure 4.11: Other income...........................................................................................62

x
LIST OF ABBREVIATIONS
SLSI - Sri Lanka Standard Institution
ASTA - American Spice Trade Association
ESA - European Spice Association
CISIR - Ceylon Institute for Scientific and Industrial Research
GATT - General Agreement on Tariff and Trade
FMA - Food Manufacturers Association
EOA - Essential Oil Association
GMP - Good Manufacturing Practices
HS - Harmonized System
SME - Small and Medium scale Enterprises
HACCP - Hazard Analysis Critical Control Point
ISO - International Organization for Standardization
COP - Cost of Production
FAO - Food and Agriculture Organization
ICT - Information and Communication Technology
UNIDO - United Nations Industrial Development Organization

1
CHAPTER 01
INTRODUCTION
Sri Lanka’s ability to run a successful spice industry is enormous, as it produces large
amounts of spices. The spice industry is one of the key agricultural sub-sectors in the
country, and has a high potential for product development which can contribute for
rural development, employment and wealth creation. True cinnamon (Cinnamomum
zeylanicum) is the most unique spice commodity among all other spices produced in
Sri Lanka.
Value addition of raw spices is an essential part to be competitive in the international
market. The industry at global scale is developing rapidly with the advanced
technology and Sri Lanka should use novel techniques to produce high quality value
added spice products. The development of new products which having high
commercial value is important for the development of spice sector. Value addition has
been identified as the most fitting strategic action to be implemented to capture higher
market share in international spice trade. Time has come for Sri Lanka to diverse the
production and the export form. Bulk form exportation of spices limits the
development of overall spice industry such as few employment opportunities, poor
technology transformation and low return to spice investments (Ministry of Minor
Export Crop Promotion, 2014).
The Ceylon cinnamon or true cinnamon, is the dried bark of Cinnamomum
zeylanicum, belongs to the family Lauraceae and is indigenous to Sri Lanka.
Therefore, Sri Lanka is the largest supplier of true cinnamon exports to the world
spice market which represents around 70% of true cinnamon of the world market.
Though cinnamon plays key role in spice sector, the performance of the overall sector

2
has not been up to the expectations over the years. Similarly, Sri Lanka ranks well
below in value added cinnamon exports to the world market. Other competitor
countries make huge profits by adding value to cinnamon exported from Sri Lanka,
while Sri Lanka is losing profit due to exporting more raw cinnamon.
The demand for value added cinnamon products such as cinnamon leaf oil, bark oil,
crushed cinnamon and ground cinnamon for confectionery and other food related
industries has increased in the world. Sri Lanka is planning to double cinnamon
export earnings by increasing value addition of cinnamon (Export Development
Board, 2014).
There are many other countries that produce number of Cinnamon products. India
produces wide range of value added Cinnamon products and now playing major role
in world market. And the importing countries reprocess and add value to our spice
and re-export as final product and earn higher income. Adding value to Sri Lankan
spice would be the most viable option and to export them to special niche markets in
Europe, Japan and USA.
The growing and processing of spices provides cash income to large rural population
of Sri Lanka. The main spice crops include Cinnamon, pepper, cloves, cardamoms,
nutmeg and mace. True cinnamon accounts for more than 50% of total spice exports.
Smallholders play an important role in the spice value chain where 70% of
production comes from smallholder units of less than one hectare of land. There are
approximately 400,000 smallholder farm units in the country. The highest
concentration of pepper and clove cultivation is found in the central hills, while
cinnamon is grown predominantly in the Southern province. Sri Lanka spice cluster
was formed in 2001 with the assistance of the USAID-funded programme- The

3
Competitiveness Initiative (TCI). The cluster was formed in response to challenges,
both global and local, facing the spice industry in Sri Lanka. Participants include
growers, traders, distillers, extractors, exporters, brokers, associations and industrial
technology institutes. In 2003, the spice cluster formalized itself by incorporating the
Spice council (Dasanayaka, 2011).
According to the Department of Export Agriculture, the majority of spice cultivation
owners are subsistence level farmers who are not willing to invest in productivity
improvement programmes. Many of them are part time farmers with other sources of
income. Only a small group of farmers are commercial oriented and are willing to
improve productivity (Lindara et. al., 2004,cited in Samaratunga, 2006). Spice
growers operating about two acres obtain about 30 percent of their family income
from spices. Cultivation and processing are labour intensive with female labour taking
a prominent place. Sri Lanka and other countries have shown that labour cost is over
50 percent of the total cost of production (Herath, 2002).
Rapid and ongoing changes are occurring in the domestic and export procurement
systems in terms of increased quality due to the development of high quality retail
markets (supermarkets), bulk purchasing by domestic manufacturing firms, increased
quality awareness on the agenda and the reality of the global trading system. This
phenomenon has been further influenced by urbanization, income increase, increased
migration of Sri Lankan citizens, increased female participation in the labour force,
etc. these factors have created a new demand pattern shifting the focus towards
continuous supply of high quality, value added products with improved processing,
packaging and labeling (Samaratunga, 2006).
However, Sri Lanka is yet to obtain the true potential of these values as traditional
system has been to market our products as bulk commodities rather than to offer value

4
added end products from the valuable spice crops. The newly emerging spice
producing countries as well as the traditional large producers have been noted to
adopt scientific agronomic practices as well as high yielding propagation techniques
and have been able to produce large volume of crops at relatively lower cost. The bulk
commodity prices of most spice have decline to this reason (Ministry of Minor Export
Crop Promotion, 2014).
This research study focus on “why most of Sri Lankan Cinnamon reach to world
market in primary form without value addition” and the research will help to
determine significance factors affecting on value added production in the Cinnamon
industry of Sri Lanka and also helps to identify what are the possible reasons for lack
of value addition in Cinnamon industry.
Sri Lanka spice sector needs to recognize global market trends of easy identification
and novel appearance in packaging which enhances brand value and creates additional
sales to boost exports. The country exports spice as a raw material. However, action is
needed for value addition which will bring in more foreign exchange. Since there is
high demand for Ceylon Cinnamon, value addition will help to broaden the market.
1.1 Objectives
The broader objective of this study is to find out factors affecting value added
production in Cinnamon industry. Thereby examine factors that impact the decision to
add value to cinnamon. Knowing the relative importance of these factors will be help
decision makers to determine which factors to focus on.
The specific objective is to identify possible reasons for lack of value addition in
cinnamon industry of Sri Lanka.

5
CHAPTER 02
LITERATURE REVIEW
2.1 Introduction of Spices
Spices constitute an important group of agricultural commodities, which are virtually
crucial in the culinary art. They can be primarily defined as “farm products used in
various forms, namely fresh, ripe, dried, broken, powdered, etc. which contribute
aroma, taste, flavor, color and pungency to food”. Spices may be either bark, buds,
flowers, fruits, leaves, rhizomes, roots, seeds, stigmas and styles or the entire plant
tops (Takeda et. al., 2007).
According to American Spice Association, spice is ‘any dried plant product used
primarily for seasoning purposes’. Spices include tropical aromatics, leafy herbs,
spice seeds and dehydrated vegetables which may be used to add aroma or flavour to
food stuffs, beverages, pharmaceuticals, cosmetics and households and personal care
items. They are occasionally used as the functional agents like air fresheners (Sri
Lanka Spices Cluster, 2002).
A spice is a dried seed (cumin, coriander, cardamom, mustard), flower- bud
(clove), fruit or flower (peppercorns, allspice), bark and root (cinnamon, cassia,
ginger) as the leaf (kaffer -lime leaves, or curry leaf) of the plants. In general they
have tropical origin and native to the East. There are exceptions: (Morris and Mackley
2001).
Exports of spices and allied products are in the range of Rs.5700 million and provide
many socio-economic benefits to the rural economy. Exports of spices can be divided
in to two groups, primary form and value added form - powder, oil, spice mixes and

6
various recipes. Major Markets are Mexico, U.S.A., U.K., Colombia, Germany and
India.
2.2 Spice Industry in Sri Lanka
An ancient Sri Lanka known as Ceylon, was referred to as the “Pearl of the Orient”
and the “Isle of Spices” by many explorers from Sinbad to Marco Polo, and was very
much acquainted with the “Spice Route” from East to West for many centuries. From
ancient times, other cultures have been in contact with Sri Lanka to obtain the spices.
More than over the last five hundred years, European countries have been attracting to
Ceylon spices. The Portuguese, Dutch, and finally the British, were attracted to India
and then Sri Lanka by a persisting appetite for spices. It is well known that the best
cinnamon, cloves, and other spices are indigenous to Sri Lanka (Takeda et. al., 2007).
Sri Lanka the Spice Island is renowned for the spices export from time immemorial.
Cinnamon, Pepper, Cardamom, Clove and Nutmeg are the major spices which has the
export significance. Cinnamon (Cinnamomum verum syn.Cynnamomum Zeylanicum)
is one of the oldest and the most significant spice grown and it was a popular spice
in ancient Arab world. Firstly the Arabs and then the Europeans became the
traders for Cinnamon and this brought Sri Lanka in contact with other parts of the
world. It became a crucial turning point for the future aspects of the country.
Cinnamon played a major role in the world’s history, by motivating the
Christopher Columbus to discover the new world and Vasco de Gama to South India
and Sri Lanka (Knox. R. 2004, cited in Thantirige 2011).
Multi- climate zones and different soil types found in Sri Lanka favour the production
of high quality varieties of spices, aromatic plants and herbs. Sri Lankan spices have
been famous for their inherent qualities and have been sought after by consumers and
processors throughout the world of centuries.

