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June, 2008

U.S. Tobacco Cooperative

Working for Indian Farmers,
a Focus on the Indian Tobacco Board

By Heneage Mitchell

According to Indian Tobacco Board (ITB) Chairman Dr. Suresh Babu, tobacco auctions in the Karnataka region saw intense action as the 2006–07 crop was snapped up by exporters anxious to assure adequate supplies for international purchasers.

In many ways, India’s 2006–07 crop was unusually good. “Indian tobacco exports rose by US$50 mn in 2007,” said Babu, “increasing from the US$330 mn earned in the 2005 to 2006 season to US$380 mn.”

International demand for Indian tobacco is increasing, in part, Babu said, because of Zimbabwe’s reduced production.

“We anticipated a crop of around 100 mn kg,” said Babu, “but unexpected rains saw the actual production fall to around 90 mn kg. So while the farmers suffered a commensurate loss, buyers rushed to purchase as foreign companies confirmed orders. Exporter participation was very high. A kilo of green leaf sold for an average of R57 (US$1.44) at auction. However, the US dollar declined by 15%, so net returns to farmers remained essentially stable over the last two seasons.”

The authorized Karnataka crop had been set at “a more realistic figure” of 95 mn kg. Exporters, who are still feeling the pinch after several years of “selling more tobacco but earning less from it,” were not expecting to earn well from the 2007 crop. They were hoping for a 10% increase in exports, but the market price remained about the same as in 2006.

Labor shortages
In Andrha Pradesh, an authorized crop of 158 mn kg has been fixed for 2007–08, up from the 150 mn kg set in 2006.

“Andrha actually produced 172 mn kg in 2006–07,” said Babu, “We were actually expecting around 165 mn kg.”

Tobacco farmers are now facing labor shortages as the economy continues to grow.

With the economic boom comes real estate development and construction. The labor pool is increasingly being drawn to cities. “Some farmers paid advances to labor groups,” Babu continues, “to ensure they had an adequate work force, but many simply didn’t show up. This is a cause of increasing concern for farmers.”

Practical initiatives
The cost of inputs has continued to rise too, creating further challenges or farmers.

ITB sources seeds, fertilizers, pesticides, and other inputs directly from manufacturers, offering them to farmers at the best possible price.

“ITB is trying to reduce the costs of inputs to the farmer,” Babu said. “By sourcing inputs directly from the manufacturers and passing on the savings to the farmer, we can be assured of maintaining a quality crop,” said Babu. “There is six months between auctions to work on sourcing and distributing these inputs, so we work with manufacturers in advance, fixing - and approving - the best quality at the best price. The inputs are therefore cheaper than market rates, and the quality is assured.”

To ensure the farmers are able to take advantage of these inputs, ITB has developed a program that helps farmers mobilize bank loans from banks in their own names.

“The borrower issues a letter of consent to the bank allowing all proceeds earned from the auction of his tobacco to be deposited into the lending bank,” Babu explained. “The bank retains the loan and pays the balance to the borrower. All parties are happy with this arrangement, because the farmer gets a loan at a lesser interest rate, the bank is guaranteed repayment with no recovery costs, and ITB sees the best possible quality crop.”

ITB works with farmers in other practical ways too.

Farmers typically use firewood for curing tobacco, so Babu personally looked into ways of reducing both the amount of wood needed and the emissions produced in the process. He came up with an energy-conserving modification to the flue pipe of conventional flue-curing systems that is now being widely adopted by farmers.

“The system introduces savings of around 15% to 30% in firewood required, and curing time is reduced by 8 to 10 hours,” explained Babu. “We initiated a trial-run in Andrha and Karnataka in 2006. The system produces more uniform results than traditional flue-curing system, and is a better solution for bright grades. The farmers can save on firewood too; they were very happy with the results. We are now introducing the technology on a wider scale, and we hope it will help to bring about a marginal increase of 5% over 2006 prices.”

The flue curing system is clearly winning favor with farmers as they are buying units themselves.

Insuring tobacco’s future
ITB has negotiated various insurance programs that tobacco farmers can take advantage of.

