As the final phase of the European Union's (EU) tobacco sector reform gets set to take effect, indications are that Italy is better prepared than it was for the earlier phases.
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The EU authorised the reforms to its Common Agricultural Policy (CAP) in 2004, and when the changes it created for tobacco growers went into effect, starting in 2006, they sent ripples through the Italian industry that lasted a long time. The region of Apulia, for example, which had been the fourth-leading producer of tobacco among Italian regions, stopped producing the crop completely, after 100 per cent of its subsidies were decoupled (meaning the subsidies were no longer tied to output, an incentive for producers to stop growing tobacco all together). In the other nine tobacco-producing regions, 40 per cent of the subsidies were decoupled, eroding production levels in those regions to the extent that Italy, Europe's largest tobacco-producing country, slipped to seventh place among the world's producers, from fifth place previously.The next step will further decouple subsidies starting in 2010, leaving only 20 per cent of the total of EUR 170 million (USD 250 million) actually linked to production levels. But the industry says it is calm as the clock ticks toward the deadline. What happened When reforms were first put into motion, most Italian efforts in the sector sought to push the 2010 deadline back. Italian newspaper stories on the industry from 2007 and 2008 all focused on Italy's fruitless diplomatic efforts to have the final phase delayed until 2013 or 2014, in order to give the industry more time to prepare. The European Commission's competition and agriculture directorate generals refused to budge, and the deadline remained unchanged."Eventually, the powers that be stopped worrying about postponing the changes and started focusing on adapting to them," one industry player, who asked not to be indentified, said in an interview.Calls for a delay in full implementation of the reforms have not ceased completely, but even if a delay is not granted (and EU officials maintain an extension is unlikely) producers now say the Italian tobacco leaf industry is ready."I think that even after 2010, production levels will remain about the same," Carlo Sacchetto, director of the Italian Tobacco Producers' Association (APTI), told Tobacco Journal International.Sacchetto pointed to several trends to prove his point, noting that, following a lull in spending in the wake of the earlier reforms, tobacco farmers were again investing in new equipment, for example. He also said that with many marginal producers eliminated by the previous sets of reforms, the industry was focusing more on quality than before - a shift he said that resonated through the market."The quality here is higher than ever, and I think that the fact that proves it is that all of Italy's production is sold every year," Sacchetto said.That is a point echoed by Denis Pantini, editor of the annual report on the state of Italian tobacco, produced by Nomisma, an Italian economic research consultancy. Pantini told Tobacco Journal International that after production slipped in 2006 and 2007, it reach a plateau in 2008 and will actually rise in 2009, for the first time since 2005. Estimates are that production will reach 98 million kg in 2009, down from 121 million at its peak but much stronger than 92 million just two years ago. Pantini declined to guess about how the final phase of decoupling will affect production in 2010, but he said he was not worried about tobacco growers."The industry will be fine," he predicted. "The emphasis on quality is definitely an important factor. There are parts of Tuscany and Veneto that produce some of the best tobacco in the world, and tobacco of that quality will always find a market." He added that demand for such high quality tobacco would be bolstered by the fact that leaf production is falling elsewhere "in most parts of the world", creating an opportunity for Italian producers, if they maintain quality and output.
Italy remains important market
While the European reforms were the biggest change in the Italian tobacco industry in recent years, a close second is probably the 2003 acquisition by British American Tobacco (BAT) of Ente Tabacchi Italiani (ETI), the former Italian state tobacco monopoly. The retail sector remains dominated by Philip Morris, which continues to control around half the domestic market, but the change immediately made BAT a player, surging from around five per cent of the market to controlling a quarter. The change meant that three private players - Philip Morris, BAT, and Japan Tobacco (JTI), which also owns around a quarter of the market - now dominate the sector. Massimiliano di Domenico, BAT's director of communications and of corporate responsibility, said the EUR 2.3 billion (USD 3.4 billion) acquisition has had its challenges: "You'd expect that coming from such different corporate cultures," di Domenico said, but overall, it has been a success.He said that in the five years since the acquisition, BAT had solidified its market position in a consolidating Italian market, improved the quality bought from Italian growers (he said BAT bought 9,000 tonnes of Italian tobacco in 2008), and was optimistic about the future.Just as the growers see tobacco production stabilising, di Domenico sees the same thing in terms of consumption. A ban on indoor smoking in Italy, which was introduced in 2005, caused an immediate overall market contraction of six per cent, but it grew by two per cent the following year and seems to have stabilised, with sales of around 92 billion cigarettes a year, down only slightly from 100 billion five years earlier, before the ban. He said BAT was proud that it had managed to digest ETI without laying off a single one of the former state company's 3,500 workers."There's no doubt that Italy remains one of the essential cigarette markets in Europe," di Domenico said in an interview. "We feel good about our place in the market."The long-term future of the tobacco industry in Italy remains somewhat uncertain. Health advocates in Brussels continue to lobby for a complete elimination of the European tobacco subsidy, and the creation of other disincentives aimed at discouraging smoking. Industry advocates point to the value of the jobs the industry creates and the long tradition of tobacco production on the boot-shaped peninsula. Even the most far-sighted analysts shy away from predicting anything more than five years into the future.But industry players say Italy's newfound emphasis on higher quality tobacco and the fact that at least 80 per cent of its production travels beyond the country's borders should help insulate it from internal Italian changes in law or cultural preferences."I think the industry has reason to be cautiously optimistic," Nomisma's Pantini said. "The worst has probably passed and, for better or worse, the industry probably holds the future in its own hands." Enditem