7
World trade in spices, their related products and herbal health care products is
estimated to be US dollars 200 billion per year with an annual growth rate of over 5%.
However, Sri Lanka’s present contribution to the world trade in this sector is mere US
dollars 150 million per year (0.075%), which consists mainly of unprocessed primary
products while the export of value added or processed products is below US dollars
10 million per year. Although there are many state and private sector institutions
responsible for the development of this sector, the rate of growth achieved during the
past 25 years is far from its potential, especially compared to the neighboring India,
which has achieved a ten-fold increase in revenue from this sector during the past 10
years (Export Development Board, 2014).
2.2.1 Quality and Grading Standards
The bulk of spices entering international trade is in whole and ungrounded form.
When ground or mixed spices are exported, specially testing for contamination or
other residues is needed. Sri Lanka follows SLSI standards but actual quality
standards required are set by importers and major end users against the health and
safety requirements of Food and Drug Act, ASTA Specifications, EU regulations or
ESA standards. The main quality factors considered are appearance, flavour, aroma,
colour, volatile oil content and cleanliness (Jayasundara, 2010).
2.2.2 Packing
Spices are required to be packed in clean, hygienic materials which do not interact
with the product itself and also depend on the importer’s specification Most of the
spices are packed in jute bags lined with waterproof. Cinnamon is generally packed in
bales and for other spices steel drums or wooden cases and for cardamom black
polythene can be used for colour preservation. All spices must be thoroughly dried to
avoid the formation of mould before shipment (Jayasundara, 2010).

8
2.2.3 Packaging
There are different ways of packaging. The 200 L metal or tin lining drums are
normally used for shipping high volume essential oils. These drums contain
approximately 180 Kg of oil. Special attention must be paid to sealing the drums, to
avoid dilution of the essential oils during transport.
2.2.4 Market Segmentation
Essential oils can be used in various end-use products. It depends on the kind of oil
and the quality of the oil in what kind of end-use product they are processed. Some of
the different industries, which use essential oils, are Perfume industry, Pharmaceutical
industry, Food industry, Bakery, Confectionery and Beverages.
The Labeling on the drums must include a short description of the product and
country of origin and the date of production. Further it is recommended to include the
specific aspects on the label such as Name / address of the producer / exporter, Net
weight Recommended storage conditions (Jayasundara, 2010).
2.3 Issues, Challenges and Opportunities for Spice Industry
The most obvious opportunity available to the spice sector is the intrinsic quality of
many spices brought about by the superior genetic base of the cultivations. In order to
transfer this biological wealth in to monetary values, the final products of spices must
be of favorable quality, which is not the current situation. Along with the challenges
arising from new trade agreements, they provide a number of opportunities too, such
as (a) doors of more and more international markets will be opened, (b) a short term
price increase could be expected,(c) more trading opportunities will be available for
value added products, and(d) foreign direct investment could be expected in the spice
sector due to more liberal marketing and increased transparency.

9
The major issues concerning the production aspects of spices include high cost of
production, small size of cultivation, improper quality of spices and the competition
for land from other commercial crops. Number of interrelated factors contributes to
these issues .The important factors are low yield, underutilization of land, senility of
cultivations, and low rate of replanting, subsistence nature of cultivations, and market
disincentives (Herath, 2002).
2.3.1 Productivity Based Issues
Since, spice cultivation is traditionally of a small scale, subsistent and poorly
managed system; various problems relating to non-commercial agriculture arise. The
subsistence nature of growers’ activities has shifted them away from having quality
awareness and exploiting marketing advantages (Lindara et. al, 2004). Furthermore,
they lack the credit eligibility demanded by commercial banks and have had limited
support from government and other institutional intervention policies. Characteristics
such as poor management, inadequate knowledge to implement improved practice
recommendations, the use of mixed cropping and a lack of financial resources have all
caused a serious threat to the productivity and sustainability of the sector.
2.3.2 Issues Relating to Value Addition
Value addition is an important area in the development of the spice industry due to the
potential of employment generation and increasing foreign exchange earnings.
However, the sector is facing number of issues and challenges in this area. The main
issue is the lack of regular supply of spices in the country. The amount is also small so
that the advantage of economy of scale is lost for investors in value addition.
Similarly, new technology for value addition is seriously lacking in the country. For
instance, India is several steps ahead of Sri Lanka in this respect. Technology can be

10
imported and that process will be relatively cheaper than generating locally although
they are covered under TRIP (Trade-Related Aspects of Intellectual Property Rights).
Cost of energy is the other significant issue. Value addition needs mechanization.
With the high cost of raw spices, high cost of energy is a limitation for establishing
value-adding processes (Herath, 2002).
2.3.3 Domestic Trade Issues
There are various issues and limitations relating to the domestic trade of spices. The
bases of many of these limitations are the low quality of the product and unorganized
nature of marketing and production of spices.
One of main issues is many spice producers and even exporters are not fully aware of
the quality requirement of the final consumer. It is expected that the information on
quality trickle down to the producers through the trade channel. On the other hand,
exporters have not taken much interest in understanding the quality and overseas
importers have also not effectively delivered the quality norms fully to their suppliers.
As a result Sri Lanka has experienced rejections of spice deliveries and further
negotiations on price adjustments on several occasions.
Since farm-gate quality of spices does not match with any standard quality, there is a
considerable amount of "cleaning" and processing carried out throughout the trade
channel. These increase the cost of marketing and also affect the final quality of
products. Other challenge is almost all of the marketing of spices is done by the
private sector and contribution of the Spice and Allied Product Marketing Board in
marketing is insignificant. Thus there is no compatible marketing strategy, and even
though there is one, it is very difficult to implement it within the current market

11
structure. There are no market-driven production plans and net consistency in exports
volumes (Herath, 2002).
In addition, very frequent price fluctuations in the spice markets are a expressing the
volatility in both export and domestic markets. This is a situation by which many
countries suffer. And the overall price structure of the spice sector is a restraint for
investors to establish value-added products. The farm-gate prices of many spices and
the retail prices are very close to the world market price on average terms. Although
this is a favourable situation for growers, relatively high prices of raw spices
discourage investment in value addition.
2.3.4 World Trade Issues
There are many issues and challenges arising due to the factors related to world trade
of spices. It is very important to face them to develop the industry.
The most stubborn general issue arising from the world trading is the quality.
ISO9000 certification and Hazard Analysis at Critical Control Points (HACCP) are
becoming essential tools in the management of food processing industries.
Governments and Association of Industries in most developed countries have
approved industry standards, which require strict management controls for
procurement of raw material and other inputs. Spice is one important item. These
requirements are all focusing on strict quality standards for exporters.
The next major issue is the impacts of GATT Uruguay round agreements on spice
trade. This is a complex issue with many variables. There are four basic rules. Those
are, protecting the domestic industry by tariff only, tariffs should be reduced and
bound against further increase, trade according to the most favoured national clause,
and national treatment on which the agreements are based. The spice trade will be
completely under control of all those four principles. They provide both advantages

12
and disadvantages to the Sri Lankan spice sector in terms of maintaining the industry.
The crucial challenge is to try and minimize the disadvantages as soon as possible
(Herath, 2002).
2.4 Cinnamon
The “true” cinnamon or spice cinnamon is the dried inner stem-bark of Cinnamomum
verum (Syn. C. zeylanicum). Sri Lanka produces about three-quarters of the total
world production of cinnamon. Although the Sri Lankan grown spice has a special
demand because of its organoleptic properties, there are, however, significant
compositional variations even within the plantations in Sri Lanka (Wijesekera et al.,
1974). Cinnamon is a hardy plant, which can grow well in almost all types of soils
under a wide variety of tropical conditions. In Sri Lanka, it is cultivated under varying
conditions ranging from semi-dry to wet zone conditions and soils varying from the
silver sands to the loamy, lateritie, and gravelly soils of the Kalutara, Galle and
Matara districts. The ideal temperature for growing cinnamon is between 20 °C and
30 °C. Rainfall should be in the range of 1250–2500 mm. Generally, cinnamon does
not prosper well in the drier parts of the low-country. It prospers well as a forest tree
at 300 to 350 m above sea level.
In two to three years after planting, depending on the climatic factors, the plants reach
a height of 1.5 to 2 m, with three to four shoots, and are then ready for harvesting.
Generally, cinnamon can be harvested two to three times per year depending on the
rainfall and soil fertility and well-tended trees free of diseases such as leaf blight and
white root yield about 100 kilograms of cured bark per acre. After harvesting, the
leaves are separated and the stems are peeled to remove the bark. The processing of
different products then begins (Ranatunga et al., 2004).