“Insurance schemes we have negotiated include barn and post-harvest coverage - but not standing crop - and a personal accident policy for the farmer,” Babu said. “ There is a health insurance scheme covering major health, and a compensation scheme for the family to receive funds the event of the farmer’s death is being discussed with grower associations at the moment. The associations have come up with 50% of the costs and they are asking ITB to put up the other 50%. The scheme is in the final stage of acceptance; it will happen.”

ITB can help arrange a loan for a farmer wanting to construct a bulking shed, and supplies tarpaulins, some subsidized by the penalty collected on excess tobacco

(tobacco produced above the authorized allotment) from previous years.

“I want to see this money returned to the farmer,” Babu said, “and this is one practical and useful way to do it. The tobacco board has also embarked on infrastructure enhancements for the auction system, including grower rest house improvements. We are putting a part of the money into R&D to improve yield quality.”

Research
The impetus to develop ever-more productive strains is fueled by the knowledge that all the land suitable to grow tobacco on is already growing tobacco. There is simply no further acreage left that could be planted to tobacco, so if more tobacco is to be grown, then yields per hectare have to increase.

“Crop rotation is not a practical reality for tobacco farmers as all the suitable land is already in use,” Babu pointed out. “The inputs the farmers are receiving are good quality, the leaves they are producing are good quality and curing processes are good too. Really, the variable is climatic conditions.”

ITB works closely with Central Tobacco Research Institute (CTRI), defining and resolving agri-related issues. Developing and sourcing appropriate tobacco seeds for ITB to supply to farmers is a critical aspect of this relationship.

“CTRI research in 2006 resulted in the issuance of a promising new [seed] variety, Siri, that promises yields of up to 3,500 kg/ha,” said Babu. “These seeds are mainly intended for traditional black soils, but some light soil farmers are trying them as well, and if it is successful, I am sure more farmers will want to use them. The plants have no nitrosamines, and they grow tall, and so they have more leaves.”

The farmer is the man
The Tobacco Board feels a strong responsibility towards the tobacco farmer. This is borne out by Babu’s passionate support for tobacco farmers. He would like to see a more rational and fair approach to the tobacco farmer, a better price paid for the tobacco that ends up making manufacturers huge profits, but often leaves the farmer - and the exporter - struggling to get by.

“Input costs and taxes account for 60% of a farmer’s costs. So he is left with 40% of the selling price,” Babu pointed out. “Growers work hard in the fields, taking all the risks, but they are working on very tight margins. Manufacturers, on the other hand, are able to address their incremental price increases on manufacturing inputs correctly. Farmers are much less able to do so. Manufacturers earn very well from the farmer’s leaf. Could they not pay a little more to the farmer? It would not add that much more to the manufacturing costs, but it would help to give stability and assure supply of quality leaf to the market.”

Tobacco farmers face challenges other farmers don’t as well.

“Today, unlike other agricultural suppliers, tobacco farmers are being increasingly marginalized and stigmatized as a result of increasing anti-smoking campaigns,” Babu said. “Alternate crops is a ‘solution’ that is widely touted, but this is far easier talked about than actually done. The agro-climatic requirements of tobacco differ from other crops, so there is a limitation to the viability of shifting to alternative produce. Besides, farmers have significant investment in infrastructure such as barns and curing sheds. Tobacco cultivation is a small-scale industry in itself. Unless farmers are properly compensated, they cannot simply switch crops,” Babu concluded.

The focus, Babu believes, should be to try to stabilize India’s tobacco crop production. Because, regardless of what the so-called “antis” may wish, Indian tobacco remains popular with international buyers.

Export promise
India and the Soviet Union once shared a cozy relationship that saw much of India’s tobacco shipped to the USSR for soviet smokers to enjoy. The collapse of communism left Indian tobacco exporters with a glut of leaf and few markets. In the intervening years, Indian tobacco has seen plenty of ups and downs, culminating in the “crop holiday” at the start of the millennium.

Today, pretty much all the available Indian leaf is exportable, but the price remains low.

“We sell more every year, but we are making less every year” is a common lament among Guntur-based tobacco traders.

Southeast Asia and Europe are the two largest markets for Indian tobacco these days, but “the actual destination is less important in these days of acquisitions and mergers,” Babu pointed out. “Tobacco is a commodity supplied by a handful of international traders.”

So, while much of the ever-increasing tonnage of tobacco exported by India these days is traceable back to its source, its final destination often remains unknown.


Tobacco International - June, 2008

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