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About the Author
Wardie Leppan is a Senior Program Specialist in the Non-communicable Disease Prevention program of the International Development Research Centre (IDRC). He has been actively supporting research in the field of tobacco control at the IDRC since 1998.
Natacha Lecours is a Program Management Officer at the IDRC and member of the Non-communicable Disease Prevention program.
Daniel Buckles is an Independent Consultant and Adjunct Research Professor at Carleton University in Ottawa, Canada. He has published various books on the social and economic dimensions of agriculture.
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Tobacco Control and Tobacco Farming
Separating Myth from Reality
By Wardie Leppan, Natacha Lecours, Daniel Buckles
Wimbledon Publishing CompanyCopyright © 2014 International Development Research Centre
All rights reserved.
DETERMINANTS AND LIKELY EVOLUTION OF GLOBAL TOBACCO LEAF DEMAND
Tobacco industry advocates argue that tobacco-control policies are the chief culprits in reducing global tobacco leaf demand, thus negatively affecting farmers' livelihoods. The argument runs as follows: tobacco- control policies lead to a decrease in tobacco consumption and therefore to a decline in global demand for tobacco leaf. This will impoverish large numbers of farmers in poorer countries that heavily rely on tobacco leaf farming.
This chapter examines trends in the global tobacco leaf market, key features of the tobacco industry and a range of factors driving global tobacco leaf demand. It shows that tobacco-control policies play a very minor role in determining short- to medium-term global demand for tobacco leaf. Population growth, income growth, cultural norms, new technology, national economic and political dynamics, government subsidies and the corporate strategies of a monopolistic industry carry much more weight in driving demand for and production of tobacco globally and in particular national contexts. By placing global tobacco leaf demand in this broader perspective, the fallacy of the industry argument against tobacco-control policies is revealed. It also highlights the real source of vulnerability of tobacco farmers to fluctuations in demand and falling farm-gate prices for tobacco leaf – their weak position in the leaf marketing chain.
Overview of the Tobacco Leaf Market
Global consumption of tobacco products
Demand for tobacco leaf is essentially derived from demand for manufactured tobacco products, predominantly cigarettes. More than 43 trillion cigarettes have been smoked in the last ten years, with more than six trillion cigarettes being sold every year. The global market for cigarettes was estimated at USD 610 billion in the year 2010 and accounted for over 95 percent of total worldwide sales of tobacco products (Euromonitor 2011; Eriksen et al. 2012).
Health organizations and financial analysts estimate the total number of smokers today at approximately 1.3 billion worldwide (Mazars 2011; Eriksen et al. 2012). Around 20 percent of the world's population smokes cigarettes. Figure 1.1 shows the evolution of global cigarette consumption in billions of sticks since manufactured cigarettes were introduced in the late nineteenth century, forecast through to 2020.
Global consumption of cigarettes has historically been highest in high-income countries (HIC) where it increased steadily until the early 1990s. Between 1990 and 2009, however, overall tobacco consumption diverged geographically. While in HICs tobacco demand was leveling off or slowly declining, more tobacco was used in low- and middle-income countries (LMIC). For example, during this period, cigarette consumption dropped by 26 percent in Western Europe and rose by 57 percent in the Middle East and Africa (Eriksen et al. 2012).
The shift in tobacco consumption from high-income countries to low- and middle-income countries is due to many factors. In HICs, the downward consumption trend was reinforced by changing consumer awareness of the dangers of smoking, reinforced by strong tobacco-control policies and regulations limiting advertising. In LMICs, targeted international marketing campaigns and trade liberalization driving down prices for tobacco products stimulated demand, which was sustained by higher population growth and increases in disposable income (FAO 2003a).
Figure 1.2 portrays global tobacco consumption in 2009 (Shafey et al. 2009; Mazars 2011). China alone accounted for 38 percent of tobacco consumption worldwide, followed by Russia at 7 percent. Ng et al. (2014) provide recent evidence of the impact of rapid population growth in developing countries on the prevalence of tobacco use and cigarette consumption. For instance, between 1980 and 2012, the total number of cigarettes smoked in China grew from 1 trillion to 2.3 trillion, while in the US there was a decline from 610 billion to 310 billion.
