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April, 2007

Volume Down, Quality Up

by Guido Jungbluth

High-quality tobacco yields in southern Brazil have some celebrating, but growers still face challenges.

Quality is not the only reason for celebration at the current tobacco crop in southern Brazil. Yields are up, too. Sindifumo’s projection is for a 715,000 ton crop, harvested from 354,000 hectares. In 2005-06, it was 774,767 tons, from 416,000 hectares, with yields of 1,861 kg per hectare, while for the current season, the expectation is for 2,020 kg per hectare.

Besides the favorable weather conditions, the reduction in planted area also contributed toward the higher yields and excellent quality. According to Marcílio Laurindo Drescher, president of the Tobacco Growers’ Association (Afubra), by reducing the planted area the families had more time to devote to their crops, depending less on hired labor, thus keeping the desired quality standards.

On the other hand, Iro Schünke, the president of Sindifumo, points out that the farmers conducted their fields in accordance with appropriate cultural practices, resulting into a crop of the desired color, leaf structure, and alkaloid contents — just what the market requires.

Quality reappears
The main cash crop for approximately 200,000 families, tobacco went through difficult times over the past years. Unfavorable climatic conditions reduced yields and compromised quality, with direct impacts on earnings.

At the 2006-07 crop, the scenario changed. Although some areas experienced frost conditions right after transplanting and short periods of unusually high temperatures in December and January, in general, climatic conditions during the growing period were favorable for plant development, with well-distributed rainfall at normal historical levels, combined with warm temperatures. The result is bodied leaves with balanced alkaloid content, in line with the characteristics desired by the industry, superior in quality as compared to the previous seasons, when erratic weather conditions took a heavy toll on the crop. Although being an overall good quality crop, the improvement became more noticeable in the south, which suffered the most at the previous crop. In the highlands of Rio Grande do Sul, Santa Catarina, and South Parana, where tobacco is planted later, the same quality standards predominate.

The yields of 2.020 kg per hectare are expected to result in a 715,000 ton crop, ensuring the usual export volumes and higher revenue.

Growers’ concerns
The 2006-07 crop signals quality and yields superior to previous years, but what this is going to represent for the pockets of the growers and the coffers of the industry remains to be seen. In a meeting on January 30th, with farmer representative associations, the industry decided to maintain the green price table in effect since the 2005/06 crop. The decision took into consideration the current difficulties facing the industry, such as exchange rate, ICMS credits, stocks and the fact that farmer production costs have remained almost stable. The farmer representatives presented a proposal for a price increase of 15.8%.

According to the president of Afubra, M. L. Drescher, the production cost rose only 1.2% from the previous crop. It is a small variation if compared to other agricultural crops. But he insists that grower profits have been dwindling down and this fact should be taken into account as well. The increases given by the industry over the past years were always lower than expected, particularly last year when the representatives asked for 24% but the industry granted only 4%. In addition, with strict grading standards and an inferior quality crop, as was the case last year, the growers received the worst remuneration in recent years. In Afubra’s view, for the survival of both the growers and the dealers, tobacco farming should have a fair and dignified remuneration.

While the growers are fighting to recover the lucrativeness of tobacco farming, for the industry the question is how to overcome the hurdles that have been pressing down their results over the past years. The challenges include the unfavorable exchange rate and the retention of the tax credits by the government. This has made the companies stick to the same price table, with no changes for this year.

“Besides, the policy of the new government with regard to taxation and other money-saving initiatives is signaling more difficulties for the tobacco industry,” Iro Schünke pointed out. But in his view, there is not only bad news around, because this year, both growers and industries should financially benefit from the good quality and the higher yields. For the growers, these factors make a difference in income, while the industries will be able to please their international clients more than in recent years, Schünke observed.

Highly reputed and globally recognized
The tobacco leaves of the current crop, orange-colored and within the specifications of the international market — particularly with regard to balanced alkaloid contents — should again make a difference abroad. It is through quality that Brazil again should hit record sales this year, which were on a rising trend since the year 2000, and receded slightly only last year.

Of the total volume, 85% are destined for the international market, where around 100 countries acquire tobacco from Brazil. In 2006, the sector’s exports reached 560,000 tons, bringing in revenue of US$1.72 bn/FOB. With such a performance, tobacco ranks third on Brazil’s export agenda of primary agricultural products, coming only after soybean and coffee, and accounts for 1.5% of the country’s total foreign sales.

Last year’s shortfall was caused particularly by the poor quality of the leaf, along with a devalued dollar against the real. For the current crop, although smaller than last year, the industry can resort to leftover stocks besides the good quality leaf of this year’s crop, which are to push up exports again.

“Nevertheless, as the variables of last year’s economic scenario still hold, it is only quality that could bring competitiveness back to Brazil’s tobacco,” said Schünke. “The country is the biggest exporter of flavor, taste, and aroma leaf, and this makes a big difference in the international marketplace.”

Sector innovates and upgrades
The hurdles and not-so-good results faced by the tobacco sector in 2006 may have given rise to caution but did not curb the industry’s drive for process innovation and improvement. Investments at industry and field level have never stopped.

Eager to supply the market with a product of precise granulometry and recognized uniformity, Souza Cruz upgraded its threshing line. Hand stripping was expanded, and 500 new temporary job vacancies were created, which required an internal refurbishment, where the company excelled in space harmonization and humanization; R$1.5 mn were invested.

At field level, the Rural SOL Program has led the farmers to keep their farms clean, safe, and organized, with reflections on the quality of life and crop enhancement. A total of 240 training sessions were staged in the three southern states, involving 3,870 tobacco growers.

Souza Cruz also upgraded the field information system by replacing the notebooks used by the field staff with palmtops, an investment of R$500,000.

KBH&C Tabacos, based in Vera Cruz, made investments in processing machinery, and for the second year now has been using the four six-hour shifts, thus creating 200 new job positions. Meanwhile, Erni Dockhorn, former president of Meridional de Tabacos, a subsidiary of Alliance One and Transcontinental, has joined the board as vice-president of sales and operations.

Alliance One has raised its field staff to 330 farm technicians to assist the 49,000 growers spread across 600 municipalities in south Brazil. The goal is to produce quality leaf, free from any impurities, and all tobacco from the farmers is inspected at delivery.

CTA-Continental Tobaccos Alliance, based in Venâncio Aires, invested R$3.3 mn in the construction of a new 10,400-square-meter pavilion, and R$2 mn in the acquisition of machinery and equipment. Another R$8.4 mn is to be invested this year, split into constructions and industrial equipment.

Tabacos Marasca, also based in Venãncio Aires, has just installed a processing line for 12,500 kg per hour. The equipment started operating in early March this year.

Tobacco International - April, 2007

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