Following the dissolution of the U.S. tobacco program, Stabilization is working to provide additional
marketing opportunities by venturing down new paths.
As the U.S. tobacco industry redefines itself, Stabilization is redefining its role in order to provide additional marketing options for tobacco farmers. The U.S. Flue-Cured Tobacco Cooperative Stabilization Corp. was founded in 1946 to administer the price support program under the U.S. tobacco program. Now that the program has been eliminated as part of the buyout, many wonder if the cooperative will cease to exist. To the contrary, Stabilization has big plans for the future, which its managers recently shared with Tobacco Farm Quarterly.
When Stabilization was formed, it was granted broad powers; it was allowed to participate in any kind of tobacco-related business, says Arnold Hamm, Stabilization’s assistant general manager. Historically, the cooperative hasn’t strayed far from its core mission of administering the price support. It did branch out twice however—once in 1967, when it purchased Brown Tobacco Co. in Fuquay-Varina, North Carolina, to process leaf (Stabilization sold the company in the late 1980s but held on to the storage space), and again in 2001, when, after the first U.S. tobacco companies started contract buying, the cooperative ventured into the management of marketing centers.
Faced with the potential of a buyout and an uncertain future, Stabilization’s members in 2002 started thinking about new marketing opportunities. They asked, Why can’t the cooperative make cigarettes? “So, the board created a committee to explore manufacturing,” says Hamm. “A little over a year ago, we heard Vector was selling its factory. We went on a tour and I, for one, was bowled over.”
The processing and cigarette making factory in Timberlake, North Carolina, has its own stemmery and equipment for the production of puffed stem. It also has a primary for cutting and flavoring. Its production capacity for cigarettes is 10 billion sticks per year.
After rounds of negotiations, Stabilization purchased the facility for us$26 million. Critics questioned why Stabilization would venture into a business in which it lacked experience. However, Hamm says, “We knew we could hire the expertise.” Indeed, Stabilization brought on Tim Jackson as operations manager. Jackson has 25 years of experience working for Vector and Liggett.
The acquisition was completed on July 13, 2004. Stabilization immediately started upfitting the stemmery and began processing loan stock in August.
The acquisition affords Stabilization the ability to move tobacco in different ways. The company will offer unmanufactured strips, stem byproduct (puffed stem), cut rag and manufactured cigarettes. Asked which of these will be the bestseller, Hamm says, “It’s my sense we can move far more tobacco in unmanufactured strips.”
The factory was constructed in 1992. Vector built all the extras into its factory because of the uniqueness of its product, says Hamm. Vector contracts with farmers to grow genetically modified (GMO) tobacco for its low- and no-nicotine cigarettes. Because the genetically modified product is so controversial, Vector had to do all the processing and handling of the leaf at its facility.
As part of the purchase agreement with Vector, the factory had to be free of any traces of GMO tobacco. As part of the deal, Vector hired an outside environmental group to clean the factory.
Hamm says Stabilization ran tests on every stage of the production line to make sure no traces of GMO tobacco could be found.
Stabilization faced one major competitor for acquiring the facility—New Century Tobacco Group of Miami, Florida, USA, which is a cigarette distribution company that was interested in manufacturing its own brands. The two decided to strike a deal. Stabilization signed an agreement with New Century, which distributes in all 50 states and nearly 20 countries. Stabilization will contract-manufacture New Century’s trademarked brands and New Century will distribute Stabilization’s brands.
Stabilization hopes to begin manufacturing cigarettes this month. The new processing and manufacturing arm is named U.S. Flue-Cured Tobacco Growers Inc. and is a subsidiary of Stabilization.
The company is in the process of joining the Master Settlement Agreement. Hamm says the process is taking longer than he and his colleagues would like, but it should be completed soon.
The company has also applied for its own brand trademarks.
Meanwhile, Stabilization is also ven-turing further into the leaf arena. Beginning this year, it is offering its members the opportunity to sign either an exclusive or nonexclusive marketing agreement with the cooperative. The farmers who sign marketing agreements will sell their tobacco at Stabilization marketing centers, where it will be offered to buyers through the traditional auction.
Stabilization will run the marketing centers again, but will adjust the number based on demand. Last year, Stabilization had 14 marketing centers. Hamm predicts that number will drop to half or even less.
“Today, farmers need Stabilization more than ever,” says Hamm. “They need an alternative to contracting with manufacturers and leaf dealers. It’s always been in our articles of incorporation and bylaws to offer a marketing agreement—which is a contract—but we’ve never had to do that before.”
Stabilization will offer farmers two options for marketing tobacco. “There are farmers who will lose contracts, who don’t want to contract, or [who] produce excess tobacco. We will offer marketing agreements to any current tobacco farmer who wants one,” says Hamm.
Stabilization will offer an advance payment for the leaf signed to an exclusive marketing agreement. “It’s not unlike a price support, but it’s not a price support,” says Hamm. The farmer with an exclusive marketing agreement will be eligible to receive an advance based on a portion of their effective quota pounds for 2004.
Export-quality grades eligible for an advance and not purchased during the auction will be eligible for the advance. The proposed advance averages $1.40 per pound. In addition, farmers who have contracts with other companies will be able to sign a nonexclusive marketing agreement for their overage. However, such tobacco will not be eligible for an advance and will be sold at a time to be determined by Stabilization. The farmer who signs either agreement, exclusive or nonexclusive, may be eligible to receive additional payments based upon their level of patronage.
Whatever tobacco is not sold at the auction goes into Stabilization stocks. Stabilization will set a cap in advance on the amount of pounds it will buy each year. Hamm says that this year it will cap the amount eligible for an advance at 40 million pounds.
ON THE ROAD
Stabilization’s people are now traveling the world selling tobacco. They are also traveling the U.S., meeting with farmers to explain the transition.
The new company will likely bring on a few more people. “We are in the process of beefing up our sales force,” says Hamm.
Initially, Hamm predicts, buyers in Southeast Asia will be Stabilization’s biggest customers of leaf. “We also intend on going after European buyers.”
Stabilization’s role will be maintaining relationships with farmers, operating marketing centers and selling leaf, while U.S. Flue-Cured Tobacco Growers Inc. will focus on processing and manufacturing cigarettes. With its new involvement in all stages from seed to smoke, Stabilization is sure to guarantee its future in tobacco.