Brazil: Tobacco Export Powerhouse

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Features

With the biggest export market since 1993, Brazil keeps its top position even with a 24% drop in sales in 2014.

By Kelly Stein

The year 2013 is remembered nowadays as the year of records in the Brazilian tobacco industry. It was a great year for the rural population of the countryside, with an annual crop of 624,000 tons, and a terrific year for the city dwellers: the sales topped US$3.240 billion. With such good numbers, the question was: how to keep it up in the upcoming months? The Brazilian political and economic outlook in the following months wasn’t very bright and it reflected straight into the numbers. The 2014 crop was the least impressive in the previous 10 years (as seen from the chart below).

Some 473,000 tons of tobacco was produced last year and sales also shrunk to US$2.459 billion, representing a drop of 24% when compared to the previous year. The internal market was worried, but “…this fall wasn’t enough to remove Brazil from the top of world export ranking. We are leaders in exports since 1993,” said Iro Schünke, president of Interstate Association of Tobacco Industry (Sinditabaco).

One of the reasons for the precipitous sales drop is related to the loss of some buying markets: 13 countries did not buy anything from the Brazilian production last year. Despite Belgium and Holland’s 30% commercial reduction, the European Union is still the main destination for Brazilian tobacco (42%). China also reduced shipments (-27%), but the biggest loss was registered in the US market (-42%). 

It could have been even worse if Brazil hadn’t entered seven new tobacco buying countries. The balance was partially restored because 96 buying countries kept generating new business for the 162,000 Brazilian producers.

According to Sinditabaco, the slight reduction in world cigarettes consumption in 2013 also did not help to improve the sales results in 2014. Fewer clients combined with competitor countries, which started selling more and good quality tobacco exacerbated the situation. Especially when it came to African countries, where great tobacco had been produced for better prices.

“Zimbabwe has significantly increased its production, reaching levels similar to those of the early 2000s, when it was a major competitor of Brazil in high quality tobacco. Our costs are higher, especially considering the labor expenses. It is important to mention that beyond producing high quality tobacco, we are advanced regarding to traceability and sustainability, with good social responsibility practices and environmental preservation,” explained Schünke.

In addition, high labor, energy, and raw material costs are also partly responsible. It is important to consider the political and economic crisis that also directly impacts the currency exchange. The real’s oscillations in the first quarter of 2014 didn’t help business. For this reason, the Brazilian tobacco industry is internally debating ways to maintain the favorable transactions with its actual buyers. For instance, Europe is the main market for Brazilian tobacco. It represents 42% of sales and it is followed by Far East (28%), North America (10%), Eastern Europe (8%), Africa/Middle East, and Latin America (both 6%).

According to a survey conducted by PriceWaterhouseCoopers, the export trends will not register significant changes for 2015.

“Our challenge is finding a way to make our international prices even more competitive. The African countries are our main competitors in this way, because they produce tobacco similar to the Brazilian tobacco, but with production costs lower than ours,” explains Schünke. “Exchange rate fluctuations also impact our competitiveness and it is an obstacle that Brazilian industry needs to face”.

One strategy to recover the business is to introduce positive assets that Brazilian tobacco already has to the buyers. Traceability, sustainability, agricultural good practices, environmental conservation, and low rates of child labor in the farms are some of the areas where Brazil is ahead of other countries.

According to the Bureau of Foreign Trade, Ministry of Development, Industry, and Foreign Trade (SECEX/MDIC), the market already reacted positively in the first three months of 2015. March marked a sales increase of 87%. In the same period in 2014, sales dropped 39% and the following months would not be good either.

Tobacco Producing Areas

With the huge historical and economic importance of tobacco in Brazil’s development, it is peculiar that most Brazilian citizens ignore and do not acknowledge how important this business is. Very few people know that Brazil is the top exporter in the market and the second biggest tobacco producer in world. But who would ever imagine that all these crop records have been broken by only three states in Brazil – Rio Grande do Sul, Santa Catarina, and Paraná – located in the south of the country, where tobacco plants find good conditions to grow and 651 tobacco producing municipalities are located. Of their total production, 85% is destined for the international market.

According to the Brazil’s association of tobacco growers (AFUBRA), 347,000 hectares are planted by 162,000 big and small growers. Approximately 650,000 people are involved in this production cycle, reaching a gross income of R$5.3 billion (US$1.5 billion).

Good for the countryside, great for the government: only in 2014, the collected taxes averaged US$3.07 billion. Dealing with Brazil’s high tax rates of up to 74% has become one of the tobacco industry’s biggest challenges in Brazil.

“The agroindustrial tobacco complex in South Brazil is responsible for a financial movement in excess of R$10.8 billion/year, considering the various stages of the production and commercial process. Starting from financing and selling of inputs to the farmers, the acquisition of the crop from the growers, product industrialization, expenses incurred from materials, energy and freights, payment of salaries, tax collections, commercialization in the domestic market, and exports”, states a report from Sinditabaco.

History of Tobacco in Brazil

When the first Portuguese colonizers arrived to Brazilian lands they found tobacco plantations cared for by several indigenous tribes, who considered it a sacred plant with mystical origins. For this reason, it was believed to be special, meant to be used only for restricted occasions, and its consumption was managed by the tribe chief or by the local shaman. The main uses were religious (a call to the gods and in predictions) and medicinal (curing wounds, migraines, stomach aches). At that time, indigenous Brazilian tribes had the habit of eating, chewing, drinking, inhaling, and smoking tobacco.

Smoking, however, prevailed with time and this form of consumption spread all over the world. It became really popular in Europe when the French ambassador in Portugal, Jean Nicot, discovered in 1560 that the plant cured migraines. So, he sent it to his queen, Catherine de Medici, who suffered from constant headaches. The gift worked and she started a habit of smoking tobacco on a daily basis for medical reasons, and, as consequence, it was imitated by noble men and women from her court.

Since the dawn of the 16th century, Brazil has been selling tobacco to Europe.  Sales made quick progress in colonial times and tobacco became so important that during the next century, a special legislation on the crop was approved and taxes were lighter. In the 17th century, it was the biggest export item during Brazil’s Imperial time.

What Brazilian people rarely know is that tobacco is so important to the Brazilian history and economic development that its leaves are drawn alongside coffee leaves in the Coat of Arms of Brazil, a very important national symbol.