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February, 2008

Renegade-Auction

American Tobacco Company:
Working for Sustainable Tobacco Crops Worldwide

By Heneage Mitchell

In his office in Henley-upon-Thames in southern England, Associated Tobacco Company’s Ian Bolwell met with TI writer Heneage Mitchell to discuss the challenges and issues that cigarette manufacturers, tobacco farmers, and tobacco dealers face and to share some insight into his company and its role in sustaining and developing socially responsible tobacco production around the globe.


The global tobacco supply chain is, in the opinion of Ian Bolwell, in need of a bit of an overhaul. Problems such as child labor, poverty eradication, creating fair and sustainable profits for farmers and other social and environmental concerns are some of the key issues facing the industry at the moment. Solutions to these issues are likely to differ for each producing and consuming nation, but there are several core elements that Bolwell identified.

“Third-world currencies are gaining strength against the once-almighty US dollar, and the comfortable annual 10% devaluation we once took for granted is pretty much over now,” said Bolwell. “We are seeing the quality of tobacco improving overall year-on-year but without the price increase one would expect to see. For example, in Brazil over the last three years we have seen a revaluation of around 38–39%, but customers have been unable to keep pace with such rapid economic changes.”

In large part, the situation is compounded by the ever-shrinking number of end buyers for tobacco, but in the main, the large multi-national companies are unwilling to pay what dealers and farmers believe to be a fair price for their crops. This is resulting in what Bolwell refers to as “dealer demise,” a situation where incomes from an ever reducing customer base are flat-lined and the weakness of the dollar compounds the hurt even more.

“The net result of all of this is the farmer eventually cannot sustain quality growth or in ever-increasing cases, growth at all.”

In the past few years, the growing culture of corporate and social responsibility espoused by cigarette manufacturers has and will continue to trickle all the way down throughout the entire tobacco supply chain. Grading practices will come under ever-more scrutiny, and cheats will be penalized. Tobacco dealers will continue to have to supply written assurances to manufacturers that no child labor was involved in the production of the tobacco they are selling and that pesticide levels have been checked throughout and found acceptable. Afforestation projects, health education, and social outreach programs will need to be implemented, not only in Brazil as it is now, but worldwide, and finally manufacturers are increasingly looking for fully-traceable tobacco for their inventories. This all comes at cost, but in the recent past, manufacturers have found it difficult to meet these costs alongside already spoken off economic factors.

All of these present challenges for tobacco suppliers and traders, but the core issue is that the farmer is being hit the hardest, and few of the measures outlined above actually benefit farmers in any meaningful way.

“Farmers are at the very bottom of the heap,” said Bolwell, “and their needs, which can only realistically be resolved though achieving a better price for their crop, are not being met. Farmer suicides over debt are increasing in countries such as India and Brazil and dealers who are facing tough choices and diminishing returns in their own right are unable to do anything about it.”

In simple terms, the picture looks like this—farmers: in debt; dealers: in debt; manufacturers: very profitable.

  “Clearly this is unfair and unsustainable,” said Bolwell. “Manufacturers need to look at this situation carefully. While there is a lot of good work being done at many levels of corporate and social responsibility, these efforts become pointless if the very farmers we are supposedly trying to protect with social responsibility programs are bankrupted anyway. This will not go down well with anyone.”

The situation is delicate and all parties are anxious to safeguard their respective positions. “The cost of inputs continues to rise, but the dollar is losing value,” said Bolwell. “It used to be that local currencies would dip with the dollar and everything would even out internationally, but we cannot play that game anymore.”

Manufacturers are increasingly finding their backs up against the wall when dealing with tax increases, anti-smoking legislation, and mounting litigation against them.

“But there must be awareness that the other stakeholders, the farmers and leaf dealers, also require and deserve a fair return somewhere along the line.”

Group aspect
ATC was born in 1997 by a core team of former Intabex executives. The company has focused heavily on Brazil since its inception. (Three of its shareholders are Brazilian-based, two are UK residents.) However, solid and sustained growth in India, China, and Africa is now providing ATC’s customers with a well balanced source of supply from some of the top tobacco production regions globally.

