ITGA Tobacco Market Overview
What has 2019 meant for tobacco leaf so far? As February ended, it was finally possible to look at the results of the main tobacco companies (JTI, PMI, BAT, Imperial, and Altria), how volumes had evolved, would there be any changes in the strategy, and how were the financials of each one? Every one of these questions can possibly send shockwaves that can severely affect tobacco growers.
The above graphic easily shows that for the first time in five years there was an increase in tobacco volumes by the top four international tobacco companies (JTI, PMI, BAT, and Imperial). Of course, one has to take into account the fact that with decreasing smoking rates this increase may be due to acquisitions and mergers by these companies. However, that does not negate the fact that volumes did indeed grow last year.
For leaf production, Malawi harvest estimates are at 206,000 tons of tobacco, however, leaf dealers demand is only 166,900 tons, thus creating a gap of 40,000 tons, which will surely create some difficulties regarding prices come marketing season. Despite this factor, the government is expecting revenues of US$345 million.
ITGA Tobacco Market Overview
Total Volumes (billion sticks) (Source: Calculated from company data)
The beginning of the marketing season in Zimbabwe did not come without problems arising. Due to the country being in a sensitive financial situation, the country’s central bank, the Reserve Bank of Zimbabwe or RBZ, aimed to harness most of the foreign currency income from tobacco leaf selling to complement the country’s forex necessities. After a lot of discussion between the industry board, and farmers’ associations, a consensus was reached. Tobacco farmers would retain 50% of foreign currency earned from tobacco leaf and the remaining 50% are to be paid in RTGS (the new currency, real-time gross settlement). Large-scale farmers (those with over two hectares) will be able to hold their foreign currency for a period of 180 days, while small-scale farmers’ holding period is indefinite. As March entered its third week, 172,471 growers were registered to sell their crop, up from 123,763 in 2018 (39% increase). Opening day had an average price of US$1.83 per kg, compared to US$2.22 average price for the full marketing season last year (17% drop). Farmers were hoping for higher prices due to the costs per hectare doubling during the year due to the inflation problems the country is facing.
Last but not least, leaf dealers boycotted the auctions, seeking an exemption on a 2% intermediate transaction taxes. There was a lot of turmoil in the beginning of the marketing season, in a country in which tobacco occupies such an important role. Growers worldwide should follow closely how the situation in the country evolves in the short-term.
The Zambian government announced that legislation would be revised to bring order to a very important sector for the country, an example of the efforts the government is making to safeguard an industry that took many years to develop.
In Argentina, price negotiations in Misiones concluded with prices increasing 59.5%, compared with 2018. Burley will sell for US$1.81/kg and Criollo agreed price was US$0.93/kg. The cooperative had received 32,000 tons.
At time of print, Brazil’s tobacco harvest was almost completed and negotiations to settle prices had been settled, with growers reaching an agreement with two companies. Souza Cruz and Japan Tobacco International will buy Brazilian tobacco leaf. The delivery process was underway with completion of 14% for the flue-cured Virginia (FCV)variety, 25% for burley and 64% for comum. Dominican tobacco leaf output dropped. However, quality is sure to rise due to the dry weather having created a stronger and higher quality crop.
The situation for US tobacco worsened since the beginning of 2019, due to the tariff war with China (an important export market for US tobacco.) Leaf companies announced reductions in contract volumes in the order of 30-80%, which will complicate the process of selling the crops for many US tobacco growers. New data on US leaf export during 2018 revealed a 5% increase of exports during 2018 compared with 2017, with revenue surpassing the US$1 billion barrier. The resignation of FDA commissioner Scott Gottlieb was received with surprise by everyone in the industry, with analysts predicting that many initiatives by the agency would subside following his departure. However, that initial excitement has disappeared as many of the measures promoted by Gottlieb are FDA’s policies and as the agency is a joint effort, the main agenda most probably is not going to change. Planting for the news season has already begun in Florida as good weather and soil conditions enticed growers to plant their seeds. In North Carolina, however, the process of planting the seeds has not yet started due to concerns over pests and diseases.
Leaf prices in Hungary were updated with increases of 10% for FCV and 8% increase for burley, with output being, respectively, 3,500 tons and 1,000 tons. From the Middle East, the Pakistan Tobacco Board set demand on 37,070 tons of leaf, which represented a 34% drop compared to 2018.
A lawsuit in Canada ordered tobacco companies to pay US$ 10.4 billion for health damages inflicted to Canadian smokers. Several class action suits in Canada combined achieve an amount close to US$375 billion, which would pose significant risk to the industry as a whole.
This period of the year is, without doubt, an important one, as several of the most important countries in the world stage, when tobacco is concerned, started their marketing seasons. This can dictate the prices for the rest of the world.
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