ITGA Crop Monitor: February 2020

By International Tobacco Growers’ Association

As is customary, the year begins with tobacco price negotiations in South American countries: Argentina, Brazil, and Colombia. Tobacco growers’ associations started their meeting with tobacco companies and leaf dealers.

The price of tobacco has been stagnated for quite some time while production costs have evolved in the opposite direction. In the case of Argentina, the increase in production costs has been dramatic. The value of the domestic currency, the peso, has severely devalued in recent years leading to strong inflation which erodes tobacco growers’ purchasing power. The peso value fell by 39% from January 2019 to February 2019. The prices for tobacco are defined only at the end of the season and tobacco growers are left to withstand the rising production costs during the entire year. In anticipation of the negotiation meetings, Misiones’ tobacco growers calculated the cost of growing 13,000 plants to be ARS155,000 (US$ 2,560) ensuring a production cost per kg averaging between ARS95-100. The associations will negotiate with ARS130 per kg in mind. This price would ensure that tobacco growers can earn something for the effort they have developed during the year.

However, in Brazil, the negotiations have once again reached a stalemate. The representation commission has classified the meeting’s production cost revisal proposal as “a total lack of respect for tobacco growers”. The Commission highlighted that one company did not even present a proposal, while another company presented a value that was lower than the production costs that it personally estimated. The proposals, which ranged between 2.1% and 2.85% adjustment, did not cover the production costs. The tobacco growers’ representatives argued that the companies did not comply with the rules established by the National Forum for the Integration of Tobacco (Foniagro). As such, a Foniagro meeting will be held on the 5th of March to address the impasse.

This year the US burley tobacco campaign was not a very successful one. The US Department of Agriculture had projected the crop to reach a volume of 45,359 tons. However, Daniel Green, c.e.o. of the Burley Stabilization Corporation, has projected a total production of 38,555 tons. The lower domestic production was attributed to weather events. Growers who were fortunate to avoid bad weather were able to fetch good prices at the contract floors. The next season for US tobacco growers may be positively affected by the impact on the Malawi tobacco leaf import ban. The US imported from Malawi over 6,800 tons of tobacco leaf during 2019. The imports represented a total value of close to US$30 million. Some of the US purchases of Malawian burley tobacco may now be replaced by US-grown burley.

The development of the US-China trade deal may also exert a positive effect in the US tobacco leaf market. However, there a lot of uncertainties concerning the trade deal. Even if all tariffs are lifted trade may be slow to respond. Since the beginning of the trade tensions, the Chinese had to shift their leaf buying operations to other countries, forging new relations in the process. Recommencing trade with the Asian nation will carry additional weight from this fact.

US virginia tobacco growers may feel increased competition from countries with substantially lower production costs. These countries had a two-year timeframe to convince the Chinese of the quality of their leaf and to strengthen commercial ties. The only thing left in the hands of American growers is to focus on producing the best possible crop during 2020, which,  one thing is sure, quality is key.

The Tobacco Industry and Marketing Board (TIMB) from Zimbabwe has announced it will delay the beginning of the marketing season. Late rains, which may have affected the crops’ maturation period, was the reason behind the decision. Last year, the marketing season started on the 21st of March. The announcement was accompanied by a statement highlighting that tobacco growers will be paid like last year. Zimbabwe’s tobacco growers will only receive 50% of the revenue in US dollars. The remaining share of the revenue is paid in the domestic currency. The domestic growers’ associations, growers, and several tobacco stakeholders spent a significant portion of 2019 emphasizing the importance that US dollars have for tobacco growers. Lowering the amount they receive will severely impact the ability to reinvest and retool. For the 2020 tobacco season, a decrease of the total tobacco volume of at least 13% is already being projected.

Several important multinational tobacco companies (Philip Morris International, Japan Tobacco International, and Altria) so far have released the reports for the full-year 2019:

The volume of British American Tobacco (BAT) is an estimate based on the company’s forecast for the year. BAT anticipated a 3.5% reduction of combustible cigarette shipments. Imperial Brands has not yet released its 2019 results report, therefore there is no updated data for the company. However, Imperial Brands’ last forward outlook painted a rather dire picture of 2019’s results. The multinational was deeply affected by the US flavor ban.

PMI’s heated-tobacco category has lessened the impact of the decrease in conventional cigarette sales. Cigarette volume decreased by 33.6 billion units while heated-tobacco sales increased by 18.3 billion units. Philip Morris sold 59.6 billion units of HEETS (the stick used by IQOS) which represents a 44% increase from last year’s volume. The company intends to achieve 100 billion HEETS sales by 2021, a target that appears to be attainable. The device has started to be sold in the US, however, no data on the sales volume has been released. Looking carefully at Philip Morris’ results it is possible to calculate that the margins for heated-tobacco units are significantly higher than for combustible cigarettes.

Despite heated tobacco representing just 7.7% of the total volume of units sold by PMI it represented 14% of the company’s net revenue. Calculations from the company’s data reveal that for cigarettes, the company generates a net revenue of approximately US$0.034 per unit sold while heated tobacco net revenue is significantly higher at US$0.094 per unit. The revenue from heated tobacco is 276% higher than that of cigarettes. It is worth noting that the net revenue of reduced-risk products may include other products sold by PMI which can affect the calculation of the profit per unit. The incentive to get smokers to switch to reduced-risk products is double – while bringing benefits for smokers it also improves the company’s core business.