13
The “Chinese cinnamon” or cassia was initially produced from C. cassia, grown in
the south-eastern provinces of China and Vietnam. Chinese cassia was marketed
through Canton and Hong Kong. Cassia trees are grown on hillsides, about 100–300
m above sea level. Peeling of the bark is done after six years of growing (Brown,
1955). Fairly large quantities are exported from China and through Hong Kong,
mainly to the USA (Manning, 1970).
C. burmannii is the source of another commercially accepted quality of bark known as
Indonesian cassia or Batavia or Korintgi cinnamon. These plantations are found in the
Padang area of the Indonesian island of Sumatra. Over 80% of US imports come from
this source. At present the quantity remains at around 10,000 tons per annum
(Senanayake and wijesekara, 2004).
Cinnamon is unique plant which has essential oil in leaves, bark and roots but
chemical composition of them are completely different from each other. Essential oils
are produced from both bark and leaves. The flavor of cinnamon is owed an aromatic
that makes up 0.5% to 1% of its composition. The pungent taste and scent is due to an
cinnamic aldehyde or cinnamaldehyde (about 90% of the essential oil from the bark).
Other chemical components of the essential oil include ethyl cinnamate, eugenol
(found most in the leaves), beta-caryophyllene, linalool and methyl chavicol
(Senanayake and wijesekara, 2004).
While Sri Lanka's most famous export today might be tea, historically the most
important has been cinnamon. In fact, so strong is the affinity between cinnamon and
Sri Lanka that the very botanical name of the spice - Cinnamomum zeylanicum is
derived from the island's former name, Ceylon. Throughout the long history of the
island, particularly from the 16th through the 18th centuries, cinnamon was the Holy
Grail of foreign invaders, becoming the main article of trade for the great Dutch East

14
India Company and over which long and costly wars were fought between Portugal
and Holland. Today Sri Lanka is still the world's leading source of true cinnamon,
producing not only four-fifths of the world output but its choicest grades as well
(Ratwatte 1991).
Cinnamon has its distinctive, spicy fragrance to a volatile oil that it contains.
Cinnamon oil is distilled in copper stills from off-grade bark, leaves and roots. The
distilleries, always located close to plantations, have a very pleasant effect on the
surroundings, scenting the air with a sweet and spicy perfume. Earlier, Cinnamon is
mainly used as a flavor and after scientific evidence proved the medical value of
cinnamon such as reducing blood cholesterol and blood sugar, cinnamon is now used
as a beverage and in a wide range of food. It is also used as an astringent, it dispels
gas, and it is anti-bacterial and anti-microbial and it can also help relieve diarrhea
(Ratwatte, 1991).
Ceylon Cinnamon Cassia Cinnamon
⁻ Soft in Texture, easily broken
⁻ Soft & Sweet Aromatic flavor
⁻ Light Brown in colour
⁻ Soft in appearance
⁻ Number of folders/layers in quill
⁻ Native to Sri Lanka
⁻ Low Cinnamaldehyde
⁻ Coumarine content 0.004%
generally safe
(Gunaratne, n.d)
⁻ Hard texture not easily broken
⁻ Pungent and very Spicy flavor
⁻ Dark Brown or Reddish in colour
⁻ Rough in Appearance
⁻ One inward folded, empty cavity
⁻ Native to, China, Indonesia, Vietnam
⁻ High Cinnamaldehyde
⁻ Coumarine content 5%
Toxic in prolonged use

15
2.5 Cinnamon Industry in Sri Lanka
There are eight cinnamon species in Sri Lanka such as Panni Miris Kurundu, Thitta
Kurundu, Kahata Kurundu, Veli Kurundu, Sevel Kurundu, Naga Kurundu, Penirasa
Kurundu. Among them only Cinnamomum zealanicum is grown commercially.
Currently ten cinnamon selections have been identified and those selections are under
evaluation in different agro climatic zones.
The history of Cinnamon dates back to about 2800 B.C where it can be found
referenced as “kwai” in Chinese writings. Cinnamon is even mentioned in the Bible
when Moses used it as an ingredient for his anointing oil in ancient Rome. Cinnamon
has been burned in Roman funerals, perhaps partly to overcome the bad odor from
dead bodies. Ancient Egyptians used it in embalming mummies because of pleasant
odors and its preservative qualities. Cinnamon was a precious spice in the west during
14th
to 15th
centuries and its primary use was to preserve meat and to retard the growth
of bacteria. The quest for Cinnamon was a major factor which led to exploration of
the world in 15th
century. By that time the real Cinnamon was produced in only one
place, namely in Ceylon or Sri Lanka (Ministry of Minor Export Crop Promotion,
2014).
It was estimated to 25,294 ha of cinnamon lands distributed in the entire country.
About 93,767 families with around 150,000 labour units are actively involved in
Cinnamon cultivation (Bawappa et al. 2005, 7). The average age of cinnamon
plantation in Sri Lanka is around 40 years and about 20% are over 70 years of age.
Small holder cultivation is the dominant type, which are in average about 0.5 ha (1.5
acre). The size of holdings has been diminishing and only 5 to 10 % of the plantations
are of sizable extent ranging from 8 to 20 ha (Department of Export Agriculture,
2003).

16
The bulk of the cinnamon plantation is about 70–80 years old, most of which belongs
to small holders. Only about 10% of the plantations exceed 8–10 ha. Sri Lanka
commands about 60% of the world export market and exports about 7,000 tons of
quills and chips per year, apart from cinnamon leaf oil and bark oil (Dayananda et al.,
2004).
There is a notable growth in the volume of cinnamon exports during the last
two decades, but not adequate enough when compared with the growth of export
volume of Cassia which is the competitor for Cinnamon market at global level.
However, Cinnamon is exported without any product diversification and its product
range is limited to very few numbers and majority of Cinnamon raw materials
exported is used for variety of purposes. Cinnamon exporting has become a major
component of the entire economy. It has held number one place among the other
spices exports (Thantirige, 2011).
There are about 250,000 cinnamon cultivators and 400,000Cinnamon sector
employees in Sri Lanka and 60,000 family units dependent directly on the cinnamon
industry being the main source of income. Sri Lanka is the largest producer of
Cinnamon in the world accounting for about 65 to 70 % of the global production, with
Seychelles, Madagascar, India and other suppliers collectively contributing the
balance. Sri Lanka exports spices to about 70 countries in the world with Mexico,
India, USA and Europe being the major buyers (Rupasinghe, 2011).
However the only product known to be exported is the Cinnamon quills with a
length of 106.7 cm and weight of 45 kg and also, preparation of the cinnamon
quill needs special expertise which has been handed down from generation to
generation, and it is an art unique to Sri Lanka.

17
Apart from two to three products exported as Cinnamon value added products
there is no considerable range of Cinnamon products although it has multi usages.
Therefore it is clear that the Cinnamon is not promoted and no appropriate marketing
strategies were undertaken to promote this industry at local and global levels.
Cinnamon exporting is in the hands of very few entrepreneurs and they mostly
achieve their export quantities through collecting the harvest from the small and
medium holders (Thanthirige, 2011).
Spice Council Chairman Mr. Sarada de Silva was addressing the launch event of the
UNIDO-backed and announced that “We support the Government’s cess on bulk
exports since we want more value addition taking place. It is the Spice Council that
proposed this cess”.
However, the value added product extracts namely cinnamon leaf oil and bark oils are
exported only in relatively low quantities and clearly have secured higher amount of
foreign exchange due to the high value of the products. The statistics clearly indicate
the export of quality value added products is a must if Sri Lanka to achieve its
cherished goals in the spice crop sector in 2025. Sri Lanka is far behind other
countries in the export of value-added cinnamon. There is increasing demand for
organic cinnamon and Sri Lanka is still in behind other countries in growing organic
produce (Export Development Board, 2014).
There were some circumstances found in literature as draw backs for the cinnamon
industry in Sri Lanka. CMA (2007) has pointed some of them as lack of marketing
skills, lack of financial support to develop cinnamon as an industry, low the product
quality, high production cost and not exporting as value added product. The Germen
Development Institute (2006) also has identified the following drawbacks in the Sri
Lankan cinnamon industry. They are substitute products which are coming from

