Pakistan: Purchase of All Locally-produced Tobacco Bar Encourages Punjab to Switch to Tobacco Farming

Source from:  Business Recorder  12/19/2013

The legal bar on cigarette manufacturers to purchase all locally produced tobacco has encouraged farmers in Punjab after Khyber Pakhtunkhwa to switch to tobacco farming, owing to its low risk and high reward. Industry sources told Business Recorder here on Wednesday that after emerging as one of the highest performing cash crops in Khyber Pakhtunkhwa, the Punjab's farmers were also leaning towards tobacco farming.

The cigarette manufacturers are required to buy all tobacco being grown, regardless of their demand. Therefore, tobacco farmers are never faced with the prospect of throwing away surplus production - as is the case with many other crops. Last year, after discussions in the Standing Committees for Ministry of Commerce in the National Assembly and Senate, it was decided that the PTB follows due process of law while setting the Minimum Indicative Price (MIP). They said that a number of shelters had been provided to growers by Pakistan Tobacco Board (PTB) and manufacturers, making tobacco farming an extremely safe form of agriculture. Currently, KPK produces nearly 80 per cent of Pakistan's total tobacco crop - worth more than Rs 10 billion. The province has attained global recognition for its achievements in tobacco yield per hectare - the yield is 14 percent higher than the global average. In order to protect farmers, a Minimum Indicative Price (MIP) for tobacco crop is set annually by the PTB guaranteeing farmers to receive a minimum price, even in surplus supply situations. The MIP is calculated on the basis of various factors including increase in cost of tobacco production, rate of inflation in Pakistan, global tobacco trends, cross-commodity price increases, and wholesale prices of industry specific raw material.

According to the Martial Law Order-487 of 1985, the minimum price at which the farmer sells cannot be lower than the previous year. Therefore, farmers are continuously benefiting from annual protectionist pricing. The MIP has risen 15.7 per cent annually over the last 5 years - which is very promising considering annual inflation of 10.5 per cent over the same period. That being said, the market price of tobacco is routinely higher than the MIP - last year the average market price was 14 per cent higher than MIP.

A key factor in determining the MIP is cost of production, which is ascertained in active consultation with tobacco farmers, agriculture departments, and the PTB, he maintained.

Additionally, tobacco farmers do not have prolonged payment procedures, as the tobacco industry has implemented various methods of tobacco purchase which expedite payments. Furthermore, the industry spends millions of rupees annually on mechanisms to provide innovative marketing facilities for the growers. Tobacco growers are further sheltered from global commodity price fluctuations by the MLO-487.

The cigarette manufacturers incur the most risk, having to purchase all production-regardless of their own production requirements. If tobacco prices go on rising at such meteoric pace, there is a fear in some private quarters that tobacco companies might start buying less tobacco or even have to shut down local manufacturing, sources added. Enditem