Tobacco Co-Op Agrees to Buy Vector Plant

Source from:  JOURNAL RALEIGH BUREAU By David Rice 06/09/2004

Growers' group will process leaf, manufacture cigarettes A cooperative of tobacco growers in five states has agreed to pay $25.8 million to buy the Vector Tobacco plant in Roxboro - a move that would let the growers' cooperative start processing leaf and making cigarettes. "We can move greater quantities of farmers' tobacco that way. That's the point," said Arnold Hamm, the assistant general manager of the Flue-Cured Tobacco Cooperative Stabilization Corp. "The idea here is that as some of our cigarette manufacturers and our leaf dealers have moved toward dealing in offshore tobacco, we have no one left who is dealing in only U.S. tobacco. And that's our primary focus," Hamm said. Vector Tobacco Inc., a subsidiary of Liggett Vector Brands Inc., opened a plant outside Roxboro in 2001 to produce low-nicotine Quest cigarettes. But Liggett closed the plant last year and consolidated production of all its brands at a plant in Mebane. In a filing with the Securities and Exchange Commission, Liggett said it plans to close on the sale by July 15. "We have signed an agreement, but we haven't consummated a deal yet," Hamm said. But he said that the cooperative hopes to have the plant processing surplus leaf reserves that didn't fetch government support prices by the end of the current crop year in late August. Hamm said that the new move into processing and cigarette manufacturing is consistent with those of other grower groups. Cranberry growers formed the cooperative that sells Ocean Spray juices. A growers' cooperative makes Growers' Own orange juice. California nut growers market their own almonds. And a Midwest cotton growers' cooperative makes denim. "This seems to be falling in line with the trend where farmers are taking control of marketing their product for the purpose of adding greater value at the farm gate," Hamm said. Although the Roxboro plant would be able to convert 10 million pounds of tobacco into as many as 10 billion cigarettes a year, officials at the cooperative appear more enthused about its ability to process 50 million pounds of leaf to sell to cigarette-makers overseas. "What we're looking at is the future," Hamm said. "We've slowly but surely over the last couple of years developed a foreign customer base. This is a way, with or without a tobacco program, to continue to supply that customer base and assure them that their supplier will only be focused on U.S. tobacco." Blake Brown, a professor of agricultural economics at N.C. State University, agreed that the plant's leaf-processing capacity of 50 million pounds is more important than its cigarette-making capacity. "It provides one additional outlet for farmers who may produce more than they have got contracted, or who may not have contracted at all," he said. Peter Daniel, the assistant to the president at N.C. Farm Bureau, had a similar view. "The processing capacity is tremendous. The manufacturing is negligible. They may be able to do some blends for foreign manufacturers," Daniel said. "The future is just wide open." The plant could also change the role of the stabilization cooperative in the industry. The cooperative traditionally has used money on loan from the Commodity Credit Corp. to buy leaf that didn't bring the federal support price, then sell the leaf later. If a buyout of the federal tobacco program passes, Brown said, "then the obvious role for Stabilization is to become more of a marketing cooperative. Their role in the past has been to implement the federal program." The co-op's entry into the leaf-processing and cigarette-making businesses also changes its role from that of a supplier to a leaf buyer and a competitor with other companies. "They do become, in essence, a competitor with other leaf dealers," Brown said. "I'm not sure that Philip Morris or the other (cigarette manufacturers) see 10 billion cigarettes as that big a threat." The cooperative currently contracts with such dealers as Standard Commercial and Universal Leaf to process its leaf. Hamm said that the cooperative will pay for the plant out of more than $240 million in reserves that it holds. But no money from the Commodity Credit Corp. will go to buy the plant, he said. Though some small cigarette-makers have chosen not to join a 1998 settlement between the industry and the states, Hamm said, the cooperative will participate in the settlement. The cigarette plant could produce cigarettes for foreign markets under contracts with other manufacturers, Hamm said. But the plant will not get deals on discounted tobacco that other cigarette-makers don't, he said. The U.S. Department of Agriculture "will insist on safeguards to prevent that," he said. "In terms of the loan stocks, whatever price the USDA approves is going to be offered to the entire industry on a first-come, first-served basis. We wouldn't jeopardize that relationship." Ron Bernstein, the president and chief executive of Liggett Vector Brands, said yesterday that Liggett and the cooperative hope to close on the deal soon. "I certainly applaud the initiative of Flue-Cured Stabilization to pursue initiatives to give their farmers an expanded market for their products," he said. "That's their stated objective, and we're going to do everything in our power to help them meet that objective." Daniel, at Farm Bureau, said that the farm group likes the stabilization co-op's move. "We are extremely pleased that the co-op board has taken this bold step. They are planning a future for tobacco farmers," he said. "We're pleased with this move to allow farmers to have more choices, more marketing options, down the road." Enditem