18
countries like China, Indonesia, Vietnam and Philippine which are producing Cassia
cinnamon with very low labor cost with large scale production. These countries are
using new strategies to capture global market. Sri Lankan cinnamon industry is in far
behind the usage of new innovative technologies to promote products in the
international market place. The market is requesting for innovative products. Most of
the Sri Lanka cinnamons are going to the international market as raw products.
2.5.1 Structure of Cinnamon Industry
The number of companies registered in the export directory in 2000 was 65 and active
companies are less than 40, of which the majority (80%) are small and medium scale
companies. Participants in the industry could be grouped into five categories: a)
producer, b) resident trader, c) town-trader, d) manufacturer and e) exporter. Some
80% of the cinnamon holdings are less than two hectares. Resident traders live in the
village itself and purchase cinnamon product (quills) directly from the producers in
the area and sell them to the town-traders who in turn supply to manufacturers and
exporters. Manufactures are those who produce value added products such as
cinnamon oils, powder, tablets etc. and export directly are very few and less than 5%
who own large cinnamon cultivations. Similarly exporters who have own farms are
limited.
Manufactures reported that they were working at less than full capacity due to lack of
working capital, shortage of raw materials, insufficient regional demand and the lack
of an organized sector in the trade. In the case of shortage of raw materials, problems
also arise due to inferior quality and limited storage facilities. But exporters reported
that they have adequate quantities to meet export demand. That means the export
demand is low due to the availability of cassia at a low price, which is an inferior

19
substitute in world market. The usual trading practice is to mix cassia with cinnamon
(Rupasena et al., 2007).
2.6 Value addition
In general, adding value is the process of changing or transforming a product from its
original state to a more valuable/usable state. The U.S. Department of Agriculture,
Rural Business Development defined Value-added products are as follows:
⁻ A change in the physical state or form of the product (such as milling wheat
into flour or making strawberries into jam).
⁻ The production of a product in a manner that enhances its value, as
demonstrated through a business plan (such as organically produced products).
⁻ The physical segregation of an agricultural commodity or product in a manner
that results in the enhancement of the value of that commodity or product
(such as an identity preserved marketing system) (United States Department of
Agriculture, 2009).
The focus industries as value added spice products are food ingredients, essence,
cosmetic/perfumery industry and pharmaceutical products.
Sri Lanka exports wide range of agricultural products such as fruits, nuts, vegetables,
cereals, spices, medicinal herbs, floricultural products etc. In world scenario most
agricultural products, raw materials are supplied by developing countries while
processing and packaging industries are owned by developed countries. Through this
developed countries could obtain higher profit. To get this achievement they have two
economic advantages which the producing countries do not have. They are
technological advantages and marketing advantages (Jayasundara, 2010).

20
This has become a big challenge for many developing countries like Sri Lanka, as
agriculture is the basis of sustainable economic development. Sri Lanka has to face
this challenge due to lack of technological and marketing advantages. In addition, due
to high cost of machineries Sri Lanka is far away from modern technology. On the
other hand Sri Lanka is not able to reach quality standards which are accepted by
global market with our poor quality processing facilities (Jayasundara, 2010).
Punjabi (2007) observed that it has become clear worldwide that the most rapid
growth in agriculture has been occurring on the part of post-production activities. This
is being driven by growth of middle income consumers even in low income countries
and their demands for better quality value added products. Absence of agro-industry
and agribusiness resulting in low levels of value addition of agricultural commodities
has been one of the main causes of stagnation in rural incomes. A substantial
agribusiness sector generating a high outflow of value added commodities is always
correlated with high agricultural GDP and high rural incomes.
When considering Sri Lankan Export agricultural crop sector, it is a very important
sector in national income generation process. Through this crop products country
occupy lot of foreign markets (especially European countries) finding income.
Mainly, Sri Lankan products have to face two challenges such as how to compete
with other producing countries like India, Vietnam etc. and how to penetrate
consumer mind attractively.
Quality certification and value addition are the potential opportunities to overcome
these two problems. Through the quality certification foreign consumers tend to buy
our products without hesitate. And also quality certification helps to maintain best
quality for our product. Similarly, recent market trends towards the many value added
commodities. There for have a great potential to tap global market through the value

21
addition. Thus through the value addition and quality certification Sri Lankan export
crop products can seize considerable portion from the increasing demand in foreign
markets defeating other competing countries (Jayasundara, 2010)..
"Value added" means adding value to a raw product by taking it to, at least, the next
stage of production. Value addition is a most important area in the development of the
export agriculture industry due to the potential of employment generation and
increasing foreign exchange earnings.
The value addition helps to reduce the post-harvest losses in export agricultural crops.
When the production of value added products from the row forms the losses are
minimize due to the long storage ability of that product. In addition the value addition
helps to increase the demand in global market and value added products can be sold
higher price than row form. To take advantage of value-added products, producer
must identify and understand customers and their needs and wants. It will really help
for market segmentation and product diversification (Jayasundara, 2010).
Literature review reveals some main factors which are affecting on value addition.
Ogolla and Wanjau (2013), Department of Entrepreneurship and Procurement, School
of Human Resource Development- Jomo Kenyatta University of Agriculture and
Technology has conducted a research on “factors affecting value addition in the
leather industry in Kenya”. According to that research study they recognized four
main factors. Those are capacity building, technology, finance and quality control.
And also research emphasized the technology and financial factors. It determined
technology as a one of the pillars of the success of the leather industry in Kenya as
well as Finance remains critical in value addition, and its shortage at any point in the
production chain is likely to compromise the quality of the final product. Mechanisms

22
to facilitate availability of affordable credit must be devised to enable growth in the
leather industry.
And Ngore, (2010) studied value addition in honey a panacea for poverty reduction in
the asal in africa. The research study reveals that decision to add value to honey was
significantly influenced by household heads’ age, the amount of time spent in off farm
activities, access to credit, group membership, household education level, price and
household size.
In addition Mamo et al., (2014) Ethiopian Institute of Agricultural Research, Hawassa
university-Ethiopia and University college- Ireland has conducted a research on
“Factors influencing urban and peri-urban dairy producers’ participation in milk value
addition in Welmera Woreda, Ethiopia”. It determined twelve independent variables
such as sex, age and education level of household head, number of children, other
income, distance to market place, number of milking cows, milk output, access to
credit services, access to extension services, access to market information and milk
collection centers.
Furo et al., (2011) examined prospects of value addition among small-scale rural
enterprises in Nigeria and found impacts of age, gender and level of education on
decision to value added production. Odero- Wanga et al., (2009) examined value
added milk products and constraints related to women micro enterprises in Kenya.
The research pointed out lack of access to credit, lack of appropriate training, poor
technology and marketing issues facilities as main constraints faced by value added
production.
Further Mapiye et al., (2007) revealed the potentials for value addition of cattle
products in South Africa and argued that increased value-addition can be achieved by

23
provision of appropriate incentives for the establishment of agro-processing industries
in the rural areas and promotion of partnerships between communal farmers and
agribusiness. Provision of framework for research, training and capacity building for
farmers and farmer organizations on aspects of cattle production and management,
record keeping, marketing, agro-processing, value-addition and entrepreneurship is
important. This empowers farmers to make informed decisions on value added
production and ensure their viability and sustainability.
2.7 Cinnamon Products
The commercial products of cinnamon are quills, quillings, featherings, chips,
cinnamon bark oil and cinnamon leaf oil. The most commonly produced product is
cinnamon quills. Quillings, featherings and chips are by-products generated during the
processing of quills.
2.7.1 Quills
The term quills is defined as scrapped peel of the inner bark of mature cinnamon
shoots, joined together by overlapping tubes, the hollow of which has been filled with
smaller pieces of cinnamon peels which is thereafter dried first in the sun and
thereafter in shade for a certain length of time. Cinnamon quills prepared by
experienced peelers are of uniform thickness from end to end. They have smooth skin
and uniform yellow colour. The dried quills are tightened into small bundles, each
bundle containing about 30 to 40 quills. The edges are then trimmed, making them
ready for marketing. Cinnamon quills produced in Sri Lanka are specially designated
as Ceylon Cinnamon, as there are differences in the flavour quality of the product
(Dayananda et al., 2004).

