Tobacco sector lights up
So what if Anbumani Ramadoss is out to snuff out the puff from the office corridors, restaurant restrooms and hotel alleys. Forget it. So what if 40 per cent of India’s health problems stem from tobacco use. Who cares? So what if the Centre is keen on putting a cap on the tobacco crop size. No problem. So what if new regulations are in place. What the heck? So what if the Tobacco Board collects a Rs 19 crore penalty from growers. All in the game. The industry, comprising the growers and the traders, in the tobacco heartland of Guntur is robust, kicking and powering ahead.
Though the board fixed the next season crop size at 150 million kg at its meeting in Hyderabad on July 28, members insisted on the nature’s bounty of 10 per cent to allow farmers greater relief. Already, the AP farmers have created a record of sorts by growing 172 mkg against last year’s authorised crop size of 145 mkg. At 15 per cent growth this year and with over Rs 1,500-crore exports, India (600 mkg) is in the big league, next only to China (2,000 mkg) and Brazil (700 mkg). For those who came in late, since tobacco consumption is harmful, the government insists on controlling how much tobacco can be grown in a year.
In the wake of a recent resolution passed by the UN convention on tobacco, held in Geneva, asking its member nations to cut down tobacco production by half of its present levels by 2020, the Centre has directed the board not to authorise more than the maximum extent given so far. Though the board has dropped enough hints to farmers that the crop size will not be increased beyond 150 mkg, it has to be seen whether the board will indeed reduce the size and crop for the coming years also.
Interestingly, farmers’ representatives have welcomed the move to cut down the crop size. “Since it’s not a merit crop, we cannot demand more size and more extent,” says Yelamanchili Sivaji, Virginia tobacco growers association honorary president and ex-MP. With falling output in Zimbabwe and removal of subsidies in Europe, there has been a great demand for the AP tobacco. “We are sure that the export demand of Indian tobacco, used as a filler in blends, will adjust to the higher authorised AP crop,” reveals J Suresh Babu, board chairman.
There is already a buzz in the market that the crop size will substantially go up in spite of new regulations. “How is it possible to force the farmers to restrict the crop size without showing any alternatives,” asks Chunduri Ranga Rao, a farmer’s leader from Prakasam district. Interestingly, the average price of tobacco offered by the trade has gone up despite the traders’ claims that they are losing due to the fall in dollar exchange rate.
“Traders exploit the situation by offering lesser prices. Why will they purchase the crop if they are in losses?” asks Sivaji. When some farmers switched over to crops such as maize and bengal gram last season, they ended up in huge losses while the farmers who stuck to tobacco got good revenues. This, according to the experts in the field, may prompt the farmers to go in for more tobacco.
On the other hand, political parties in Karnataka are encouraging their farmers to go in for more extent keeping in view the demand for their tobacco. The crop size of Karnataka went up to nearly 95 mkg in four years. It used to be around 20-25 mkg. With Karnataka crossing 60 per cent of AP’s size, it is set to touch 100 mkg in the coming season, which will begin in September. “The crop size from both states (AP around 120-150 mkg and Karnataka 70-100 mkg) is ideal for the trade to absorb the stocks. However, overzealous growers keep increasing the size, leading to a crash in prices,” fears Maddi Venkateswara Rao, president of the Indian Tobacco Association (ITA).
Ridiculing the claims of the traders that they are forced to offer lesser price for AP’s stock as it is of inferior quality, Babu says: “The stocks in various countries are much inferior to the Indian crop but they get better rates. This is where the presence of foreign players will be of great help.” Babu says branding is key to success in this sector. “What we should aim at is export of the end product instead of the raw material. We have the potential of doubling the exports,” he surmises. Competition is welcome to counter the corporate operational manoeuvrability as big players manipulate the prices to their advantage at the cost of small players. No wonder, industry experts feel the need to reduce the monopoly of a few players in the trade led by a big player ITC by allowing foreign direct investments (FDI). ITC, of course denies that it is a monopoly player.
For exporters, FDI ensures a bigger portfolio in the international market, opines Chebrolu Narendranath, a leading exporter and former ITA president. “Anti-smoking may impede the growth but we have the wherewithal to tide over the crisis,” he says, but insists that the penalty regime must go to drive away growers’ blues.
In fact, at the July 28 meeting, the board recommended to the Centre to reduce the penalty for over production from 15 per cent to 5 per cent. But the government is unlikely to accede to the plea, Babu says. As 60 per cent of the tobacco is exported, farmers will always have better pricing. Thanks to shortage in supply in Europe and vacuum in international market, it will always fetch higher volumes for the Indian farmers, Babu avows.
“But, we must align tobacco product pattern to meet the international demands,” Babu says. Though India is the world’s third largest producer, it has a mere 3 per cent share of $5.8 billion global tobacco leaf export trade and tobacco export accounts for 4.5 per cent of the country’s total agri exports. Despite stringent norms, the tobacco industry is healthy and well spoon-fed to sustain itself, Narendranth says, exuding an air of optimism.
