Go east, young man - Fourth Quarter 2009
The future’s in exports
With no foreseeable end to steady U.S. consumption declines, the export market may prove to be the salvation for U.S. tobacco growers. So say agricultural industry leaders who are looking beyond the borders to ensure that U.S.-grown tobacco remains viable in the next few decades. Sizable, growing Asian markets are of particular focus, as more Asian consumers are trading up to premium cigarettes of which the U.S.’s top-quality tobacco is a natural fit.
Charlie Finch, managing director of the Burley Stabilization Corporation, says the organization is working to promote U.S. burley by building relationships with overseas purchasers. “We feel like it’s picking up,” he says. “We have to be aggressive in promotion and get our product known in the global market. That’s where the future is.”
For the first time in many years, it looks like there will be a possible oversupply of burley. With the weak dollar, Stabilization sees this as the perfect opportunity to market to global manufacturers, and the organization is working to build its inventory. “The worst thing would be to have customers and not have any tobacco,” Finch says. “It looks like this is turning out to be a big crop. We’ve had a lot of timely rains. Overall, the crop looks excellent.”
According to a February 2007 report, USDA Agricultural Projections to 2016, domestic customers will continue to provide a large market for many years, but it will be shrinking. At the same time, exports are projected to increase consistently, albeit moderately, through the next decade.
The majority of burley tobacco grown in the U.S. now already goes to export markets, says Brian Furnish, general manager of the Burley Tobacco Growers Cooperative Association, which sends most of its tobacco to China, Indonesia, the Philippines and Thailand. “We’re very dependent on exports,” he says. “It’s been a drastic change in the last six to seven years. Our tobacco has gotten more competitive on the world market—the biggest thing has been the value of the dollar.”
Graham Boyd, executive vice president of the Tobacco Growers Association of North Carolina, says tax increases have put a lot of pressure on domestic markets. He adds that the 2009 flue-cured crop is one of the best in recent history, and U.S. tobacco exports are currently benefiting from a dollar that’s lost its value against the Brazilian real. Maintaining a stable base of U.S. growers, he says, is important to ensure the stability of global supply.
“We’ve been fortunate that the export market has been able to put a stopgap on [the domestic] decline,” Boyd says. “We’re not giving up on the domestic market, but it’s the reality of the situation. Compared with other tobacco markets, our tobacco is more competitive in the world marketplace right now.
“It’s critically important that international users of leaf continue to support U.S. growers. We have the quality but also the most stable supply in the world. If [international buyers] don’t sustain the grower base here, once they are out, they are out. They won’t make the capital investments to get back into tobacco growing.”
Boyd says he remains “cautiously optimistic” as demand from Asian markets, especially China, is steadily increasing. Besides China, other countries are looking, or taking a second look, at U.S. tobacco. South Korea and Vietnam look promising, and some European customers are again shopping in the U.S. based on the good value the crop currently presents.
As evidence of the promise of global markets, North Carolina Agriculture Commissioner Steve Troxler recently led a group of delegates to China in a trade mission to expand markets for North Carolina commodities, including tobacco. As part of the trip, Troxler met with the head of China’s State Tobacco Monopoly Administration, Commissioner Jiang Chenkeng, who said his company is interested in high-quality leaf and continuing to develop a relationship with North Carolina growers. Troxler later reported in a blog that he “came away from the meeting confident that North Carolina and China can strengthen our trade relationship for tobacco.”
Paul Denton, Extension burley tobacco specialist with the University of Tennessee and University of Kentucky, says American burley has a reputation for a smoother, more desirable flavor as compared with burley from Africa, Brazil or Argentina, and U.S. exports may benefit from the increasing demand from Chinese smokers for premium products.
“As their income goes up,” Denton says, “their taste in smokes goes up.”
That leads to more opportunities for U.S. growers as Chinese manufacturers buy American tobacco to improve their premium cigarettes, says Scott Bissette, international marketing specialist with the North Carolina Department of Agriculture & Consumer Services. “It’s kind of like salt and pepper,” he says. “They are adding it to Chinese tobacco to add flavor and improve the smoke of their blends.”
And even though the Chinese already grow 50 percent of the world’s flue-cured tobacco, Chinese smokers outnumber the United States’ total population, providing a colossal potential market.
Back at home
While farmers can’t have much impact on foreign currency values and international trading policies, good cultural practices can increase the value of the crop to global customers.
Growing tobacco for export markets, for the most part, is similar to growing for domestic markets, Bissette says. The Chinese seem to prefer a more lemon-colored leaf, whereas the domestic market prefers a more orange-colored leaf, but in all cases farmers should aim for the same thing—the ripest and cleanest tobacco possible.
Furnish says the best thing that burley growers can do is to have a good cure, but beyond that, it’s hard to prescribe specific production practices that would produce different leaf characteristics for different customers. “Every country wants different types,” he says. “You can’t really predict it.”
What you can predict, however, is that export customers don’t want any nontobacco-related materials such as grass, weeds or paper products. Moisture levels are also important, Finch says, as tobacco that’s too wet can cause problems on the processing side. Farmers should make sure tobacco is at proper moisture levels to avoid losing yield and adding costs to the final product.
“The global market is very competitive, especially with Brazil and Malawi,” says Finch. “We have to provide a quality product. Of course with FDA regulations on the rise, there’s going to be some real changes required on the farm level. This is a good time to really work hard to market a quality, clean product.
“Those costs [associated with moisture levels and yield loss] are going to be very important to foreign customers, especially with the competition that we’re faced with.”
Denton adds that export customers are very sensitive to pesticide residues, and growers should always carefully follow label directions. For burley, some international customers seem to prefer a lighter, medium-stalk burley, but the advantage U.S. growers still hold is that all customers are looking for a good cure, such as the one that occurs naturally in the U.S. under normal weather conditions. “It’s important to stress that a very high percentage of our burley goes to export markets,” he says. “They don’t want flash cured [from us]. They can get that anywhere in the world.”
At the current time, buyers don’t specify many production processes for contracted tobacco destined for the export market, but Denton expects that will change in the future, with companies increasing requests for growers to follow specific production steps.
“For example, companies buying for the export market are much more sensitive to MH residues,” Denton says. “And we’ve seen that different companies increasingly want their tobacco grades separated differently to meet their particular needs.
“We’re going to have to be sensitive to the needs of those markets. We’re trying to compete on quality, but there can be some substitution [in premium blends]. It’s not always a perfect substitution, but the price can only be pushed so high. So we have to compete on efficiency and price as well as quality.”
FDA regulations will continue to impact how, and where, growers do business, Boyd says. “I think that tobacco is about to change, maybe more than at any point in its history,” he says. “There’s a big question mark on what the future looks like right now. I think that some things may improve, some things may not; it just depends on what you make of it.”