Polish Tobacco: Deserving of More Global Recognition

Although one of Europe’s largest producers, Polish tobacco remains relatively obscure outside the continent – and despite its excellent quality. But EU, as well as Polish politics, might have something to do with that situation. Tobacco Asia talked to three companies about their views. 

By Thomas Schmid

According to the European Commission’s Agriculture and Rural Development Agency, tobacco is currently commercially cultivated in 12 EU countries. But the main producers are Italy, Bulgaria, Greece, Spain, and Poland, which together account for 85% of the EU’s total tobacco output. Tobacco production in Poland has a long tradition, with Virginia and burley varieties today making up the bulk of the crop. But Kentucky tobaccos and the rather strong and pungent Skroniowsky varietal are also grown, although in much smaller quantities.

FCV cultivated in Poland is characterized by a nice, warm, natural yellow color, soft tissue and – due to predominantly manual harvesting – practically no defects in the leaf. In most other western European countries tobacco is harvested using machines, which often damages the delicate leaves, causing lower quality and darker color after curing. Typically classified into six grades, Polish FCV boasts a very high sugar content of about 25% and extremely low nicotine of up to 1.2%, perfect for both shisha tobacco and cigarette manufacturing.

On the other hand, and depending on the varietal, burley from Poland may either have high or low nicotine but generally is almost bereft of sugar and comes in large and intensely brown leaves. Lastly, Kentucky varietals, as well as the Skroniowsky type, are usually fire-cured and smoked, making them exceptionally strong with a very intense scent and aroma.

Top quality at attractive prices

“Top quality Virginia tobacco from our region is much sought-after by many companies in the European tobacco industry,” attested Karol Szubiak, general manager of MCS Tobacco Trading Ltd., a company that recently relocated to Riga, Latvia, for reasons we briefly explore in our “Exodus” side box.         Middle Eastern countries over the past decade or so also have increasingly taken to Polish tobacco and, as Szubiak put it, “the last few seasons have further affirmed that there is huge demand for it there.” But these two regions disregarding, Polish tobacco remains nevertheless relatively obscure elsewhere, and despite its excellent quality and attractive prices to match.

“In my opinion, tobacco from Poland deserves more popularity in the global market due to its outstanding characteristics,” observed Łukasz Szymański, owner and managing director of Solidus Trading GmbH, another trading company curiously not headquartered in Poland but a neighboring country, in this case, Germany.

“Local farmers have specialized in growing these types of tobaccos for many years, bring great expertise to the table and have established the necessary infrastructure, like drying barns,” added Miroslaw Pekala, general manager of Lukowa Tobacco Company, a family-owned business located in Bilgoraj County in southeastern Poland, one of the country’s most important tobacco growing regions. “Moreover, the specific microclimate is very suitable for producing high-quality FCV with low nicotine and high sugar levels.” Unlike Solidus Trading and MCS Tobacco Trading, which solely are merchant firms that buy and sell tobacco, Lukowa Tobacco is a full-blown production company. It operates its own, fully-equipped processing plant and directly sources its tobaccos from its contracted farmers in the surrounding countryside.

EU intervention leads to farm consolidation

So on a whole, everything should be just fine and swell with Poland’s tobacco growing industry, right? Not so. After Poland joined the EU in 2004, a sudden cash influx thanks to generous EU tobacco subsidies saw smallholder farm incomes triple over the course of a decade, according to Szubiak. But then the bureaucrats in Brussels decided to suspend these subsidies a few years ago with the result that small-scale tobacco farming became a burden, a losing proposition for many.

“Poland’s Agricultural Market Agency reports that these farms are struggling to remain competitive and there has been a move to consolidate smaller farms into larger units in recent years, with the average acreage increasing for those who decided to stick with tobacco production” explained MCS Tobacco Trading’s general manager. But while some larger estates comprising up to 50 hectares and above are gradually emerging, too, the vast majority of the country’s tobacco still hails from small farms averaging from 1 to 4 hectares of cultivated land.

International traders dominate market

And then there is, of course, the issue with international traders and multinational tobacco manufacturers having firmly established themselves in the country. Not only have they gained enough leverage to practically dictate contract prices but they’re also sweeping up the bulk of production.

“International tobacco companies dominate Poland’s cigarette market, holding almost 90% market share, and by fixing the price of tobacco buyouts they control prices across the country,” claimed Szubiak, but added that local companies are slowly but steadily gaining ground, wrestling more market share from them every year.

