Good-Bye, Old Tobacco World

Source from:  tobaccojournal.com 11/24/2006

03 Nov 2006. This year has once again shown that the success of any leaf-tobacco producing country depends on a functioning economy and the cooperation of all parties involved. Some newcomers like Tanzania and Mozambique seem well-positioned for the future. Tobacco production in southern African countries has not, in the last few years, grown significantly, indeed, this year the region produced less yet again. There will be 360 million kg of tobacco in 2006, roughly shared equally between Burley and flue-cured tobacco. Both varieties face some difficulties. This year's 12-per-cent decline in flue-cured production is mainly due to losses in Zimbabwe, but also due to less than expected output in Tanzania and Zambia. And while Burley production in the region has gained momentum in the last five years, it has also surpassed demand. Prices have declined significantly, and especially for A-quality, prices are not being offered that would justify the efforts involved in producing top-quality compared to producing B-quality leaf. As for flue-cured tobacco, production in the region has, at best, been steady after the heavy drop in production in Zimbabwe. The failure of Zimbabwe to come back as a reliable and major supplier of quality flue-cured is one of the two developments that stand out in the region. The other development, closely related to the decline of the 'old tobacco world', are the problems the auction systems in Zimbabwe and Malawi encounter. First, this season has not only revealed that Zimbabwe is unable to recover the losses of the past, but that the country is struggling to maintain any meaningful position in the tobacco world. Merchants and manufacturers are in the process of moving their supply chain elsewhere, the Zimbabwe Tobacco Association (ZTA) stated in a positioning paper in February 2006. Moreover, the country's production facilities – which are laid out for 200 million kg – are closing down and the sophisticated, well-networked infrastructure, which made Zimbabwean tobacco one of the best world-wide, will be gone with it. One of the major buyers, Zimbabwe Leaf Tobacco, says about its production capacities: "In Zimbabwe, we run at 40 per cent of where we were. Naturally, if nothing happens in the next years we have to re-think how we can operate this business," so managing director Gary Wallace. To avoid this fate, ZTA's president Andrew Ferreira rightly says: "It is critical that we enhance our production." The second major development, the struggle of the auction system, is a direct consequence of the problems farmers face. Without the timely availability of inputs and financing, formerly provided by banks, farmers contract with leaf buyers. In Zimbabwe, only 45 per cent of the crop has been sold through auction sales this year, compared to 60 per cent last year. The rest is contracted. Even manufacturer BAT has installed a pilot project to contract farmers. This can be taken as a clear sign of the demise of the auction system in Zimbabwe: high quality leaf can no longer be found at the auctions in sufficient amounts. Meanwhile, Burley auctions in Malawi are up and running, but they, too, were far from operating efficiently this year, following the introduction of minimum prices. Discussions are still taking place to allow contract-farming for Burley production, as it is already possible for flue-cured. Across the region, contract prices tend to be far better than auction prices, but the Tobacco Control Commission is still hesitating to introduce contract-farming because many small-scale farmers might be rejected. Indeed, although leaf buyers show great interest for contract marketing – whereby farmers have to finance their inputs alone – they are not in favour of contracting farmers due to very poor track records of loan recovery rates. If contract farming gets approved, auctions will possibly no longer attract the best farmers and thus the price-finding process will be hugely biased. Up to now, contract-farming in the region is dominated by Universal Leaf and Alliance One. Universal Leaf and its subsidiaries bought roughly 180 million kg of the total, followed by Alliance One with about 130 million kg. All other players purchased much smaller amounts: BAT (30 million kg), Tribac/ Africa Leaf (20 million kg), Continental, Mastermind Tobacco and Tombwe Processing in Zambia (all less than 10 million kg). Zimbabwe: no turnaround Tobacco production in Zimbabwe has been hit worse than feared, with production dropping to an all time low of 55 million kg of flue-cured. The good news is that the quality of the leaf, the style and smoking characteristics have improved and prices went up to US$ 2.01 per kg (in 2005: US$ 1.61 per kg). One may also take comfort in the thought that a rebound is almost a certainty. Let us take a look at what went wrong last season and how these problems are being tackled this year. Following reasons are given by the Zimbabwe Tobacco Association (ZTA) for the 25 per cent decline in production this year. First, growers sold their 2004/05 crop well below their replacement cost of production. Second, the average exchange rate for sales was at about Z$ 13,000 per US dollar, whereas retooling