Home    Trade Shows    Advertising    Subscribe    Archives    Search    Tobacco Products International

April, 2008

Sell SMOKE Magazine!

Smaller Crop...
Bigger Quality!

By Guido Jungbluth

No matter the weather, Brazil’s crop maintains it’s high quality and continues to have potential for growth.

The initial predictions for the 2007–08 crop did not come true, at least as far as volume is concerned. Recurring hailstorms are responsible for the 5% lower crop size. Nonetheless, the production chain has plenty of reasons to celebrate, namely the excellent quality of this year’s leaf, with direct reflections on grower income, the domestic market and on exports.

Emerging New Contours
The tobacco produced in South Brazil, particularly in the state of Rio Grande do Sul, once more lives up to its high quality standards in the 2007–08 season. Had it not been for the frequent hailstorms that took a heavy toll on many fields and caused record losses, it would have been an ideal crop.

At the beginning, Sindifumo’s projections were pointing to 703,000 tons, to be harvested in the states of Rio Grande do Sul, Santa Catarina and Paraná, but these estimates will obviously not come true. The Tobacco Growers’ Association of Brazil (Afubra), in turn, admits that its initial estimation of 690,000 tons should be reduced to 645,000.

The smaller-than-expected volume of the current crop is not the only difference down the line. The introduction of a new grading table, reducing the number of grades from 48 to 41, is an innovation that marks the period. Grades XL3, CL3, BL3 and TL3 were excluded, while grades 2K and 3K were transformed into K, in accordance with the four stalk positions (X,C,B, and T), and the grades are XK, CK, BK or TK. The changes also include a new grade, known as N, for the leaf that does not fit into any standard grade. Of note is also the new price negotiation system suggested by the industry. For the first time on record, prices are negotiated by the grower representative organizations and the industry, on an individual basis, with each company. The new formula replaces the old table, which, by the way, was not updated at the previous crop. Iro Schünke, the President of Sindifumo, understands that even the prices agreed upon at assemblies, between growers and dealers, used to taken in reference only. In practice, some companies had been following their own price sheets, taking into consideration quality and grading criteria.

The 2006–07 crop endowed the national tobacco farming business with gains in yields, quality, and profitability, whilst expanding exports and bringing leftover stocks to a balance. The 2007–08, under the influence of an exchange rate unfavorable to foreign sales, made the planted area, and the production volumes, recede by 5%. Yields are also reckoned to remain below last year’s 2,099 kg/ha. With regard to quality, nevertheless, it is expected to match last year’s standards, which led Brazil to hit records in shipments abroad.

According to data released by Sindifumo, 334,000 hectares were planted in the three southern states, involving 182,000 families. Rio Grande do Sul, as usual, accounts for roughly 50% of the area, followed by Santa Catarina, with 33%, and Paraná, 17%.

It may be worth mentioning that the Vale do Rio Pardo region, to which Santa Cruz do Sul belongs, is home to the biggest tobacco producers in Brazil. Venâncio Aires, 30 km from Santa Cruz, is the leading municipality in the entire country, with 22,096 tons, grown by 5,075 producers. Canguçú comes second, followed by Santa Cruz, with 14,931 tons and 4,145 growers.

A Time for Caution
The climate was not entirely favorable during the season, particularly in terms of yield. The President of the Tobacco Growers’ Association (Afubra), Benício Werner, understands that average yields per hectare will not live up to the initial estimate. Hailstorms are to blame for this lower performance, especially in harvested volumes. “Our initial forecast was for a 689,500 ton crop, but we had to revise our figures, and now we believe in something around 645,000 tons. Quality, nonetheless, is excellent.”

This positive feature is meant to make a difference in the final results for the growers. However, Werner has it that a bigger crop would have been more than welcome. “The ideal remuneration results from a combination of quality and quantity. There is no question about the former, but in productivity we will not match last year’s crop, which is something to regret.”

