By Ivan Genov, ITGA Tobacco Industry Expert
The 35th International Tobacco Growers' Association annual general meeting, in an online environment for the first time in history, provided a timely opportunity to discuss the pressing issues the industry is currently facing. Fourteen speakers explored a wide range of topics ranging from the latest production and consumption trends, the supply chain disruption caused by Covid-19 to alternative crops and innovations, as well as sustainable development.
Tobacco trends in times of pandemic
The 2020 tobacco leaf production figures, covering all tobacco types, showed a record 2.7% decline on a year-on-year basis. This was primarily driven by drops in the most popular tobacco type flue-cured Virginia tobacco in Africa and the Americas, especially in Zimbabwe, the US, and Brazil. The rising costs of production, adverse weather conditions and the global pandemic all contributed to this result. Overall, the cost-benefit analysis in major markets show a worrying reality; making ends meet for growers is becoming increasingly difficult. According to Universal Leaf, 2021 is forecast to bring tobacco production back to marginal growth. However, considerable uncertainties remain.
Euromonitor International's (EI) latest consumption figures also paint a picture of secular decline. The market research agency estimated that the global cigarette market in 2020 stands at around five trillion sticks, a 3.7% decline compared to 2019, or 5.6% decline if China is excluded. In addition, the biggest category in tobacco now accounts for 85% of the total industry value, a number that is destined to go down further in the face of growing importance of alternative products. Shane MacGuill, senior head of tobacco research at EI, believes that Covid-19 will create additional barriers for cigarette value growth, while heated tobacco and closed vaping systems have the biggest growth potential in the long run. For key Asian markets including China, India, Indonesia, Japan, and the Philippines, Covid-19 led to worsening of the cigarette future outlook, while South Korea is one of a few where forecasts improved.
Coming as no surprise, the global pandemic disrupted the entire supply chain. For growers, it resulted in lack of inputs for tobacco farming due to travelling and transport restrictions. In many places, including Zimbabwe, there were delays in the beginning of the marketing season, while in others, such as Argentina, the season was interrupted. In Brazil, the industry changed the mode of interaction with customers. Sales were made via video conferences, followed by growers sending product samples to buyers.
Further complications arose because of lack of storage facilities for tobacco leaf and ultimately a drop in demand due to overall lower consumption. In relation to manufacturers, big companies, like Altria, were forced to suspend work in some facilities and others experienced shortage of products in inventories. In countries where tobacco was not deemed an essential business points of sale were closed. Notably, in South Africa, the sale of tobacco products was suspended altogether for the duration of the lockdown. The economic difficulties that followed resulted in governments considering increasing taxation to fund budget shortfalls and help pay for their Covid-19 response.
In effect, the global pandemic could establish a new normal for tobacco control, which is likely to be more restrictive and extend further to vapour categories.
Future opportunities
These challenging times make the exploration of tobacco adjacent categories and possible diversification strategies even more important. One of the most interesting avenues for growth is the legal cannabis market. El has estimated that the market comprising of medicinal cannabis, adult-use cannabis and CBD will reach US$ 95 billion by 2025. This goes in line with the agency's view of changing demand drivers that favor new substances and natural activities, ethical and natural living, as well as mindful consumption. Regulatory hurdles currently present the biggest obstacles for growth.
However, consumer attitudes are changing fast. During the last presidential election in the US, voters in four states – Arizona, Montana, New Jersey, and South Dakota – chose to legalize and tax recreational marijuana, while the latest Gallup polls reveal that more than two-thirds of all Americans support legal marijuana, a clear majority that goes beyond party identification and political ideology. However, there is no single solution to tobacco growers' hardships. Dr. Snell, co-director of the Agricultural Leadership Program at the University of Kentucky, revealed that the US Farm Bill, which effectively allowed hemp production on a national level, did not solve farmers problems overnight. Although there are some clear advantages for tobacco growers to engage with hemp, such as similarities in the production model, infrastructure, and nature of the crop, the challenges are also multi-layered. Hemp and tobacco are both commodity markets that favor the lowest price. This was already felt by the US farmers. Excess supply caused by the initial euphoria resulted in collapsing prices. In addition, the market is becoming increasingly concentrated and regulatory uncertainties still persist. The long-term forecast for hemp is positive but the road will surely be difficult.
Digital innovation
ITGA also gave the floor to innovation-focused companies that center their efforts on digital agriculture and providing software solutions to producers. For example, AGRIVI helps building efficient supply chains based on partnerships with growers. Much like the lean manufacturing concept, such solutions can ensure the right supplies, the exact quality and volumes, secure profitability and ultimately lead to responsible growth. Another vital topic for the tobacco ecosystem is water management. KILIMO collects data to calculate hyperlocal evapotranspiration, use satellites, and machine learning to track crop coverage and ultimately aim to reduce the water used on fields. Such digital innovations strengthen environmental responsibility, reduce costs, and increase the sustainability of crop production. What is more, all these initiatives support the United Nations sustainable development goals and move towards building a better future for everyone involved.
Sustainable development
The event also allocated significant time to discuss child labor, youth empowerment, and enhancing farmers working conditions. For instance, ECLT Foundation presented solutions to fight child labour that include raising awareness, collaborating with local communities, building up capacities to improve livelihoods, and increasing access to quality education and skills training. This strongly resonated with the founder and president of ICFU, Mayiwepi Jiti in Zimbabwe, the first black woman in the country to venture into export markets in Europe, who gave details about the challenges facing the rural tobacco growing areas, where the choice between education and work is often not possible. The country also experiences a lack of care for the farming communities manifested in the shortage of protective clothing and the need of facilities for the young, in addition to razor thin profits and corruption.
Youth empowerment is the focus of Growing Up Right Institute, which presented the case of Brazil as an example of positive transformation. The institute's main objectives include professionalization with income generation, development of skills, and combating child labour in tobacco production. What emerged as a consensus view is that the sustainable development goals are increasingly interrelated and require utmost attention from all industry stakeholders.
The importance of collaboration
The entire world experienced an unprecedented shock in 2020, the negative effects of which will be felt for the years to come. In line with the troubling present, ITGA's executives underscored the importance of collaboration across the supply chain. The industry proves to be more resilient than many expected. This is why we must remember our roots, understand the current realities, and work towards a better future together.