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Dr. Iqbal Lambat, c.e.o., Star Agritech, Turkey. Photo credit: Star Agritech
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Dr. Noor Zaman Khan, c.e.o., Malburo Tobacco International. Photo credit: Thomas Schmid
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Zafer Atici, owner and managing director, Prestige Leaf. Photo credit: Thomas Schmid
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Miroslaw Pekala, c.e.o., Lukowa Tobacco. Photo credit: Thomas Schmid
As the world nosedives into its worst leaf tobacco supply crisis since 2008, Tobacco Asia asked four top executives about the situation’s ramifications.
Iqbal Lambat, c.e.o., Star Agritech, Turkey
Tobacco Asia (TA): Short crops are reported from Zimbabwe, Malawi, and even Brazil. Approximately by what percentage have harvests fallen short this season in those three countries?
Lambat: Zimbabwean production will be about 200,000 tons this year; that is a 20% short crop. Malawi will be approximately 35% below normal production, with a yield of about 100,000 tons of burley. And Brazil… well, the country will produce a projected 450,000 tons of FCV versus its usual target of 600,000 tons, so that’s down a full quarter, or 25%. As for Brazilian burley, normal production hovers around 100,000 tons. But this year it won’t be much more than 40,000 tons, a decrease of a staggering 65%.
TA: Indonesian suppliers were frantically rushed buyers at the recent WT Surabaya exhibition. What’s the supply situation in Indonesia? Is Indonesia running out of tobacco, too?
Lambat: The Lombok crop, suitable for white cigarette production, has fallen from 55,000 tons to slightly over 20,000 tons. That’s almost a 50% reduction. And the cigar style Besuki has continually decreased over the past decade, from an erstwhile 100,000 tons to only 7,000 tons last year. However, sun-cured varieties such as Madura, Jatim, and Phyton have remained constant at 150,000 tons; and we expect the same this year.
TA: What are the facts in India?
Lambat: The Mysore crop is at 62,000 tons, down 38% from the normal yield of 100,000 tons. Other traditional crops that were harvested in March and April likewise were down at least by 30%.
TA: Who is winning in this supply crisis, and who will be affected most?
Lambat: The winners are mostly leaf merchants who saw this crisis looming early on and correctly interpreted it as a turning point from a “buyers’ market” to a “sellers’ market”. Prices for unmanufactured tobacco have risen by 30-50% compared to last year. There are now basically no uncommitted stocks at origin. Hardest hit will be the SMEs who have to pay a significant premium to get their hands on tobacco.
TA: When will the current shortage abate? What’s your prognosis and estimated timeframe? And what will need to happen?
Lambat: My forecast is that this crisis will be upon us for at least the next two to three years and before demand and supply will return to equilibrium. But, Brazil already is forecasting a short crop for 2023 and it will very likely mirror 2022 numbers. Brazil and Zimbabwe dominate the supply of flavored FCV. When they sneeze, the whole world catches a cold!
Dr. Noor Zaman Khan, c.e.o., Malburo Tobacco International, Indonesia/Pakistan/Malaysia
TA: Pakistan’s supply situation is deteriorating a lot. Why is this happening?
Khan: There are two causes for the drop. As you know, Pakistan has been experiencing serious flooding, which basically drowned many crops. But, there also was the Covid pandemic, during which growers had trouble selling off their stocks. So they down adjusted how much they planted. If we take these two aspects into account, tobacco production in Pakistan is 50% less than it was before the virus pandemic.
TA: Which areas in Pakistan were most heavily affected by the flooding?
Khan: There were many, but especially the area around [the city of] Mardan and Khyber Pakhtunkhwa province in general. Some areas were five feet underwater. It drowned the crops. But as I mentioned, farmers also had been down adjusting their crops. They were very concerned that if they planted too much, they might not be able to sell it, rotting in warehouses. And then suddenly, that shortage was upon us and everybody was shocked.
TA: Who is “everybody”?
Khan: The farmers, but the merchants and exporters also. Nobody expected that sudden shortage.
TA: So you’re saying that foreign importers and manufacturers will have difficulties having their orders of Pakistani tobacco filled?
Khan: Yes. [Foreign businesses] have placed orders for millions of kilograms with us, but we cannot fill those orders because we just don’t have enough stocks.
TA: Has this been driving up prices?
Khan: Yes. The price is really very high now.
TA: What’s the median price point currently?
Khan: For hand stripped, it’s almost US$4.
TA: And previously?
Khan: Previously it was in the range of US$3.30 to US$3.50.
TA: How will this situation develop? Is it going to improve next year because farmers will plant more again?
Khan: The farmers are of course very conscious about the present market shortage. So I believe that in the next season they will grow nothing but tobacco. But, they also have leverage now that prices are so high at present. They will tell you they want US$4 a kilo. And if you don’t want to buy at that price, they’ll say: “Okay, no problem, go away. I’ll sell to somebody else – at US$4.20.” But then again, I believe the next growing season is going to bring things back to normal. We will have a huge volume available next year.
