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Most tobacco growers adapted in the face of different challenges and expect a return to a more normal way of work, albeit with increased focus on costs.
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In the beginning of 2022, the International Tobacco Growers Association (ITGA) conducted a market survey covering its wide member and partnership base. The questions focused on topics ranging from the Covid-19 disruptive effects on the sector to wider social and environmental challenges that impact tobacco growing. Shortly after the survey was closed, the war between Russia and Ukraine broke out. In addition to the big humanitarian disaster that is currently unfolding, the conflict will have a major impact not only on tobacco but on the wider agricultural context in general.
The global pandemic
Covid-19 started leaving its mark on the sector during 2020, when there were season interruptions and delays, traveling and transport restrictions, even bans of growers on participating during the sales process. In certain cases, there were very few attendees at sales days, while in others the disruption to adjacent service providers had a knock-on effect on the farming sector causing upward pressures on production costs, such as fertilizers and energy. In some markets there were shortages of labor force and in others the export operations were seriously disturbed. Luckily, a few associations escaped the situation relatively untouched. However, the overall effects of disturbed supply chains and multiple crises building on top of each other will leave no one completely unaffected.
To battle the negative consequences of the pandemic our members and partners applied a variety of measures. Moderating access to allow for keeping social distancing, extensive use of masks and stricter hygiene standards were among the common procedures taken. In fact, ITGA in coordination with members and the ECLT Foundation, devised an awareness-bringing campaign, #TogetherWeCare, targeting non-contracted small-scale farmers in particular. This involved activities such as translating educative materials to local languages and connecting with key UN agencies. In the case of Zimbabwe, decentralization of auction floors was done in order to give farmers an opportunity to be at the sales process as well as save on transport costs. In Brazil, problems were fewer as production and marketing suffered less, with business getting back to normal relatively quickly. Ultimately, this led to optimized planning, improvements of quality and productivity in many regions.
Nevertheless, as most growers have adapted to the difficult situation, the challenges for the immediate future remain firm. Members have flagged that with further crisis and rising inflation the supply chain will feel more tension. In some markets, like India, the supply base has shrunk and demand will be created naturally from now on. While Covid-19 remains an issue, in Zambia other illnesses like malaria are far more deadly. Finally, the expectations are for a return to a more normal way of work, but with increased focus on costs.
Environmental issues
Apart from the global pandemic, other problems are also putting constant pressure on tobacco growers. Nowadays, environmental issues and climate change are leading causes of concern. For example, volcanic eruptions in Indonesia affected tobacco growers in the area, while high temperatures and drought impacted planting of late regions in Brazil. Tropical storm Ana, a deadly cyclone, passed through Madagascar, Malawi, and Mozambique leaving more than 100 dead. Deforestation is another major issue in Africa, and Zimbabwe in particular. Land degradation caused by fertilizer policies and increases in soil acidification were also flagged as pressing problems. In Africa, our members feel the need for farmers to be educated more often on causes and implications of such events, as well as giving incentives for those who keep the environment safe while penalizing serial offenders. In overall, the vast majority of respondents indicated that the impact of climate change to the sector is medium or big.
Social issues
Social issues in most tobacco growing areas are also abundant. Child labor remains a significant problem. ITGA continues to work closely with the ECLT Foundation to combat its root causes around the world. In addition, the farmers' community is aging while young generations are not interested in agriculture leading to scarcity of labor. The lack of viable alternatives to tobacco and constant threats by NGOs are other major factors that have an effect on the long-term sustainability of the sector. Minimal involvement by local authorities to educate the rural population on improved agricultural practices was also flagged as a key concern. Ultimately, poverty is often the underlying cause of most issues. The viscous circle of low crop prices and the expensive school fees keep workers in tobacco unable to rise above the current levels- both in terms of education and skills building.
Cost of production
Unsurprisingly, the rising cost of production is a major concern impacting the sector by most survey respondents. Among the contributors to this dynamic are inflation, higher transportation costs, rising prices of fertilizers, and higher labor costs. Most share the concern that prices of inputs are continuously increasing while pricing is not catching up quickly enough. Corruption is also an issue in most developing markets. All this appears to form the perfect storm for immediate problems.
War in Ukraine
The war in Ukraine adds one more worrying element to the already complicated global situation. Russia and Ukraine supply around a third of the global wheat exports, while Ukraine alone accounts for around 15% of all corn exports. Sunflower oil and seeds, barley, and colza seeds are other items with substantial share of global trade originating from the two countries. Most of Ukrainian shipments go through various ports on the Black Sea which are now closed for commercial activities. It has already been indicated that planting for 2022 will be disrupted. Russia is a major source market for fertilizers, which means that crop yields could be impacted. Since the start of the war, many key commodities soared in price. Such developments can boost the prospects of other key source markets for the affected crops, but the emerging new normal is likely to be more complicated. The recent spike in Covid-19 cases in China that led to strict lockdowns of major hubs such as Shenzhen and Shanghai means that supply chains will take even longer to normalize.
The economic sanctions put on Russia will have a major impact on tobacco multinationals. In fact, Russia is a major focus market for the big four, accounting for between 10% and 20% of cigarette shipment volumes, while the country is also the second biggest heated tobacco market after Japan. Major manufacturers already announced strategic directional changes. PMI shared the concrete steps it has taken to suspend planned investments and scale down its manufacturing operations in Russia. These include discontinuing a number of its cigarette products and reducing manufacturing activities, cancellation of all product launches planned for 2022, including the new IQOS device, and cancelling the USD150 million investment for heated tobacco manufacturing capabilities. The company is also working on options to exit the market in an orderly manner. BAT has concluded that the ownership of the business in Russia is no longer sustainable in the current environment. The company has initiated the process to rapidly transfer the Russian business in full compliance with international and local laws. Upon completion, BAT will no longer have a presence in Russia. JTI suspended all new investments and marketing activities as well as the planned launch of its latest heated tobacco product, Ploom X, in Russia. Unless the operating environment and geopolitical situation improve significantly, JTI cannot exclude the possibility of a suspension and selling of its manufacturing operations in the country. Finally, Imperial Brands has finished negotiations with a local third party about a transfer of its Russian assets and operations. Having in mind that Russia has the largest adult smoking population in Europe (around 35 million people) it remains unclear how the market will operate in the near future. What is certain is that tobacco and major food commodities will likely undergo changes in their usual path to market.