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Going the extra mile

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In June, a delegation of tobacco farmers and representatives of the Tobacco Growers’ Association of North Carolina (TGANC) traveled to Europe to meet with representatives of House of Prince and Philip Morris International. The delegation’s mission: to learn how they could improve their leaf and, ultimately, how to sell more North Carolina tobacco.

Matt Mullen

The trip, which the growers paid for out of their own pockets, was a good example of tobacco farmers trying a unique approach to go “the extra mile” to serve their customers.

TFQ’s editor, Matt Mullen, tagged along and kept a diary during his trip. Below, he shares his impressions.

Tuesday, June 6, 2006
Søborg, Denmark
After a long trip from Raleigh, N.C., to Copenhagen, I meet my traveling companions outside their hotel, and we board a bus to the nearby House of Prince (HOP) headquarters and manufacturing center in Søborg.

On the bus ride over, Graham Boyd, TGANC executive vice president, explains to me the purpose of the delegation’s visit to Europe. “We have here a group of farmers that represent the core leadership of the growers in North Carolina …. These guys paid their own way to go on this trip.”

Boyd stressed the impor-
tance of the trip in forging relationships that will enable a vertical partnership between North Carolina growers, the leaf dealers and the end customer. “These growers will do anything at the request of the customer, as long as it can still be profitable for them.”

Upon arriving, we file into a conference room to meet Jørgen Tandrup, managing director of Scandinavian Tobacco, HOP’s parent company.

Tandrup tells us that the recipe for HOP’s leading brand, Prince, has not changed since 1957. The cigarette is known for its high-quality leaf blend. “U.S. leaf is a key part of the recipe,” he says. “Our strategy is to buy top-quality leaf, the highest-quality tobacco. We don’t use reconstituted tobacco.”

Prince cigarettes are sold primarily in Scandinavian countries, but the company aims to become a larger regional player by expanding into eastern and central Europe.

After Tandrup’s introduction, Richard Renegar, past president of the TGANC and a grower from Harmony, N.C., asks the group what North Carolina growers can do to sell more of their tobacco to House of Prince.

Tandrup says lower post-buyout prices now make U.S. leaf more competitive with Brazil. With the troubles in Zimbabwe, he thinks the outlook for U.S. tobacco at ST is positive. He says that many tobacco companies have been trying to upgrade other African markets after the collapse of Zimbabwe but that the quality is still not at the level of the U.S. and Brazil.

But not all the news is positive. Ole Ludvigsen, another executive within HOP’s leaf department, says the company’s purchases of U.S. leaf have dropped over the years, because U.S. filler is too expensive and has been replaced by filler from Brazil.

Ludvigsen expresses other concerns to the growers. He is apprehensive about dwindling production in Georgia and Florida, where House of Prince has traditionally sourced much of its U.S. leaf. He also says that after the buyout, U.S. leaf is still at least 20 percent more expensive than com-
parable leaf from Brazil.

While non-tobacco-related materials (NTRMs) and pesticide residue levels have decreased in recent U.S. crop years, there is still room for improve-
ment, Ludvigsen says. At this, he holds up bags of NTRMs from the 2000 crop, which contain debris such as candy wrappers, papers and feathers.

Pesticide residues are another worry. HOP had some problems with high MH levels in one Georgia crop. As a result, the company is setting up strict MH residue standards.

Ludvigsen says the company is also concerned that growers tend to go for the highest yields, but that proper ripeness of the crop is the most important quality.

Lawrence Davenport, a director of the TGANC, says that the old quota program in the U.S. sometimes encouraged an early harvest, but now if companies produce incentives to let it ripen more, then they will see growers change their methods.

The delegates then address the exit of Georgia and Florida growers. Bill Collins, coordinator of tobacco programs with North Carolina State University, says that North Carolina growers can be quick to fill any gaps. “We [growers in North Carolina] are poised to take advantage of growing more. We have only 2 percent of our tillable land in tobacco.”

One HOP executive asks if anything can be done to lower prices.

The farmers generally agree that lowering their price is difficult, mainly because of the amount of hand labor that is involved. Davenport says, “We are not sure right now how we can lower prices, but we are working on it, you can be certain.”

Collins says that North Carolina still strongly supports its tobacco research programs, even while land-grant universities in other states have cut back. North Carolina growers, in part, fund a lot of this research through a voluntary program that assesses a fee based on the number of pounds they grow. Collins says some of the research projects the university is focusing on address the problem of expensive hand labor by developing mechanized processes for harvest. The university is looking into using wood chips as a fuel source for curing, eliminating nitrosamines and potentially saving the growers a great deal of money on fuel costs.

