ITGA Leaf Tobacco Overview
By International Tobacco Growers’ Association
Tobacco leaf production goes into 2019 with earlier projections pointing to volumes around 5.14 million tons during this crop season. Albeit constituting a 2% increase over past year (2018) estimates, this volume keeps to the same trajectory, distancing from the 5.83 million tons produced not so long ago (2015), which were already showing signs of decline.
In the US, Hurricane Florence had a huge impact on tobacco production, causing a decrease of FC Virginia production by 30% and burley by 40%. On the other hand, two relevant African tobacco-producing countries delivered well: Malawi and Zimbabwe (Figure 1). However, average prices were hit by increased production, declining to US$ 1.56 in Malawi and US$ 2.92 in Zimbabwe.
This setback is due to more factors, especially if we look to the generalized increase of production costs (illustrated by Figure 2, solely representing FC Virginia).
After a period of stable volumes, Zimbabwe had taken off last year, breaking the record of production volumes since the land reform. This impact remains severely important for this country, which despite having exported tobacco worth US$892 million, still has difficulties accessing foreign exchange and having to deal with inflation.
Data at the end of December showed a 48% increase in the number of growers registered for this year’s crop, as well as a 7% rise in planted area. The likely volume increase in 2019 will, therefore, depend on the impact that El Niño may cause in the country. Meanwhile, growers remain cautious because of reduced rainfall.
Having produced the least of the past five year-crops by 2017 (82,000 tons), last season Malawi showed some signs of overcoming on burley, the tobacco type in which Malawi ranks number one in international trade volumes, by doubling the quantity it produced. The 20% area expansion does not entirely explain this increase, as better weather conditions contributed as well. So did the return of growers who had given up on the crop in the previous crop but returned last year. Higher prices fetched in Malawi than those in its neighboring countries also led to some tobacco crossing borders.
The top tobacco exporter, Brazil, showed a harvest execution rate close to 45% by the end of January in the three main producing southern states. Although having benefited from a lower hail incidence, this weather condition caused more severe damages this year. A 5% decline in volumes is expected compared to 2018.
On the opposite side, price negotiations have not been conclusive. Despite having been previously scheduled for November-end, talks have been dragging since and by January’s first fortnight there was yet no agreement upon the update on prices. Growers’ associations are aiming at echoing the production costs’ increase in the price. Leaf dealers, however, were not receptive to such a sharp rise on price matrixes.
US tobacco growers may yet remain equally disappointed in the aftermath of last season. First, they had received notice that Alliance One would not contract domestic burley tobacco growers. They were, then, hit by Hurricane Florence, harming production. And if that was not enough, production volumes are, nonetheless, superior to real demand for American leaf. For those reasons, growers may be eager to hear about diversification with other crops. And why not cannabis? – that’s the question that is raised in an ever-growing number of American tobacco producers’ minds.
In a short period, Altria got to play on the acquisitions market with two relevant operations. On one hand, buying a minority position in Juul Labs, the company that holds the device that, despite its clear stake in the US vapor market (Juul closed the year with a market share of 76% on vapors), does not emancipate from the reported youth consumption. On the other hand, Altria gets a say on the new market trend: after much secrecy over its (potential) relationship with cannabis, December’s headlines read that, after many weeks of speculation, Altria had bought a stake in Cronos, a Canadian cannabis producing company for US$1.8 billion. Altria’s venture into the cannabis market had been consummated.
It was official before that the tobacco market is highly interested in this product, which has the potential to grow from US$8 billion in 2017 to US$31 billion by 2021. But, as we see it, even tobacco growers cannot ignore this trend. Data from some consultancy firms point that the heat-not-burn market may be worth US$21 billion by 2023. However, this recent market may not be enough to offset the fall in demand for tobacco leaf caused by the decline in the conventional cigarette market, which decreased 1.4% in 2017.
While many countries hold the debate on cannabis legalization for medical and/or recreational uses in their agendas, others take their stances further, as the US did. The Trump administration recently signed a bill that will allow for the production of hemp, cannabis with lower than 0.3% THC that is commonly used to produce fibers, pairing it up with any other agricultural crop, thus giving its producers the same rights as those growing other crops. Pennsylvania, North Carolina, and Kentucky growers are among those who, in need of crop reconversion, may benefit further from this initiative. These measures hold, ultimately, the potential to drive numerous paradigm changes in this increasingly live market.
The Year 2017 was marked by the final stages on the acquisition of Reynolds by British American Tobacco and by the reentry of Japan Tobacco in the acquisitions market scene in high-potential Asian markets. However, 2018 was not any less active: the year started with Alliance One (now Pyxus International) buying two Canadian cannabis producing companies and ended with the activity by Altria. During this course, the stock market value retreated almost US$130 billion, due to the volatility generated by regulation, raising uncertainty. BAT was, among the main manufacturers, the one that suffered the most, as 50% of its sales comprised in the US are menthol products that the US FDA may come to ban.
For 2019, China National Tobacco Corp’s IPO in the Hong Kong Stock Exchange over its international business is anticipated. Although it represents a very diminished stake of CNTC’s total portfolio, it may help the company direct funds to new investments and acquisitions, as well as diversifying to new products in the heat-not-burn segment.
Last notes are about the introduction of plain packaging in three countries in 2019 (Turkey, Thailand, and Saudi Arabia). Whether with counterchange or not, this is a measure that will gain track over the next few years.
