A flue-cured tobacco “live” auction takes place at the Big M Warehouse in Wilson, N.C., in 2013. Owner Mann Mullen (at left in a blue shirt) says that far from being obsolete, the auction system allows farmers to get the best price available. But there has been a change at Mullen’s warehouse: He now runs a “sealed bid” auction where buyers review the tobacco one bale at a time and make their bids in writing. Visible among the buyers is dealer Rick Smith of Independent Leaf Tobacco (right).
By Chris Bickers
Starting in April of this year, Philip Morris International Inc. (PMI) changed its approach to acquiring leaf tobacco. In what it called a new “model” of leaf procurement, the company elected to end its direct purchasing of US tobacco through contracts with growers and instead went 100% to acquiring US leaf through dealers. Two dealers, to be specific: Alliance One International (AOI) and Universal Corporation (Universal). The traditional interface between buyer and grower that had been in effect for so long (if you count the history of PMI’s parent company, Philip Morris) was erased with the signing of legal documents.
The conversion seemed to run strangely counter to the strategies of the two Asian companies that came into existence in America in the last five years.
In 2010, Japan Tobacco International created a new leaf company in Danville, Va., for the procurement and processing of US leaf tobacco and called it JTI Leaf Services (JTI LS). Dealers were, and still are, involved: it was a joint venture with leaf dealers Hail & Cotton of Springfield, Tenn., and J.E.B. International of Danville, Virg. But JTI LS’ goal was to contract directly with American farmers—face to face, so to speak—to supply JTI’s needs for quality leaf. It has set up a processing plant in a pre-existing building.
Three years later, China Tobacco International made a similar decision when it created its subsidiary China Tobacco International North America (CTI-NA) and established an office for it in the Raleigh, NC, area. Like JTI GS, the help of dealers has been sought, but the company has been committed to direct contracting with the growers. As far as is known, the company hasn’t set up a processing plant to date.
Now, if things are as they have been described by the three companies, then it is apparent that there is a significant contrast between the two Asian companies on one hand and PMI on the other. PMI’s approach is almost diametrically opposed to that of JTI LS and CTI-NA. It has no face-to-face contact with the grower.
When CTI-NA announced its plan to move to Raleigh, it emphasized the importance of closeness to the producers. “It is better to be closer to the market and farmers,” said Madam Zhanhua Liang, CTI-NA president. “We chose North Carolina due to its advantages [of proximity to growers]”
JTI LS seemed to approach its establishment as something of a sociocultural crusade. Danville had traditionally been the center of the Virginia tobacco industry, but in recent years the industry had faded.
Getting behind the plow: flue-cured grower Michael Gregory plows his young tobacco in early June on his farm near Four Oaks, N.C.,which is south of Raleigh on the western edge of the Coastal Plain.
“Th[is] company has revived the tobacco industry in Danville with its processing facility,” said Steve Daniels, JTI LS director and a Danville native himself. “I feel an enormous sense of pride knowing that JTI has once again given this area such a strong tobacco presence.”
JTI LS has 50 full-time and 250 seasonal employees, quite an addition to the workforce. JTI LS has direct contracts with more than 1,200 American farmers in 6 states and is designed to process 85 million pounds of tobacco annually.
The company has even built a handsome fountain on the city’s main street to honor the legacy of tobacco as an economic force for Danville over a span of four centuries.
There might be one advantage of leaving purchases to the dealers, which is that the company could buy just those grades that it wanted. When contracting directly, you would be bound to buy all the leaves from the plant.
When PMI announced the new buying model, it went to some length to insist that the change would result in improved conditions for tobacco labor, particularly underaged workers. But this contention was vague, and only seemed to imply that AOI and Universal personnel are better at monitoring treatment of workers than PMI personnel would be, which seems unlikely.
Michael Gregory sprays for insects on his flue-cured field near Four Oaks, N.C.
Who Got What in the R.J. Reynolds / Lorillard Merger?
Reynolds divested itself to Imperial the cigarette brands Winston, Kool, Salem, and Maverick and the e-cigarette blu. All but Maverick were Reynolds brands. Reynolds also divested to Imperial Lorillard’s factory and other facilities in Greensboro, NC.
It provided Imperial with the opportunity to hire most of the existing Lorillard management, staff, and sales force.
For a short period, the newly merged Reynolds and Lorillard also are required to provide Imperial with retail shelf space and to provide other operational support during the transition.
The most significant probable effect: Imperial Tobacco will go from a minor player in the US market to number three, with about a 10% market share.
The second most significant effect: Camel and Newport are now on the same team.
Could Auctions Make a Comeback in the US?
Tobacco auctions nearly disappeared when companies started contracting in the early 2000s, but a handful of auction warehouses have kept the marketing concept alive. Now, overplantings strongly suggest that the market will be awash in excess production in September and October. Could auctions be the place to go with it?
Mann Mullen, the owner of Big M Warehouse in Wilson, N.C., says an auction is going to be the best choice to get the best price for uncommitted leaf.
“I believe that the farmers who sell here will get the best price they possibly can,” Mullen says. “I certainly think they will gain more in higher price than the commission we charge.”
Competition is the key: There are at least six buyers at every sale at Big M, and he expects that many this season. Most are dealers. Rather than a traditional “live” auction, Mullen runs a sealed bid auction, where buyers review the tobacco one bale at a time and make their bids in writing. Farmers have the right of refusal of a bid.
“If they want, we offer it again at the following sale,” Mullen says. “Everything offered on our floor has entered the trade.”