Boyd thanks HOP for its commitment to U.S. tobacco. “Things have changed rapidly in the U.S. tobacco world after the buyout,” he says. “Growers in the business today are in it by choice .... The old program tended to reward mediocrity. Now the growers that are left are not ensured a profit unless they produce the highest-quality leaf.”

After the meeting concludes, most of the attendees agree that the visit produced constructive dialogue and helped build some meaningful relationships among growers and executives from the company.



Wednesday, June 7, 2006
Lausanne, Switzerland
The next morning, we bid farewell to Copenhagen and board a plane for the short flight to Geneva.

We’re met at the airport by Matthias Meier, PMI manager of leaf agronomy, who has arranged the 45-minute train ride along Lake Geneva to Lausanne.

After a brief break at the hotel, we walk up the street to the nondescript building that houses the PMI corporate headquarters.

Along with Meier, we’re meeting with Nicolas Denis, director of leaf agronomy; Hajo Saalfeldt, director of leaf buying; and Alexander Blom, area manager of leaf buying.

Collins asks Meier if he can ever recall a group of growers coming to meet with PMI. Meier says no, at least not in his 10 years with the company.

Meier gives a brief introduction of PMI’s business. PMI’s volume has grown from 87 billion units in 1970 to 805 billion units in 2005.

PMI’s major strategies for the future are to pursue continued growth and to work on harm reduction.

Boyd kicks off the discussion by stating that growers who have continued growing tobacco after the program ended are committed to the crop. “North Carolina growers want to increase the amount of tobacco they grow. Farmers are making capital investments as a sign of their commitment. Farmers are as enthusiastic and excited as they’ve ever been.”

The growers made the trip to communicate to PMI some of the issues they currently face at home, but they are also there to listen, Boyd says. “We want to see what the requirements are of our global customers …. How can we improve our product and still remain profitable? We know you can’t buy our tobacco just to keep us on the farm. We want to earn it.”

Saalfeldt says that PMI is currently analyzing the different countries that they source tobacco from. In the past, PMI has acquired its U.S. tobaccos from Philip Morris USA (PMUSA). Now PMI has set up its own buying stations in Elizabethtown, Ky.; Smithfield, N.C.; and Kernersville, N.C. “U.S. tobacco is important to us because we recognize the high quality. We felt that by going directly to growers, we have seen positive results without hurting our relationship with PMUSA. We think that [being closer to the source of our tobaccos] will help us share our expectations with growers for the quality of the product,” Saalfeldt says.

“In principle, we don’t see much of a difference between our quality expectations and PMUSA’s. We want our tobacco separated by stalk position and free of NTRMs …. Growers that contract with PMI will not see many changes except the sign at the buying station will have a PMI sign instead of a PMUSA sign.”

Sam Crews, TGANC president and a grower from Oxford, N.C., asks the PMI representatives if they foresee putting more U.S. tobacco in their blends.

Saalfeldt says it would be possible if their business needs demand it. “The price gap [between U.S. leaf and Brazil’s] has closed. We will continue to buy U.S. leaf even with this price gap as an investment in our future. If our premium brands grow, we will need more U.S. tobacco.”

Saalfeldt cautions that a recent tax hike on cigarettes in much of Europe has allowed value brands to expand their markets. “We want to continue concentrating on producing mid-level and premium products, so this is something we will have to deal with.”

Denis also notes that PMI is gaining market share in many countries, but because total volume in many markets is decreasing, this doesn’t necessary mean that sales are rising dramatically.

Saalfeldt next turns the discussion to the quality of U.S. leaf, and has mostly positive news to report to the assembled growers. PMI plans to continue buying all stalk positions, and the company, for the most part, has been pleased with U.S. quality. “At PMI, we don’t see any big problems with U.S. tobacco. Many issues of the past have been resolved and quality has improved since the beginning of direct contracting. Can some things still be improved? Yes.”

Saalfeldt encourages growers to continue to be vigilant in keeping the tobacco clean and free of NTRMs, making sure that the infrastructure necessary for production is maintained and making sure that growers are producing ripe leaf. “These problems require constant vigilance and prevention.”

Denis says it is necessary for growers to produce tobacco that will be acceptable in all 160 countries where PMI sells its products. One area that definitely needs improvement is the pesticide residues on some of the crops.

