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Sweet solution

| May 1, 2014

Alliance One is helping Kenya reverse deforestation.

By Robin Sutton Anders

The lush forests that once spread across Kenya’s landscape are now vanishing at an alarming rate. While environmental impacts of deforestation border upon dismal, the lack of trees also threatens the entire country with drought.

Today, the Kenyan government seeks to save its country’s green by constitutionally mandating an increase in forest cover from its current 1.7 percent to 10 percent by 2030, and Alliance One International is stepping in to help. As an independent leaf tobacco merchant that purchases tobacco in more than 45 countries—with a strong network of flue-cured growers in Kenya—Alliance One has good reason to accept the challenge.

“We would like to de-link tobacco from any form of deforestation and to sustain the environment in our growing regions,” says Francis Chege, deputy managing director of Alliance One Kenya. “Our main focus is to progressively reduce the use of firewood used for curing tobacco and ensure the wood that is used originates from a sustainably grown source. We believe this can be achieved through commitment and collaboration with the national government and other stakeholders.”

Starting with a program that helps growers cure their tobacco with sugarcane waste material instead of wood and continuing on to a reforestation program that has resulted in the annual planting of 4 million trees, Alliance One’s work has met with growing success—and has received international acclaim.

Innovation from within

Alliance One’s first reforestation strategy calls on the region’s surrounding crops. The idea of bagasse briquetting, or using a sugarcane waste product to produce a combustible wood alternative, was originally brought to management’s attention by Valentine Ogongo and James Gichuche in the company’s agronomy department.

“One of our core values is to ‘pursue innovation and excellence,’ and this stood out as an obvious example,” says Chege. “We immediately approached local sugar factories to get their buy-in. Then the Kenya management team presented a proposal to our corporate office, which immediately approved the initial investment for the test phase.”

The concept behind substituting traditional wood in tobacco curing barns is simple: Unlike wood, where one piece can burn differently from the next, briquettes burn uniformly. “Tests have proven that briquettes can be used as a fuel replacement without affecting the quality of a tobacco leaf in a flue-cured curing barn,” says Chege. “The controlled flame—and temperature increase—actually gives the farmer more control, resulting in a steady tobacco cure.”

And while briquettes can be constructed from many biomass materials, including dust, rice husks and coffee husks, Alliance One used sugarcane because bagasse has a high calorific content. “That means fewer briquettes are required to cure a hectare of tobacco in a barn, compared to other products,” explains Chege.

Plus, three sugar factories operate in Alliance One’s growing area, so the crop presents a viable long-term sustainable source of raw material. “The strong sugarcane farmer base helped us to get the briquettes to tobacco farmers quickly to replace the wood required as the standard fuel for curing,” Chege says.

Additionally, bagasse briquetting offers a sustainable solution for the disposal of sugarcane waste. “Until the idea of briquetting started three years ago, the sugarcane factories used a small volume of bagasse waste to fuel their boilers, and the excess was disposed of at a cost,” Chege says. “But now, there is a commercial value attached.”

He adds that not only do the briquettes save farmers money, they also save on the amount of time growers spend cutting, transporting, splitting and stacking firewood. “The briquettes are delivered to the farmers by the company. The farmers have not had to make any changes to existing barns, as briquettes are cut to the right size from the factory to fit the furnaces in their current state,” Chege says.

Bagasse challenges

Bagasse integration, however, is not without its “teething problems”—the phrase Chege uses to describe the challenges faced by Alliance One. “The challenges were mainly technical in nature,” he explains. The first of which is sugarcane’s composition: If not decomposed, the large, fibrous form of bagasse can quickly degrade machines.

To discover how to most effectively preserve its machinery, Alliance One conducted extensive tests to see how production could be improved to accommodate bagasse’s stringy makeup. “We found that after breaking down the size of the material using a hammer mill, production increased by around 25 percent, and the machinery experienced less trauma,” Chege says.

The transition from firewood to briquettes also required buy-in from the farmers. “Their main concern was in storage of the briquettes,” says Chege. “Briquettes easily disintegrate if exposed to wet conditions, and therefore have to be stored in-house or under an enclosed shed. We put in a condition that farmers must provide storage to qualify for use of briquette.” Chege says farmers were willing to provide the infrastructure in exchange for the cheaper and more efficient fuel alternative.

“We can confidently affirm that, having seen the cost-cutting and reduction in labor days, the farmers are now accepting the new concept,” says Chege. After having gone through the initial trial of running bagasse through briquette machines, Alliance One is comfortable with expanding its investment and commitment.

Environmental sustainability

During the project’s test phase, which ran from January through August 2013, Alliance One saved 2,666 trees through the production of more than 200 metric tons of briquettes from bagasse. And that’s just the beginning, says Chege. “Our intention is to expand our investment in briquetting plants from curing 50 percent to 100 percent of the Alliance One portion of the current 12 million kilos [of] production volumes by 2015,” he says.

In this first year of full production, Alliance One hopes to produce about 7,500 metric tons of briquettes, enough to cure 1,664 hectares of tobacco. If that figure were realized, the company could spare 40 hectares of trees in the first year alone.

“The introduction of a briquetting plant was an expensive venture in terms of cost,” Chege says. “However, the long-term savings far outweigh the costs.” If the company meets its eventual target of 34,944 tons of briquettes each year, then 186 hectares, or 465,919 trees, would be preserved.

Farmer savings

While environmental sustainability was the original target, Kenyan farmers have also realized the added benefit of significant savings to their operations. To cure one hectare of tobacco with wood costs growers $610, whereas to cure the same amount with briquettes only costs $418.

Alliance One believes this project will also have a significant impact on household energy requirements by providing an alternative fuel for domestic cooking and heating. “The more bagasse being used, the less pressure on forests since households will not have to cut trees for their domestic needs,” says Chege. “That alone would go a long way in helping the country achieve its target of 10 percent land cover under forest by 2030.”

Tree restocking

Alliance One International employs a robust agronomy department that includes professional agronomists, foresters and technicians who work directly with farmers to aid in another of the company’s missions: to plant 4 million trees a year.

“The reforestation program started in 2003,” says Chege. “To date, we have planted over 30 million trees, with 23 million surviving.”

AOI Kenya manages 22 nurseries across the country. To ensure its reforestation target is met, the company sells the seedlings from these nurseries to tobacco, commercial and independent farmers at 2 cents each. “We also donate tree seedlings to schools, government institutions and non-cultivated government areas for reforestation.”

Not only does the program get the government closer to its target, it also helps growers from a financial perspective, as they have the availability of tree seedlings to grow as a cash crop or for domestic use.

Alliance One’s tree experts offer specific guidelines to growers for how to select the type of tree seedlings, how to plant the seedlings, how to care for them during the rainy season, how to determine the appropriate fertilization regimen and how to effectively apply certain pesticides. “This is in order to achieve self-sufficiency for tobacco at the same time, assisting with reducing domestic consumption,” says Chege. “The program has been very well received by farmers as a continuous sustainable wood source.”

Future initiatives

Alliance One may still be in the initial roll-out phase of the bagasse project, but the company is already looking ahead to solar energy-assisted curing barns. “These curing barns are currently in the research and development stage,” says Chege. “One of the initiatives is the ongoing conversion of conventional barns to more efficient rocket barns in order to reduce curing’s fuel usage.”