TA: Can you please say a little bit about your own company and its involvement in tobacco trading?
Khan: Certainly. Malburo Tobacco International has business locations in Pakistan, Malaysia, and Indonesia, but our main office is located in Surabaya. We supply whole leaf, threshed leaf, rag, and blended tobacco. We export from Pakistan and Indonesia and import from the US, China, Brazil, and Zimbabwe.
Zafer Atici, m.d., Prestige Leaf, Hong Kong
TA: Zafer, you are specializing in oriental tobacco from Turkey. Tell me a bit about the situation in Turkey this year.
Atici: Thank you for bringing up this question, because Turkish tobacco production has been a real problem over the past year, mainly because of bottlenecks in global supply chains. Turkish farmers couldn’t get their fertilizers and other supplies at reasonable costs. For instance, fertilizer costs in Turkey went up 600% on average. And fuel oil went up by more than double. The second problem has been the climate. the summertime heat, with the highest ever countryside temperature at 47 degrees Celsius.
TA: But tobacco crops are irrigated, are they not?
Atici: Oriental requires almost no irrigation, but fields suffered nevertheless due to the enormous heat. So, farmers were rushing to rescue their crops and save what could be saved by harvesting prematurely, which of course reduced the yield. Harvest target for the main Turkish tobacco varieties this year was originally estimated at over 40,000 tons, but that has now been scaled down to only around 31,000-32,000 tons. It will be difficult for end product manufacturers to get their oriental orders filled. But these are not the only issues.
TA: What are the others?
Atici: Demand was much higher as the world emerged from the Covid pandemic, so available stocks were depleted rapidly. Secondly, there has been a law change regarding the proportion of domestically grown tobaccos that local manufacturers must use in their blends. It’s now a minimum of 21%. Minimum. Of course across all tobacco types, including oriental, FCV, or burley. And that law will inevitably – and additionally – reduce the tobacco volumes available for export.
TA: So, the hot climate paired with premature harvesting, the high post-Covid demand, the high purchasing prices for fertilizer and fuel… it all comes together.
Atici: Exactly. Production slowdowns during Covid were already bad enough. And now, those other factors. And we can even add one more dimension to the compounding problems: the war between Russia and Ukraine, which has added to the supply chain and energy concerns. Turkey has traditionally purchased a major proportion of its fertilizers and oil from Russia.
TA: Can you give an example how all of that has affected oriental prices?
Atici: I’d rather not. All I am prepared to say is that the cost of production has more than doubled and the farmers are unhappy because the money they receive in the end for their produce does not even cover their costs. I have not experienced a year like this in my 30 years in the business.
TA: Any end in sight?
Atici: I believe it depends on what we all do. There have been attempts to correct the shortage, for example in India, but then the weather there went haywire again and damaged the crops. The next six months will be crucial, because that is when the crops from the big producer countries come in – China, Brazil, Zimbabwe, USA. If they manage to come up with reasonably sized crops and also increase production [in the next season], I think things are going to start to settle.
Miroslaw Pekala, c.e.o., Lukowa Tobacco, Poland
TA: What is presently on the books for Poland’s tobacco growing sector?
Pekala: In Poland we face a considerable volume decrease for the 2022 tobacco crop. It is caused by the economic situations as well as the energy crisis which is gripping Europe in general.
TA: How is that translating in terms of factual figures?
Pekala: Compared to last year, when Poland produced around 18,000 tons of tobacco, we expect quite a bit less this year, roughly 15,000 tons.
TA: How did this happen?
Pekala: Over 20% of Polish tobacco farmers didn’t grow tobacco this year. Well, some of them started cultivating seedling in spring, but then, as the economic situation worsened, they discarded those seedlings and switched to other crops.
TA: Can you elaborate on the economic situation, please?
Pekala: Leaf drying, for example, consumes so much energy that there’s no profit left. Farmers were afraid that they’d be eaten up by the production cost. The price for fertilizer also went up four to five times since last year. And then there also is the insecurity what farmers will be able to get for their crop in autumn, how market prices will have developed in autumn, when the purchasing season starts. Seeding begins very early in February, so it’s a long wait till autumn.
TA: So it’s a compound issue of sales price insecurity and skyrocketing production cost?
Pekala: Yes. Everything has become so expensive, especially gas to operate the tobacco dryers. And gas prices may rise even further. It’s so unpredict-able. As a result of all of that, our volume has dropped.
TA: How long do you expect this to persist?
Pekala: Nobody can be sure when it is going to normalize again. But if I had to tender a guess, I’d say maybe two years, maybe even three. It also depends on whether energy prices and production cost overall will come down. But then again, it just as well could be that they will remain at the same level. Who knows?