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Archive for May, 2014

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Hedging their bets

| May 29, 2014

As the tobacco market becomes more challenging, some leaf traders are diversifying into other lines of business.

By George Gay

In announcing in February Universal Corp.’s financial results for the third quarter to the end of December, George C. Freeman III, the chairman, president and CEO, said in part that a very preliminary look ahead at 2014 crops indicated there would be increased production in some origins. “At the same time, there are possible reductions in cigarette manufacturers’ needs due to lower cigarette sales in Europe and the United States,” he added.

Now, as I sit down to write a story about leaf supply, it’s not possible to draw too many conclusions from these remarks, but I get the idea that, right now, I’d be better off as a buyer of leaf tobacco than as a seller. But nothing is certain because, as Freeman said also, Universal operates in “uncertain global markets.”

The whole business of growing leaf tobacco and getting it to tobacco-product manufacturers is fraught with uncertainties that start with the weather and that might end up with weather’s bigger, meaner brother: climate change. But taking a slightly wider view, there are the issues—some leaf-industry positive, some neutral but mostly negative—of urban migration, tobacco-grower aging, the World Health Organization’s Framework Convention on Tobacco Control, crop financing, environmental responsibilities, health and safety regulations, NTRM, vertical integration, controlled air fumigation, tobacco expansion, anti-tobacco regulation, population growth and female emancipation. And no doubt there is any number of other factors unknown to me.

I would imagine that it would be easy to drive yourself mad trying to factor all of the above variables into estimations of how much leaf of what types and varieties need to be grown where, and I have no intention of messing with my sanity. In any case, it is sometimes much easier and much more informative to sit back and watch what people in the business are doing. For instance, just as I was finishing the first draft of this story, Universal announced that it had entered the fruit and vegetable food ingredients market through its new subsidiary, Carolina Innovative Food Ingredients (CIFI). Initially the business is set to focus upon value-added ingredients derived from sweet potatoes.

“Universal continues to seek out growth opportunities that enhance our company’s value and help to sustain tobacco growers,” Freeman was quoted as saying. “With this new business, we will be able to offer high-quality food ingredients to the food and pet food manufacturing industries while providing tobacco growers with a new market for sweet potatoes. Nearly half of U.S. sweet potato production comes from North Carolina and they are often grown in rotation with tobacco.”

This surely is a great initiative that potentially edges Universal and some of its growers in the direction of a more sustainable future. After all, governments are nagging people to eat more and more helpings of vegetables and fruit each day while making it increasingly difficult to obtain and enjoy tobacco.

Alliance One International (AOI) has also been busy edging in new directions that seem to give pointers to the future. On March 12, an AOI press note described how the company’s Turkish subsidiary, Alliance One Tütün (AOT), and Öz-Ege Tütün Sanayi Ve Ticaret (Öz-Ege) had entered into a joint venture, Oryantal Tütün Paketleme Sanayi (OTP) located in Torbali, Izmir, Turkey. Under the joint venture, AOT and Öz-Ege will contract with OTP for oriental tobacco processing and storage, while continuing to maintain separate farmer contracting, agronomy, buying and selling operations.

In announcing the joint venture, Mahmut Özgener, the chairman of Öz-Ege’s board of directors, said that Turkey was the world leader for high-quality, aromatic oriental tobacco, a key ingredient in many cigarette blends around the globe. “To drive improved value for our customers, we have developed this processing and storage joint venture in our modern, efficient facility,” he said. “We look forward to the mutual benefits with AOT that this joint venture solidifies.”

This venture seems to underline the importance and potential further importance being attached to classical oriental tobacco production. Classical oriental will become an increasingly vital ingredient of American-blend cigarettes should regulators introduce more cigarette ingredient restrictions.

And the venture perhaps hints at the fact that, even given a slight hiccup in 2013, the demand/supply situation for classical oriental is pretty much in balance without much room for production increases. Indeed, classical oriental farming, perhaps even more than the farming of other types of tobacco, well illustrates the drift of people from the countryside to the cities and the reluctance of young people to become involved in farming.

Then, on March 31, in another press note, AOI described how its Brazilian subsidiary, Alliance One Brasil Exportadora de Tabacos, and China Tabaco Internacional do Brasil, the Brazilian subsidiary of China Tobacco, had formed a new joint-venture company, China Brasil Tobacos Exportadora, in Brazil. The importance of this joint venture is not difficult to spot. China has the world’s biggest cigarette market and is one of the few markets to be growing, partly because of the country’s growing population and an increase in smoking prevalence among women.

I understand also that sales of cigars in China are booming, though from a very low base. Currently, I am told, this boom is mainly being met by local leaf tobacco, though with limited amounts of imports being used for higher-quality local products. If the boom continues, there will be increased demand from China also for cigar tobaccos.

Finally, on April 7, AOI said that one of its subsidiaries and an affiliate of IOTO International had completed the formation of a U.S.-based joint venture, IOTO E-Liquids America, located in Greenville, North Carolina, USA. The joint venture is owned equally by the partners and produces a variety of flavored liquids that are sold to the growing customer base that markets and distributes e-vapor products. Again, no prizes for guessing the significance of this announcement. Given that e-cigarettes are improved, and given that regulators don’t destroy them, they, and therefore e-liquids, have the potential to sell in huge numbers. But the shift from tobacco cigarettes to e-cigarettes is going to have an effect on leaf-tobacco demand that will go beyond mere volumes, and it will have to be managed.