According to Chege, the company is also partnering with a nongovernmental organization to introduce energy-saving cooking stoves and solar lamps for lighting within its farming communities. “Through commitment and collaboration with the national government and all other stakeholders—and by investing in reforestation—we not only protect the future viability of the tobacco crop, but we also help protect the natural resources and biodiversity of the country.”

Taking liberties

| May 1, 2014

Anti-smoking activists’ careless use of the facts could have serious consequences for tobacco harm reduction.

By George Gay

You can usually judge the veracity of a statement by the conviction with which a person states it and the vehemence with which he or she defends it when challenged. As a general rule of thumb, veracity is in inverse proportion to conviction and vehemence.

Two propositions that seem to get stated with conviction and defended vehemently have it that smoking is addictive to the point of being almost impossible to quit and that secondhand smoke causes fatal diseases in nonsmokers.

In June 2006, the then U.S. surgeon general, Richard Carmona, was quoted in a Washington Post story as saying the health effects of secondhand-smoke exposure were more pervasive than had been previously thought. “The scientific evidence is now indisputable: Secondhand smoke is not a mere annoyance,” he was quoted as saying. “It is a serious health hazard that can lead to disease and premature death in children and nonsmoking adults.”

The Post pointed out that the findings of the report he was launching were not based on new scientific data, but rather were the result of looking again at research that had been conducted during the previous two decades. Nevertheless, a spokesperson for the Campaign for Tobacco-Free Kids was quoted as saying: “This report once and for all ends any scientific debate about whether exposure to secondhand smoke is a cause of serious diseases like lung cancer and heart disease.”

At this point, alarm bells go off in my head and a big neon sign starts blinking out: Whoa, dude! Surely if somebody says that scientific evidence is indisputable or that a scientific debate is over, you know there is something wrong because science doesn’t work that way—not at least in respect of an issue as complex as that surrounding the risk created by secondhand smoke. And there has been something seriously wrong with the debate on secondhand smoke for a long time. In 1998, the World Health Organization (WHO) was presumably rather embarrassed when it became known that a study it had commissioned had found no statistically significant increase in risk of lung cancer among the nonsmoking spouses of smokers. Workplace risk was similarly not statistically significant.

But, according to one report, there was a statistically significant result within the WHO study: that children raised by smokers were 22 percent less likely to get lung cancer than were those raised by nonsmokers.

The WHO study was by no means unusual in seemingly getting secondhand smoke off of the hook. As recently as December 2013, Daniel Fisher reported for Forbes that a large-scale study had found no clear link between secondhand tobacco-smoke exposure and lung cancer. Fisher cited an article in the Journal of the National Cancer Institute that provided the results of a study—commissioned by the institute—of 76,000 women over more than a decade. The study apparently found a link between smoking and cancer, with lung cancer 13 times more common among current smokers and four times more common in former smokers than in nonsmokers.

But the study found no statistically significant relationship between lung cancer and exposure to passive smoke.

And yet the fear of secondhand smoke has been used to introduce the most draconian restrictions on smokers, restrictions that are starting to reach into people’s homes and that, if one campaigner has his way, will include any public place used by children and nonsmokers, which, I guess, covers everywhere.

But I wonder whether some of this is the last throw of the dice. I say this simply because I see that the emphasis seems to be shifting to so called “third-hand smoke,” which, of course, is not smoke at all but the residues left by smoke on surfaces. One report I saw had it that research out of the U.S.’s Lawrence Berkeley National Laboratory had found that the residue from smoking indoors had the potential to cause cancer. The researchers were said to have found that when nicotine in secondhand smoke reacted with nitrous acid in the air, it created nitrosamines.


But let’s take a look now at addiction, which, as is mentioned above, is, like secondhand smoke, liable to raise strong feelings. In January this year, a report in Canada’s Globe and Mail told how the Non-Smokers’ Rights Association in that country had filed a complaint with the Collège des médecins du Québec against a key expert witness who had testified at the long-running class-action suit against tobacco manufacturers at the Quebec Superior Court in Montreal. The complaint accused Dr. Dominique Bourget, a forensic psychiatrist at the Royal Ottawa Mental Health Centre, of breaching the college’s ethics code by “minimizing the gravity of, if not denying the existence of, tobacco dependence.” According to François Damphousse, the Quebec director of the association, Bourget just “brushe[d] aside all the science on nicotine addiction and the neurophysiological effects of nicotine on the brain.” Damphousse apparently said that Bourget had played down tobacco’s addictive potential and rejected current scientific knowledge about addiction; and he added, “She is not allowed to do that as a member of the Collège.”

Again, I would suggest that this is not how science is supposed to work. The search for scientific truths doesn’t have a cut-off point, at which time you stick your fingers in your ears and go “la la la.” And luckily for us laypeople, there are scientists who are willing to peer beyond the cut-off point. The piece in the Globe and Mail was contributed by Sally Satel, who is a practicing addiction psychiatrist and a resident scholar at the American Enterprise Institute in Washington. “I can understand why the plaintiffs (and their supporters) reject Dr. Bourget’s view of addiction,” she said. “It is inconsistent with the narrative of enslavement: that once people become addicted to nicotine, they are helpless to quit.

“As a psychiatrist specializing in addiction, I routinely hear that addiction leads to changes in the brain that ‘hijack’ the smoker’s capacity to change his behavior. Yet, insisting that the biological changes produced by addiction do not [my emphasis] prevent recovery is entirely consistent with what we know about addiction.

“Do brain changes make it hard to quit? Yes. But by no means do they make it impossible. Indeed, we can give our patients hope precisely because heroin (or cocaine, alcohol and so on) [does] not cripple their brains. With motivation and guidance, they can and do free themselves. So can smokers.”

There were a number of things I liked about the Satel piece, not least the message of hope it brings, which makes a pleasant change from the voices of doom that offer no hope of salvation to smokers, only the bitter medicine of victimhood. I also liked the fact that the message was in line with what the layperson observes every day. Smokers—lots of them—do give up, most of them in my experience without assistance and, I suspect, without planning.

Staying with the idea of the layperson as observer, and taking addiction and secondhand smoke together, there is something that has long puzzled me. Why have I never observed a nonsmoker stalking a smoker down a street trying to get a whiff of tobacco smoke to feed the addiction caused by her exposure to secondhand smoke? I have, after all, heard it said that one puff on a cigarette is enough to get a person hooked on smoking.

And so it should be the case also that, say, all of the women who were the partners of the smokers reported on in the study published in the Journal of the National Cancer Institute mentioned above should have become addicted smokers long before the end of the study.

It is certainly the case that tobacco addiction is not a simple matter. It seems that it is not only about nicotine, for instance. Researchers in New Zealand reported last year that non-nicotinic components had a role in tobacco dependence and that some tobacco products had higher abuse liability than did others, irrespective of nicotine levels.

Apparently, tobacco addiction can be stronger or weaker depending on the person addicted, or on whether the nicotine is “manipulated” in some way: something that tobacco manufacturers have been accused of in the past. Even the addition of menthol, in some people’s estimation, can make cigarettes more addictive than they otherwise would be.

