Myanmar is one of the countries in Asia where AOI does business.
THE TOBACCO ASIA PROFILE
By Thomas Schmid and Chris Bickers
Few Westerners in the leaf trade are more keenly aware of the challenges of buying and selling leaf in Asia than Pieter Sikkel.
Starting in 1983, Sikkel has worked in Asia, first for Standard Commercial, then for its successor Alliance One International (AOI), where he served in multiple roles in South Korea, Philippines, and Thailand, among others.
He went on to the post he now holds, president and chief executive officer of AOI, a position that calls almost daily on the lessons he learned in the time he spent in the Far East. In a recent interview with Tobacco Asia at the AOI corporate headquarters near Raleigh, NC, Sikkel, who was born in Holland and educated in England, said that one thing you have to keep in mind when working in Asia is that good business relationships are an absolute necessity.
“In Asia, you can’t build trust quickly,” he said. “Time and commitment are very important.”
Most of the AOI staff members in Asia are natives of the nation where they work. “Our approach is to build up a local team that understands local customs,” Sikkel said. “They understand both the language and the values of the people they work with. We have done this for a long time. We have to.”
AOI is currently one of only two globally represented, publicly listed leaf tobacco merchants and processes tobacco in more than 35 owned and third-party facilities around the world, including Asia, where the company is active in China, India, Thailand, Indonesia, Vietnam, and – since recently and only to a certain extent – Myanmar. Besides cultivating tobacco, the company also manages or supervises processing and storage facilities in practically all of these Asian countries, although those are mostly owned either by partner companies, third-party corporations or – as in China, for example – state-run tobacco monopolies or tobacco boards. Each of the tobacco processing plants typically operates between seven to nine months per the year, which corresponds to the applicable harvesting season in each country.
Singapore: Regional Nerve Center
The company’s Asia regional headquarters is strategically located in Singapore.
“We can travel to the majority of our [production] sites from our [Singapore] office and reach them within only one day,” said Henrik Baark, regional director Asia. According to Sikkel part of the reason why the office was established there is because Singapore is a firm supporter of ASEAN (Association of Southeast Asian Nations) free trade. This advantage comes into full swing as the clock strikes midnight on December 31, 2015 and the 10 member countries of ASEAN open up their borders and bring down trade barriers. Furthermore, Singapore’s location at the very tip of the Malay Peninsula, and thus right in the center of the region, affords AOI executives and operatives easy travel options.
A Network of Contractors for Various Tobacco Types
Together with its numerous partners and stakeholders, AOI directly contacts tobacco farmers to cultivate specific tobacco types whenever possible.
“Asia produces the majority of tobacco types needed, including flue-cured Virginia [FCV], burley, and Oriental, primarily Prilep and Basma, but also [certain] sun and air-cured types, dark fire-cured [DFC] and cigar tobaccos,” explains Raymond Faasen, the company’s regional agronomy director Asia, who is based out of Chiang Mai in northern Thailand.
In some countries, however, AOI is not able to directly contract farmers.
“For example, China is an FOB market where we cannot directly contract farmers, but we can – and do – assist China National Tobacco Corporation [CNTC] on projects and initiatives,” said Baark. Elsewhere, only the cultivation, harvesting, and marketing of certain tobacco types are supervised by the state, while others are not. One example according to Baark would be Indian FCV, which is under the control of the Tobacco Board and 100% marketed over the auction platforms.
However, Faasen emphasized that the region does lack some of the flavors for FCV and burley that can be produced in the US, Brazil, and parts of Africa, as well as the top-quality, full-flavored Oriental tobaccos produced in the classical growing areas of Europe. Furthermore, many of the sun- and air-cured tobaccos are only produced specifically for domestic use in specific products, such as Rajangan in Indonesia and the Natu’s and Native types in India. There also is a specific niche production such as Kasturi and Besuki tobaccos in Indonesia.
Yet it might be just this broad diversity in types, styles, and flavors that may potentially intrigue buyers from outside the region. “Some of [the Asian tobaccos] are not grown in any other areas around the world. If customers are looking for something unusual, Asia is an ideal region to start that the search,” asserted Sikkel. He added that AOI was also seeing continued improvement in flavors coming from China and Indonesia.
Just last year AOI announced its entrance into Myanmar, thus effectively expanding its already existing regional production network.
“Myanmar is centrally located… and we produce a flavor and style of tobacco that is unlike any other areas where we operate,” said Baark. “We are excited about our recent expansion into Myanmar and we look forward to [further] developing our presence in [a] region… that is responsible for two-thirds of global cigarette consumption,” added Sikkel. Because customer demands continue to evolve, AOI was always looking for strategic opportunities and partners, he said. And as Asia was a key market for Alliance One, the company was committed to maintaining a strong presence in the region.
