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July/August, 2006

Renegade-Auction

Flue-Cured Cooperative Increases 2006 Price

By Chris Bickers

In Timberlake, North Carolina, with delivery of the US flue-cured tobacco looming just over the horizon, growers approached the market with optimism in June.

There seemed good reason. China had made a substantial purchase of their tobacco over the winter and indicated that increased purchases are likely this season. Sales of leaf are increasing to other markets.

And the cooperative’s cigarette factory near this small central North Carolina town had geared up and was turning out a number of cigarettes, including the promising new Fact and Wellstone brands, as well as little cigars. Before the end of the summer, the cooperative planned to introduce a new roll-your-own brand of its own called 1839.

So even though the prices at the 2005 flue-cured auctions — the first since the quota buyout ended the price support program — were less than expected, the flue-cured growers’ cooperative felt confident in taking steps to get more leaf on the floor.

A higher price, higher cost of production
So in June, the Flue Cured Tobacco Cooperative of Raleigh NC increased the price it guaranteed its contracting farmers, though only on select grades.

The increase will help farmers cover the increased expenses of 2006, said Albert Johnson of Gallivant’s Ferry SC, the farmer-president of the cooperative at its annual meeting on June 9. “We all know what is happening with diesel fuel, natural gas, l.p. gas and gasoline prices.”

Also, said Johnson, some changes were needed in the way the cooperative accepts the tobacco from the grower. The main change is that the farmer will now be able to begin collecting advances on his leaf as soon as he delivers it.

“This year he will bring the tobacco in, and it will be graded,” Johnson said. “If his tobacco meets the advance grades, we will cut him a check right then. Last year it took two trips to get an advance. Now it will take only one.”

Not all grades will earn an advance, but the cooperative will attempt to sell all leaf on exclusive contract on the auction floor.

In another indication that a good market is expected, the cooperative has also agreed to purchase tobacco this year from all stalk positions, unlike 2005, when purchases were more limited.

About 50 million pounds of flue-cured have been contracted by the cooperative this season, up about 25% from 2005.

Chinese may buy more
For 2006, the bright spot for the cooperative is prospective sales of blended strips.

“The cooperative has secured large customers for unmanufactured tobacco strips,” explained Johnson. Also, there have been “demands from international customers for a broader selection of grades,” he said.

In 2005, China purchased 6,177 MT of flue-cured from the cooperative. Counting flue-cured leaf from other American sources, it bought a total of about 8,000 MT of US flue cured, cooperative sources said.

Shipment of China’s 2005 purchases from the cooperative — from Norfolk VA — were completed in March 2006. The tobacco was distributed to 17 of China’s largest cigarette manufacturers.

China might need as much as 10,000 MT of US flue-cured when its buyers return in October, sources at the cooperative said.

There will be some changes in the marketing system in 2006. The cooperative conducts the only auctions at which flue-cured tobacco is now sold. The number of market towns for 2006 will be down from 11 to nine. The two eliminated were Oxford NC, where the volume of tobacco available did not justify the expense of operation, and Wilson NC, where no suitable warehouse was available.

The nine operating warehouses are in Nashville and Statesboro GA, Lake City and Mullins VA, Danville and South Hill VA, and Clinton, Williamston and Rural Hall, NC.

The cooperative has entered into “exclusive” contracts with over 800 farmers for the season, said Arnold Hamm, general director of the cooperative. These farmers promise to bring all their tobacco to the cooperative’s warehouses and receive a price advance up to the agreed-upon amount. Hopefully, the market will absorb all this leaf. The cooperative buys part of it on the warehouse floor to meet its own needs.

The cooperative also entered into about 700 “non-exclusive” marketing agreements. Non-exclusive contracts involve no price advance, and the farmers have limited access to the auctions. But the non-exclusive farmer is not required to deliver any certain amount to the cooperative’s warehouses or indeed any at all if he chooses not to.

New meeting place in a new market
The cooperative’s annual meeting was held for the first time at its still-new factory about 40 miles from the cooperative’s headquarters in Raleigh. For many of its members, this was the first opportunity to see the interior of the building.

“The people who hadn’t seen the facility before were bowled over,” said Hamm. “It gave us a good chance to let our members see what we do.”

Cost was a factor in the cooperative’s decision to move its meeting location. The meeting had traditionally been held at the NC State Fairgrounds in Raleigh, but the expense of renting that hall had gotten rather steep.

“We were able to do it in Timberlake at a much lower cost,” said Hamm. “I am sure we will be holding it here in Timberlake again in the future.”

Attendance was not affected. In fact, the crowd of about 200 was actually more than the year before in Raleigh.

The meeting marked the sixtieth year of the cooperative’s existence and the end of its first year of operation in a free market.

“There have been many challenges in the past 12 months in the transition from administering the price support program to becoming a value-added marketing cooperative,” said Johnson in his address to members. “We now have the facility to produce several value-added tobacco products, including consumer products. That translates to more income opportunities for members in the future.”


Tobacco International - July/August, 2006

BMJ


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