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April, 2009

US brands deal with new market realities
Winston-Salem - R.J. Reynolds Tobacco Co. raised the list price on its cigarette brands in the range of 41 cents to 78 cents a pack for wholesale customers in mid-March. Camel, Kool, Winston, and Salem will go up 44 cents a pack, and Pall Mall, Doral, and Capri will go up 41 cents. Its other brands will go up 71 cents to 78 cents a pack, depending on the brand.

Analysts projected the sharp price increases before Congress passed the 62-cent increase in the federal excise tax to pay for expansion of the State Children's Health Insurance Program. That tax increase took effect April 1.

Reynolds is not the only manufacturer raising prices. The Altria Group Inc. recently announced it would be increasing the list price for certain brands including Marlboro, Virginia Slims, and Parliament by $7.10 a carton, and the list price for other brands that include Benson & Hedges, Chesterfield, and Merit by $8.07 a carton. However, they decided to lower the prices on smokeless goods, a venue they have been vigorously persuing. Altria has plans to cut prices for Copenhagen and Skoal the smokeless tobacco brands it acquired through its purchase of UST Inc. by 62 cents per tin. The lower prices could boost volumes of Altri’s smokeless brands and make them more attractive to consumers. Altria’s move to lower smokeless prices could mean fresh competition for Reynolds American Inc. (RAI), which sells smokeless tobacco products like popular discount brand Grizzly through its Conwood unit.

Lorillard Tobacco Co. is also increasing its list price by $7.10 a carton, according to Pat Shehan, the owner of Tarheel Tobacco in Winston-Salem.

Bulgaria's Tobacco Monopoly hikes prices over market war
Sofia - Bulgaria's tobacco monopoly Bulgartabac plans to increasing cigarette prices by an average of 27%. The company’s CEO Ivan Bilarev pointed out that the new prices were not even as high as the current market situation dictated, but added Bulgartabac would try to maintain them as long as possible. The CEO explained that many competitors have listed one price for cigarettes, but selling at different ones, thus stirring a market war. Bulgartabac's share of the country's cigarette market is about 60%.

Growers to sue manufacturers?
Ontario - Early indicators are there will be high participation in a class action lawsuit against tobacco manufacturers.

Following a recent meeting with producers who grew tobacco between 1985 and 1996, a Windsor law firm specializing in class action lawsuits announced a suit against tobacco manufacturers Imperial Tobacco Canada and Rothmans Benson and Hedges was being investigated. The legal action is in connection with a July 31, 2008 guilty plea by the companies for aiding persons to sell or be in possession of tobacco products manufactured in Canada that were not packaged and stamped in conformity with the Excise Act.

As a result, it is alleged that growers received less for tobacco sold in the specified time frame due to the companies paying the lower export price for tobacco that was allegedly sold in Canada. Werner Keller of Sutts Strosberg LLP estimated the difference to be 50c to $1 per pound.

As of print date, there were already more than 750 contact forms filled out and turned into the tobacco board office. Such forms are not necessary to participate in the class action suit, but do provide updated contact information.

It is not mandatory that producers take part in the class action suit and opting out is an option, one lawyer connected with the suit mentioned, but nobody has opted out yet. It is not known if the lawsuit would be open to sharegrowers and those who grew with rented quota.

Imperial Tobacco to cut 780 jobs at Spanish Altadis unit
Madrid - Imperial Tobacco Group PLC's Franco-Spanish unit Altadis recently reported will cut 780 jobs in Spain. In a press release, Altadis said the company would negotiate early retirement and other settlements with the employees affected by the cutbacks, that will take effect in June 2010. Imperial Tobacco said last year the Altadis takeover would bring roughly 2,440 job cuts throughout the company. The job cuts come as Altadis closes its factory in Alicante, in Southeastern Spain, to concentrate production plants in the Northern Spanish city of Logrono and in the Cantabria region. The company said it would add 108 new jobs at the Logrono plant and 28 jobs at the Cantabria plant.

Tanzania Cigarette Co. says 2008 profit rose 27%
Dodoma - Tanzania Cigarette Co., the country's largest cigarette maker, said profit rose 27% last year as sales increased.

The company posted net income of 31.1 bn Tanzanian shillings ($23.8 mn) for the year to Dec. 31, compared with 24.4 bn shillings a year earlier, it said in a statement published in the Dar es Salaam-based Citizen today.

JTI owns 75% of Tanzania Cigarette Co. The remaining shares are traded on the Dar es Salaam Stock Exchange.

United States
Inventory fears spark cutback in contracts
Richmond - Philip Morris USA appeared to have sparked a wave of resentment from flue-cured growers in February over what the farmers considered bad faith in the company’s leaf-contracting program.

The bone of contention according to a number of farmers was that PM USA representatives had negotiated and signed (at least on a preliminary basis) production contracts with the farmers earlier this year, then sent the contracts to the home office in Richmond, Virginia for corporate approval.

The farmers had no reason to think approval would not be forthcoming. But in February and March, many growers were informed that their contracts were not accepted at the agreed-upon amount and would only be re-offered at a reduced amount.

A 10% to 12% reduction from the original volume was reported by many. Some growers suffered even greater cuts, and a few said that their opportunity to contract with PM USA was withdrawn altogether.

PM USA had not confirmed these reports as this report was written.

Whatever the company did, it seemed almost certain to have been triggered by the big increase in the federal excise tax on tobacco products generated by the SCHIP legislation passed late in January.

A retired economist with long experience in the leaf business suggested to Tobacco International that the cause of the cutbacks may have been SCHIP-related inventory adjustment.

“PM USA may have elected to take all of the expected ‘hit’ from SCHIP this season,” he said. “US manufactures [typically] hold three-year's inventory. If they were previously projecting flat or growing sales, SCHIP reductions of 5% to 8% mean that not only do they need to reduce purchases this season - they have also bought 5% to 8% too much last year and the year before.”

In the glory days of US leaf, that might have been considered a manageable problem. But now the expense of holding excess inventory is too expensive, he said.

“Hence, the cuts of 10% to 12% - or even more - this year. It will be interesting to see what other manufacturers do in this regard. I would expect after the large SCHIP tax increase, legal cigarette consumption will continue its long–term trend decline of at least 2% to 3% per year.”

On March 18, the president of the Tobacco Growers Association of North Carolina wrote to all manufactures saying that the contract changes were “the equivalent of yanking the rug out from under [the farmers].”

“Widespread withdrawal of contracts in early March will likely result in causing extreme and unnecessary financial hardship on hundreds of tobacco farmers,” wrote Mel Ray of Whiteville, North Carolina. “There are already too many pressures working to bring an end to the volume of tobacco growers without our tobacco company’s contribution to the attrition.” (For more information on PM USA see Altria profile on page 16.) - Bickers

Tobacco International - April, 2009

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