24
2.7.2 Quillings
Quillings are made from broken pieces and splits of all grades of cinnamon quills.
The main characteristics of quillings are their shapes and sizes. The aroma and taste
of quillings are the same as the quills, even though they are marketed as medium
quality cinnamon. They contain featherings and chips but their quantities should not
exceed 3% by mass. If proper guidelines are not taken during the processing,
unnecessary matter including pieces of wood, stems or twigs may get mixed with the
quillings. Quillings are separated from the quills in the preparation of quills and they
are separately dried in shade followed by sun drying (Dayananda et al., 2004).
2.7.3 Featherings
Featherings are feather-like pieces of inner bark consisting of shavings and small
pieces of bark left over from the process of making quills. Scrapings from the bark or
small twigs and stalks of cinnamon shoots, including a minimum quantity of chips,
are also considered as featherings. The product is marketed as medium quality
cinnamon (Dayananda et al., 2004).
2.7.4 Chips
Chips are not peeled out from the stem. Instead they are scraped off from the greenish
brown, mature and thick pieces of bark, which are inferior quality cinnamon. The
outer bark, which has been obtained by beating or scraping the shoots is also
considered to be chips. Chips are graded into two categories. Those containing small
featherings obtained by scraping very small twigs categorize as Grade 1. They contain
a small amount of other bark material and those containing inner and outer bark and
pieces of wood categorize as Grade 2. Depending on the extent to which chips are free
from unnecessary matter such as refuse and dust, the chips are cleaned by washing or

25
bleaching and are further divided into four types such as type 1, 3, 0 and 00
(Dayananda et al., 2004).
At present, the quality of cinnamon is assessed on the basis of standards set by the Sri
Lanka Standards Institution (SLSI) in February 2001, which are identical with
international standards. Both physical and technical requirements have been taken
into account and also odour/flavor, color, presence of foreign material and mould are
also included in the quality parameters. The odour and flavor needs to be fresh and
characteristics of cinnamon genuine. It should be free of foreign flavors including
mustiness. Also ground cinnamon should be yellowish to reddish-brown in color.
There is no provision for pre-shipment inspection of quality control certification.
SLSI function as a focal point for information. During the course of the survey the
exporters emphasized that they have to meet the buyer’s requirements as regarding
quality. Depending on the buyer’s needs, supplier gets the quality control certificate
from the Industrial Technology Institute (ITI), which has the necessary equipment and
facilities to undertake testing. In most cases, the exporters have to re-process and re-
grade to upgrade the quality to meet market requirements and this adds a cost to the
exporters (Rupasena et al., 2007).

26
2.7.4.1 Grades of Sri Lankan (Ceylon) Cinnamon
Table 2.1 Grades of Ceylon cinnamon ISO 6539 :
1997 (E)Grade Diameter in
mm (Max)
1050 mm
Quills per
Kg (Max)
Korahadi
% (Max)
Minimum
length of a
Quill in a
bundle
(mm)
Same
Quality
broken
pieces in a
bundle
(Max)
Alba 6 45 0 200 0.1
Continental
C5 Special 6 35 10
200 1C5 10 31 10
C4 13 24 10
Mexican
M5 Special 16 22 50
200 2M5 16 22 60
M4 19 18 60
Hamburg
H1 23 11 25
150 3
H2 special 25 9 40
H2 32 7
H3 38 7 65
Source: The Spice Council of Sri Lanka
2.7.4.2 International Standard Organization Standards (ISO)
⁻ ISO 3524 – Cinnamon Leaf oil
⁻ ISO 6538 – Cassia Leaf Oil
⁻ ISO 6539 – Cinnamon specification
⁻ ISO/R 928 – Spices determination of water insoluble ash
⁻ ISO/R 930 – Spices – determination of acid insoluble ash
⁻ ISO/R 939 – Spices – determination of moisture content
Source: The Spice Council of Sri Lanka

27
2.7.5 Essential Oils and Oleoresins
Essential oils are aromatic, odorous oily liquids obtained from plant material, for
instance flower buds, leaves, seeds, bask fruits and roots. Essential oils, the most
flavorful part of many spices and herbs, therefore, high values than the spice itself.
Essential oils can be obtained from the plant material by distillation or extraction.
Sri Lanka has a long history for exporting essential oils. There are three different
distillation methods called water distillation, water and steam distillation and Steam
distillation (Dayananda et al., 2004).
2.7.5.1 Cinnamon Bark Oil
Bark oil possesses the delicate aroma of the spice and a sweet and pungent taste. It is
essentially extracted by the steam distillation of cinnamon and the oil percentage
varies from 0.5 to 2.50/0. The main constituent of this oil is cinnamaldehyde which is
about 65% but other compounds like the eugenol, eugenyl acetate, ketones, esters and
terpenes also impart characteristic odour and fiavor to this oil.. It is employed mainly
in the flavouring industry where it is used in meat and fast food seasonings, sauces
and pickles, baked goods, confectionery, cola-type drinks, tobacco flavours and in
dental and pharmaceutical preparations. Perfumery applications are far fewer than in
flavours because the oil has some skin-sensitizing properties, but it has limited use in
some perfumes (Dayananda et al., 2004).
2.7.5.2 Cinnamon Leaf Oil
Cinnamon leaf oil has a warm, spicy, but rather harsh odour, lacking the rich body of
the bark oil. Its major constituent is eugenol rather than cinnamaldehyde. It is used as
a flavouring agent for seasonings and savory snacks. As a cheap fragrance it is added
to soaps and insecticides. The oil's high eugenol content also makes it valuable as a

28
source of this chemical for subsequent conversion into iso-eugenol, another
flavouring agent.
Leaf oil is produces by steam distillation of leaves yielding 0.5 to 0.7% oil. The major
constituent is the eugenol (70-90%) while the cinnamaldehyde content is less than
5%. It is used mainly for flavouring cola-type drinks, with smaller amounts used in
bakery products, sauces, confectionery and liqueurs. Like cinnamon bark oil, its use
as a fragrance is limited by its skin sensitizing properties.
2.7.5.3 Cinnamon Oleoresin
The dry cinnamons bark powder on treating with solvents like acetone, hexane, ethyl
acetate yields a viscous mass that attribute to the total taste and aroma of cinnamon.
The oleoresin content varies from 7 to 10%. The oleoresin is dispersed on sugar and
salt and used for flavouring processed foods. Oleoresins are solvent extracts of spices
that contain the volatile oil, non-volatile resinous material and the active ingredient
that characterises the spice as hot or pungent when such an ingredient is present. The
solvents commonly used for the preparation of the oleoresins are acetone, ether,
ethanol, propanol or methylene chloride. Ethanol was at one time the preferred
solvent but is no longer used due to its high cost. Acetone is now the most commonly
used solvent for oleoresin production (Dayananda et al., 2004).

29
2.8 Current Situation of Sri Lankan Cinnamon Oil Industry
2.8.1 Introduction
In last few decades, there were many argues on qualitative and quantitative
dimensions of cinnamon oils. Specially, the connection between oil producers and
exporters has been fouled due to the quality reduction of cinnamon leaf oil. Ceylon
cinnamon contains very little amount of cumarin (0.004%) and large amount of
eugenol (75%- 85%). Therefore there is high demand for Ceylon cinnamon oil in
world market. Large amount of cinnamon oils export to European countries as a raw
material for cosmetics production. But local value added products are very rare.
Cassia cinnamon is the main substitute for Ceylon cinnamon in world market and
there is big competition between this two. Other countries such as Indonesia, India,
China etc. export large quantities of cassia cinnamon for low price (Apasinghe et al.,
2013).
2.8.2 Extraction of Essential Oils
There are five main methods of extraction: Expression, Hydro- or water-distillation,
Water and steam distillation and Solvent extraction.
Distillation is still the most economical method of extracting essential oils from
spices. The main advantage of distillation is that it can generally be carried out with
some very simple equipment, close to the location of plant production. Even in
relatively remote locations large quantities of material can be processed in a relatively
short time. Distillation is less labour intensive and has a lower labour skill
requirement than solvent extraction. Adopting the simplest or cheapest extraction
method however, may prove to be false economy because of low yield, poor or highly
variable oil quality and low market value. Water distillation is the simplest of the

30
three distillation methods. The plant material is mixed directly with water in a still
pot. A perforated grid may be inserted above the base of the still pot to prevent the
plant material settling on the bottom and coming in direct contact with the heated base
of the still and charring water distillation is probably the simplest and cheapest
method of extracting essential oils, but the quality of the oil has the greatest potential
to be modified due to the effects of direct heating and the water contact (Apasinghe et
al., 2013).
Cinnamon and Cassia bark produces two oils, a superior type derived from the inner
bark and a lower quality from broken quills, chips and bark. Hydro distillation or
steam distillation of chips, featherings and quillings produce cinnamon bark oil or
Chinese cassia oil. Bark to be distilled for oil should be kept dry as dampness
encourages mould or fermentation that directly affects oil composition. The leaves left
after trimming the cut stems, as well as those obtained from pruning, provide the raw
material for production of cinnamon leaf oil. The leaves are usually allowed to dry for
a few days before distillation. Cinnamon and cassia oils, which have variation in
quality because of geographical origins of the source material, are both normally
rectified to provide oils of a more uniform composition.
2.8.3 Maintenance of Quality Standards
One major problem for the industry is to ensure quality standards are maintained by
growing and processing clean, high quality spice that has no adulteration or
contamination. This requires a concerted effort by the growers, processors, and traders
to make certain that the products are of the highest standard to meet food hygiene
requirements. There is a need to identify the problem areas (e.g. drying methods, or
storage) that can have a significant effect on the quality outcome. The adoption of a
hazard analysis and critical control point (HACCP) system which focuses on