FDI IN TOBACCO INDUSTRY
If top MNCs like BAT and Phillip Morris set up shop here, it will not only enhance Indian tobacco worldwide but will ensure better leverage for the AP farmers, Babu observes. Industry sources say as per the norms, foreign companies will be allowed to invest only when they either set up their units in India or invest in the existing companies.
With no existing company ready to take money in the form of FDI, the only way out for the foreign investors is to set up a unit here. For that, they need to secure a licence from the government. “Without the licence, they cannot set up manufacturing units and will not be allowed to pick up stocks from the market,” observes a leading exporter.
Need for tobacco board regime
Recognising the need to regulate production, promotion of overseas marketing and to control recurring instances of imbalances in supply and demand, which led to market problems, the Government of India had established the Tobacco Board in place of Tobacco Export Promotion Council under the Tobacco Board Act of 1975. Its tasks
Constant monitoring of the Virginia tobacco market, both in India and abroad, and ensuring fair and remunerative price to the growers and reducing wide fluctuations in the prices of the commodity.
Establishing auction platforms for sale of Virginia tobacco by registered growers and functioning as an auctioneer at auction platforms either established by it or registered with it.
Promoting tobacco grading at the level of growers and sponsoring, assisting, coordinating or encouraging scientific, technological and economic research for promotion of tobacco industry.
The board announced the minimum growing price (MGP) for the first time in 1988 Karnataka auctions after carrying out negotiations with the growers and traders. The system of MGP was extended to AP in the 1989 season.
Auctioning platforms
The board felt that the panacea for all the problems in the marketing system was introduction of an auction system. The Tobacco Board Act of 1975 was amended in 1978 to empower the board to establish auction platforms and function as an auctioneer at the platforms. The board studied the auction systems in tobacco producing countries like the US, Canada and Zimbabwe to evolve a system suitable to Indian conditions and designed the Zimbabwean model system. Although the Indian auction system was designed after the Zimbabwe model, it is unique by itself as it incorporates distinct features of several auction systems in the world.
Features of auction system
Through the mechanism of auction system, the board is in a position to control the production of tobacco to a certain degree, though of late, an increasing tendency to indulge in speculative overproduction is in evidence. Registration of area and the quota of tobacco to be delivered at auction platforms are fixed well before the season, depending on the nature of soil and curing capacity of barns. Growers are authorised to sell allotted quota of tobacco only at the auction platforms. Electronic weighing scales have been installed to have accuracy and transparency in weighment. This system provides for prompt payment to the growers by the board for the full value of the tobacco sold.
Though the board fixed the next season crop size at 150 million kg at its meeting in Hyderabad on July 28, members insisted on the nature’s bounty of 10 per cent to allow farmers greater relief. Already, the AP farmers have created a record of sorts by growing 172 mkg against last year’s authorised crop size of 145 mkg. At 15 per cent growth this year and with over Rs 1,500-crore exports, India (600 mkg) is in the big league, next only to China (2,000 mkg) and Brazil (700 mkg). For those who came in late, since tobacco consumption is harmful, the government insists on controlling how much tobacco can be grown in a year.
In the wake of a recent resolution passed by the UN convention on tobacco, held in Geneva, asking its member nations to cut down tobacco production by half of its present levels by 2020, the Centre has directed the board not to authorise more than the maximum extent given so far. Though the board has dropped enough hints to farmers that the crop size will not be increased beyond 150 mkg, it has to be seen whether the board will indeed reduce the size and crop for the coming years also.
Interestingly, farmers’ representatives have welcomed the move to cut down the crop size. “Since it’s not a merit crop, we cannot demand more size and more extent,” says Yelamanchili Sivaji, Virginia tobacco growers association honorary president and ex-MP. With falling output in Zimbabwe and removal of subsidies in Europe, there has been a great demand for the AP tobacco. “We are sure that the export demand of Indian tobacco, used as a filler in blends, will adjust to the higher authorised AP crop,” reveals J Suresh Babu, board chairman.
There is already a buzz in the market that the crop size will substantially go up in spite of new regulations. “How is it possible to force the farmers to restrict the crop size without showing any alternatives,” asks Chunduri Ranga Rao, a farmer’s leader from Prakasam district. Interestingly, the average price of tobacco offered by the trade has gone up despite the traders’ claims that they are losing due to the fall in dollar exchange rate.
“Traders exploit the situation by offering lesser prices. Why will they purchase the crop if they are in losses?” asks Sivaji. When some farmers switched over to crops such as maize and bengal gram last season, they ended up in huge losses while the farmers who stuck to tobacco got good revenues. This, according to the experts in the field, may prompt the farmers to go in for more tobacco.