A Vast Blanket of Tobacco Fields
“Let’s look at the main countries in Asia that supply AOI, primarily China, India, Thailand, and Indonesia,” said Faasen. “The combined total cultivated area under tobacco for these four countries is estimated at 1,545,977 hectares.” Among these China represents the overwhelming majority of cultivated land in Asia at an estimated 69.5%, which corresponds to 1,074,000 hectares. Of that, FCV cultivation covers approximately 1,054,000 hectares, while the balance is made up of Oriental and burley tobaccos.
In India, currently AOI’s currently second largest supplier produces FCV, burley, sun-cured, DFC, and Oriental tobaccos with a combined cultivation area of around 269,500 hectares. While FCV is the predominant tobacco type covering a production area of 218,000 hectares, Oriental tobacco takes up only an estimated 7,500 hectares, with DFC tobacco standing at a mere 2,700 hectares. The remaining balance of 28,300 hectares is dedicated to a number of sun-cured tobacco types almost exclusively used in local tobacco products.
Indonesia’s tobacco cultivation is estimated by Faasen at 173,400 hectares in total, comprising FCV, burley, DFC, dark air-cured, and native sun-cured types. “The sun-cured native types dominate production area at approximately 150,000 hectares. FCV cultivation covers about 16,000 hectares. DFC and dark air-cured is grown on around 6,000 hectares, and burley on 1,400 hectares,” he elaborated.
Meanwhile, Thailand produces FVC, burley, and Oriental, primarily in the northern region of the country, with an estimated combined cultivation area of 29,077 hectares. This is split into some 13,600 hectares for burley, 8,250 hectares for FCV, and 7,500 hectares for Oriental.
Why Sustainability is a Priority
“Sustainable tobacco farming has always been an important company policy, not only in Asia, but worldwide,” said Sikkel. “AOI’s sustainability programs are generating positive economic change and improving access to vital resources in the communities where we operate, but [besides that] we also often find that projects have many unexpected benefits.” For example, the introduction of stringing machines in Thailand increased the efficiency and profitability of farmers growing Oriental tobacco. An additional advantage was that it minimized the risk of labor abuses as the number of work hours needed to actually cure the tobacco was brought down.
Giving producers the tools and opportunities to create better lives for themselves and their families is essential to empowering the next generation of growers, said Sikkel.
“Through model farms, process enhancements, and improved growing techniques, our network of over 1,000 agronomists and field technicians educate producers throughout the world on new ways they can improve their productivity and efficiency, reduce their impact on the environment, and generate a better income for their families.”
“Through our education programs we are helping our contracted growers to better understand Good Agricultural Practices [GAP], as well as the principles of our Agricultural Labor Practices [ALP] policy,” Faasen pointed out.
Education is one thing, but monitoring compliance with and sustained implementation of the introduced programs is equally crucial. In this regard, AOI resorts to a rather modern, high-tech approach.
“[We have] taken a unique approach to monitoring [our contractors’] GAP and ALP practices and identifying room for improvement,” said Faasen. Rather than simply visiting farms and manually tracking information, field technicians utilize a global data capture system that provides them with real-time visibility into the grower base. Dubbed “grower’s management system” (GMS), it has allowed the company to build a profile of each farmer, including information such as a GPS position of the farm, type of tobacco being grown, curing equipment being used, and GAP and ALP training progress. GMS is incorporated into a handheld mobile device for technicians, who input data into the system as they visit each grower.
“We can easily generate reports from GMS, which allow the company to identify the greatest risks and develop solutions,” explained Faasen. “We have found GMS to be incredibly beneficial in helping us recognize any areas where increased education is needed.” The tool also provides AOI with enhanced capabilities to trace tobacco leaf from seed to box. It can document exactly which farms produced a box of processed tobacco and confirms that it was grown in a manner compliant with ALP and GAP principles. This ensures that customers are supplied with tobacco leaf that was grown with integrity and in compliance with pertinent legislation.
Crop price negotiations in Indonesia.
Farm sustainability also requires the backing of local communities. “We will continue our locally and internationally recognized support of schools, clean water projects, medical facilities, micro-financing, and other community programs,” said Sikkel. Through community enhancements like health care improvements, education initiatives, and clean water programs, AOI tries to ensure that its efforts benefit not only its producers but also the entire population of the communities in which the company operates.
Preserving the planet and its resources for future generations is a key component of the company’s sustainability efforts. For example, AOI’s wood resource management strategy is focused not only on implementing reforestation programs but also on helping contracted growers effectively use alternative fuels. AOI’s efforts to help growers improve their harvesting and curing techniques, combined with significant reforestation and alternative fuel programs, have helped the company reduce its carbon footprint, preserve the native landscape, and protect the habitat of countless species of wildlife, said Sikkel.
“The steps we are taking in our sustainability program are helping to ensure that AOI is creating a better planet for future generations.”
Alternative Fuel in Indonesia
Over the last three decades the dominant fuel used to cure flue-cured tobacco has been kerosene. But existing subsidies of industrial kerosene were eliminated in 2010, causing many farmers to turn to coal and wood. However, both of these choices led to quality issues, supply chain deficiencies, pollution issues, and deforestation.