The company initially set up shop in the UK with plans to open offices alongside Brazil in other markets around the world to formulate a “group aspect” thus allowing the new group to grow its customer base as quickly as possible.

The company invested early and heavily in equipment and machinery in Brazil. It also invested in quality control and factory grading and certain processing equipment in China and India.

In 2002, ATC opened a 40,000 tons per annum factory processing flue-cured and burley tobacco to be sourced from its own contracted farmers.

  From the outset, Asian customers proved to be partial to ATC’s offerings. “Southeast Asian customers were willing to give ATC a chance,” said Bolwell. “And ATC has delivered product that is highly suitable and of good quality. As a company, we had a wealth of collective experience operating in Asia, and this opened many doors for us. They remain open because of a close adherence on our part to quality and price requirements.”

ATC operates a sales office based in Singapore, which operates solely for the South East Asian sector.

Well-established European markets presented a greater challenge to ATC: it had, of course, entered the arena late, but its growing reputation as a reliable and consistent supplier quickly began to bear fruit.

The marketing efforts were helped greatly by what Bolwell calls a group of “solid sales people” that comprises an ATC marketing team backed up by good production and operations management.

“ATC staffers initially mostly come from strong Intabex or similar character type backgrounds,” Bolwell pointed out. “Experience; solid ‘old tobacco’ values; ‘what you see is what you get’ types who have worked hard to establish a good reputation, and worked just as hard to establish repeat business—an important indicator of success.”

The company follows a policy of constant upgrading, according to Bolwell. “We push employees through and up so they are not static—we employ young, mobile management teams under experienced senior executive guidance. Our operations in China, India, Indonesia, central Africa, and Brazil are all managed by up and coming younger people.”

Cross-sections
ATC has chosen the regimens and areas it is involved in very carefully. It seeks a good cross-section of enduring quality crops that have every likelihood of maintaining their respective positions in the world market in terms of both sustainability in quantity and quality.

“Brazil accounts for about 45% of our groups turn-over,” said Bolwell. “This years crop yield is perhaps decreasing slightly, probably down 8—10% for both flue cured and burley but the quality of the 2007–08 crop appears to be above average and nicely balanced in terms of chemistry and smoke.

In 2007 the problem in Brazil was that there were zero increases for the farmer and any increases given to the dealer were lost in the revaluation of the real to the US dollar. One might have expected better returns for a crop which produced a high level of quality. The 2007–08 crop also has produced what looks like a very similar good quality crop but the economic circumstances which prevail at this time are unchanged to 2007. A very weak dollar, a strong Brazilian real and a farmer who is insistent that he receives a good return for a good product.

Important year
2008 is an important year for the Brazilian Tobacco industry, Bolwell feels “The Brazilian farmer was not happy with 2007 prices but his feelings will not be felt with reduction this year. It always takes 2 seasons for the Brazilian farmer to show his feelings on viability of tobacco growth. This year we are down 8–10%, I hate to think what 2009 could be if we don’t get off to a good start this year.”

Although Brazil remains the cornerstone of the company; its other markets are varied and growing. “China, India, Indonesia, and central Africa are our main core suppliers,” said Bolwell. “We intend to increase our presence in Burley crops such as Malawi and Zambia to enhance our already strong regional sales.”

In China, ATC have tended to concentrate in the southern regions of Yunnan, Guizhau, and Szechuan, which have provided a large percentage of ATC’s exports from China. ATC China is now looking into a greater cross section of Chinese Provincial growth and has been forced to increase staffing levels in China to cover this increased off-take.

“Increased requirement from local and large external manufacturers produced a shortage as the 2006–07 season progressed,” noted Bolwell. “But major external manufacturer’s requirements turned out to be less than envisaged and so more tobacco became available for export—that didn’t really help ATC’s position in the market that much but as a consequence ATC are now well positioned in terms of supply from 2008 going forward.”