One of the oddest aspects of tobacco addiction is that, again in some people’s eyes, no matter how powerful that addiction might be, it, like everything else, comes at a price. People in government, especially those connected with finance ministries, believe that the price of cigarettes can be raised to the point where addicted smokers simply give up their habit. In fact, the figures are quite explicit in South Korea, where the current average price of a pack of cigarettes is won2,500. A recent report had it that for smokers in the bottom 25 percent income bracket, won8,497 per pack would prompt them to give up, while those in the top 25 percent would hold out until the price went to won9,660 per pack.

Physical aspects

It has long been known that a smoking habit is about more than just taking in smoke. In describing last year a cigarette substitute they had developed, two Canadian doctors said they had wanted to make it look like a cigarette. There was something about hanging out with friends and holding something and putting it up to your mouth, they said. There was a physical addiction and a social addiction.

Later on, the doctors pointed out that, by itself, nicotine focused attention and improved alertness, with few negative side effects. It had some pretty good properties in relatively small doses. It was the dirty delivery system that made cigarettes incredibly harmful.

Indeed, I sometimes get the idea that addiction is a fairly normal human condition that has simply been given a name and a medical history so that a lot of people can make money out of providing remedies and cures. Last year I saw a promotional piece for a book offering to cure addiction in which it was said that almost everyone was touched by addiction. And I have seen over the years addiction applied to more and more products and activities: drugs, alcohol, prescription painkillers, smoking, gambling, sex, pornography and soap operas to name but a few. Now I would be the first to admit that some of these products and activities can prove destructive, but where they don’t prevent a person from functioning normally in public life, what’s the problem?

Having said all of this, I don’t think that the important point is whether secondhand smoke is deadly or not, or whether tobacco addiction is impossible or difficult to break. What is important in my view is that only the truth about such matters, in so far as it is known, is used to make decisions concerning “tobacco” consumption. We are entering a new phase of the tobacco industry, and there is a great danger that the debate about products such as e-cigarettes is being hijacked by people who, having learned bad habits in dealing with traditional cigarettes, don’t mind being careless with the truth if it suits their viewpoint—often the viewpoint that people shouldn’t be seen to be enjoying themselves. When the debate was focused on traditional cigarettes, the conclusions drawn from the distortions told about secondhand smoke caused inconvenience to those who enjoyed tobacco. Now that the debate is about a product that some find a useful substitute for tobacco and that is almost certainly a gazillion times less risky than tobacco cigarettes, the distortions, which are beginning to appear by the truckload, could be lethal.

Changing times

| May 1, 2014

Faced with soft demand from traditional customers, U.S. tobacco farmers work to optimize their operations while eyeing opportunities presented by e-cigarettes.

By Chris Bickers

Tim Yarbrough, vice president of the Tobacco Growers Association of North Carolina, USA, recently expressed concern that an imbalance between tobacco demand and tobacco supply could lead to a drastically lower price for U.S. tobacco than in either of the two previous seasons. Speaking at the annual meeting of the export promotion organization Tobacco Associates (TA), Yarbrough, who grows flue-cured tobacco in Prospect Hill, North Carolina, said he is worried.

“I hope we are not looking at an oversupply situation,” he said. “Soft demand and too much tobacco would be a ‘perfect storm’ leading to a much lower price.”

Just as this story was completed, the U.S. Department of Agriculture announced its planting projection for 2014 for flue-cured of 232,300 acres, up 2 percent from 2013, and for burley, 100,100 acres, up 1 percent from 2013.

There certainly are a number of challenges facing U.S. growers, said George Scott, vice president for leaf for Universal Leaf North America.

“Domestic consumption in the U.S. declined 4.3 percent from 2011 to 2012, while European consumption is forecast to decline 7 to 8 percent,” said Scott, who spoke at the meeting held in Wilson, North Carolina.

“At the same time, e-cigarettes continue to increase market share,” he said. On the supply side, the Zimbabwe crop is expected to increase, while the exchange rate between Brazil and U.S. is projected to decrease by 15 percent.

Scott suggested three initiatives are necessary in order to keep U.S. production at current levels—finding a balance of grower sustainability while becoming competitive in the world market again, returning to a stable price market and continuing to provide a high-quality, compliant product.

Exports of U.S. leaf are up, but not because of purchases from traditional U.S. customers, said Blake Brown, a North Carolina Extension economist and another speaker at the TA meeting.

“The European Union [traditionally the leading destination for U.S. exports] is trending down,” he said. “But the demand in China is robust, and that is keeping exports strong.”

Short global supplies of flavor-style, good-quality flue-cured should work in favor of the U.S.

Confronted by these and other challenges, U.S. tobacco farmers are gearing up for either more production or more efficient production. Bob Pope, general manager of Long Tobacco Barn Co. in Tarboro, North Carolina, said that many farmers expressed interest in new curing barns at farm shows over the winter.

“We sold quite a few there, and we have continued to sell barns since then,” he said. “We will continue building 2014 barns through September.”

Used barns are selling at a fast clip too, Pope observed. “Barn haulers tell me they are very busy moving used barns that are bringing record high prices, which suggests tobacco farmers remain enthusiastic about their future prospects.”

Jumping into the liquid-nicotine market

In the meantime, American growers have begun exploring opportunities to provide the nicotine liquids used in e-cigarettes.

“So far, it is believed that the nicotine for these devices comes from China, India and maybe Eastern Europe,” said Rod Kuegel, a burley and dark tobacco grower from Owensboro, Kentucky.

He said meetings and negotiations were scheduled to see if this market could be developed, and he is sure that an experimental batch of liquid nicotine will be produced somewhere in the burley belt this year for further research.

“We [Americans] have the best controls on pesticide residues that exist in tobacco,” he said. “If electronic cigarettes are supposed to be healthier, how can they use nicotine from tobacco that doesn’t measure up to ours? This product should be produced in the U.S.”

The production practices for liquid nicotine have not been developed, but whatever the method, it is not likely to be too difficult for Americans to master.

And processing the raw product to liquid could be done on the farm. “All the equipment needed to process the tobacco could fit into a semi-trailer and be carried from farm to farm,” said Kuegel, who is president of the Council for Burley Tobacco.

E-liquid nicotine for e-cigarettes is being derived from tobacco, at least for now, said Brown. It is usually dissolved in a solution of propylene glycol, vegetable glycerin or polyethylene glycol.

Change may be dramatic, but it is difficult to forecast, said Brown, who noted one projection that e-cigarettes will overtake traditional cigarettes in volume sold by 2023.

But the technology and characteristics of the e-cigarette market may change dramatically, he said. Many companies are in the startup phase now, but consolidation will occur.

All of the major cigarette manufacturers in the U.S. and Europe have either purchased an e-cigarette company or are developing their own e-product.

“We will just have to see how the technology advances, but it’s one factor that could really impact the cigarette market in the future as more and more smokers switch to those kinds of products,” said Brown.

More plantings

Meanwhile, growers interviewed confirmed the slight increase in production anticipated by Department of Agriculture. Jeff Aiken of Telford, Tennessee, said acreage has been gradually increasing.