With less tobacco from the fields, but in total compliance with the strict international standards, Werner believes in a remarkably good buying season. “Our producers can rest assured that, by virtue of the quality of the current crop, there will be tight demand for Brazil’s tobacco in the international scenario.” This has made the president warn the farmers to be cautious at their deliveries. “The farmers need to prize their tobacco for its quality. This year they are in a position to make more money from their crops than in previous seasons.”

Grower remuneration is obviously linked directly to the value tobacco catches at every different crop. The current season held peculiarities in store, like the price adjustment negotiated by each company with its integrated growers. After negotiation rounds, where the farmer representatives were demanding price readjustments of around 20%, while the companies were offering 5%, an agreement for a 7.6% rise was reached at individual meetings, held on 21st February, between representatives of the growers and tobacco company officials, on the premises of Afubra, in Santa Cruz do Sul.

Growers and companies signed a protocol, whereby other matters related to the integrated production system are addressed. This was the second negotiation round, following the January negotiations of the parties.

According to Werner, the Association is engaged in a recovery agenda for the integrated system, which has been through some turbulence. Any recovery of the system involves better remuneration and improved quality of life standards for the farmers, he concludes. Tobacco is present in 780 municipalities throughout the three southern states of Brazil, and its foundation lies in the Integrated Production System, now going for 90 years. Thanks to the system, the companies control the crop volumes to their needs, with the focus on client needs and requirements. “It is a consolidated operational system, which sets an example to other crops and other countries,” Iro Schünke comments. Advantages for the farmers include free technical assistance, financial support (the companies cosign farmer bank loans) and free transport from farm gate to processing facilities.

For four years in a row, producers and dealers had not reached consensus about the prices, and the seasons went by without the traditional protocol signed by the parties. This time, however, several factors induced Afubra and the rural federations in the three southern states of Brazil to reach an agreement with the dealers. One of these factors, says Werner, is the R$227.5 mn rise in gross farmer income in the current season. The other factors are related to the guarantee granted by the tobacco companies to make good on the grading criteria. “The companies are going to comply with the criteria in place since the early days of tobacco deliveries,” he stressed.

According to Werner, as the quality of the crop is very good, and the volume remains below initial expectations, the growers are now benefiting from “fair remuneration standards.”

A Billionaire Crop
Now that the price table has been defined, which, despite the individualized negotiations, holds for all the companies, a kilo of BO1, flue-cured Virginia, sells for R$6.25, raising the arroba to R$93.65. The TO2 grade now sells for R$5.02 per kilo. “It is not what the growers were in fact expecting, but these are viable values,” said the President of Afubra.

According to Afubra’s statistics department, if the expectations for the around 640,000 ton crop hold true, it will generate a gross income of R$3.2 bn for the growers in South Brazil.

The revival of the protocol, in Werner’s view, marks the beginning of a new era of mutual understanding between the industrial and production sectors. According to him, there is a need to reconstruct the relations, which had been through turbulent times since 2003. “We need to reevaluate the integrated system, now facing problems,” the official remarked. The problems are related to the production cost survey, the interference of the middlemen, high taxation and prices paid by cigarette manufacturers. To this end, meetings are to be held from next month onward.

Leaf Exports Reach 700,000 Tons and US$ 2.2 bn in South Brazil
Leaf exports hit an all-time record in 2007. According to official figures released by the Tobacco Industry Association (Sindifumo), the 2007 volume of leaf exports in the South was up 25% from the previous year, totaling 700,000 tons, resulting into revenues of US$ 2.2 bn (FOB). “Factors that are credited with this outstanding performance include the good quality of the 2007 crop, along with the sales of the leftover stocks from the previous year,” says Iro Schünke, President of Sindifumo. In 2006, exports of the sector reached 560,000 tons, with revenues of US$ 1.72 bn (FOB).

The figures, which push tobacco into a prominent position among Brazilian exports, went up 140% (in volume) over the past ten years, when the shipments reached 291,000 tons (1998) and revenue of US$ 960 mn. In the view of Mr. Schünke, the expressive growth rate stems from the quality and integrity of the leaf produced in Brazil, along with a guarantee of supply that relies on the Integrated Production System. “Thanks to these factors, Brazil consolidated its position as leading world exporter and second biggest producer,” the official remarked.