Global tobacco consumption is projected to increase steadily. The World Health Organization (WHO) estimates that over the next five years the number of smokers on the globe will increase at a compound annual growth rate of 3.5 percent to 4 percent. This trend will be maintained despite falling rates of tobacco use in developed countries because the population increase in developing countries will drive the overall growth in the number of tobacco users worldwide. China alone will add 8.5 million new smokers by the year 2015. Financial analysts predict that there will still be at least one billion tobacco users by the year 2050 (Euromonitor 2011).
Global production of tobacco leaf
Tobacco occupies 3.8 million hectares of agricultural land worldwide, in 124 countries. China, Indonesia, India, Brazil and Malawi account for about two-thirds of this total (FAO 2012). In 2009, some 7.1 million tons of tobacco were produced (Eriksen et al. 2012).
Tobacco will grow in any warm and moist environment. However, several factors influence the characteristics of the final product, including climate and soil conditions, harvesting methods and curing procedures. Among these, the curing method generally defines each type of tobacco (Van Liemt 2002). The most widely used curing methods are flue-curing, fire-curing, air-curing and sun-curing. After curing, which is the last stage in the production of tobacco, leaves are manufactured into the final tobacco product.
Most tobacco goes to the manufacture of cigarettes. Different manufacturers and brands use specific mixes of tobacco types (plus other additives) in their cigarettes. There are four main types of cigarettes, namely Virginia, American blend, dark and oriental cigarettes. For instance, the American blend, which is the most popular type, contains a mix of flue-cured Virginia, Burley and Oriental tobaccos. Virginia cigarettes are made almost completely from flue-cured Virginia tobacco (Van Liemt 2002). Other tobacco products include cigars, cigarillos, pipe tobacco, hand-rolled cigarettes (like bidis), roll-your-own (RYO), kretek, shisha, candy or fruit-flavored cigarettes and smokeless tobacco products like snuff, snus and chewing tobacco. Currently, almost 100 million people work in the tobacco industry worldwide, of which 40 million work in growing leaves and only about 1.2 million in manufacturing cigarettes. As discussed further below, improved manufacturing and the ongoing consolidation of the industry (not the decline in cigarette consumption) continues to drive employment down (ILO 2003).
While unmanufactured tobacco stores well, cigarettes do not. Consequently, manufacturers stock various types of unmanufactured tobacco so they can respond to increases in demand for cigarettes without delay. This practice shelters prices for cigarettes from much more variable conditions affecting the supply and prices for diverse types of unmanufactured tobacco leaf across various growing regions (Van Liemt 2002). These differences in demand and supply dynamics allow global manufacturers to seek out the lowest price for inputs and highest price for the end product.
In recent decades tobacco leaf production declined steadily in HICs as transnational tobacco corporations shifted their attention to lower cost production environments in LMICs. t the same time, support to tobacco growing in HICs in the form of subsidies and technical assistance was withdrawn and, in some cases, support was provided to farmers to switch to other crops (Cunningham 1996; Gale et al. 2000). Tobacco production shifted steadily to LMICs (FAO 2003a; Geist 2009).
Figure 1.3 depicts the world's major tobacco-producing countries. China is the world's largest tobacco producer, contributing 43 percent of global production. Three countries – China, Brazil and India – account for two-thirds of all global tobacco leaf production. The USA and the European Union, formerly major tobacco producers, currently both account for four percent each of the world's tobacco. Developing countries, including Zimbabwe, Tanzania, Malawi, Argentina, Indonesia and Pakistan, also experienced significant growth in the sector over the last decade. Percent increases in production were greatest, however, in four countries in frica (Mozambique, Zambia, Mali and Ghana) and in Cambodia, suggesting that the diversification of sources of unmanufactured tobacco by transnational tobacco companies continues (Eriksen et al. 2012).
Global tobacco leaf trade
International tobacco trade involves both tobacco leaves as raw material and manufactured tobacco products such as cigarettes. The total tobacco leaf trade is estimated at an annual value of USD 7 billion, whereas the annual value for international trade of manufactured tobacco products is estimated at more than twice that amount, USD 15 billion in 2010 (Mazars 2011).