MH residues seem to be the major concern. PMI would like MH residues in its leaf purchases to be below 80 ppm. “We are just saying use common sense and use the proper dosage,” Denis says. “We aren’t saying you can’t use it. Just don’t overuse it, as it produces high levels of MH residues.”

Some countries are planning to increase their restrictions on pesticide residues on tobaccos in the future. He suggests farmers find alternatives or use less. “We want to be able to use U.S. tobacco in all 160 of our locations,” Denis says.

Collins says, “You can look forward to lower MH residues, because of the willingness of these growers to respond.”

One thing growers could do to address the problem is to lower the pressure on their pumps when they are spraying sucker controls, Collins says. MH residues would decrease dramatically. Some growers seem to think they have to turn the pressure up high to soak the plant top to bottom, he says, but this isn’t necessary.

Collins also notes that new chemical combinations are on the market that will also reduce MH residues.

Boyd gives the PMI representatives a short update on the labor situation in the U.S. The TGANC is working with other agricultural organizations to reform the guest labor program to ensure a supply of steady labor. One problem with the current program: the 2006 Adverse Effect Wage Rate at $8.52 per hour is too high. With the added burden of providing housing and benefits for workers, this wage rate effectively costs growers $13 to $14 per hour for each worker. In addition, the costs to bring a worker to a North Carolina farm total about $1,000.

This makes turning a profit at current leaf prices difficult. In addition, growers are exposed to litigation risk related to alleged mistreatment of laborers. Boyd says that no farmer wants to mistreat their laborers, as they are essential to the success of any farm operation, but at the same time lawsuits in the U.S. can arise frequently and often without cause.

Another issue the growers face is the next generation of growers. “Many farmers are getting older,” Boyd says. “How will we replace them? We want to provide leadership in partnership with you so that we can foster the next generation of leaders and growers.”

Collins and Boyd are working to develop a leadership training program in the style of Philip Morris’ now-defunct Young Leadership Program.

Saalfeldt says his superiors want to ensure a steady supply of U.S. leaf for the future. “What can we do to encourage these young people?” he asks.

Jimmy Crews, brother of Sam Crews and a grower in Oxford, N.C., says that getting into farming requires a huge investment to get started. Even with a land inheritance, it’s still an expensive financial investment for potentially low returns.

One encouraging sign for young growers is that the buyout has the potential to ensure stability, Boyd says. Farmers may now be able to tell their children there’s a future in tobacco farming.

Boyd says the farmers are also keeping an eye on urban sprawl and the increasing costs of land. Boyd says that development will definitely be a problem for future farmers. “A penny more here and there [for their tobacco] might make the difference for a young grower to decide not to sell off a few acres and build houses on it.”

Boyd asks the PMI representatives to talk about the world market. “What opportunities are there? What is the status with Brazil and China?”

Saalfeldt says that Brazil’s production of leaf has expanded greatly over the years, but the quality of their leaf didn’t seem to suffer much. This is a time that individual companies will have to re-evaluate what they will do in Brazil. The current exchange rate has helped narrow the price gap between U.S. and Brazilian tobaccos. Saalfeldt seems to imply that there are more questions than answers now. “Where will this exchange rate stabilize at? Where will it be going forward?”

China produces most of the flue-cured tobacco in the world, yet from an export point of view, their impact is negligible, Saalfeldt says. Most tobacco imports into China used to come mainly from Zimbabwe. With the trouble there, they might start importing more from the U.S. and Brazil.

Denis says, “Whatever they do, with imports or exports, they are so huge that it will have a huge impact on production elsewhere.”

As for flue-cured production in Africa, Saalfeldt seems somewhat exasperated. “The instability in Zimbabwe has resulted in the lowest crop there in the last 25 years. This political instability is not conducive to going forward there.”

Tanzania, how-ever, has found a market, he notes, and the country is producing leaf at a good price. “The style of the tobacco there is acceptable by all major manu-facturers. Whether it will continue to grow remains to be seen.”

After the meet-ing concluded, the PMI executives joined us for dinner at a local restaurant.

Everyone seem-ed pleased by the trip. The farmers learned more about the customer’s needs and desires. The tobacco companies learned about the issues farmers are dealing with in the U.S. and how badly these farmers want to continue to growing tobacco for them.

As Denis had said earlier, “It’s great to see growers reaching out like this so that we can face our challenges together.”