31
prevention rather than relying mainly on end-product testing, would seem to be a
worthwhile advance. The HACCP system provides a science-based and systematic
approach to identify specific hazards, and measures for their control, It ensure the
safety of foods. There is a need for the production and processing stages for each crop
to have individual HACCP procedures developed and adopted to ensure quality
standards and to provide an insight into the most hazardous areas likely to affect spice
quality (Food and Agriculture Organization, 2005).
2.9 World supply and Demand Trends
2.9.1 Markets
Cinnamon bark oil is a high-value essential oil but the volumes traded are very low.
In the ten years since 1983 exports from Sri Lanka, virtually the only supplier of the
oil, have never been more than 2.8 tons. The major market is the EC, within which
France is the biggest importer. In recent years the United States has emerged as the
second largest importing country.
World demand for cinnamon leaf oil has been around 120-150 tons in recent years,
met almost entirely by Sri Lanka. Sri Lankan exports have averaged about 120 tons
for the period 1987 to 92, but this includes an exceptionally low output in 1990. The
United States and Western Europe are the largest markets for cinnamon leaf oil.
Imports into France and the UK have fallen in the last few years, as they have slightly
for India. Hong Kong is a significant importer although most of the oil is re-exported.
The ready availability of eugenol in clove leaf oil has led to some loss in markets for
cinnamon leaf oil. When eugenol is required for further conversion into iso-eugenol,
that produced from cinnamon leaf oil possesses a more desirable aroma and flavour
than when derived from clove leaf oil. For most other purposes, however, the cheaper
eugenol clove leaf oil is preferred.

32
Imports of Cassia oil into the USA have risen in recent years and, with a soft drinks
market which shows no sign of weakening, demand for cassia oil is expected to
remain strong. Imports from Japan and Hong Kong are almost entirely re-exports of
Chinese oil. Most cassia oil in international trade is of Chinese origin. There is
believed to be significant domestic consumption so total annual production may be in
excess of 500 tons.
2.9.2 Quality and prices
There is no international standard for cinnamon bark oil although batches containing
cinnamaldehyde at the higher end of the range fetch the higher price. In the United
States, an EOA standard specifies an aldehyde content of 55 to 78 percent.
International (ISO) standards exist for cinnamon leaf and cassia oils. For cinnamon
leaf oil, ranges between which the major constituent, eugenol, should fall are
specified in terms of total phenol content for oils of different origin. Oil from the
Seychelles used to be preferred because of its high eugenol content (90%).
In the United States an FMA monograph, which replaces the old EOA standard,
specifies the eugenol content of cinnamon leaf oil in terms of its solubility in
potassium hydroxide (80 to 88 percent). For cassia oil, cinnamaldehyde is the major
constituent and a minimum content of 80 percent is specified in the ISO standard.
Again, physico-chemical data are provided (Madan and Kannan, 2004).
Cinnamon leaf oil, in contrast, has been in the range US$ 6.50 to 7.50 per 1kg for
most of the last three years. Its price fell gradually from about US$ 7.50 in early 1991
to US$ 6.50 in mid-1993. In late 1993 it had risen again to US$ 7.30/kg and in early
1994 it was US$ 8.25/kg. Although it is comparatively low-priced oil it is still more
expensive than clove leaf oil as a source of eugenol (which was approximately US$
2.70/kg in early 1994).

33
Cinnamon bark oil is considerably more expensive than the leaf oil and probably the
most highly priced of all essential oils. During 1992 it was being offered at around
US$ 385/kg, largely reflecting the high raw material cost. In 1993 and early 1994
dealers in London were only quoting prices on request (Madan and Kannan, 2004).
Cassia oil, too, has remained fairly level in price over the last few years. In the period
early 1991 to mid-1993 it fetched US$ 33-35/kg. It then fell slightly and in early 1994
it was about US$ 29/kg. These prices are significantly lower than those which
prevailed in the early and mid-1980s, when there was a shortage of cassia bark in the
China. Any appreciable rise in price above the US$ 30-35/kg level is likely to
encourage end-users to blend cheaply available synthetic cinnamaldehyde with
natural cassia oil (Food and Agriculture Organization, 1995).
For the cinnamon oils of international commerce, production of oil is secondary to the
production of the spice. The establishment of new areas of these particular
Cinnamomum species will depend upon demand for the spice and economic returns to
the farmer. Whether "waste" material from spice production is then utilized for oil
production is, again, dependent on demand, prevailing oil prices and economic
returns. The close relationship between the two commodities makes it unlikely that
production of oil will shift, geographically, from the traditional centers of spice
production (Food and Agriculture Organization, 1995).

34
CHAPTER 03
METHODOLOGY
3.1 Conceptual framework
Constructing the conceptual framework is the main concern and it will be
incorporated as the main guide for the entire study. It is given a special attention to
the research design and the data collection process while deciding the methodology
adopted.
The conceptual framework was developed based on research factors which were
identified from literature review. Above main factors have been identified through
literature review as significant factors affecting on production of value added
products.
3.2 Population
The population of the research study was the lists of registered Cinnamon
manufacturers/processors (GMP processors) in Colombo and Galle Districts where
⁻ Education level
⁻ Age
⁻ Attitude
⁻ Technology
⁻ Experience in industry
⁻ Cost of production
⁻ Support service
⁻ Access to credit
⁻ Availability of skilled
labours
⁻ Other income
Production of Value-added
products

35
most of cinnamon processors, manufacturers and exporters are present. The lists of
contact details were obtained by Ministry of Minor Export Crop Promotion and
Department of Export Agriculture. There were 102 registered processors/
manufacturers who are contributing to the export market. Out of 102, 34
manufacturers were from Colombo and 68 from Galle District. Data were collected
from that whole population.
3.3 Data Collection
Primary data were collected using structured questionnaire. Prepared questionnaire
was pre-tested by interviewing ten exporters and manufacturers. Then questionnaire
was finalized according to their answers and opinions. The final questionnaire was
used to conduct the survey. Questionnaire focuses on areas related to processing and
production of Cinnamon products such as attitude, technology, finance, skill, support
services and demand in order to achieve the objectives of the study. Primary data
were collected from processors/manufacturers and exporters through face-to-face
interviews, telephone calls and e-mails. The questionnaire contained five point likert
scale questions, yes/no questions (dummy variable) and open-ended questions. Since
data were collected by large scale, medium scale and small scale five point likert scale
helps to measure some variables fairly.
Relevant secondary data for the study such as export data, Government policies, HS
codes etc. were obtained from Custom Department, Ministry Of Minor Export Crop
Promotion, Department of Export Agriculture and Export Development Board.
Information regarding the Cinnamon industry was taken by personal interviews from
the executive persons.

36
3.4 Data analysis
3.4.1 Empirical Model for The Econometric Analysis
Econometric analysis was used to achieve the broader objective of the research study
in quantitative terms. Therefore the Binary logistic regression analysis was used to
quantify the relationship between dependent variable and independent variable.
Analysis was done by using “STATA” Statistical software. In statistics, logistic
regression, or logit regression, or logit model is a regression model where the
dependent variable is categorical and it was developed by statistician David Cox in
1958.
3.4.2 Binary Logistic Regression
Binary Logistic Regression examines the relationship between one or more predictor
variables and a binary response. A binary response variable has two possible
outcomes, such as the presence or absence. In this research study, the response
variable is production of cinnamon value added products. The two outcomes are that
whether produce or not produce the value added products. Therefore, Binary Logistic
Regression model is the best to analyse the coefficient of independent variables. The p
value is used to find the level of significant and odd ratios and coefficient value can
be used to develop regression equation.
However, logistic regression estimates the probability of an event occurring. What we
want to predict from a knowledge of relevant independent variables is not a precise
numerical value of a dependent variable, but rather the probability (p) that it is 1
(event occurring) rather than 0 (event not occurring). This means that, while in linear
regression, the relationship between the dependent and the independent variables is
linear; this assumption is not made in logistic regression. Instead, the logistic
regression function is used.

