Raleigh Tobacco Cooperative Cultivates New Mission

Source from:  By Lee Weisbecker Triangle Business Journal 7:00 p.m. ET Dec. 11, 2005 12/13/2005

A farmers cooperative that played a major role in running the now-defunct federal tobacco program has reinvented itself as a cigarette maker and a tobacco exporter targeting China's 300 million smokers. The Flue-Cured Tobacco Cooperative, or FCTC, has spent $26 million of a $245 million bank account it built up during its 60 years in business to buy a state-of-the-art cigarette manufacturing plant in Roxboro, north of Durham, from Miami-based Vector Tobacco. FCTC also owns a processing plant in Timberlake, near Roxboro, where tobacco is stored and prepared for export. There, tobacco already is flowing to global destinations including Spain, the Middle East and the Pacific Rim - with China on the horizon. But some of the owner-members of FCTC are not happy with the Raleigh-based organization's new strategy. Two lawsuits have been filed in Wake County Superior Court arguing that the co-op's reserves should be distributed among its members. Those cases are pending. Part of the tobacco culture Prior to the end of the price-support program, FCTC was known to generations of farmers, auctioneers and warehousemen as simply "stabilization" or the "stabilization corp." It bought and stored surplus tobacco from its members at the federal support price to help protect them from drastic price declines. Now, 100 workers in Roxboro are churning out packs of smokes with brand names such as Traffic, Kick, Passport and Fact. A spokesman for the co-op says employment could rise as high as 400 over the next few years. Meanwhile, some 14 million pounds of processed, flue-cured tobacco, purchased from the co-op's list of 3,500 active farmers and valued at $35.3 million, is set for shipment to China in February in the group's biggest overseas deal. "We're really in our first year of operation," says co-op director Arnold Hamm. "The results have exceeded expectations." But the newly tooled enterprise has not reached profitability, which Hamm says he and the co-op's 11-member board of directors have targeted to achieve in the third year of operation. When, and if, that day does arrive, the co-op plans to begin sharing revenue with its members, a key drawing card if the organization is to maintain the loyalty of farmers who are free to sell their product to any cigarette maker or exporter. Challenging row to hoe "What they are trying to do is going to be a challenge," says Gary Bullen, an extension specialist with North Carolina State University's Department of Agriculture and Resource Economics. Co-ops in other agricultural areas - peanuts, for example - have survived the end of federal price support programs, Bullen says. "They have to work to find themselves a niche," he says. "It was as a broker in the peanut industry and the co-op has survived, for now." NCSU tobacco economist Blake Brown compares the co-op to any other fringe cigarette manufacturer, but with one twist. "Unlike the others, they will use only U.S. tobacco," he says. "This group seems to have proliferated, and they continue to grow. I'd rate their chances like any other fringe maker." To get a 1 percent share of the U.S. cigarette market, a company must sell anywhere from 3 billion to 4 billion sticks of leaf. At its processing plant, the co-op expects to hit the 1 billion mark by early 2006. But not all those cigarettes are for the domestic market. Some brands, which are produced under contract with suppliers, are being shipped to Spain, the Middle East and the Pacific Rim. Hamm says he expects the employment ramp-up to begin at the plant during 2006 as the co-op signs contracts to supply other bands. In its stabilization days, which began in 1946, the Flue-Cured Tobacco Cooperative purchased crop from growers in the Carolinas, Virginia, Georgia and Florida that it would hold in storage in anticipation of better prices. In years when those ultimate prices were favorable, the co-op was able to amass a war chest that, through investing, grew to $245 million. Now it's begun its entrepreneurial mission, but some members have different notions about the organization's future and its assets. In the two lawsuits, separate groups of growers and co-op members have sought to have the organization dismantled and the proceeds distributed. In recent weeks, co-op and plaintiffs attorneys have asked the court to consider a possible settlement in one of those cases. The settlement proposal, heard by Judge John Jolly, would set aside at least $50 million for distribution but would permit the organization to proceed on its new path as a cigarette maker and leaf exporter. Enditem