Tea Board chairman Niraj De Mel told Reuters the island would produce more than 325 million kg in 2005, breaking the previous 2002 record of 310 million, but said the sector should in future sacrifice quantity in favour of quality.
"There is so much tea around the world," he said on Wednesday. "With the exception of Malawi and Bangladesh, all the world's tea producers have agreed to drop production. Around 260-280 million kg would put Sri Lanka in a much more comfortable position."
De Mel said Sri Lanka had lost out in recent years as drinkers in its key markets discovered teabags. While tea from Kenya can be cut, tailed and curled so the tea diffuses quickly from the bag, Ceylon tea cannot and would need a new type of teabag paper to produce the best taste.
Sri Lankan government scientists were investigating the idea but more money needed to be put into development.
"We need to find a teabag that best brings out the taste of Ceylon tea," he said.
Russia, which consumes 20 percent of Sri Lankan tea exports, making it the biggest single destination, was also seeing a worrying trend towards teabag usage, De Mel said.
The world's fourth largest producer after China, India and Kenya, Sri Lanka exports around 290 million kg a year which earns 13 percent of the island's export income.
Ceylon tea was now fetching $1.90-$1.95 a kg against $2.18 a year ago due to global oversupply, but Sri Lankan plantation owners were still stripping as many leaves as possible off their bushes to boost their income.
"What we want to do is concentrate on the parts of the leaf that will produce the best quality," he said. "At the moment they are pushing the bushes pretty hard and the quality is mediocre."
But with plantations failing to replant the recommended two percent of their crop every year as they try to maximise income, output would fall in years to come.
"Bushes are getting old - from now I think it will be a downward trend," he said. "I think we'll see a bigger role for the small scale growers. They can manage themselves better and are more responsible for the land."
Tea was introduced to Sri Lanka in the 19th century after a blight wiped out the island's coffee plantations, when the colonial British shipped in hundreds of thousands of Indian Tamils to harvest the new crop.
Larger plantations would likely become more mechanised, De Mel said, as even with thousands of tea pickers earning less than $2 a day the industry was still not as cost-effective as its more technically advanced counterpart in Kenya.