“There hasn’t been a mass re-emergence of growers,” he said. “It has primarily been a matter of growers who stayed in it planting more.”

The price was somewhere in the $2.05–$2.07 per pound range for the 2013 crop, which was enough to appeal to producers.

Burley growers went for years with no price increase at all, said Aiken, who is vice president of the Tennessee Farm Bureau Federation. “The price now is not where it should be, but it is an improvement over where it has been.”

In Kentucky, it looks like there might be a little expansion in burley acreage, said Kuegel. ”Supply is still a little short, so we hear, but domestic consumption is still declining, and that is a concern.”

In North Carolina, a small increase in flue-cured acreage seems likely, said Yarbrough. If that happens, and if farmers produce an average yield, we might see an average price about 10 cents less this season compared to 2013, he said.

“That would be livable if we can keep variable costs under control,” he added.

In Kentucky and Tennessee, additional contracts for dark tobacco growers were available this spring, although the volume was modest.

“Our yield in 2013 was low, and some companies reported falling 10 percent to 15 percent below their goal,” says Andy Bailey, Extension dark tobacco specialist. “Burley contracts appear to be similar to last year, and farmers are enthusiastic after the good price for the last crop.”

In addition, plantings of all tobacco types may be favored by the drop in the price of grain. “Farmers may divert some acres into tobacco instead,” he says.




Serious business

| May 1, 2014

The illicit cigarette trade isn’t just about lost profits and unpaid taxes; it provides seed money for other crimes, including terrorism and human trafficking.

By Timothy S. Donahue

Tobacco companies are sometimes criticized for overstating the seriousness of the impact the illicit cigarette trade has on society. Anti-smoking groups contend that stories of smuggled smokes funding crimes such as terrorism and human trafficking are exaggerated and the problem is more about lost profits than lost lives. A look at the facts, however, suggests the link between the illegal tobacco trade and serious crime is all too real.

Examples of such connections are disturbingly easy to come by. The notorious terrorist Maokhtar Belmokhtar, for instance, is frequently referred to as “Mr. Marlboro” for financing his jihadist activities through cigarette smuggling across the Sahel. Income from the illicit tobacco trade allowed him to finance spectacular operations such as the 2013 gas field hostage drama in In Amenas, Algeria, during which 40 people died.

Louise Shelley, director of the Terrorism, Transnational Crime and Corruption Center and a professor with the School of Public Policy at George Mason University, in Fairfax County, Virginia, USA, says cigarettes are just one part of Belmokhtar’s criminal panoply, which also includes kidnapping, extortion, arms dealing and drug smuggling.

Because of its role in funding terrorist organizations, the illicit cigarette trade can be blamed for the deaths of military personnel from numerous countries, says Doug daCosta, president of Elite Security Services International and a former agent with the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). While there are a number of steps between cigarette smuggling and terror, daCosta insists the link is clear.

“There is no argument about the fact that money made from illicit trade that is funneled to these terrorists groups can either barter or buy guns, ammunition and explosives that are used by al-Qaida, Hezbollah, Hamas and numerous other terrorist groups,” he says.

Criminal networks in the 21st century are vast, operating across both geographic and functional borders, says Brendan Lemoult, anti-illicit trade vice president at Japan Tobacco International (JTI). “We know that criminals and terrorists traffic illegal tobacco just like they traffic humans, drugs and weapons. It’s the same gangs using the same smuggling routes,” he says. “This is not a victimless crime.”

The Irish Republican Army (IRA) was one of the first groups to use cigarettes to fund its activities, according to Interpol. Police estimate that the IRA, in its various incarnations, made $100 million in just five years (1999–2004) from trafficking illicit cigarettes. In September 2013, a rocket fired by al-Qaida at a massive container ship blew the lid off a multimillion-euro illegal cigarette operation run by a millionaire businessman with links to former IRA leader Thomas “Slab” Murphy.

But criminals need not always cross national borders to profit. On May 15, 2013, law enforcement officials in New York City took down a Palestinian cigarette smuggling ring that bought $55 million worth of cigarettes in Virginia and sold them at a hefty profit in New York City. Virginia’s cigarette tax is $0.30, compared with $4.35 in New York City.

Day after day, truckloads of illicit cigarettes continue to be purchased from southeastern U.S. states, which levy comparatively low tobacco taxes, and then shipped to and sold in the Northeast, where taxes are higher. “We refer to the Interstate 95 corridor as ‘the new tobacco road,’” says David Howard, senior director of communications for R.J. Reynolds. “It’s estimated that more than 60 percent of the cigarettes sold in New York are illicit, which is significant because New York collects more than a billion dollars a year in tobacco taxes sold through legitimate markets.” In a recent study conducted by the city of New York,  more than 40 percent of the 1,700-plus stores surveyed sold illicit cigarettes.

One of those arrested in the New York City operation, appropriately dubbed “Tobacco Road,” was Youssef Odeh, a vocal supporter of Omar Abdel-Rahman, the blind sheik now serving a life sentence for his role in a foiled 1993 plot to blow up New York City’s World Trade Center. The ring was run by brothers Basel and Samir Ramadan of Ocean City, Maryland, USA, who are believed to have ties to Hamas and Hezbollah.

Examples of the illicit cigarette trade contributing to terrorism and organized crime appear in the news almost daily. The U.S. Congressional Research Service’s Report on Terrorism and Transnational Crime mentions that “cigarette smuggling schemes as a means for financing terrorists have been discovered in a range of countries and regions, including the United States, Europe, Turkey, the Middle East and North Africa, and Iraq.”

Murphy is said to have amassed a £40 million ($66.7 million) fortune through smuggling cigarettes and other goods. During a 2006 raid on his home, police officers  confiscated 30,000 cigarettes and $1.1 million in sterling bank notes. In March 2013, Murphy was tipped off four hours before he was again targeted in a major cross-border police raid. As of this writing, Murphy, in an Al Capone-like fashion, is being prosecuted on nine charges of failing to furnish tax returns from 1996 to 2004.

Money from illicit cigarette sales is often funneled to terrorist networks through a bartering system that operates outside of, or parallel to, traditional banking channels, according to daCosta. A hawala is an informal value transfer system based on the principle “honor among thieves,” which includes numerous cash brokers. Although they are primarily located in the Middle East, North Africa, the Horn of Africa and the Indian subcontinent, the reach of the hawala is global.

“It’s how money was given to some of the pilots for training for September 11,” says daCosta. “How it works is a guy in, let’s say, the Middle East, tells his associate, ‘I need you to send money over to this guy in California.’ Then contact is made to their guy in San Diego, they send him a message, and he pays the debt. Maybe later the guy in San Diego needs to pay a debt in the Middle East, and that cancels the first debt or increases what the other side owes. Once a year they may get together to level everyone’s balance sheet. It’s worldwide and nearly untraceable.”

The first case of documented links between a terrorist organization and cigarette smuggling in the U.S. was uncovered nearly 20 years ago. In 1996, ATF agents and other law enforcement agencies discovered that a group of men were purchasing large pallets of cigarettes from local distributors and paying for everything in cash. Their business model involved moving those cigarettes across state lines, where they would be sold for a substantial profit. According to court documents, “the conspiracy involved a quantity of cigarettes valued at roughly $7.5 million.”