for the following season was carried out at Z$ 26,000 to Z$ 100,000 per US dollar. Third, small-scale growers only accessed partial funding in December/January. Fourth, growers were unable to meaningfully access the promised 15 per cent retention funding for inputs. Fifth, the fertiliser, fuel and coal inputs fell well below requirements, even for a reduced crop. Have these issue been tackled in time for next season? Stanley Mutepfa, general manager of the Tobacco Industry and Marketing Board (TIMB), says the industry is better prepared and reports a 24 per cent increase in tobacco seed purchases, so the crop size should again rise to 70 million kg of flue-cured next year. According to the board, factors that promise improvement for next year include that, firstly, contractors have supported a larger hectarage than last year with imported fertilisers, agro-chemicals, diesel and coal. Secondly, growers will be entitled to retain 15 per cent of their US dollar proceeds from the 2007 crop in foreign currency denominated bank accounts to procure critical inputs and capital items required for re-tooling the 2007/08 crop, the board says. Moreover, a bonus support framework was already installed in April this year, whereby farmers received a 35 per cent bonus of the total value of tobacco sold before 31 July, and a 15 per cent bonus up to 31 August. This is a better incentive to produce quality leaf than the tobacco support price system that had previously been in place. Another factor that should lead to higher yields and thus a better crop next year are higher dam levels following more effective rains. Finally, according to the TIMB the "security of tenure is clearer following pronouncements that 99-year long leases will be issued shortly by government to eligible farmers". Yet the 200 remaining white large-scale farmers do worry about the word 'shortly' since promises have been made for several months to secure tenure. Before this issue is resolved, farmers will hardly update or invest in new machinery. That their doubts about a secure future are justified was again shown by a comment from one of the ministers, who said he wants all white farmers off the land. "Since the land issue seems to have entered the presidential succession race, any quick solutions still eludes Zimbabwean farmers," concludes the ZTA. Note that this issue remains the crucial element deciding Zimbabwe's future as a tobacco supplier, considering that the top 350 farmers contribute 60 per cent of the total crop and most of the high-quality leaf. Thousands of small-scale farmers quit tobacco farming. There are three more areas of concern. For one, funding provided by the Agricultural Sector Productivity Enhancement Facility (ASPEF) might, again, take too much time to come through. Secondly, the economic crisis continues unabated, with annual inflation running at 1,200 per cent, despite the removal of three zeros from the denomination of the banknotes. Thirdly, there is a worrying shortage of coal. The situation is so delicate that the ZTA calls it "the biggest single impediment to any meaningful increase in production" and is stepping into the coal facilitating business itself. Zambia: producing with an effort Zambia's leaf production experienced a major decline this year. Only 29.5 million kg will come to the market – compared to 37.9 million kg last year. As of 28 September 2006, 13.1 million kg of flue-cured and 13.5 million kg of Burley have been sold. While the marketing for Burley has finished, flue-cured sales – expected at 16 million kg – will continue until 20 October. What has happened to the country that was set to absorb the production losses in Zimbabwe? For one, there were heavy rains at the beginning of the season, reducing yields considerably. Observers note that the production decline could have been even worse, but was somewhat offset by the supply of additional inputs from the government. Secondly, one seemingly good measure for the country, the debt write-off by the IMF, has turned out badly for farmers since the resulting appreciation of the kwacha led to rising input costs. Many farmers have moved out of tobacco or have reduced areas dedicated to tobacco. There are currently about 20,000 tobacco farmers, 5,000 of whom are commercial large-scale farmers. Farmers are experiencing viability and funding problems. For next season, funding has not come forward sufficiently, reports the Tobacco Association of Zambia. At least the association can no longer provide loans to farmers, so funding is available only through commercial banks, and the leaf buyers involved in pre-financing, namely Zambia Leaf Tobacco (a subsidiary of Universal Leaf), Alliance One and Tombwe Processing. Two other buyers are active on the market - Associated Central Africa and Tobacco Leaf Brokers. Since there is a shortage of funding and planting has already started, crop estimates for next year are humble. The tobacco association anticipates a crop of 10 million kg of flue-cured and 12 million kg of Burley – which would be a 42 per cent reduction from 2005 levels. However, forecasts by the tobacco board are more optimistic at 14 million kg flue-cured and 14.5 million kg Burley. As for this year, the rain has not affected the quality of the