Tobacco was introduced to the Philippines in the late 16th century by Spanish missionaries. The first tobacco seeds were from Cuba, arriving via Mexico, and tobacco cultivation quickly became an important facet of the Spanish colonialists, eventually becoming the single largest income generator for the government.
As a crop, tobacco still plays a fundamental role in providing income to thousands of farmers throughout the islands. And the income earned from taxes on tobacco products remains a significant element of the Philippine government's revenue stream.
[b]Favorable conditions[/b]
The Philippines is blessed with fertile soil and generally favorable climatic conditions for the cultivation of tobacco. However, the annual typhoon season and the extreme rains passing storms bring can play havoc with crops, as can other climatic inconsistencies, such as the drought of 2006 in northeastern Luzon that saw many farmers lose their entire burley crop and the income that went along with it.
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But Filipinos are resilient, and with the help of companies such as Universal Leaf and Philip Morris Philippines Manufacturing Inc (PMPMI), who granted debt-relief to the affected farmers in an effort to ensure ongoing sustainability, the current burley crop is expected to achieve new heights of excellence.
"The crop is certainly improving, and PMPMI expects to resume exports of burley accordingly," according to PMPMI's managing director Chris Nelson, who added that the debtforgiveness granted to the burley farmers who lost their crops the previous season had "paid off".
"We are still seeing relatively small quantities," Nelson said, "but the Philippines resumed exporting tobacco in excess to our domestic requirements two or three years ago, and this is a good sign."
Winston Uy of Universal Tobacco Philippines added that there is still more to do to ensure the continued viability of the domestic burley crop.
"Philippine burley is a popular leaf choice for many international manufacturers," said Uy. "There is strong domestic demand as well. This puts some pressure on us to supply both the local and export markets. Growing conditions over the last few years have been challenging - the 2006 drought was a particularly difficult hurdle we had to overcome. Farmers need to earn money from whatever they grow, and of course they look to other crops to substitute for tobacco if the market conditions are not adequate, or if they perceive the crop is not sustainable. We recognize that there is a need to address farmer's profitability issues, and we are implementing a variety of mechanisms, aside from the debt-relief granted after the 2006 drought, to ensure that farmers earn well from this crop, well enough to ensure they opt to plant the next season with the expectation of seeing increased returns for their labors."
Buyers of burley and other Philippine tobacco have had to accept that the previous prices they were paying are no longer sustainable. There is evidence that manufacturers now understand that they will have to pay more.
"Manufacturers have turned a corner from looking at shareholder values and driving traders down to understanding that they need work with farmers and traders to ensure a continuity of supply," said Uy.
"Manufacturers are now looking at competing crops edging their way into the scene and asking 'what do we need to pay farmers to ensure they keep growing tobacco?'. They now see that this is not a one-off thing, it's a structural challenge. They have noticed over the last year that all types of tobacco are showing signs of inconsistent supply and rising prices. The sudden shortfalls and price increases shock many manufacturers into waking up to the realities of the market."
The Philippine government is continuing to try to lure tobacco farmers into switching to food crops, but currently a farmer stands to earn more from a successful tobacco crop, and there is the added incentive of support from the private sector to enhance the decision to remain with tobacco.
[b]Issues affecting production[/b]
Despite the convulsions shaking the global economy, tobacco is regarded as "recession-proof", or at least "recessionresistant," and few in the industry believe that tobacco farmers, traders and manufacturers will be overly affected by current events. However, there are still a number of issues that are likely to affect domestic production in 2009.
"We may well see a shortage of tobacco again in 2009," predicted Elena S. Tan, president of Continental Leaf Tobacco Philippines (Conleaf). "We have seen a tremendous increase in the price farmers are paying for fertilizer and other inputs, depending on the type of tobacco they are growing. Some farmers may elect to cut back on fertilizer use, and this could lead to a reduction of quality and quantity."
"Smallholders can't afford expensive inputs, and there is evidence of a 30% drop in the use of fertilizers," concurred Uy.
[b]New dynamics[/b]
Virginia tobacco is the primary domestic tobacco crop, and in the past, the Philippine crop has been uncompetitive in terms of price and quality.