At PT. Alliance One Indonesia, much emphasis has been placed on moving forward with the implementation of sustainable fuel energy. The source has been palm oil kernel shell (POKS), the outer dry shell of the palm seed, a material considered to be waste in the past. POKS is supplied by many different areas around the world such as the islands of Sumatra and Borneo. It has proven to have a value in tobacco production. In conjunction with a new furnace system, curing with POKS has led to cost reductions and fuel efficiency savings.
Now, 61% of tobacco grown by AOI growers in Indonesia is cured with POKS, and the company expects to be at 90% in 2015 – 50% of AOI growers’ furnaces have been converted, and that percentage is expected to be at 100% by 2016.
Conversion to a POKS furnace refers to not only the furnace, but also a renovation of the barns, which have to be completely sealed in order to optimize the calorific value released inside of the barn. The sealing minimizes temperature variances which helps maintain the quality of the cured leaves. The reason the percentage of farmers using POKS is higher than the number of curing barn conversions is that farmers are curing tobacco with POKS but using another type of burner, proving that POKS has been well accepted by the farmers.
The POKS furnace system is semi-automated: The inflow of POKS into the furnace is controlled by a hopper/level, increasing the grower’s efficiency and reducing labor needs.
When compared to curing with coal, wood, and non-subsidized kerosene, curing with POKS offers substantial cost savings.
“The use of POKS reduces negative environmental impacts from tobacco curing in Indonesia, and the POKS furnace system minimizes the amount of labor that is required,” said Laerte Elias Costa, president director, executive of Alliance One Indonesia. “We strongly believe that POKS provides a long-term, sustainable energy source for tobacco growers in Indonesia. Growers are at the heart of the tobacco supply chain, and we are proud to be able to help them improve their productivity and profitability.”
Ongoing Sustainability Initiatives in Asia
In India, AOI introduced Oriental tobacco growing to a local community.
“The land in this area of production is very rocky, without much real soil,” said Sikkel. “But we thought we could grow Oriental tobacco there. We contracted with farmers there to grow it, and it has produced satisfactorily.” The experience indicated that Oriental could grow in much dryer and hotter situations than other tobacco types can.
“The people of the area liked the results, and it was observed that after three years, there was a net in-migration of population, attributable to tobacco growing,” he said. “They had a crop they could grow profitably, and they grew it. For now, we expect to continue to contract it. At the cost we can produce it for there and with the quality they can produce, it has a place in the current Oriental market.”
AOI India also partners with various organizations to make an impact on the living conditions of farmers such as providing infrastructure for safe drinking water, building primary health centers and helping to meet the educational needs of those in their farming regions.
GAP education helps improve farmer profitability and minimize environmental impact.
In Thailand, Alliance One and its partners have been working with the farming communities since the 1960s and have been instrumental in the modernization of the Thai tobacco industry. Due to ongoing GAP education and the implementation of select hybrid varieties, both yield and return to AOI farmers has been vastly improved.
Also, through a financing program in the late 1990s all of the company’s local suppliers’ FCV curing barns have been upgraded to modern automated bulk curing facilities. This led to reduction in fuel usage of up to 60% and enabled the utilization of renewable fuels, thus improving the income for the farmer while significantly reducing the impact on the environment.
Recent news: AOI to help PMI in Brazil, USA
Beginning with the 2016 crop, AOI will provide Brazilian burley leaf tobacco to Philip Morris International (PMI) through the company’s subsidiary Alliance One Brasil Exportadora de Tabacos (AOB). This comes as part of PMIMSA’s new leaf supply arrangement in Brazil. Previously, Philip Morris Brasil directly contracted and purchased a portion of its burley tobacco requirements from Brazilian growers. In the new arrangement, PMI will purchase its processed burley tobacco requirements directly from AOB.
This arrangement is expected to provide enhanced supply chain efficiencies while reducing sourcing complexity, according to the company. It reflects PMI’s and AOI’s commitment to Brazilian growers and their communities as well as PMI’s intent to remain a major purchaser of Brazilian tobacco.
“The sustainability of our grower communities is vital to the success of Alliance One and our customers, and we are excited to further support the tobacco supply chain in Brazil through this new leaf supply arrangement,” said Sikkel. “From working with farmers during the growing season through processing and delivery, we focus on providing customers with a high-quality product that is produced in a compliant manner.
Including its predecessor companies, AOI has operated in Brazil for over 60 years.
Earlier, AOI was selected as one of two leaf dealers chosen to supply US tobacco to PMI as part of that company’s decision to transition from direct contracting and purchasing of tobacco from US growers to sourcing its US tobacco requirements from AOI and Universal.
At the time, Herbert Weatherford, AOI’s regional director for North and Central America, said, “We remain proudly committed to our current, well-established US grower partners and look forward to working with a new grower base as well as other service providers. The broader grower base (provided in the agreement) better positions Alliance One to expand the availability of US and Canadian tobacco to domestic and international markets.”