In 1999, the Federal Bureau of Investigation notified the ATF that a Hezbollah cell was raising funds and procuring equipment in Charlotte, North Carolina, USA. Mohamad Hammoud led the fundraising efforts for the cell, and he was also a prime suspect in the cigarette smuggling ring identified by the ATF in 1996. Hammoud transferred his ill-gotten gains generated by the cigarette trafficking scheme, as well as money raised from other sources, back to Lebanon through a hawala and into the coffers of Hezbollah, which the U.S. government considers a terrorist organization.

Winning an unwinnable war

The main problem in combating the scourge of smuggling is the high profits, which rival those of narcotics, and the relative cheapness of conducting a terrorist operation. A shipping container holding 10 million cigarettes could cost as little as $100,000 to produce in Asia, says daCosta, but could bring in as much as $3 million to $4 million in the U.S. Contrast that against the estimated $400,000 to $500,000 it cost al-Qaida for the September 11 attacks, according to the final report of the National Commission on Terrorist Attacks Upon the United States.

Dismayed by the link between the illicit cigarette trade and serious crime (and, yes, also by their lost sales), tobacco companies are playing an active role in stopping smuggling. It is not uncommon for companies to hire private investigators to help law enforcement catch the crooks. Imperial Tobacco Group has gained years of experience in compiling intelligence, analyzing data and briefing law enforcement agencies on the findings of Imperial’s security team.

“We have been central to the breakup of several sophisticated criminal gangs, including those who operate on an international scale, during the past several years,” says Steve Smith, Imperial’s head of group security and risk management. “The largest by volume was in Hamburg in May 2013. We passed intelligence to OLAF [the European anti-fraud office] on a suspect shipping container; OLAF in turn notified German customs, and 53 million cigarettes were subsequently seized.”

Philip Morris International (PMI) has been working with private investigators in Singapore to identify smugglers’ distribution networks. After months of surveillance, the investigators managed to identify the supply chain routes used by smugglers and shared the results with Singapore customs. “As a result, two seizures were carried out by the customs authorities, with the latest, in December 2013, involving illegal cigarettes worth over sgd1.6 million ($1.26 million),” says Iro Antoniadou, manager, external communications, PMI.

Penalties are another problem. “Since penalties and sentences for tobacco smuggling are frequently much lighter than those for smuggling drugs, criminals see it as a soft and easy option,” says a British American Tobacco representative. “They hedge their bets, and there is a lot less risk of being put out of business for extended periods when you sell illegal cigarettes.”

Howard and Smith believe that laws should be enacted to increase fines for illicit trade activity and impose penalties that treat such crimes as felonies where they are not already regarded as such. “Organized crime and terrorism has been involved in the illicit tobacco trade for many years, as it’s a very profitable practice for them, and, for those caught, the penalties are too often very light,” says Smith.

“Weak border controls in some regions also contribute to the problem. We believe that in order for anti-illicit trade measures to be practical and effective, responsibility for each of the key elements should be assigned clearly to the individual parties involved: a) tobacco companies, b) government authorities and international organizations, c) tobacco companies and/or government authorities and international organizations working together.”

Tobacco companies are often working together with law enforcement to combat the problem. One example of an industrywide effort is the Digital Coding & Tracking Association (DCTA), whose members include BAT, Imperial, JTI and PMI. DCTA members produce more than 75 percent of the world’s tobacco products (excluding China) and move billions of finished goods through international supply chains every year, undertaking millions of cross-border transactions in the process.

Codentify, the main product offered by the DCTA, offers quick and easy access through a mobile phone or computer terminal to all information concerning a case, carton and, recently, some packs of cigarettes. The coding on the packages verifies the legitimacy of shipments and meets future international regulatory methods, including the World Health Organization’s protocol to eliminate the illicit trade in tobacco.

The implementation of Codentify as JTI’s track-and-trace solution has been a valuable tool for its anti-illegal tobacco team, according to LeMoult. “Codentify has provided us with concrete information on illegal tobacco routes that we have passed on to law enforcement, at times stopping illegal supply chains in their tracks,” he says.

Agreeing with a recent report from the European Commission, LeMoult also noted that JTI’s implementation of Codentify, combined with its other anti-illegal tobacco and due diligence measures, explains why the company has been so successful in reducing the criminal diversion of genuine JTI products into the illegal market, even during a time when the commission warns that “overall, the illicit trade is increasing in the EU.”

Smith adds that tracking and breaking down the types of gangs that smuggle smokes is resource intensive, and Imperial is investing heavily in technology (e.g., Codentify). “Whilst not a silver bullet to illicit trade, technology is a key tool in securing the legal supply chain,” he says. “Consolidating intelligence builds a more complete picture of known criminal operations.”

Lemoult notes that if corporations work together alongside law enforcement to combat the illegal cigarette trade, together they can blaze a path forward. “Through concerted action by governments, the public and the industry, by taking a stand together, we can deliver considerable benefits for national economies, as well as local businesses and communities,” he says. And while cracking down on illicit trade will, by itself, not stop terrorism, it will at least make perpetrators’ lives more difficult by forcing them to find alternative sources of funding.



Bigger than Imperial

Due to its nature, illicit trade is notoriously difficult to measure. Philip Morris International (PMI) estimates that global non-tax-paid volume was around 570 billion units in 2012. “This represents between $40 billion–$45 billion in unpaid taxes and approximately $4 billion to $5 billion in lost margins for legitimate manufacturers,” says Iro Antoniadou, manager, external communications, PMI.

Steve Smith, head of group security and risk management with Imperial Tobacco, believes those numbers may be even higher, with revenue losses for the industry possibly reaching as high as double PMI’s estimates—about $10 billion annually. “This makes ‘Illicit Tobacco PLC’ bigger, in volume terms, than Imperial Tobacco,” he says.

British American Tobacco says organized crime holds 11.1 percent of the EU cigarette market and is selling 65.5 billion cigarettes a year, pulling in a profit of up to €5 billion ($6.87 billion).






The slippery slope

| May 1, 2014

Once dismissed as scaremongering, the tobacco industry’s warning that health advocates would soon target other sectors is starting to sound prescient.

By Simon Roper

“Sugar is the new tobacco,” proclaimed a January headline in the Daily Mail, a major U.K. tabloid. The refrain echoes around the world. Type the terms tobacco and sugar together into your Internet search engine, and you’ll receive a large number of results; my query returned 60 million hits. The volume of published research on sugar and obesity grows swiftly as well, rivaling that on alcohol and tobacco. A new campaign organization, Action on Sugar, has been set up in the U.K. and the U.S. to drive awareness and promote government intervention. Ninety percent of doctors surveyed in Europe believe governments should do more.

The growing vilification of sugar suggests that, having “tamed” tobacco, public health advocates are in search of a new target. Dr. Margaret Chan, director of the World Health Organization (WHO), admitted as much when she said that, in the wake of the tobacco control movement’s success, “obesity is now the most visible epidemic that needs to be stopped.”