37
An important concept in logistic regression is that of odds ratios. Logistic regression,
being based on the probability of an event occurring, allows us to calculate these,
which are defined the ratio of the odds of an event occurring to it not occurring. The
pseudo R2
value and p value of goodness of fit testis indicate overall explanatory
power of the estimated function.
The Linear regression model is specified as,
Y = β0 + βiX i + ε
Here Y, dependent variable is the decision to produce value added cinnamon
products, Xi is independent variables, β0 is the constant, βi is coefficient of
independent variables to be estimated and Ԑi is random error term. (i = 1, 2, 3…).
Logistic regression generates the coefficients and its standard errors and significance
levels of a formula to predict a “logit transformation” of the probability of presence of
the characteristic of interest.
The coefficients returned from a logistic regression model are log-odds ratios. They
tell us how the log-odds of a "success" change with a one-unit change in the
independent variable. Increasing the log-odds of a success means increasing the
probability, and vice-versa decreasing the log-odds of a success means decreasing the
probability.
Y = β0 + β1X 1 + β2X 2 + β3X 3 + β4X 4 + β5X 5 + β6X 6 + β7X 7 + β8X 8 + β9X 9+ β10X 10 + ε

38
Rather than choosing parameters that minimize the sum of squared errors (like in
ordinary regression), estimation in logistic regression chooses parameters that
maximize the likelihood of observing the sample values.
Table 3.1: Description of Independent Variables
Variable Description Unit of measurement
X1= Education level Education of the processor In years
X2= Age Age of the processor Categorical variable
X3= Experience Experience in industry In years
X4= Attitude
Attitude towards value
addition
Score (5 point likert response
scale)
X5= Technology
Availability of adequate
relevant technology
Score (5 point likert response
scale)
X6= Availability of enough
skilled labours
Number of labours
X7= Access to credit
Access to any financial
source/procedure
Yes/No
X8= Other income Having any other income Yes/No
X9= Support service Availability of technical
support service
Yes/No
X10= Cost of production
As a percentage from total
income

39
CHAPTER 04
RESULT AND DISCUSSION
This chapter presents the results obtained from data analysis and the interpretation of
the results. Both descriptive and econometric analyses were used to accomplish
objectives of the study. Data was analyzed through STATA 12 and Minitab 16
statistical software.
4.1 Summary Statistics
Table 4.1 Descriptive Statistics of Independent Variables
Variable Mean Std.Dev Min Max
Education 11.60241 3.7284 5 18
Age 2.831325 0,921548 1 4
Experience 17.6988 10.23354 3 48
Attitude 5.86747 1.636259 2 9
Technology 3.361446 0.7254656 2 5
Labour 14.59036 16,82191 4 85
Credit access 0.4698795 0.502126 0 1
Other income 0.5542169 0.5000735 0 1
Support services 0.4216867 0.496831 0 1
COP 56.98795 8.658133 45 75

40
According to the summery statistics, mean education in years of respondents is
11.60241 and it is ranged between 5 to 18 years. Mean experience in years for the
sample is 18.06024 and it is ranged between 3 to 48 years. Mean number of labour is
14.59036 and it is ranged between from 4 to 85. Some large scale processing
companies have high number of labours while small and medium scale processors are
suffering from labour scarcity, because those SMEs are not capable of hiring available
labours at high payments. Average cost of production for the sample is 56.98795
percent and it is ranged between from 45% to 75%. Cost of production for value
added products are comparatively high than primary production.
4.2 Distribution of Variables
The distribution of different variables of the population is represented by charts and
tables. Out of 102 processors of the population 83 were responded to the
questionnaire. That is because of some processors have stopped their production and
some were reluctant to give information. From those respondents 24 respondents were
from Colombo District and 59 from Galle District. Out of 102, around 10 registered
processors have departed from the cinnamon industry reflects the complicated
situation of cinnamon industry of Sri Lanka.

41
4.3 Determinants of value added production in Cinnamon
industry
Table 0.2 Estimation of Binary Logistic Model
Variable Coefficient SD P>|z| Odds ratio Marginal effect
Education 0.1508549 0.1621106 0.352 1.162828 0.0122289
Age -0.7712856 1.187861 0.516 0.4624282 -0.0625237
Experience -0.1086429 0.105677 0.304 0.8970507 -0.0088071
Technology 2.354375** 1.034657 0.023 10.53154 0.1908556
Attitude 0.496583** 0.2222641 0.025 1.643098 0.0402551
Labour 0.0807053* 0.0432837 0.062 1.084051 0.0065423
Creditacces 1.761008* 1.066816 0.099 5.818301 0.1427548
Otherincom -1.735089 1.102775 0.116 0.1763844 -0.1406537
Sup.service 0.7958454 0.8835274 0.368 2.216314 0.0645146
COP 2.839062** 1.269343 0.025 17.09971 0.2301464
Constant -16.96677 6.733189 0.012 4.28e-08
*: Significance at 10%, **: Significance at 5%, ***: Significance at 1%
Number of obs = 83
LR chi2(10) = 68.35
Prob > chi2 = 0.0000
Log likelihood = -21.163024 Pseudo R2 = 0.6176

42
The logistic regression model of the factors influencing the decision on value added
production in Cinnamon industry is presented in Table 4.3. Overall, the model
predicted 61.76 percent of the sample correctly and posted a log likelihood value of -
21.163024 and a goodness of fit chi-square value of 68.35 which is statistically
significant at 1.0% level. In the model, five out of ten explanatory variables were
statistically significant at given levels and these are the coefficient of available
technology, attitude, labour availability, access to credit and the cost of production.
The positive sign on the variable’s coefficient indicates that higher values of the
variable increase the decision to embark on value added production and negative signs
imply wise versa. The distinction regarding a positive or negative relationship in the
odds ratios is given by which side of 1 they fall on. 1 indicates no relationship. Less
than one indicates a negative relationship and greater than one indicates a positive
relationship. Marginal effects indicate the effects of one unit change in an
independent variable on the probability that an operator adds value to his product.
4.3.1 Participation in Value Added Production
Value addition is any act by the trader that takes his product a step closer to the form
in which the consumer desires it. Considering the value added production, 39% of
respondents (32) engage with value addition at different levels and 61% of majority
processors/manufacturers (51) are producing primary cinnamon products. Main
primary form is quills.

43
Figure 4.1: Participation in value added production
4.3.2 Availability of Technology
According to the research findings most of cinnamon processors/ manufacturers have
low technology capacity. As a percentage 45% of the sample has low technology and
10% has very low technology capacity. The second highest percentage is 39% from
the category of up to some extend. The lowest percentage 3% of the sample has high
technology capacity.
Highly_availbleUpto_some_extendLowVery_low
50
40
30
20
10
0
Available technology
Percent
3.61446
39.759
45.7831
10.8434
Percent within all data.
Figure 0.2: Available Technology
Yes - 32
39%
No - 51
61%
Yes
No

44
According to the regression estimation, the coefficient (0.2760421) and odds ratio
(10.53154) of available technology was positive and statistically significant at 5%
level. This implies that an increase the adaptation to technology will stir up the value
added production. The odds ratio of available technology indicates that increment of
available technology effects to increase the probability of value added production.
Nevertheless processors should concern cost aspects when applying new technologies.
This result supports the findings of Ogolla and Wanjau (2013) who inferred that
technology is one of the pillars of the success of agriculture industry and industry
should embrace dissemination of information to facilitate engagement of local
producers with international markets.
Available technology includes both the equipment and the value addition methods
used by cinnamon processors. Most of small and medium scale manufacturers suffer
from an inadequate provision of technical information, limited use of modern
production and value adding technologies. Tragedy is even though some processors
have sound knowledge on cinnamon processing product development, they cannot
access to new technologies due to financial constraints and also some manufacturers
have developed traditional methods into modern techniques with their knowledge.
Although various types of cinnamon value addition equipments and machineries were
readily available in the market, the most of processors had limited access to them and
used traditional methods. As a result, majority used very simple and basic value
addition technologies. This was reflected in the type of value added cinnamon
products produced. Even though there is wide range of value added cinnamon
products in the world market, majority of Sri Lankan manufacturers processed cut
cinnamon, essential oils and cinnamon powder, all of which do not require highly
sophisticated processing equipment. Very few are producing other value added