leaf, which is good, with yellow leaf dominating. Flue-cured fetches an average price of US$ 1.96, while Burley was sold at US$ 1.00 on average. Overall, it does not look as if Zambia can fulfil the expectations set in the past. Moreover, the general elections on 28 November 2006 demonstrated that not everyone wants these expectations to be fulfilled. Worryingly to many ex-Zimbabwean farmers, the main opposition candidate, Michael Sata of the Patriotic Front, has praised Zimbabwe's president Robert Mugabe for seizing white-owned land. He came behind president Levy Mwanawasa in an election that was accompanied by protests from the opposition demanding recounts. Tanzania: set for growth The crop in Tanzania has been widely hit by drought this year and so the previous production target of 65 million kg was lowered to 48.6 million kg. Up to 14 September, 49.06 million kg had been sold. The final figure will be above 50 million kg, since markets for dark fire-cured are still in progress until the end of September. The main crop in Tanzania is flue-cured with 46.5 million kg having been sold this season. The quality of the crop improved after rains resumed in the last half of the farming season and average farm gate prices of flue-cured are at TSh 1,107 (US$ 0.90) per kg. Tanzania also produces a good amount of dark fire-cured tobacco. Up to 14 September 2,247 tonnes have been purchased, but final figures will be in the region of 4,251 tonnes. Farm gate prices are Tsh 677 (US$ 0.55) per kg. Tanzanian Leaf Tobacco (a Universal subsidiary) and Alliance One share the Tanzanian market, with 58 per cent and 42 per cent respectively. Both companies have also started contracting Burley in 2003. By now, there are 1,400 farmers, who produced a Burley crop of 353 tonnes in 2005/06 at TSh 924 (US$ 0.75) per kg. This is, however, only half the size of last year's crop (of 741 tonnes), since Tanzanian Leaf Tobacco has largely moved out of Burley again and contracted only 40 tonnes, as opposed to 549 tonnes last season. Still, the future looks promising for the 78,000 registered farmers. Yields have been increasing in the last years and the industry has the support of the government, which, for example, has included the tobacco industry in their fertiliser subsidies scheme for the last two seasons. There is a subsidy per 50-kg bag of fertiliser and another subsidy of TSh 850 (US$ 0.76) that covers transport costs of fertiliser from port to the villages. The industry body, the Tanzania Tobacco Co-operative, expects subsidies to further increase this year. Tobacco is certainly developing into one of the most important export crops in Tanzania. A total of 39.94 million kg of flue-cured has been exported so far this season, at an average price of US$ 2.02. But more could be done to help the relatively young industry to prosper. In particular, yields can be raised further from the current average of 1,125 kg per hectare. In mid May the government of Tanzania issued a statement requiring stakeholders to increase production of the major traditional cash crops, namely cotton, coffee, tobacco and cashew nuts. For tobacco, the government has targeted 100 million kg to be attained by 2010. "The government requested tobacco buyers to see how they could increase the quality and hence the price of tobacco to motivate farmers to achieve the targeted tonnage," says Emmanuel Kivanda, operations manager of the Tanzania Tobacco Co-operative Apex. "It is envisaged that this, if attained, will increase employment and will thus help eradicate poverty." Malawi: Reforms ahead The Malawian government surprised the international tobacco community when it introduced minimum prices for auctioning tobacco this season. The measure was intended to help farmers receive better prices but instead left tonnes of tobacco unsold and farmers without much needed cash. The system clogged up and so, after 17 weeks, the minimum prices were relaxed to such an extent that normal market activity was back in place. In those seventeen weeks, only 58 per cent of Burley had been auctioned so that the auctions now run until the middle of October. As of 28 September, 108.3 million kg of Burley were auctioned; final sales are expected at 128 million kg. The 8-per-cent increase on last year's production level is largely due to the subsidising of fertiliser, implemented by the government last year. On average, leaf quality is medium to low, with a large percentage of moisture and pressure damage. Flue-cured, not being sold at auction, was not affected by the turmoil and production is doing relatively well. It is mostly grown on the large estates run by the state agency General Farming, which since 2002 is managed and sponsored by Limbe Leaf Tobacco, a Universal Leaf subsidiary. The average price for flue-cured has so far been US$ 1.59 per kg, contract sales amounted to 16.8 million kg. The auction price of Burley, however, has seen further price decline, from US$ 0.99 per kg last year to US$ 0.87 per kg as of 28 September. Yet after abandoning minimum prices better quality leaf did come through at auctions, and prices have seen a recovery to around US$ 0.90 to 1.00 per kg. However, the cost of production is put at US$ 1.20 per kg and the resulting inability of many small-holder