Figure 1.4 shows tobacco leaf exports by country for 2011. While the European Union is still the single largest exporter of manufactured tobacco products (mainly cigarettes) and a major exporter of tobacco leaf, Brazil leads among exporters of unmanufactured tobacco leaf. China, India and the USA follow. Malawi and Zimbabwe, while smaller players in the global trade of tobacco leaf, rely very heavily on tobacco leaf exports as a proportion of the national economy. These relatively small exporters consume only a fraction of their production, and do not have an internationally competitive cigarette production industry that can compete internationally for market share (Streatfield 2005).
The largest share of tobacco produced in LMICs is ultimately traded in global markets and is therefore largely unaffected by demand reduction measures in their own country. There are a few exceptions, however. China, which produces the largest amount of tobacco leaf by far, manufactures and consumes much of its production. Nevertheless, it still accounts for 6 percent of global tobacco trade. Similarly, India is a major consumer of lower quality bidi products manufactured nationally and a major global exporter of higher quality unmanufactured tobacco and manufactured tobacco products. On balance, tobacco leaf production in both countries is likely to continue to gain from increases in overall global demand for tobacco leaf. rgentina is also an exceptional case as tobacco farmers there receive direct subsidies from taxes on local consumption. Reduced consumption nationally would eventually result in lower subsidies for farmers, depending on changes in tobacco taxes.
Illicit trade in tobacco products also stimulates the global market for unmanufactured tobacco. Cigarettes are among the most commonly smuggled products globally – 580 billion sticks were traded worldwide on the black market in 2010 (Euromonitor 2011). Financial analysts expect that the world illicit cigarette market will grow by 60 percent between 2010 and 2015, with the Middle East, Africa and Australasia being the largest growing regions. While high taxes on tobacco products are commonly cited by the tobacco industry as a major factor of smuggling, illicit trade is most prevalent in LMICs where taxes are generally low. Some LMICs have high smuggling rates and high prevalence of illicit trade, even though the price of cigarettes is low (World Bank 2003). In most high-income countries, the prevalence of smuggling is minimal even though cigarette prices are high. Ineffective sanctions against smuggling, weak border controls, organized crime, fraud and complicity of officials with the industry seem to be the main drivers, rather than price (see Joossens and Raw (2012) for a recent discussion).
Global tobacco companies
The global tobacco industry is controlled by five multinational corporations, consolidated in recent decades through mergers and take overs. These are Philip Morris International, Altria/Philip Morris USA, Japan Tobacco International, British American Tobacco and Imperial Tobacco. As of 21 March 2012 the World Lung Foundation reported on its website that "estimates of revenues from the global tobacco industry likely approach a half trillion U.S. dollars annually. In 2010, the combined profits of the six leading tobacco companies was USD 35.1 billion, equal to the combined profits of Coca-Cola, Microsoft and McDonald's in the same year. If Big Tobacco were a country, it would have a gross domestic product (GDP) of countries like Poland, Saudi Arabia, Sweden and Venezuela."
In addition to these privately-owned transnational corporations, the state-owned China National Tobacco Corporation (CNTC) is a major player. It is the world's largest tobacco company by volume and exports Chinese brands to other countries. In 2010, China produced 41 percent of manufactured cigarettes globally, followed by Russia (7 percent), the USA (6 percent), Germany (4 percent) and Indonesia (3 percent) (Eriksen et al. 2012). Over 500 cigarette factories around the world manufacture about 6 trillion cigarettes yearly, with a 13 percent increase in the last decade. Most of these factories are located in China and in Europe (especially Germany).
Tobacco leaf marketing chain
Figure 1.5 describes the generic features of the tobacco leaf marketing chain. Tobacco companies procure tobacco leaves either through integrated leaf operations where manufacturers buy leaf directly from farmers or via an intermediate party, the leaf merchant. Leaf dealers or merchants are leaf-buying companies that link between farmers and tobacco product manufacturers. Two major US-based merchants dominate the global leaf-buying market: Universal Corporation and lliance One (formerly Dimon and Standard corporation before their merger in 2005).
Tobacco leaves are internationally traded either through the auction system or the contract system. In both cases, the market is controlled by a few major companies – tobacco manufacturers and leaf processors. Under the auction system, farmers take their crop to the trading floor at the end of the growing season. Leaf-buying companies examine the quality of the leaves and establish the grade. Price is then decided by auction. In many countries, however, only one or two companies control the majority of the market so they have considerable influence over price. Evidence of price collusion among leaf buyers also suggests that bargaining power is highly concentrated (see Otañez and Graen, this volume).
