United States: Inventory Fears Spark Cutback in Contracts

Source from:  Tobacco International 05/08/2009

Philip Morris USA appeared to have sparked a wave of resentment from flue-cured growers in February over what the farmers considered bad faith in the company's leaf-contracting program. The bone of contention according to a number of farmers was that PM USA representatives had negotiated and signed (at least on a preliminary basis) production contracts with the farmers earlier this year, then sent the contracts to the home office in Richmond, Virginia for corporate approval. The farmers had no reason to think approval would not be forthcoming. But in February and March, many growers were informed that their contracts were not accepted at the agreed-upon amount and would only be re-offered at a reduced amount. A 10% to 12% reduction from the original volume was reported by many. Some growers suffered even greater cuts, and a few said that their opportunity to contract with PM USA was withdrawn altogether. PM USA had not confirmed these reports as this report was written. Whatever the company did, it seemed almost certain to have been triggered by the big increase in the federal excise tax on tobacco products generated by the SCHIP legislation passed late in January. A retired economist with long experience in the leaf business suggested to Tobacco International that the cause of the cutbacks may have been SCHIP-related inventory adjustment. "PM USA may have elected to take all of the expected 'hit' from SCHIP this season," he said. "US manufactures [typically] hold three-year's inventory. If they were previously projecting flat or growing sales, SCHIP reductions of 5% to 8% mean that not only do they need to reduce purchases this season - they have also bought 5% to 8% too much last year and the year before." In the glory days of US leaf, that might have been considered a manageable problem. But now the expense of holding excess inventory is too expensive, he said. "Hence, the cuts of 10% to 12% - or even more - this year. It will be interesting to see what other manufacturers do in this regard. I would expect after the large SCHIP tax increase, legal cigarette consumption will continue its long-term trend decline of at least 2% to 3% per year." On March 18, the president of the Tobacco Growers Association of North Carolina wrote to all manufactures saying that the contract changes were "the equivalent of yanking the rug out from under [the farmers]." "Widespread withdrawal of contracts in early March will likely result in causing extreme and unnecessary financial hardship on hundreds of tobacco farmers," wrote Mel Ray of Whiteville, North Carolina. "There are already too many pressures working to bring an end to the volume of tobacco growers without our tobacco company's contribution to the attrition." Enditem