farmers to break even has become a major political issue since Malawi's economy largely depends on tobacco. The whole system should have been reformed years ago in order to improve yields, availability of inputs, finance, transportation and marketing. Now, changes to the tobacco act are being laid out. Felix Mkumba, the executive secretary of the Tobacco Association of Malawi, says that contract-marketing and contract-growing might be approved, as well as the deletion of the state marketing board ADMARC (Agriculture Development and Marketing Corporation) as a major buyer of tobacco grown on the customary land. Plans would also include the "incorporation of a liberalised market and the incorporation of more user-friendly descriptions, for example the use of sales floors rather auction floors, etc," so Mkumba. Mozambique: 'Universal country' Mozambique's main crop, Burley, amounts to 48 million kg this year, which is about 2 million kg less than last year. There was also a slight decline in flue-cured and fire-cured leaf. The start of the season was slightly wet and therefore some damaged tobacco came up during the early part of buying. However, overall quality is of a good standard, soft-natured traditional crop and there is an increase in better quality bodied leaf styles. Good agricultural practices are reported to have improved, too. This is seen as a direct result of the successful instalment of contract-farming as well as the support of the government for the industry. Burley production started in the late 1990s and has taken off in the last three years. However, a big change for the tobacco sector came in May this year, when Alliance One withdrew its operations (see also report in TJI 3/2005). Universal Leaf's subsidiary Mozambique Leaf Tobacco (MLT) has bought all of Alliance One's crop, estimated at 9.8 million kg of Burley, and is now the leading leaf buyer. Only two more companies, Sunil and Africa Leaf, have small concessions. Also in May this year, the president inaugurated MLT's green leaf processing plant, which is Mozambique's first such plant and the most modern in Africa. In operation since the 2004/05 season, it has a capacity of 42 million kg and another processing line will be added soon. South Africa: Niche market producer For many years, production levels in South Africa have been shrinking, but this year's crop size was a mere half of that of the previous year. Production declined from 23.5 million kg in 2005 to 14.85 million kg this year, made up of 12.5 million kg of flue-cured tobacco and 2.35 million kg of dark air-cured. South African tobacco has clearly become a niche product. Moreover, the industry shrank by 5 million kg more than expected. The strong rand and the world-wide overproduction of flue-cured have rendered South African tobacco less competitive and forced upon the industry a drastic transformation process. As a consequence, nearly half of the growers left farming. There are now 380 tobacco farmers left in South Africa and another 80 farmers might be leaving by next year, according to estimates by the Tobacco Institute of South Africa (TISA). Especially flue-cured prices have taken a hit in the last three years. Dark air-cured – used mainly for snuff and pipes – is faring better, especially because the air-cured tobacco sector already went through a restructuring process. The bulk of the air-cured crop is delivered on contract to Universal Leaf in Rustenburg. As for flue-cured, the restructuring process has not been without problems. The entire industry in South Africa worked together and developed a model which "could ensure the future for tobacco farmers", reports Francois van der Merwe, chairman of TISA. "This model was based on drastic rationalisation of excess infrastructure, especially green leaf tobacco plants, to take costs out of the system. Duplication of services had to be identified and removed; all functions had to be re-evaluated and stream-lined." Yet Golden Leaf in Nelspruit decided to walk away from the agreed industry model late in 2005 and continued on its own. "This left the industry divided and ineffective," says van der Merwe. Then in August 2006, Golden Leaf terminated its tobacco activities and recommended its growers to deliver tobacco to Afgri Tobacco in Rustenburg. Afgri, a listed agricultural company, had previously been approached to become involved in the tobacco industry. They were asked to bring to the industry professional and de-politicised management, shared services for better cost effectiveness, security to farmers in terms of their services, financing, and importantly, a more professional approach and service to buyers of tobacco, reports TISA. From 2007 onward all flue-cured tobacco will be delivered to one green leaf plant, namely Afgri Tobacco in Rustenburg. The other two processing plants, in Nelspruit and Potgietersrus, have been shut down. Given these developments, TISA has confidence in the restructuring of the tobacco sector. "With a restructured farming industry, where 'above farm gate costs' have been optimised, the tobacco farmers in South Africa can look forward to a sustainable future in tobacco growing," concludes van der Merwe. TISA reckons that production will stabilise at around 14 million kg. Enditem