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April 27, 2009

Despite crop's stigma, tobacco prices still good for farmers

by Roelof Bezuidenhout

Despite global upheavals 2008 ended with excellent results for tobacco, rounding off a decade of value creation with a total shareholder return of 486%, according to the British American Tobacco (BAT) group. Developing markets in Eastern Europe and East Asia are expanding and the group expects the profit pool to grow.

Even allowing for an average per capita decline in tobacco consumption of 1% per year, adult population growth could see the world’s smokers increase to 1,5 billion by 2050.

Last year, the BAT group alone bought 380 000t of tobacco leaf, mostly from farmers and suppliers in emerging economies where the crop is said to be more profitable than maize and cotton. BAT’s social responsibility programme, which addresses issues such as leaf growing, processing, health, and the environment, reaches 300 000 such producers across the globe.

According to the Tobacco Institute of South Africa, international demand for cigarette tobacco was expected to exceed supply by the end of 2008. The institute believes research and extension services based on key priorities should help restore confidence in the crop among farmers, many of whom have been spooked out of producing a stigmatised product.

The local flue-cured crop declined from nearly 33 million kilograms in 2003 to about 12 million kilograms in 2007, while the dark air-cured crop fell from 4,7 million kilograms to 2,3 million kilograms. Zimbabwe’s tobacco output has dropped from about 240 000t in 2000 to an estimated 50 000t. Along with South America, other African countries are now increasing production, often helped by Zimbabwean expertise.

But the industry continues to battle problems caused by illicit trade, health concerns, law suits, and sin tax. BAT said illicit trade is now worth over 300 billion cigarettes a year, about 6% of total consumption and costing governments over R100 billion in tax.

Parties to the World Health Organisation’s Framework Convention on Tobacco Control regularly revise guidelines for governments on tobacco policies, including bans on advertising and the use of plain tobacco packaging.

But BAT believes the industry should be drawn into the regulatory process to prevent impractical legislation. It insists the industry is not about boosting the number of smokers or targeting the underage, but about offering adult consumers a high-quality brand they’ll choose over competitors’ brands.

The group is positive about developing new products recognised by scientific and public health communities, and regulators, as having fewer risks. An example is the less harmful snus oral tobacco product, which smokers can enjoy without lighting up.

Meanwhile, BAT reduced its 83 factories to 49, closing a factory in Paarl 2008. In South Africa growth was achieved by higher prices and an improved product mix.

Farming UK

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