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March, 2007

Renegade-Auction

In India, Cigarettes on the Rise

By Heneage Mitchell

Despite higher costs, more and more Indians are turning to white sticks, and the demand is making for lively tobacco auctions.

More Indians are smoking cigarettes. Cigarette production has grown by up to 6% as the bidi segment remains static. Indian tobacco growers have seen their crop snapped up at higher prices on auction floors across tobacco-growing regions of Andhra Pradesh (AP) and Karnataka in a frenzy of bidding that in some cases has reportedly turned into fist-fighting free-for-alls.

“There is a definite increase in domestic cigarette use,” according to Dr. J. Suresh Babu, IAS, chairman of the Indian Tobacco Board (ITB). “As the population keeps growing, and as Indians become more affluent, cigarettes are being smoked by more people.”

All this despite a much higher tax bracket than other domestic tobacco products enjoy. Currently, taxes on white stick sales, which account for around 15% of total sales of tobacco products, account for more than 85% of the total taxes levied on tobacco products, a situation that remains contentious within the white stick industry.

Equal taxation on bidis and other tobacco segments is what cigarette manufacturers believe is the best way to establish a level playing field.

With hundreds of thousands of Indian workers involved in bidi production in rural areas, many of them women supporting families, nobody expects the government is going to interfere dramatically with the bidi industry. At the same time, bidi exports have declined in the face of legislation and debate in North America and elsewhere.

Mixed success
Given the significant increase in the number of white stick smokers over the last year or so, clearly the government’s anti-smoking strategy has been a mixed success at best.

India has had smoking bans in place for three years now, and a draft of legislation has been passed to further limit cigarette consumption. By February 2007, all cigarettes sold in India will have to carry graphic health warnings (GHW). However, point-of-sale advertising is still permitted, although exactly where a point-of-sale can and cannot be located remains confusing if not contentious.

The law states that no cigarettes may be sold within 100 yards of schools and colleges: India is a country that is education-crazy, and a school or learning institution of some sort or another can be found in virtually every street in every city and town. Critics of the law point out that if it were (or even could be) enforced to the letter, it would be effectively illegal to sell a cigarette practically anywhere within any city, town, or village in India.

The public smoking bans, on the other hand, have met with more compliance in some instances than was expected in some quarters. Smoking on India’s crowded and seemingly chaotic railways has virtually disappeared.

Crop Results
Due to climatic conditions affecting the crop and causing some areas to achieve a lower-than-usual yield, production was a little lower in the 2005–06 season over the previous year. AP produced 145 mn kg (compared to 153 mn kg in 2004–05) and Karnataka 83 mn kg (against 90 mn kg in 2004–05).

Overall, the crop came in a better quality, and fetched around US$1 per kg for filler and semi-flavored varieties.

Tobacco production in India is essentially planned in advance and farmers are given “authorized” crop totals (expressed in kg) to grow. The excess, if any, is termed “unauthorized.” Similarly, curing barns are required to have a license to operate. In the past, many disputes arose over both “unauthorized” tobacco and “illegal” curing barns, with all sides in the equation crying foul. But through a process of regularization, both of these perennial issues appear to have been resolved.

“All tobacco now produced is authorized,” said Babu. “We have essentially divided the crop each farmer produces into authorized and excess tobacco, based on what the farmer was authorized to grow at the start of the season. A farmer can produce excess and still be able to sell it, although he will receive a lower price for it overall due to levy of penalties on excess tobacco crop produced over and above the authorized crop to the farmer.”

Farmers incur a penalty on excess crop amounting to a flat fee of Rs.2/- (US0.05) per kg and 15% of the sale price.

“The penalty is qualitative and quantitative,” said Babu. “With regards to the curing-barn issues, there are now very few of these left unauthorized. Almost all tobacco production has now been regularized, and we have a much more stable production scenario, all in all a very ideal situation. Farmers were very happy in 2006.

“The Tobacco Board is trying to improve grading awareness and procedures through a large-scale multimedia campaign to emphasize the issue among farmers. It is also supplying subsidized tarpaulins to farmers to use for their grading to help keep foreign matter out,” said Babu.

ITB works with the Central Tobacco Research Institute (CTRI) to keep abreast of technological innovations and to sustain productivity and improve the quality of Indian tobacco

“The CTRI is the backbone of Indian tobacco research, introducing and developing new varieties, new techniques, and new technologies,” said Babu.