On the other hand, political parties in Karnataka are encouraging their farmers to go in for more extent keeping in view the demand for their tobacco. The crop size of Karnataka went up to nearly 95 mkg in four years. It used to be around 20-25 mkg. With Karnataka crossing 60 per cent of AP’s size, it is set to touch 100 mkg in the coming season, which will begin in September. “The crop size from both states (AP around 120-150 mkg and Karnataka 70-100 mkg) is ideal for the trade to absorb the stocks. However, overzealous growers keep increasing the size, leading to a crash in prices,” fears Maddi Venkateswara Rao, president of the Indian Tobacco Association (ITA).
Ridiculing the claims of the traders that they are forced to offer lesser price for AP’s stock as it is of inferior quality, Babu says: “The stocks in various countries are much inferior to the Indian crop but they get better rates. This is where the presence of foreign players will be of great help.” Babu says branding is key to success in this sector. “What we should aim at is export of the end product instead of the raw material. We have the potential of doubling the exports,” he surmises. Competition is welcome to counter the corporate operational manoeuvrability as big players manipulate the prices to their advantage at the cost of small players. No wonder, industry experts feel the need to reduce the monopoly of a few players in the trade led by a big player ITC by allowing foreign direct investments (FDI). ITC, of course denies that it is a monopoly player.
For exporters, FDI ensures a bigger portfolio in the international market, opines Chebrolu Narendranath, a leading exporter and former ITA president. “Anti-smoking may impede the growth but we have the wherewithal to tide over the crisis,” he says, but insists that the penalty regime must go to drive away growers’ blues.
In fact, at the July 28 meeting, the board recommended to the Centre to reduce the penalty for over production from 15 per cent to 5 per cent. But the government is unlikely to accede to the plea, Babu says. As 60 per cent of the tobacco is exported, farmers will always have better pricing. Thanks to shortage in supply in Europe and vacuum in international market, it will always fetch higher volumes for the Indian farmers, Babu avows.
“But, we must align tobacco product pattern to meet the international demands,” Babu says. Though India is the world’s third largest producer, it has a mere 3 per cent share of $5.8 billion global tobacco leaf export trade and tobacco export accounts for 4.5 per cent of the country’s total agri exports. Despite stringent norms, the tobacco industry is healthy and well spoon-fed to sustain itself, Narendranth says, exuding an air of optimism.
FDI IN TOBACCO INDUSTRY
If top MNCs like BAT and Phillip Morris set up shop here, it will not only enhance Indian tobacco worldwide but will ensure better leverage for the AP farmers, Babu observes. Industry sources say as per the norms, foreign companies will be allowed to invest only when they either set up their units in India or invest in the existing companies.
With no existing company ready to take money in the form of FDI, the only way out for the foreign investors is to set up a unit here. For that, they need to secure a licence from the government. “Without the licence, they cannot set up manufacturing units and will not be allowed to pick up stocks from the market,” observes a leading exporter.
Need for tobacco board regime
Recognising the need to regulate production, promotion of overseas marketing and to control recurring instances of imbalances in supply and demand, which led to market problems, the Government of India had established the Tobacco Board in place of Tobacco Export Promotion Council under the Tobacco Board Act of 1975. Its tasks
Constant monitoring of the Virginia tobacco market, both in India and abroad, and ensuring fair and remunerative price to the growers and reducing wide fluctuations in the prices of the commodity.
Establishing auction platforms for sale of Virginia tobacco by registered growers and functioning as an auctioneer at auction platforms either established by it or registered with it.
Promoting tobacco grading at the level of growers and sponsoring, assisting, coordinating or encouraging scientific, technological and economic research for promotion of tobacco industry.
The board announced the minimum growing price (MGP) for the first time in 1988 Karnataka auctions after carrying out negotiations with the growers and traders. The system of MGP was extended to AP in the 1989 season.
Auctioning platforms
The board felt that the panacea for all the problems in the marketing system was introduction of an auction system. The Tobacco Board Act of 1975 was amended in 1978 to empower the board to establish auction platforms and function as an auctioneer at the platforms. The board studied the auction systems in tobacco producing countries like the US, Canada and Zimbabwe to evolve a system suitable to Indian conditions and designed the Zimbabwean model system. Although the Indian auction system was designed after the Zimbabwe model, it is unique by itself as it incorporates distinct features of several auction systems in the world.
Features of auction system
Through the mechanism of auction system, the board is in a position to control the production of tobacco to a certain degree, though of late, an increasing tendency to indulge in speculative overproduction is in evidence. Registration of area and the quota of tobacco to be delivered at auction platforms are fixed well before the season, depending on the nature of soil and curing capacity of barns. Growers are authorised to sell allotted quota of tobacco only at the auction platforms. Electronic weighing scales have been installed to have accuracy and transparency in weighment. This system provides for prompt payment to the growers by the board for the full value of the tobacco sold.
© Madhu Chowdery., all rights reserved.
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