Despite the shift in focus, it seems unlikely that the pressure on tobacco will be eased just yet. Many developed countries are targeting smoking rates of just 5 percent, even as prevalence has proved difficult to push below 15 percent. So regulators are advocating ever-more extreme restrictions, grasping for untested measures, such as smoking bans in cars, standardized packaging and other measures that will further denormalize smoking.

But as the public health lobby widens its net, the risk that the tobacco industry has been warning about for years—that other lifestyle products would be targeted next—is starting to be realized. The same weapons used to fight tobacco will be deployed in the battle to make us healthier citizens—or, at least, less costly citizens. It used to be said that the issues raised by regulation pertained only to tobacco companies and that the “slippery slope” was a narrow ride reserved for them. It may be about to get busier and wider.

From sweet to sour

Why sugar? Just like mechanization made cigarette production easier and cheaper, and the growth in international trade carried them around the world, sugar refining and the advent of sweet drinks led to widespread consumption of sugar, not only in markets such as the U.S. but also in the developing world. The results have been dramatic: Two-thirds of Americans are now overweight; more than one-third are clinically obese. Seventeen percent of children are obese. Obesity significantly raises the risk for diabetes, heart disease, strokes and some cancers. These diseases can be expensive to treat, and governments are increasingly concerned about the drain on their resources. According to Action on Sugar, “Obesity and diabetes already cost the U.K. over £5 billion [$8.37 billion] a year. Without regulation, these costs will exceed £50 billion by 2050.”

Sugar is not the only risk factor for obesity, but some argue it is by far the most important. One influential voice is Dr. Robert Lustig, of the University of California, an expert on childhood obesity. He has been campaigning against sugar for some time and has a growing Internet following. His lecture Sugar: The bitter truth has been viewed more than 4 million times on YouTube. Lustig believes, and seeks to demonstrate through biochemistry, that fructose (the main form of sugar used in drinks) is not just high in calories; it causes much higher levels of fat in the body than glucose or other carbohydrates and should be treated as a toxin. He equates fructose with alcohol and asks why the U.S. Food and Drug Administration does not regulate it like that substance.

Increasingly alarmed, the WHO recently halved its recommended daily intake of sugar. In 2000 it adopted a plan to target non-communicable diseases, principally diabetes, cancer, COPD and heart disease. A new strategy to drive the initiative forward, the NCD Global Acton Plan 2013–2020, was adopted last year. Chan recently warned that diabetes alone was becoming a major health burden to many governments, consuming up to 15 percent of some nations’ annual budgets.

In a recent report, Credit Suisse offered this insight: “The global obesity epidemic and related nutritional issues are arguably this century’s primary social health concern. The focus on well-being has shifted from disease to diet.” For many, like Lustig, sugar and sugary drinks call for the most urgent attention.

The obesity phenomenon is not restricted to the developed world. Since World War II, the biggest winner, U.S. industry, has been hugely successful in taking its products to all corners of the world—and none more so than Coca-Cola.

Critics call it the “Coke-colonization” of the world, complaining initially about the erosion of local cultures but more recently about Coke’s contribution to significant increases in obesity rates in developing countries. The Economist’s December 2012 obesity report said that a combination of unreliable tap water and savvy marketing have helped make Mexico the world’s leading guzzler of Coca-Cola. For many campaigners, this is enough to explain Mexico’s rapid rise in obesity rates, which now match those north of the Rio Grande.

Lessons learned

As health campaigners and governments address the global obesity “pandemic,” food and drink companies can expect a storm of regulation in the coming years. An editorial in The Lancet, a leading medical journal, recently suggested that anti-alcohol and fast-food campaigners could draw valuable lessons from the fight against tobacco. The WHO’s commitment to combating NCDs and its new focus on obesity can lead in only one direction.

The story of tobacco regulation is familiar. Government campaigns discouraging consumption, starting famously with James I of England’s “Counterblast to Tobacco” of 1604, and taking firm root in the 1960s in the U.S. and the U.K., were followed by health warnings on packs and advertisements. Taxation, always attractive to governments, became a win-win tool as it was exploited to help smokers help themselves, while handsomely lining state coffers.

Governments then crafted regulations with the goal of modifying the product by reducing tar-per-cigarette levels, although they no longer appear to favor this approach and are now turning to banning ingredients, such as menthol. Further encouragement to quit was given to the smoker when the nonsmoker was identified as a victim in need of protection, and public smoking bans became widespread. The consumer’s freedom to learn about new products became increasingly curtailed by advertising bans. Finally, when only packaging remained as a means for cigarette manufacturers to communicate with consumers, some countries, such as Australia, decided that this too must stop.

Different target, same methods

The lessons learned from tobacco are already starting to be applied to sugar, as demonstrated by Michael Bloomberg’s (unsuccessful) attempt to limit the size of sugary drinks when he was mayor of New York City. Many call for more information about sugar to be printed on packs and cans. Thirty-three U.S. states have already introduced soda taxes.

But a “fat tax,” like that introduced—and then abolished—by Denmark, can be difficult to get right. Might regulators see packaging and promotion as an easier target? How long before the iconic Coke bottle—a trademark in its own right—is threatened with standardization? No doubt survey evidence from young consumers (unable to make informed choices) will be produced to show that they find the bottle shape and the red curlicue script attractive. If such “evidence” was enough for Australia—and now, apparently, the U.K.—to justify standardized cigarette packs, might  it  be used one day to introduce similar measures to crack down on the consumption of sugar?

Just as health campaigners adopt the lessons of tobacco control in determining the means of reducing consumption, so they are likely to adopt the same methods. For example, cooperate with industry at the outset, but marginalize and demonize it down the line. In the sugar-control arena, this is already contentious. Some talk of the bad behavior of industry, arguing that business is so conflicted it cannot be trusted. Litigation, which proved so popular in the U.S. as a way of driving tobacco regulation, is also advocated against fast food and soda drink producers.

However, others argue that self-regulation should be given a chance. For the time being, the WHO appears to favor cooperation, in contrast to its approach toward tobacco, where engagement and dialogue are proscribed. How long this willingness to treat the food and drink industries differently will last must strike those who follow the WHO’s Chan. In a recent speech at the Global Conference on Health Promotion, she said, “It is not just Big Tobacco anymore. Public health must also contend with Big Food, Big Soda and Big Alcohol. All of these industries fear regulation, and protect themselves by the same tactics.” But while Chan brackets these industries together, they appear to defend their interests largely on their own.

Meanwhile, the tobacco industry bears a great responsibility, on behalf of all lifestyle product manufacturers, to defend against unreasonable regulation. Should it fail, its defeats will surely be visited upon the other industries, like sugar, that are seen as the next targets.

For example, if the World Trade Organization’s Dispute Panel upholds Australia’s plain packaging legislation, it will make it difficult for other industries to employ international trade laws to protect their own intellectual property—the brands and trademarks grown and matured over many years and at great expense. Perhaps it is encouraging to note that a number of the countries contesting the Australian law, including Cuba, the Dominican Republic and Honduras, produce not just tobacco but also sugar. Is it possible that without a successful outcome in Geneva, the Coke bottle may indeed one day become a collector’s item?

Simon Roper is an experienced lawyer who joined the industry in the mid-1990s when tobacco litigation flared around the world. Recently, he has worked on defending the sector’s interests against unreasonable regulation, such as plain packaging. He is now consulting and lives in Geneva, Switzerland. 