Over the last few decades, the global tobacco industry has moved in the direction of vertically integrated operations where a single company or its subsidiaries has control over all steps in the supply chain, usually through pre-established contracts with farmers. Under the direct contracting system, buyers purchase their tobacco leaf from farmers at harvest time. Buyers usually extend credit and technical support to farmers at the beginning of the year, which often ends up in a form of debt bondage allowing tobacco companies to further control farmers (see Lecours, this volume and khter et al., this volume). Under both systems, farmers do not have bargaining power in relationships with the small number of powerful buyers who in reality control the pricing.
Determinants of Global Tobacco Leaf Demand
s shown above, the global demand for tobacco leaf basically follows the global demand for cigarettes. Many factors influence demand for cigarettes, although key to the product's appeal is the addictive nature of nicotine, leading to habit formation and addiction. The increasing awareness over the past decades of the dangers of tobacco use has triggered international organizations and a number of national governments to change their perspective on tobacco farming and consumption and to deploy efforts to reduce tobacco prevalence. These include pricing, excise taxes and anti-smoking policies and marketing campaigns. Corporate advertising and lobbying strategies have also been curtailed. Given this attention, it is not surprising that tobacco-control policies and regulations have a strong profile in the industry and in the minds of the public. They are not, however, prominent in determining global tobacco leaf demand.
Demographic, socioeconomic and cultural factors
The prevalence of the use of tobacco products is strongly influenced by demographic trends (younger populations) in different countries and regions, access to new income and cultural factors. Overall tobacco prevalence worldwide, and consequently global demand for tobacco leaf, are still on the rise, forecast to peak in 2015. It is then expected to gradually fall by 8 percent in volume between 2015 and 2050 (Euromonitor 2011). This long-term global market decline will be affected by ups and downs, with big declines in the USA, Japan and Germany and big increases in China, India, Egypt, Indonesia, Vietnam and the Philippines. China's share of world cigarette market by volume is expected to reach 50 percent by 2050. By contrast, some major developing markets like Brazil, Turkey, South Korea and Ukraine will witness significant falls due to the adoption of stringent anti-smoking legislation (Euromonitor 2011).
Excerpted from Tobacco Control and Tobacco Farming by Wardie Leppan, Natacha Lecours, Daniel Buckles. Copyright © 2014 International Development Research Centre. Excerpted by permission of Wimbledon Publishing Company.
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Table of Contents
Foreword by Ahmed Ogwell; Preface: Wardie Leppan and Natacha Lecours; Introduction: Separating Myth from Reality by Wardie Leppan, Natacha Lecours and Daniel Buckles; Section 1: The Determinants of Tobacco Leaf Demand; Chapter 1: Determinants and Likely Evolution of Global Tobacco Leaf Demandby Jad Chaaban; Chapter 2: Tobacco Leaf Farming in Lebanon: Why Marginalized Farmers Need a Better Option by Kanj Hamade; Chapter 3: ‘Gentlemen, Why Not Suppress the Prices?’: Global Leaf Companies Suppress Rural Livelihoods in Malawi by Marty Otañez and Laura Graen; Section 2: Farming Conditions in Low- and Middle-Income Countries; Chapter 4: The Harsh Realities of Tobacco Farming in Low- and Middle-Income Countries: A review of the Socioeconomic, Health and Environmental Impacts by Natacha Lecours; Section 3: Economically Sustainable Alternatives to Tobacco; Chapter 5: Breaking the Dependency on Tobacco Production: Transition Strategies for Bangladesh by Farida Akhter, Daniel Buckles and Rafiqul Haque Tito; Chapter 6: Substituting Bamboo for Tobacco in South Nyanza Region, Kenya by Jacob K. Kibwage, Godfrey W. Netondo and Peter O. Magati; Chapter 7: Diversification Strategies for Tobacco Farmers: Lessons from Brazil by Guilherme Eidt Gonçalves de Almeida; Section 4: Conclusions: Reframing the Debate on Tobacco Control and Tobacco Farming by Daniel Buckles, Natacha Lecours and Wardie Leppan