45
products such as cinnamon tablets, cosmetic products, pharmaceutical products,
bakery products, drinks and beverages etc.
Processing high quality cinnamon products requires that raw cinnamon should be of
good quality. This requires strict testing procedures as well as quality measures at the
receiving end. A majority of the processors used low to medium technology methods
and simple techniques to test for the quality of cinnamon products. Simple techniques
included the use of body senses such as smell, sight and taste (organoleptic). But these
are not acceptable methods. Some processors were did not use any method to test the
quality of raw cinnamon and simply trusted that the supplied raw materials was good.
These faults resulting the low quality products and then buyers will reject the product
lots which makes huge losses to the producer. When this happens again and again
then processors may stopped their production.
Government institutions such as Ministry of Minor Export Crop Promotion,
Agriculture Department and Export Development Board state that at time technology
is available to cinnamon processors but due to their limited knowledge and skills of
improved new technologies, the rate of adoption and implementation is very low.
Mangstl (2008) is describing that the use of e –Agriculture is supporting for
cultivation, quality maintenance and direct access to the market place. The Philippines
government has employed set of people with ICT background [Agricultural extension
workers (AEWs)] to support adopting farmers in to ICT. They are equipped with
mobile technologies, internet access and laptops. AEWs are visiting farmers regularly
and supporting them to get use in to ICT. (Barroga at el, 2010). India is a country
which is highly using ICT in agro business. They have implemented many systems to
support farmers (Alavion and Allahyari, 2012). Daka and Chayal (2010) are saying
that ICT can be used in the agricultural field as a reliable source of information about

46
best practices, pest, pesticides, fluctuations in the market, methods of production,
quality standards. It is linking farmers, traders, government authorities, risk covering
institutes, quality assuring institutes and financial organizations.
Indonesia is a leading agricultural country and they produce large amount of Cassia
cinnamon to the world market at a low price. They are using ICT as a strategic tool to
develop the agriculture in the country (Hasibuan at el., 2012). According to Lee and
Purnomoi (2010), Indonesian government has employed Agricultural Extension
Officers (AEO) to develop agriculture sector.
According to the Baddegama (2014), Sri Lankan cinnamon is having a good demand
internationally. But to sustain in the international market and getting the maximum
profit for the product is an issue. Countries which are producing competitive and
substitute products are highly using ICT in agriculture sector with government
influences. Further he states that the cinnamon industry is an industry with digital
divide. Due to this, bottom line is suffering without information and education on
product development and direct market access.
4.3.3 Attitude towards value addition
Majority of the sample have agreed with the statement of “Value addition is too
costly”. As a percentage 43% respondents (36) are agreed and 22% respondents (18)
are strongly agreed with above statement. Both together represent 65% of the sample.
28% of respondents (24) disagreed and 6% have no idea about the statement. No one
strongly disagreed with that statement. Most of value added processors are disagreed
with that statement while most of non-value added processors agreed with the
statement.
The second statement is “value addition is important to generate high income” and
majority of the sample have agreed with the statement. As a percentage 44%

47
respondents (37) are agreed and 22% respondents (18) are strongly agreed with above
statement. Both together represent 65% of the sample. 28% of respondents (24)
disagreed and 6% have no idea about the statement. Most of value added processors
are agreed with that statement while most of non-value added processors disagreed
with the statement.
DisagreeNo_ideaAgreeStrongly_agree
40
30
20
10
0
Attitude1 (value addition is too costly)
Percent
28.9157
6.0241
43.3735
21.6867
Strongly_agreeAgreeNo_ideaDisagreeStrongly_disagree
40
30
20
10
0
Attitude 2 (value addition is important to generate high income)
Percent
10.8434
40.9639
14.4578
32.5301
1.20482
Figure 0.3: Attitude towards value addition

48
According to statistical analysis, processors’ attitude gave positive coefficient
(0.4965832) and odds ratio (1.643098) which were significant at 5% level. Positive
attitude towards value addition has a positive influence on the decision to value added
production. This indicates that a cinnamon processor who has positive attitude
towards is likely to take a step further and engage in value added production.
Correspondingly odds ratio value infers positive attitudes raise the probability of
engage in value added production. This affirms with the Thanthirige (2011), who
stated that the positive attitudes and the right perceptions will naturally provide
definite motivation and the power to the entire industry to reach expected level. Some
are having understood different aspects of value addition agreed with the statement of
“value addition is important to high income generation”. But most of primary
processors are not agreed with the above and agreed with the statement of “value
addition is too costly”. This finding reveals that most of processors are mainly
concern on production cost and profits than income. Even though they have no any
acceptable argument, they strictly hang on negative attitudes towards value added
production and it is very difficult to change them. Whilst they cannot move from the
negative attitudes they cannot move to the value added production. The processors
who are having high experience in raw production with enough profits do not have
eager on value addition.
According to the Thanthirige (2011), before producers examine value-added
processing and marketing, cost minimization in production must be achieved. Only
low cost and efficient producers will be able to survive and compete in production
agriculture. Adding value cannot take the place of reaching the efficiencies of
production attainable through technology and economies of scale.

49
4.3.4 Cost of Production
The total cost of production is representing as a percentage from total income.
Majority (20) of the cinnamon processors bears 55% of COP and it represents 24% of
the sample. 44% of the sample incurs more than 55 percent of cost of production.
Following graph shows the distribution of COP as a percentage. Most of value added
processors abide more than 55% of COP. Total costs of production mainly include
labour cost, cost of technology, cost for inputs and other costs for the production. The
processors who have their own cultivations and family labours are more endure the
COP, since those resources help to reduce the cost.
75706560555045
25
20
15
10
5
0
Percentage of COP
Percent
4.81928
9.63855
16.8675
15.6627
24.0964
18.0723
10.8434
Figure 0.4: Cost of production

50
Binary logistic regression analysis shows that the cost of production is significant at
5% level and has a positive relationship (2.839062) with value addition implying high
processors have to bear high cost of production for the value added production. Odds
ratio value (17.09971) also infers the same. The reason behind that is the value added
production requires high cost of production including labour, machinery/ technology
and quality assurance. Majority of value added processors are bearing more than 55%
of cost of production from total income. Other main reason for high COP is the high
loss during the storage, production and transport. For instance due to the presence of
moisture content it starts to deteriorate the quality. That type of quality degradation
could not be improved to satisfactory level even after drying at the latter stages. There
is a risk of breakage, contamination and exposed to and moisture during
transportation. Therefore, transport temperature has to be in the range of 150 0
C to
190 0
C and the cinnamon must be kept in a dry area and improper transportation
facilities increase the losses causing high COP.
Almost 40% of the volume will have to be degraded as low quality products even
after reprocessing. Such low quality products are exported sometimes at lower price
and the rest part will be sent to the local markets directly. Therefore this will result in
a loss of export volume and a loss of foreign exchange income. That estimated loss
will be about Rs 70 million per year. Further for small scale processors, high cost of
production could be related to the low production according the economies of scale.
Because small scale system is dominated by resource poor hence low capitalized,
resulting low production volume.

51
4.3.5 Labour Availability
Majority of cinnamon processors including both value added and non-value added
producers are facing big problem of labour scarcity. 54% of the respondents (45) have
number of labours below 10. Only few large scale processing companies have large
number of labours.
75604530150-15
40
30
20
10
0
Number of Labours
Percent
Mean 14.59
StDev 16.82
N 83
Normal
Figure 0.5: Labour availability
According to the statistical analysis, the coefficient of number of labours (0.1102986)
and odds ratio (1.084051) was significant at 10.0% alpha level and had a positive
effect on decision to participate in value added production in cinnamon industry. It
implies that higher the number of labour will upsurge the probability of participate in
value added production.
Without adequate skillful labours it is very difficult to continue the production and
fail to supply for the demand. And also manufacturers have to pay high wages for
available labours. Because value added products are not seasonal products as raw

52
cinnamon. Thus value added processors have to continue the production throughout
the year. If manufacturers do not have enough labours they have to automate the
production process which needs strong financial foundation plus capacity building.
Majority of small and medium scale processors are not capable for that while some
large scale processors are capable with automated production process. During the
survey, the most frequently repeated problem in this industry is the labour scarcity
and now it is a recognized problem in the cinnamon industry. Responsible
government departments also predict that the cinnamon industry will be faced to a big
problem in near future due to labour scarcity.
4.3.6 Access to credit
Following chart illustrates that 53% of the sample (44 respondents) do not have
access to the credit. Out of that 53, only 10% of respondents involve with value added
production and other 44% are producing primary cinnamon products. Other 47% of
the sample has access to credit and out of that, 29% respondents engaged in value
added production.
Value addition
Credit access
YesNo
HaveNot_haveHaveNot_have
40
30
20
10
0
Percent
28.9157
9.63855
18.0723
43.3735
Figure 0.6: Accesses to credit

Determinants of Value Added Production in Cinnamon Industry

Determinants of Value Added Production in Cinnamon Industry

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (10)

Similar to Determinants of Value Added Production in Cinnamon Industry

Similar to Determinants of Value Added Production in Cinnamon Industry (20)

Recently uploaded

Recently uploaded (20)

Determinants of Value Added Production in Cinnamon Industry