The way forward

| February 26, 2014

The Brazilian leaf tobacco industry cannot afford complacency in the wake of last year’s record earnings.

By Taco Tuinstra

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There were lots of smiling faces in southern Brazil last year. At 706 million kg, the 2012–2013 tobacco crop volume may not have broken records, but its export earnings—the variable that counts—were unprecedented. According to Sinditabaco, an industry organization, leaf exports generated a whopping $3.27 billion last year. Can Brazil continue flying high? While generally confident about the future, industry leaders say several issues, including labor cost, must be addressed if Brazil is to sustain its strong position in the global leaf market.

Brazil’s reputation as a reliable supplier of flavor tobaccos is based on several factors, including the size of its growing area (large), its farmer profile (small) and the integrated tobacco production system (ITPS), which enables the industry to coordinate production with no fewer than 160,000 farmers in the states of Rio Grande do Sul, Santa Catarina and Paraná. Like elsewhere, tobacco growing in Brazil is subject to the whims of Mother Nature. But the spread of production over such a large area, with varying climate conditions and growing calendars, means that risk, too, is spread widely.

Planting takes place over six months, from May to November—a much longer timeframe than in the United States. And whereas some 75 percent of U.S. tobacco production is concentrated in the so-called Old Belt, the Brazilian equivalent—the area around Santa Cruz do Sul and Venâncio Aires—accounts for only a quarter of that country’s cigarette tobacco production. If one region suffers from adverse weather, conditions are likely to be better in other growing areas, and the overall impact will be mitigated.

That has certainly been the case this growing season. “At the end of September and the start of October, there were rains in the Old Belt, which delayed the tobacco’s development,” says Guilherme Steffen, regional administrative director, South America, at Alliance One International (AOI). “When the heat hit between Christmas and New Year’s, the plants were unprepared.” Other areas experienced more favorable growing conditions. “The Old Belt suffered a yield reduction of about 15 percent, but there was a slight increase in yields elsewhere,” says Aldemir Paulo Faqui, leaf production director of Universal Leaf Tabacos. “Taken together, the yield is down slightly over last year, but this is compensated for by the increase in area planted.”

The Brazilian Tobacco Growers Association Afubra predicts about 700 million kg in southern Brazil, including flue-cured Virginia (FCV), burley and Galpão Comum, a native variety.

Faqui expects quality to be decent, especially for burley. “The weather in the north of Rio Grande do Sul and the west of Santa Catarina—the primary burley-growing areas—was favorable for curing,” he says. “Humidity was high and there was no low temperature. We’re looking at nice, naturally brown colors for burley.” FCV quality is projected to be average this season.

Whether prices will be as firm as last year, however, remains to be seen. Farmers tend to respond to good crops by growing more tobacco—which depresses prices the next season—and this year was no exception. The area planted for the 2013–2014 crop was 3–4 percent larger than that for 2012–2013 (332,000 ha). Also, some traders believe the industry overpaid last year. This season, it will likely practice more restraint. On the bright side, the exchange rate is more favorable than it was in 2012–2013. “The less expensive real will make Brazilian tobacco more affordable for buyers,” says Gary Russell, sales director of Marasca.

Farmer profile

The ITPS has been a major contributor to Brazil’s success in the tobacco industry. Unlike its U.S. counterpart, the Brazilian leaf tobacco industry is dominated by small-scale production. The typical tobacco farmer in southern Brazil has 16.1 ha of land of which only 2.5 ha is reserved for tobacco, according to Afubra. Greater shares of his property are covered by crops such as corn (22 percent), soy (7.6 percent) and native forest (17 percent). But while accounting for a relatively small area of the farm, tobacco generates a majority (56 percent) of the average grower’s income.

Tobacco remains the No. 1 cash crop in southern Brazil, and contrary to the image projected by some anti-tobacco activists, Brazilian tobacco farmers are not impoverished or perpetually indebted. “Over the years, tobacco income has allowed farmers to buy consumption goods of a standard similar to that common in urban areas,” says Flavio Goulart, Japan Tobacco International’s (JTI) corporate affairs and communications director for South America.

But small growers generally don’t have access to funding from conventional financial institutions; they cannot fund their own operations like many U.S. farmers do—and that’s where the ITPS comes in. In the ITPS, tobacco buyers and producers work together to produce a consistent crop. At the start of the growing season, merchants provide their contracted farmers with finance and agricultural inputs, the cost of which are subtracted from the selling price after the crop has been grown. The dealer commits to buying the entire harvest, offering the grower a degree of security that he doesn’t get from other crops. Leaf technicians help the farmer follow proper agricultural practices, ensuring the buyer gets the tobacco styles he requires.

Traditionally, small-scale farmers have relied on manual labor, provided mostly by family members and neighbors. “These farmers can respond instantly to developments in the fields,” says Robert Jones, president of Tabacum. “They can reap and top at exactly the right time, which in turn promotes quality.” But small-scale production is ill-suited for mechanization—something that could become a problem as labor gets scarcer.

Booming Brazil

Migration to the cities has been an issue for decades in rural areas worldwide. In Brazil, the challenge has been exacerbated by the country’s recent economic boom and upcoming events such as the 2014 football World Cup and the 2016 Olympics, which have created strong demand for workers in construction and services. In December, Brazil’s jobless rate fell to a record low of 4.3 percent, according to the Brazilian Institute of Geography and Statistics—a figure that many economists equate with full employment. Adding to the problem, whisper some, are generous social programs, promoted by Brazil’s ruling Workers’ Party, which have reduced the incentive for people to accept relatively low-paying positions.

Meanwhile, a government push to formalize agricultural labor has made farmers even more reluctant to hire workers. Growers are now expected to prepare proper contracts, collect taxes, etc. “For the average tobacco farmer, the paperwork required can be intimidating,” says Mario Bender, production superintendent at Premium Tabacos do Brasil. Instead of hiring help, farmers may choose to reduce their tobacco plantings to an area that they can manage with their family. The situation has also created a bit of a competitive disadvantage for Brazil versus that other flavor market dominated by small-scale producers. “You can be sure President [Robert] Mugabe isn’t enforcing all the labor protections in Zimbabwe,” says Jones. Farmers’ representatives and Brazilian legislators are discussing amendments to the legislation that would allow tobacco growers to contract temporarily labor under less onerous regulations.

In a way, the pressures are also a result of the tobacco industry’s success in eradicating child labor. The tobacco industry in southern Brazil was started in the first half of the 20th century, largely by German immigrants who brought with them a strong work ethic. As was common in those times, parents expected their children to help out on their farms. In today’s world, of course, child labor is frowned upon, and the tobacco sector has worked hard to discourage the custom. For example, in order to obtain a growing contract, a tobacco farmer must now provide proof of his children’s school enrollment. It’s not just a token formality: At the end of the school year, leaf buyers will demand to see the children’s attendance records. In addition, Sinditabaco and individual tobacco firms run campaigns to discourage child labor and promote education.

