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April, 2010

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Changing Times for Brazilian Tobacco Growers

By Guido Jungbluth

Farmers face climate-induced problems, but make up for a smaller volume with a higher quality.

During spring and summer, below the equatorial line, tobacco fields prevail throughout the landscapes of 730 municipalities in South Brazil. The raw material for cigarettes is a major economic activity in the states of Rio Grande do Sul, Santa Catarina, and Paraná.

The 2009 - 10 season comes to a close as one of the most atypical crops in many years. The bad weather conditions required hard work from the farmers in order to achieve good results, which, however, did not live up to expectations. Nevertheless, the quality is much in line with the requirements of international buyers, namely, lighter in weight and lower nicotine levels.

The 2009 - 10 crop, whose harvest came to a close in February, was a real challenge for the growers. It got off to a bad start and did not show great signs of recovery until the end of harvest. From seedbed preparation to harvesting, weather conditions caused jitters and added to the woes of the families whose main source of income is derived from tobacco. The erratic weather conditions made the crop fall short of expectations, and were responsible for the biggest reduction in crop size on record, according to sources of the Tobacco Growers' Association of Brazil (Afubra). Initial projections had pointed to 680 thousand tons. However, according to Benício Werner, president Afubra, the crop will reach 660 thousand tons, at most. If the figures confirm, it will be equivalent to a retraction of 22% from the previous period, when 744 thousand tons were harvested.

Since the start, the farmers had to grapple with difficulties. At seedbed time, frosty weather conditions caused germination problems and killed recently-planted seedlings, forcing them to replant. This was followed by a combination of cold temperatures and excessive rainfalls that leached the nutrients. The farmers had to apply more fertilizers, ending up with soaring production costs.

Excessive rainfalls reached flood proportions during harvest.
In the first week of 2010 floods throughout the tobacco growing regions wrought havoc and seriously affected quantity and, to some extent, quality, too. In some places, 400 mm of rain were recorded, enough for a three month period. Fields were either destroyed or greatly damaged, just at the end of harvest. The fate of some farmers was even worse, their cured and ready-to-deliver leaf was dragged by flood waters. In December 2009, producers in west Paraná, were also hit by excessive precipitation. Rainy days were almost an everyday scene, especially towards the end of the harvest period, with very few days dry enough to harvest. This caused tobacco to get over-ripe and difficult to cure, a fact that was particularly true for late planted fields, as temperatures got extremely warm near the end of the season. When the heat stepped in, most tobacco was no longer in the field. The erratic weather conditions affected all three southern states, with no exception and with the same consequences.

In the words of Mr. Werner, president of Afubra, the rains not only took a heavy toll on the size of the crop, they also affected the productivity rates, well below average this year, now estimated at 1,750 kilos per hectare, in the South, with the exception of the state of Rio Grande do Sul, where it will certainly remain at only 1,700 kilos per hectare. In the 2008 - 09 crop, average productivity reached 2,000 kilos per hectare. Another heavy toll on the crop was taken by 88 hailstorm incidences, hitting the three southern states, whilst 843 curing-barns went up in flames.

On the other hand, farmers can rest assured they will have no problems in terms of commercializing their crops, once, according to Werner, demand is outstripping offerings this year. “The smaller crop size is an assurance for the farmers to get a slightly better remuneration for tobacco than initially projected,” Werner remarks. However, he adds, it will not necessarily mean more money in their pockets. “Growers will suffer losses, because average prices will not make up for the smaller crop size,” he stresses. The biggest losses are to be endured by the growers of Rio Grande do Sul, once the tobacco regions of the state were the hardest hit by the erratic weather conditions. In Werner’s view, the crop frustration will not only affect the growers, but society as a whole, including banks and shops. “The ripple effects will start showing from July onward,” he predicts.

Curing tobacco was also a problem because of excessive relative humidity, and this was particularly true for burley growers, who dry their tobacco in sheds. They are quite unhappy with their yields, and with the lower than expected income, making it difficult for the dealers to reassure farmers that there is a future for this type of tobacco, should this year’s weather conditions turn into a pattern.