Cost control

When I mentioned above some of the factors that affect leaf-tobacco demand and supply, I missed one very important factor: price—or cost, depending on which side of the transaction you sit. This is clearly a significant oversight, because when I asked a medium-sized leaf dealer in March what, in general, were the factors currently affecting the global market for leaf-tobacco demand and supply, he had no hesitation in saying the biggest factor was the price pressure from all manufacturers. “They just keep driving down prices on leaf to keep profits up,” he said. “The margins for growers and dealers are thin to a breaking point. How long this can continue before the supply chain collapses is the big question.”

This raises another question too. Why is it deemed acceptable that a tobacco grower sometimes ends up earning less for his tobacco than he did the year before? How efficient would any of the big cigarette manufacturers be if their employees never knew from year to year whether they were going to earn more or less than they did the previous year, whether their head of marketing could afford the childcare that allowed her to turn up at the office?

And this is no idle question. In the U.K. these days, a lot of big corporations (I have no idea whether tobacco groups are included) “employ” people on zero-hours contracts so that those people don’t know from day to day how much they are going to earn, or if they are going to earn anything.

What happens, though, if one raises the issue of tobacco growers being paid less one year than they were paid the previous year? Well, Zimbabwe’s growers found out this year. During question time at the National Assembly, Deputy Agriculture Minister Paddy Zhanda apparently said that the international market determined the price of tobacco. “Tobacco is unlike maize, where government announces prices,” Zhanda added. “The price of a commodity which is not controlled is set by supply and demand.”

Of course, Zhanda’s statement makes it clear that the “market” does not have to rule. And it invited the question of whether tobacco should be treated like maize: whether price controls should be set. But his answer was less than encouraging as, according to one report, he insisted it would not be “prudent” for government to set a minimum price for tobacco. I wonder what he meant by that.

But surely, price controls of some type would be just as appropriate in the case of keeping tobacco prices up as they are in the case of keeping maize prices down. Maize is a staple food in that part of the world, while tobacco, we are constantly told, is internationally a staple killer.

Something needs to be done. It seems unfair to the point of immorality for poor tobacco growers in Zimbabwe to be paid lower prices for a material that is going to go into a product that will be sold at higher prices and deliver higher profits to tobacco manufacturers, and higher dividends to their shareholders.

Oh, and of course, don’t forget the question of the supply chain.

 

Harm reduction should form basis of progressive regulation, says BAT

| May 29, 2014

British American Tobacco is calling on the World Health Organization and governments around the world to adopt a policy of tobacco harm reduction as a more progressive approach to tobacco regulation, according to a note posted on the company’s website.

In support of its call, BAT quoted WHO estimates that suggest there are now one billion smokers across the globe and that by 2050 this number could increase to 2.2 billion.

“For governments seeking to reduce tobacco use, we believe it’s time for new, more progressive approaches to be considered,” said Kingsley Wheaton, director of corporate and regulatory affairs. “One such solution is to offer adult smokers a choice of substantially less risky products such as e-cigarettes.

“This approach is what many refer to as ‘tobacco harm reduction.’ However, for this to work, governments and the public health community need to embrace this concept and the products that support it.”

BAT seems to have spoken out at least partly because recent media reports have suggested that less risky nicotine products such as e-cigarettes could be classified as tobacco products by the WHO. Such a classification could prompt governments eventually to subject e-cigarettes to hefty excise duty, public smoking bans and severe marketing restrictions, all of which would hamper their growth and development.

“If e-cigarettes are classified as tobacco products, then the associated regulatory hurdles will mean smokers will find it harder to access less risky alternatives—this can only be a bad thing for public health,” said Wheaton.

“We hope the arguments being made by the scientific community, the industry and public health campaigners will demonstrate the need for policy makers to carefully consider the benefits of tobacco harm reduction and give it their full support.”

BAT said it invested about £170 million a year in research and development that was enabling it to develop an expanding range of alternative tobacco and nicotine products, and that had allowed it to launch its first e-cigarette, Vype.

“We believe we can and should be a part of this debate and possible solutions, given our knowledge of consumers and our global reach,” said Wheaton.

“Tobacco harm reduction provides a progressive public health policy direction. We welcome the opportunity to collaborate on making this policy a global reality.”

Plain packaging not a done deal in U.K.

| May 29, 2014

Ahead of the U.K. government’s consultation on standardized packaging regulations, the smokers’ group Forest is urging retailers and consumers to write to the prime minister, David Cameron, declaring their opposition to the policy.

Forest believes that such regulations could be included in the Queen’s Speech on June 4, which will outline the government’s agenda for the coming session of parliament.

A website, No Prime Minister (www.noprimeminister.org.uk), includes a letter that can be sent to Cameron.

“There is no credible evidence that children start smoking because of the packaging, or that ‘plain’ packaging will deter children from smoking,” the letter reads.