According to dealer sources, in 2007 tobacco from South Brazil was shipped to more than 100 countries. The European Union continues as the main market for Brazil’s tobacco, absorbing 45% of all sales, followed by the Far East (16%), Eastern Europe (14%), North America (13%), Africa and the Middle East (7%) and Latin America (5%).

Exchange Rate
Despite the record volume and revenue in 2007, the tobacco sector continues to suffer the ill effects from the exchange rate policy, which values the Brazilian currency highly against the dollar. In 2003, the industry was operating with a dollar at R$3.30, while in 2007 the average remained at R$2.02. “Compared to 2006, last year’s exports suffered losses of 9% due to the exchange rate gap, representing more than R$400 mn,” Iro Schünke explains. Since then, the dollar has suffered further devaluations.

Bracing for the Future
The challenging scenario faced by the tobacco industry in past years, brought about by the weak dollar versus the real, has made the companies act cautiously when it comes to new investments. However, the ever-increasing requirements of the clients and the need to keep Brazil competitive, has led the companies to destine resources for the improvement of their structures and operations.

Continental Tobaccos Alliance S/A (CTA Continental), in Venâncio Aires, spent R$6 mn in facilities and equipment, last year. Tabacos Marasca Ltda., also based in Venâncio Aires, invested more than R$10 mn in a 10-thousand-square-meter facility, and a new processing line. Brasfumo, located in the same town, invested in technical assistance in order to enhance the quality of tobacco.

Souza Cruz channeled R$150 mn into its New Research and Development Center (RDC), based in Cachoeirinha (RS), and another R$9.5 mn in the leaf production department for the acquisition of notebooks, new vehicles, processing lines, security, environmental protection and forklift renewal.

Tobacco Fields on the Decline, Shipments Abroad Not Affected
Several factors are to blame for the shrinking planted areas, over the past years. The major reasons seem to lie in the ratification of the Framework Convention on Tobacco Control, in 2005, rising production costs and smaller farmer income. A survey conducted by Afubra shows a reduction of 22.3% in area, compared to 2004.

So far, neither domestic nor foreign deliveries have been affected, but it sounds like a warning for possible problems in the long run. The record planted areas in 2004 and 2005 (see chart) coincide with the considerably smaller crop sizes in the United States and Zimbabwe. This international scenario induced many farmers to plant more, hoping to boost their income. Moreover, new families went for tobacco farming. “As time went by, market adjustments were effected. In the meantime, many newcomers started quitting tobacco farming,” says Benício Werner.

The Scenario

Crop Planted Area (in hectares)
2001–02 304,510
2002–03 353,810
2003–04 411,290
2004–05 439,220
2005–06 417,420
2006–07 360,910
2007–08 341,230

While these adjustments were entering into force, Brazil signed the Framework Convention Treaty, a fact that probably further affected the sector, inducing the farmers to start investing in other alternatives. “All these variables may have had an influence over the reductions in planted area. But the economic factor should not be overlooked, which is also decisive for the moment,” Werner concludes.

Frustrating Record
For the 2007–08 crop it was neither excessive precipitation nor drought conditions that made news. The season holds the record incidence of hailstorms ever witnessed Afubra, founded in 1955. According to their figures, the 43,400 hail incidences registered during the season represent a rise of 158% from the 2006–07 crop, when 16,840 growers suffered hail-induced losses. The phenomenon accounts for the decline in production volume from 690,000 to 640,000 tons.

Afubra’s Mutuality Department suggests that this negative record demonstrates the unpredictability of the phenomenon, knocking down the belief that a very cold winter, like the one in 2007, signals a season with few hailstorm incidences.

Tobacco International - April, 2008

Tobacco International is published by Lockwood Publications, Inc., 26 Broadway, Floor 9M, New York, NY 10004 U.S.A., Tel: (212) 391-2060. Fax: (1)(212) 827-0945. Printed in the U.S.A.. HTML production and Copyright © 2000 - 2008 by Keys Technologies and Tobacco International Magazine. All rights reserved.