CTRI recently released five new variants of seeds to ensure the quality that appeals to buyers.

India’s agricultural heritage is ancient and, by today’s standards, highly efficient as well as being primarily organic. Chemical fertilizers and pesticides are not regarded as ideal crop inputs by most farmers, and ITB works with the tobacco growers to ensure this heritage is maintained.

“ITB engages in various projects, such as subsidizing farmers to develop vermi-compost pits to ensure adequate supplies of natural fertilizers, and bio-friendly natural pesticides developed from the neem plant,” said Babu.

ITB also works with the private sector, most notably with ITC, India’s largest tobacco manufacturer, in projects to develop and implement various technological innovations.

ITC carries out a number of projects itself, such as a flavorful tobacco program it recently initiated in North Karnataka. ITC is currently studying the possibilities of advancing the planting season by a month or so in Northern Light Soils (NLS), a process that potentially increases the quality of the crop but poses a higher risk of loss due to variable climatic conditions (such as late storms). ITB is conducting similar extension programs in Southern Light Soils (SLS).

The Auction Floor
Contract farming is not allowed in India. All tobacco produced has to be auctioned, and it is ITC that takes the lion’s share of the crop every year.

But with a slightly smaller crop and an increase in domestic demand, the 2006 auctions got off to a flying start as buyers — many of whom had waited too long the previous year hoping for a drop in price that never arrived — scrambled to fulfill their requirements.

“The demand was so high that they were fighting for bales on the auction floors,” recalled Babu. “In the 22 years, the Tobacco Board has been around, we have never seen such an auction season!”

Buying agents, who in past years have seen their fortunes diminish, were resurgent this season as some main buyers, anxious to meet their demands, were constrained to employ the agents to contract their business for them.

“Agents typically buy mixed grades, re-grade and re-sell,” said Babu. “This was certainly a good year for agents as higher prices and increased demand kept them busy.”

As has been the case for some years now, all the tobacco that was brought to auction was sold, but this year there was slightly less tobacco and it sold at higher prices. But are these prices sustainable? Domestic demand seems likely to remain dynamic, and analysts believe tobacco prices may well rise, or should at least remain at this level for some time.

“If the prices stabilize at 2006 rates, that would be good,” said Babu.

While India’s auction floors can clearly be tumultuous, the concept of an electronic auction (as have been initiated in India’s tea and coffee industries) is not possible.

India’s tobacco is produced by small-scale farming, which means there are typically only a few bales per farmer, and this makes it very hard to grade to the level that would be required effectively for an electronic auction, Babu said. “Essentially, a trader is required to be physically present to inspect every bale purchased. An electronic auction will not work for tobacco.”

In January 2007, ITB led a delegation of farmers from AP and Karnataka to Brazil and Zimbabwe to study the Brazilian tobacco industry.

“In particular, we will be inspecting how tobacco is being raised and the technologies being employed,” said Babu prior to the trip, “and we hope to gain a better appreciation of the grading process as well as seeing how the Brazilians and Zimbabwe conduct their marketing.”

Meanwhile, tobacco exporters had another year of higher sales but lower incomes.

“It seem overseas buyers believe that if they get the same quality, they should pay the same price as previous years,” said Babu. “Consequently, exporters saw the gap between auction floor and export prices further narrowing, although there has been a sustained increase in exports over the last three years.”

In fact, exports in the 2006–07 season have recorded a 35% year-on-year increase in the first six months up to September 2006.

Indian tobacco is widely regarded by international buyers for its low nitrosamines and high quality. Even in years where there is a lot of excess crop, exporters boast that they have no difficulty selling everything that is grown. This issue is the price it sells at.

“Overall, the industry is doing well,” said Babu. “Of course, we hope this will be sustained over the next several years. The crop is being cultivated to the requirements of international buyers, and the quality is continuing to improve. But we must always remember that the lives of the farmers are dependent on growing tobacco, and it is our duty to see that their efforts are sustained and rewarded.

“One kilogram of tobacco makes about 1,400 sticks. A packet of 10 top-quality sticks, a common denomination in India, is priced at around Rs.34 (US$0.80). To put things in perspective, the farmer earns the equivalent of one packet of Gold Flake (India’s premium brand) for every one kilogram that is sold. In other words, the farmer spends six months providing effort and input to raise his crop and his return is 1/140th of the finished product,” said Babu. “The farmer has to make a living, too. Without him, there is no tobacco industry.”


Tobacco International - March, 2007

BMJ


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