Meanwhile, Solidus’s Szymański said that there also have been some benefits that local firms were able to reap from that dominance. “We often buy tobacco in the same regions and from the same farmers [as the large internationals] and thus we have no other choice but to adapt to their pricing policies if we want the farmers to sell us their produce at all. But on the positive side, I have to say that by submitting to that situation we gain access to some of the most valuable varieties of tobacco available in the Polish market today.”

That observation notwithstanding, he still speculated that the large international merchants “wish to create a monopoly and eliminate independent [local] entities, having strong support from politicians.”

Tobacco firms dwindling to a Mere Handful

Currently, a mere 15 legally registered companies compete for Poland’s annual tobacco crop (see table), including a handful of international traders and multinationals. But times were different not too long ago. Up until 2015 – and thus already well into Poland’s EU membership - the country brimmed with more than 300 different companies firms of all shapes and sizes. Then the government enacted a string of new rules and revised existing legislation; some of them in direct compliance with EU regulations, but others as purely domestic laws intended to streamline the entire industry from the bottom up.

This upheaval affected the demise of a large number of local firms and caused dozens of others, like Solidus Trading and MCS Tobacco Trading, to relocate to neighboring countries, where regulations at least for the time being were more favorable. The end result was the current situation, where only 15 entities remain, all of them licensed by the Ministry of Finance and authorized to legally engage in tobacco trading. While some observers may argue that this slimming-down was a much needed corrective measure to take the pressure off a cut-throat competitive market, others claim that it has merely afforded international companies with their heavy financial back-up a greater advantage in gaining market dominance.

But that claim would be a little unfair because at least the prevailing circumstances have encouraged local companies to step up their marketing efforts and become more creative and aggressive in capturing new customers abroad in the process – and that certainly must be a good thing in order to promote Polish tobaccos on a wider global scale.

The EU never sleeps

But then there is also the ever regulation-crazy EU which never seems to rest.

“We are suffering from increasingly stringent legal regulations introduced by the EU, limiting our activities and sales,” elaborated Szymański. “Due to this, we have lost several EU countries that until recently were among our most important export markets. And with a couple of other countries, things are not looking too rosy either, getting more and more difficult as well. That is of great concern for us when we think about the future of our company.”

Then again, companies like Lukowa Tobacco, which unlike many others have opted to stay instead of taking flight, appear to have come to terms with these circumstances comparatively comfortably and easily. General manager Miroslaw Pekala answered with a short, affirmative “no” when we asked him if his firm was affected by all the legal ruckus from within and without Poland, adding that Lukowa Tobacco’s strategy simply was to “try and reach all significant markets for manufacturing tobacco products like cigarettes and shisha tobacco,” whether they may be in Europe or elsewhere. Lukowa Tobacco is in a rather enviable position anyway. According to Pekala, there currently only are three companies in the whole country that have their own primary processing lines and are thus able to produce strips or loose leaf without having to go through third-party processors - and Lukowa Tobacco is one of them. “And what additionally distinguishes our company is the fact we are truly and totally independent, family-owned and operating exclusively with private capital.”

Exodus

When Poland’s government enacted a slew of new laws, imposing far more stringent regulations on tobacco trading, a burgeoning industry comprising more than 300 local firms collapsed almost overnight, leaving only 15 players. Many of the others simply folded. Others opted to move to neighboring countries, where the regulations were less restrictive. Without doubt the single main reason for that flight was the imposition by the government of hefty annual guarantee amounts to be paid by merchant companies to the customs office in exchange for being granted a tobacco trading license. The set rate of a currently PLN1 million (approx. $273,000) for each 1.000 tons of tobacco traded per annum just proved unaffordable in an environment where profit margins already were very tight. Solidus Trading, which is now based in the eastern German town of Frankfurt-on-the-Oder just a stone’s throw from the border with Poland, was among the dozens of companies that joined the exodus.

“The main and actually the only reason that we had to leave Poland in January 2015 was because of the sudden changes in tobacco regulations introduced by the new Polish government,” said managing director Łukasz Szymański. “They drastically reduced the freedom of trade and introduced a number of requirements that were almost impossible for trading companies like ours to comply with if they wanted to stay afloat. Therefore, my partners and I resolved to move our headquarters to Germany, where the regulations were more favorable.” Meanwhile, MCS Tobacco Trading could probably tell an almost similar story, as the company relocated to Riga, the Latvian capital, only very recently.