“A four-month government consultation in 2012 resulted in over 665,000 responses, with a substantial majority (427,888) opposed to the policy.

“Before pressing ahead with legislation, I urge you to wait until government has studied the impact of the tobacco display ban, which will not be fully implemented until 2015, and the introduction of larger health warnings which are being introduced in 2016 as part of the EU’s revised Tobacco Products Directive.”

According to the website, “Standardized packaging is the start of a slippery slope that will eventually lead to other potentially unhealthy products, including alcohol, sugary drinks and fast food, being sold in dull, uniform packaging.”

“The argument that plain packs will stop children smoking is based not on hard evidence but on conjecture,” said Simon Clark, the director of Forest, which runs the Hands Off Our Packs campaign and is responsible for the No Prime Minister website.

Urging retailers and consumers to write to the prime minister, Clark made the point that whereas a lot of people believed that standardized tobacco packaging was a done deal; it was not.

“There is still everything to play for so people must make their views known to government, and the prime minister in particular,” he said.

“If you feel strongly about this issue act now. It’s not too late to make a difference.”

Uganda’s proposed tobacco control bill under fire from Kampala traders

| May 29, 2014

The Kampala City Traders’ Association (Kacita) has thrown its weight behind those opposing some aspects of Uganda’s proposed Tobacco Control Bill, according to a story in The Observer.

Kacita’s chairman, Everest Kayondo, described the law as “draconian and [one that] would cost Uganda business opportunities.”

If the bill were passed in its current form, he said, it would cost billions of shillings in taxes, and hundreds of farming jobs in northwestern Uganda.

The traders have taken issue with provisions of the bill that ban the sale of tobacco products within half a kilometer of public institutions such as schools, hospitals and public offices, and that ban the display of tobacco packs in retail outlets.

“If people have invested their money, they need to sell and make a profit,” said Kayondo.

Recently, Elly Karuhanga, the chairman of British American Tobacco Uganda (BATU), advised MPs to consider the economic benefits of the tobacco trade.

The Uganda Revenue Authority ranked BATU the sixth-largest taxpayer in the country in 2010–2011, the latest year for which rankings are available.

Unions reject Bergen op Zoom package said to be “among the best”

| May 29, 2014

Trade unions have threatened to organize protests at Philip Morris’ cigarette factory at Bergen op Zoom, the Netherlands, if the tobacco company does not offer a better social plan for employees who seem set to lose their jobs.

Philip Morris Holland (PMH) said in early April that it intended to end cigarette production at Bergen op Zoom by October with the loss of about 1,230 jobs.

In a note posted on Philip Morris International’s website, PMH’s board was said to have started consultations with employee representatives. “Depending on the outcome of the consultation process, and pending approval of the PMH Supervisory Board, the proposal could affect approximately 1,230 out of the current 1,371 employees at PMH,” the note said.

The deadline given by the unions for receipt of a better offer expired on Tuesday, according to an ANP story.

They are said to be looking for higher compensation for “the enormous pension damage” that will be incurred by those involved.

Commenting on Tuesday to the-then imminent expiry of the trade unions’ ultimatum to PMH, the company said it unfortunately had to state that the trade unions’ demands, as put forward in their ultimatum, were unacceptable and demonstrably impossible to comply with.

“PMH has worked intensely over the past weeks to propose a social plan that is among the best—if not, the best—collective redundancy compensation programs ever offered to employees in the Netherlands under comparable circumstances,” the company said in its Tuesday statement. “The plan is based on the old cantonal formula (more favorable to employees) with a correction factor of 1.4, that is some 40 percent higher than the average correction factor agreed in other social plans using the old formula. It also includes a number of clauses that are designed to support the potentially affected employees in their effort to transition to new employment; these clauses also are far superior to established best practices in the country. The unions’ intransigent demand that PMH apply a correction factor of 1.9, as well as other vexatious conditions, is unprecedented, not substantiated by any well-founded arguments, and sets a target that is demonstrably unreasonable and impossible to comply with.

“PMH is also convinced that the ultimatum received is premature, as the company has already significantly increased its starting proposal and is willing to continue to discuss, based on objective and established benchmarks and best practices—benchmarks that the unions have so far categorically refused to present.

“Taking all this into account, PMH can only conclude that the trade unions’ position is to escalate unnecessarily and prematurely the ongoing negotiation into a conflictive one, which will waste precious time and resources that would be otherwise put to the service of the potentially affected employees.

“PMH fully respects its employees’ right to conduct industrial actions. However, industrial actions as such will not lead to an improved proposal, rather to more delays and insecurity for its employees. The company’s efforts remain directed towards a constructive dialogue, which still is the most effective and rapid way to achieve a social plan that is fair and viable for all parties involved.”

TMA regulations conference

| May 28, 2014

The U.S. Tobacco Merchants Association will hold a one-day conference on June 16 at the Lansdowne Resort in Leesburg, Virginia, about the Food and Drug Administration’s deeming regulations.

The event will include legal, laboratory and other presentations, in addition to breakout sessions by product sector.

For more information, visit www.tma.org or phone TMA at +1 609 275 4900.