The company’s Indonesian volumes are not large, and are mostly sourced from the Lombok FCV crop. Madura V.O, Jatim V.O, and Lombok FCV comprise the principle inventory.

“We work with a partner company, PT Ometraco, in Indonesia, a local well renowned and experienced Tobacco trading company that has been in the business for the past 40 years,” said Bolwell. “They supply, we buy. We buy steadily increasing volumes of FCV and a good cross section of Indonesian dark-fired tobacco, a crop that sees fluctuating volumes and which we endeavoring to increase in crop size with varying degrees of success.”

Tobacco framework
India “has been good to ATC where we have established a good base of supply and operations and are very much part of the tobacco frame work, despite the rising prices we have to pay,” said Bolwell.

“As with the Indian leaf traders, we are selling more but earning less: it is a low-profit, high turn-over situation,” he said.

In the early 1980s, Bolwell remembered, the market was highly equitable, and customers dealt with their preferred dealers when buying filler and semi-flavored tobacco. These days, manufacturers prefer to deal with the market thereby using a highly competitive element to keep prices very sharp.

“We deal with two supply companies in India that buy from the auction floors on our behalf,” said Bolwell. “They contract to buy only what is required, and the leaf is then processed through one of three factories. This cost-saving system has proven to be a winning strategy for us.”

Central Africa presents a different model again. Large-scale businessmen farmers in Zambia push hard for higher prices and expect to get fair return. Whereas Malawi tobaccos are bought across the auction floors giving both farmer and dealer the swings and round abouts of the auction system and finally in Zimbabwe were we see the private contract growing system coupled with the Auction system. All three regions closely linked with such differing buying and operational systems make for some interesting issues to be overcome by ATC’s on the ground resident management and staff.

“Zambia is a very interesting region for us,” says Bolwell, “The tobacco itself is as close to a Zimbabwe style as one can get. Good flavor and filler plus type tobacco” The crop however has started to stagnate with an unfortunate drop in production in 2007 down to 16,000 tons and about the same size for 2008 expected. This stagnation in the crop is due entirely the cost of growing tobacco against the diminishing returns.

Core elements
Bringing technology to the field is a core element of ATC’s strategy. “We work with farmers where possible,” confirmed Bolwell. “In Brazil, we work with close to 10,000 contracted farmers, supplying seed, fertilizer, agro-chemicals, and so on. This approach allows us to maintain a great deal of control over the final product.”

One small aspect that shows the kind of level of involvement is the policy on agro-chemical containers or containers of various inputs used by our farmers.

“We remove every container after use,” said Bolwell. “This ensures that the farmer actually used it on the tobacco crop, and also that it is not used as for water storage once the contents have been applied.”

This also highlights a further commitment of ATC, that of maintaining an environmentally- and socially-responsible approach to its work. It has, as another example, established a waste-water treatment utility at its Santa Cruz facility.

“We continuously monitor and improve our environmental footprint,” said Bolwell.

Traceability, the new buzz-word in tobacco, is taken very seriously by ATC. “We barcode every bale that comes through the door,” said Bolwell. “We know, down to a finite degree, where that tobacco is in the factory and where it came from.

Grading is another core competence of ATC on a global basis. “Grading is all part and parcel of making a successful company, said Bolwell. “We practice a bale-by-bale grading policy for all tobacco, and take this down to bundle grading for high-end tobacco. It is a group policy to ensure all tobacco packed has properly graded tobaccos in the blend.”

The company’s processing plants are upgraded continuously, according to Bolwell. “The Brazil facility in particular is upgraded annually, quality control, and foreign material technologies being an ongoing priority.”

In an age where there are essentially two major and three smaller global tobacco dealers, ATC is confident that it will continue to grow on its successes and that its vision and corporate and social practices will carry it through the troubled waters of today’s markets into a profitable and sustainable future.

“You have to be very competitive,” concluded Bolwell, “and you have to come up with a quality product.”

ATC has ensured that all the right pieces are in place to be able to accomplish both of these goals.


Tobacco International - February, 2008

BMJ


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