Brazil’s 2010 census found that the incidence of child labor in the tobacco fields had declined by 50 percent over the previous 10 years, compared with reductions of only 20 percent in other sectors. Individual companies report even more impressive accomplishments. Carlos Palma, corporate affairs manager at market leader Souza Cruz, says all of the farmers his company contracts with send their children to school now.

But the success of such initiatives also means that tobacco growing has become a less obvious choice for farmers’ children when they grow up. Exposed to a greater variety of opportunities than their parents, rural youngsters are increasingly opting for careers elsewhere, reducing the influx of new blood into the profession. Since 2009, the number of farmers has declined by 20,000, and the remaining ones are having difficulties finding labor.

The Brazilian tobacco industry’s response to the trend has been twofold. On the one hand, it is educating would-be farmers on the potential of the business, demonstrating that, for adults, cultivating tobacco is a valid—and, often, lucrative—choice. On the other, it is trying to reduce farmers’ dependence on labor through mechanization, alternative curing technologies and good agricultural practices. Such measures have the added benefit of increasing quality and, thus, income.

Because harvesting is the most labor-intensive part of the tobacco-production cycle, most efforts are focused there. Leaf dealers have been experimenting with harvesting machines, but they’ve found it challenging. Manufactured in high-cost Europe and attracting steep Brazilian import duties, the equipment is too expensive for the average tobacco grower. Efforts to convince local manufacturers to produce harvesting machines have been unsuccessful because of the still-limited market. Some suggest that, in order for mechanical harvesting to work, farmers may have to purchase them collectively. Another option would be to create a system in which specialist harvesting service providers rent out their equipment and operators.

Scale is not the only challenge. Bender points out that mechanical harvesting would require changes to agricultural practices. For example, because machines are less discriminating than humans, farmers would need to start growing tobacco varieties with leaves at greater distances from one another. “Manual laborers can pick and choose exactly the right leaves,” he says. “A machine, by contrast, simply harvests everything at a certain height.”

With labor accounting for 54 percent of tobacco production cost, mechanization offers the greatest potential for savings. But there are other opportunities to reduce expenses as well. Over the years, tobacco companies have introduced numerous technologies, such as the float system and the loose-leaf barn, to help growers become more efficient—and thus more profitable. “We can’t control world leaf prices, but we can control our expenses,” says Valmor Thesing, administrative director of Universal Leaf Tabacos. The larger companies operate dedicated research farms where they experiment with new seed varieties and cultivation techniques. Universal says it has had considerable success with no-till tobacco cultivation. As a result of such initiatives, farm yields have improved significantly over the years.

Sometimes, innovation is simply a matter of questioning existing practices. For example, Philip Morris Brazil (PMB), which entered the leaf market in 2010, no longer requires farmers to bundle tobacco, which is a time-consuming process. In the past, when there was plenty of labor, the cost of bundling was immaterial, but times have changed. “The agronomy team asked our processing guys, ‘Do you really need leaf in bundles?’” says Eduardo Muller, manager regional agricultural programs for Philip Morris International (PMI). With some adjustments, it turned out they didn’t. Non-bundling has quickly gained acceptance among Philip Morris-contracted burley growers, and the firm plans to extend the experiment to FCV farmers this year.

Vertical integration

Another significant development in Brazil has been the “verticalization” of cigarette manufacturers’ operations. Souza Cruz has sourced its leaf tobacco requirements directly for many years, but recently other manufacturers have gotten involved as well. Following several years of market volatility, JTI purchased the leaf operations of KBH&C and Kannenberg in 2009. The next year, Philip Morris International (PMI) acquired 17,000 farmer contracts from Universal and AOI, and created PMB’s tobacco operation.

“Our goals are to secure supply, be closer to farmers and take responsibility for the areas that we operate in,” says Goulart. “Vertical integration offers us an opportunity to apply the JTI way of doing things; we want to contribute to the standards.”

For the time being, both companies will continue working with leaf merchants. Without its own stemmery, PMB is still processing tobaccos at third parties. PMI also aims to buy part of its leaf requirements from other leaf merchants. JTI, too, wants a mix of third-party supply and direct sourcing. “We strive for balance,” says Goulart.

Not everybody is convinced of the wisdom of verticalization, however. Jones, an industry veteran who retired as CEO of Universal Leaf Tabacos in 2009, says many cigarette manufacturers were vertically integrated in Brazil during the 1980s, but then decided to divest their leaf operations to specialists. “Leaf sourcing is a high-cost, low-profit business,” he says. “It would not surprise me if, within 10 years, the manufacturers spin off those businesses again.”

For Universal and AOI, vertical integration has meant a shift in the emphasis of their activities toward processing, which generally carries lower margins than full-sales service. AOI has offset some of the lost PMI business by establishing a joint venture with the China National Tobacco Corp., called China Brasil Tabacos (CBT). Operating since January 2012, the JV has 6,000 integrated farmers spread over 41 municipalities of Rio Grande do Sul. CTB’s main customer is the Chinese monopoly, but the company will be selling to other customers grades that the Chinese are uninterested in.

While some have expressed concern about the large manufacturers “hoarding” tobacco, others see opportunity. Newcomer Tabacos Novo Horizonte (TNH), for example, has done well catering specifically to the needs of niche customers: companies specializing in roll-your-own or pipe tobaccos, for example. Created only three years ago, the firm has seen its volumes grow from 13 million kg in its first year of operations to an expected 23 million kg this season.

The market entry of firms such as TNH proves that, despite the adversity facing the tobacco industry, Brazilian tobacco leaf continues to generate considerable interest among businesspeople. Sinditabaco says it has added four companies to its membership since 2006—a remarkable gain in an otherwise mature industry. The challenges are real enough, however, and the sector will have to stay on top of its game to prevent last year’s smiles from turning into grimaces.


Using technology to optimize production

The size of Brazil’s tobacco industry never ceases to amaze. Leaf exporters coordinate their business with a whopping 160,000 farmers, growing a little more than 2 ha each and spread over an area larger than France. Just contemplating the logistics of supplying inputs, providing agronomic assistance and keeping track of crop development is enough to make the mind boggle. The task is further complicated by the fact that tobacco companies take on all sorts of social responsibilities, such as ensuring that farmers send their children to school.

Fortunately, technology is lightening the workload. Universal Leaf Tabacos has developed an application, Mobileaf, that allows the company to keep up with all relevant information in real time. Using tablet computers, the firm’s leaf technicians collect data from the fields about the area planted, soil types, reforestation and fertilizer requirements, among other variables. The gathered information is synchronized over wireless networks with a central database, allowing Universal to better plan its operations, respond faster to field developments and, ultimately, produce tobacco more cost-effectively.

Valmor Thesing, Universal Leaf Tabacos’ administrative director, says Mobileaf has greatly improved the quality of information. In the past, administrating relationships with the company’s 30,000 contract growers in Brazil involved lots of paper—with the associated risk of copying mistakes. Today, the risk of such errors has been virtually eliminated. Data flows faster, too. Whereas in the old days it could take up to four weeks for information to make its way back to the head office, updates are now almost instant. Brazil’s 3G mobile phone network is well developed, and even if a technician has trouble connecting from the field, he can still do so from home.

Conceived only three years ago, Mobileaf has caught on quickly. Universal is now preparing to implement the system in Africa, Italy and the United States. —T.T.