Salt-laced fields and poor agricultural practices and haphazard grading techniques have all contributed to a decline in Virginia tobacco's popularity with domestic and international buyers in the past.
But a new set of dynamics is making it much more competitive, according to Uy, who notes a strong domestic demand and increased export interest.
"Philippine Virginia tobacco has become good value in today's market conditions," he says. "Philippine FCV is unique. Its development over recent years has shown a lot of promise. The lower-middle stalks are definitely showing improvement in quality, and the upper stalks are unique, so price is now a critical factor. With some traditional suppliers suffering shortfalls, notably China, Philippine Virginia tobacco is benefitting from increased demand domestically and internationally. Certainly, the more competitive price and the improved quality of Philippine FCV have played a significant role in this resurgence."
"Grading inconsistencies and saltlaced fields are issues that have been resolved now," said Nelson. "Farmers with field's that were identified as having slat problems now no longer grow tobacco on the… In fact, there are several agencies and private sector entities that are involved in efforts to improve quality, such as Trans Manila [the largest supplier of domestic tobacco to PMPMI], Universal Leaf and the National Tobacco Administration (NTA), and to get tobacco farmers back on their feet. Essentially the Philippines is self-sufficient in tobacco production, requiring only limited imports for blending purposes."
[b]Effective mechanism[/b]
The price of tobacco is set through a tri-partite mechanism involving the NTA, manufacturers and farmers.
"This is an effective mechanism," said Nelson. "It serves to keep the price in check while maintaining the quality we want."
Established tobacco buyers such as Conleaf have long-term relationships with many of the farmers they buy from, and this can take several forms.
"We employ both direct and thirdparty mechanisms to work with our farmers," said Conleaf's Tan. "We can help with loans and cash, and we supply technical help to tobacco growers. We also work with agents, called cowboys, who select suitable salt-free fields suitable for cultivating tobacco, and assist farmers in many ways. They give us a list of farmers growing tobacco, together with the amount of land under cultivation, and this allows us to compute the amount of inputs required and potential crop size. We can help a farmer by supplying the inputs on credit or by making cash loans available. The cowboy buys the crop from the farmer and delivers the leaf to us, which we then grade and pay for accordingly on delivery."
Conleaf commits to the price it will pay to the farmer in advance which gives the farmer confidence.
"Whatever we commit to by way of pricing, we stick with," said Tan. "We never lower the price or the agreed volumes we have committed to buy, regardless of market fluctuations. While this does not always work out for the best for us, the farmer is guaranteed his profit regardless of market conditions, and so we are ultimately guaranteed a consistent supply of quality tobacco."
At Universal Leaf, a similar cooperative spirit is alive and well.
"Universal gives its full support to farmers," said Uy. "We have developed a greater appreciation of and support for farmer profitability, coupled with a lot more corporate and social responsibility."
As an example, Uy cites Univeral Leaf's condoning of farmers' debts after typhoon Cosme devastated the Pangasinan crop last May. The company has also been involved in infrastructure projects such as building roads and bridges to help farmers bring their produce to the marketplace. The company is also supplying subsidized venture furnaces to farmers which save around 30% on fuel costs.
"We are in the process of making health insurance available ot 100% of our farmers in cooperation with Philhealth, the government insurance agency. And, in conjunction with PMPMI, we have embarked on a school rooms project to bring better education to farmers' families."
[b]Bullish[/b]
The Philippines produces a wide variety of tobacco types, including types ideally suited to a wide range of tobacco products including snus and cigars.
"Around 85% of the tobacco we purchase is grown by farmers we work with directly, the remaining 15% in cooperation with our partners, who supply us with the names of the farmers so we can arrange for University of the Philippines agronomists to visit and advise," said Uy. "In the process, we are establishing 100% traceability for all the tobacco we handle. We are very bullish about the prospects for Philippine tobacco. Quality is no longer an issue. The structure we have established now ensures that consistency of quality and supply is assured."
One additional factor that contributes to the growing favor Philippine tobacco is earning among international buyers is unrelated to quality or price.
It is simply that visiting the Philippines to buy tobacco exposes the potential buyer to hospitality, charm and grace that go far beyond the usual client/supplier relationship. Enditem
