Sale to China Raises Hopes for Tobacco Farmers

Source from:  By John Reid Blackwell, Richmond Times-Dispatch, Va. Nov. 24 11/25/2005

Tobacco slipped as the state's top cash crop in 2004, but don't call the king dead just yet. U.S. leaf farmers have recently gotten their foot in the door of one potentially giant new market: China. A farmers' cooperative and tobacco leaf companies recently made a significant sale of flue-cured tobacco, the main type of leaf grown in Southside Virginia, to China's national tobacco monopoly. With more smokers than the entire U.S. population, China is a vast market that U.S. leaf farmers have been trying to unlock for years. China grows an estimated 3.5 billion pounds of tobacco -- more than any other country and more than five times as much as the United States' estimated 2005 crop. Its state-run monopoly has historically shunned tobacco imports in favor of homegrown leaf, but China has ventured into foreign markets in recent years, even purchasing small amounts of U.S.-grown tobacco, mostly burley leaf grown mainly in Kentucky, Tennessee and Southwest Virginia. The significance of the recent sale was its size, which could signal that China has become more serious about the U.S. market. Representatives from the China National Tobacco Corp. visited tobacco operations in the U.S. in October before buying almost 14 million pounds of processed leaf -- or the equivalent of about 25 million pounds of farm-weight leaf -- from the Flue-Cured Tobacco Cooperative. The Raleigh, N.C.-based farmers' co-op formerly administered the federal government's tobacco price-support and supply-control program. Congress last year eliminated the tobacco program starting with the 2005 growing season, so the co-op went private and set up its own tobacco-processing and cigarette plant in North Carolina, putting it in competition with established leaf dealers and cigarette makers. "They [the buyers from China] came in and looked at our inventory and bought what we had, and apparently they are going to come back for more," said Andrew Shepherd, a Lunenburg County farmer and Virginia's representative on the cooperative's board. "We have an opportunity here, if we can keep our price down and be competitive." China also purchased smaller amounts of tobacco from other leaf merchants, including Richmond-based Universal Corp., the world's largest tobacco merchant and a major buyer of Virginia leaf. Officials with Universal confirmed the sale but declined to comment on the amount sold. A spokesman for the second-largest leaf dealer, North Carolina-based Alliance One International, could not be reached for comment. The Burley Tobacco Grower's Cooperative, based in Lexington, Ky., also recently sold about 1.5 million pounds of tobacco to China, an official with the group said. That cooperative has sold about 4 million pounds to China in the past two years. The $35 million purchase from the flue-cured co-op included tobacco from the 2005 crop and surplus leaf from previous seasons. Excess inventories of flue-cured tobacco have contributed to low demand for the crop. "What we are going through in the industry right now is there are some excess inventories that need to disappear," said Blake Brown, a North Carolina State University agricultural economics professor who studies the tobacco industry. "Production is below the amount [of tobacco] being used because we are reducing these inventories. Anything that helps reduce inventories is significant." Demand for U.S.-grown tobacco has also declined since the 1990s as buyers have increasingly turned to cheaper leaf grown in Brazil and Africa. But the return to an entirely free-market system in the U.S. this year, and an accompanying drop in prices, could make American leaf more attractive to foreign buyers. China's interest in U.S. leaf may stem from a desire to produce more American-style cigarettes to sell in the country's metropolitan areas, said Tommy Bunn, executive vice president of the Leaf Tobacco Exporters Association. The recent sale "opens the door to something that could wind up being extremely important to the growers, especially the flue-cured growers. We will be able to move tobacco into a very fast-growing market," said Keith Parrish, a North Carolina farmer and a member of the cooperative's board. Still, there are uncertainties about the China market. The recent sale came under unusual circumstances because 2005 is the first year after the U.S. tobacco-support program was dismantled, and the flue-cured cooperative has a stockpile of leaf it can sell at a cheap price. Industry sources said the Chinese buyers are highly sensitive to price, so it is unclear how much tobacco they'll want from the U.S. in the future. China would also need to make its purchase intentions clear, so U.S. farmers could grow the right amount and type of tobacco "We have to try to do the best we can to give enough money to our growers to be able to survive and also continue to sell exports," Parrish said. "It is kind of a fine line that we have to walk." Enditem