Farmers’ woes do not stop there. A constant torment to the tobacco growers are the ever more compelling antismoking campaigns, which really picked up steam after the Framework Convention on Tobacco Control. Mr. Werner points out that, according to the latest survey, smoking in Brazil is down 7.6% from last year. “So far, exports have been absorbing our production. How long will that go on?” he wonders.

The fact is exports are no longer running as smoothly as they used to. According to Iro Schünke, president of SindiTabaco, the competitiveness of the Brazilian tobacco abroad has been affected by such factors as the devaluation of the dollar, tobacco imports - now going on for three years, recent climate-induced losses, along with the expansion of the tobacco business in some countries in Africa, China and India. However, the most compelling problem is the American dollar, which has been losing strength against the real, making Brazilian leaf more expensive for the foreign buyers. In February 2009, a dollar was worth R$ 2.30, and in February 2010, it was R$ 1.80. “This is where the quality factor comes in,” comments SindiTabaco president Iro Schünke. And he also recalls that what normally happens in rainy years is tobacco of good quality: “yhis year of almost continuous rain, from the start of the crop to the end, things should not be different.” Global stocks, which are sort of crop commercialization regulators, are in balance. “There is no huge stock, but there is no lack of tobacco either.” In 2009, Brazil exported 670 thousand tons of tobacco, raking in US$ 3.020 bn. For this year, no surveys or projections have been conducted. As far as the growers are concerned, SindiTabaco president Iro Schünke understands that the presence of the Japanese group JTI/Kennenberg, of Japan Tobacco, brings huge benefits to the integrated system, ultimately, to the growers. “If we look to the past, we will see that, sometimes, the sector is reordered and goes through transformations,” he comments. “This is a strong group, whose presence in Brazil has always had the mark of correctness and serious endeavor, therefore, for the sector as a whole, it is really good news.”

Prices have been the Achilles’ heel of the farmers over the past years.
Prices being practiced by the dealers in the 2009 - 10 crop have caused great concern among the farmers. In three months of negotiations between the parties, no agreement has been reached. In view of the difference between what the farmers’ representatives were demanding, 19.5%, and what the dealers were proposing, from 6.1% to 10% no price table was issued. The seven entities that represent the tobacco growers are advising the farmers not to deliver any tobacco below the average price of R$ 7.9 per kilo, or R$ 101.85 per arroba of Flue-Cured Virginia. As usual, Mr. Werner says, the entities that represent the growers based their claim on the production cost, where inputs and labor are the leading items. But this is also where the seed of dissent lies. Afubra and SindiTabaco never seem to see eye to eye on the inclusion of the labor costs in the price of tobacco, giving rise to heated and long debates.

The farmers are not satisfied with the manner the price negotiations are being conducted. For three years now, they are done on an individual basis with every company. Up to three years ago, the Tobacco Industries' Union (SindiTabaco) used to represent the dealers at the negotiating table, and a unique increase rate was agreed upon, and practiced by all the companies. Romeu Schneider, general secretary of Afubra, anticipates that for the coming year the farmers will no longer accept individual negotiations. This could mean more problems ahead.

Farmer indebtedness on the decline
At the start of the 2010 - 11 crop the tobacco growers are expected to reach their lowest historical indebtedness level, which should come down from 52% in 2006 to 25% this year. The reduction over the past years is the result of management policies implemented by Souza Cruz. “We created a budgetary worksheet, featuring costs, expenses and profits,” says Clínio Bernardi, Souza Cruz finance manager.

Illegal market
High taxation levied on cigarettes is the real incentive to illegal and contraband sales. It is estimated that the illegal cigarette market in Brazil accounts for 27% of all cigarette sales throughout the country, representing R$ 2 bn in tax evasion.

The coming crop
Perspectives for the 2010 - 11 crop look favorable. Werner recalls that, according to recent surveys and projections, cigarette consumption around the world should go up 6.6% from 2007 to 2013. So, no changes in the planted area are in sight. Brazil will continue planting 370 thousand hectares and there will be a market for this tobacco.


Tobacco International - April, 2010

BMJ


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