Tobacco

Overview

Introduction and General Industry Structure1

The tobacco industry has traditionally been one of the most important industries in North Carolina and a backbone of the state's agricultural heritage. Yet as the North Carolina economy continues to transition from an agricultural economy to a manufacturing and, increasingly, service-based economy, the industry faces new challenges, both at home and abroad. Internationally, as barriers to free trade in agricultural products slowly fall away, new competitors have arisen to challenge the North Carolina industry. In this section, we look to describe the outline of the industry, North Carolina's footprint, important global competitors, and the key trends and dynamics that are shaping this industry now and in the future.

The industry can be generally divided into two sections:

  • Farming - This includes not only the planting, tending, and harvesting of tobacco leaf, but generally also includes initial processing steps, including curing tobacco to dry out the leaves and stems. Farmers also sort and grade tobacco, based on criteria like color and aroma.
  • Processing - This includes both initial processing of tobacco leaf (cleaning and resorting, stemming and redrying, aging) and specific manufacturing processes for a variety of final products, including cigars, cigarettes, and chewing tobacco.

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Tobacco in North Carolina

The introduction of tobacco into North Carolina has a long history. When settlers moved from Virginia to North Carolina around 1663, they struggled to grow any other crop besides tobacco in the dry, sandy soil. During this time, the Europeans viewed tobacco as a luxury and bought it from Spain. The new colonists saw the opportunity in the overseas demand for tobacco and started growing tobacco in North Carolina as a way to gain entry into the European tobacco market.2

As centuries passed, the tobacco business became an integral part of North Carolina's culture. James B. Duke formed the American Tobacco Company in Durham and, as it expanded around the world, it continued to be based in Durham. Even today, tobacco is an instrumental part of North Carolina, especially because of its role in the employment and economy of the state. In 2005, tobacco represented 15.5% of the total value of all crops grown in North Carolina.3 In addition to these farmers, the tobacco business employs many workers in processing, manufacturing, wholesale, and retail outlets, and related industries.

Every stage of production of tobacco, from tobacco growing to final product manufacture, is located in North Carolina, and this state has been one of the centers of the US tobacco industry. North Carolina ranks first in the United States in the production of tobacco, with 2006 annual farm income of $506.2 million.4 Tobacco is a crop that can be grown in a wide range of soil and climate conditions, and 16 states and approximately 120 countries produce it across the world.5 Geographical differences exist in the production of the two main types of tobacco produced in this state: air- and flue-cured tobacco. Air-cured tobacco differs from flue-cured tobacco in a number of ways, including the filling power and pH of the smoke. North Carolina's soil is, in general, more adept at growing flue-cured tobacco, and, thus, smaller amounts of air-cured tobacco are produced in North Carolina.

Many prominent companies in the tobacco industry are linked in some way to North Carolina. Phillip Morris, the country's largest cigarette company, is one example. Phillip Morris held 50.4% of the cigarette market in the first quarter of 2007.6 While Phillip Morris' headquarters is located in Virginia, they maintain a manufacturing facility in Cabarrus County. Other well-known companies are entirely based in North Carolina. Reynolds American Inc. is another tobacco giant that recently formed when R.J. Reynolds Tobacco Co. joined with the Brown & Williamson Tobacco Corp. in 2004. R.J. Reynolds is the second-largest tobacco company in the country and is centered in Winston-Salem, North Carolina. R.J. Reynolds produced nearly one out of every four cigarettes sold in the United States, and they own four of the nation's ten best -selling brands (Camel, Winston, Salem, Doral). Finally, the Lorillard Tobacco Co., the third largest U.S. tobacco firm, is centered in Greensboro, NC.7

As centuries passed, the tobacco business became an integral part of North Carolina's culture. James B. Duke formed the American Tobacco Company in Durham and, as it expanded around the world, it continued to be based in Durham. Even today, tobacco is an instrumental part of North Carolina, especially because of its role in the employment and economy of the state. Tobacco represents 14% of the total cash crop value in North Carolina.4 In addition to these farmers, the tobacco business employs many workers in processing, manufacturing, wholesale, and retail outlets, and related industries.

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Recent Industry Trends and Developments

Until 2004, the tobacco industry operated within a system of quotas in place since 1938. Recently, quotas have become concentrated within relatively fewer hands. In the past couple of decades, demand for cigarettes has declined while foreign competition in tobacco production has increased, thus threatening the livelihood of U.S. tobacco farmers. As a result, the U.S. government has decided to limit quotas and price supports in recent years.8 In addition, these changes affect other areas of the industry, most notably the cigarette producers.

In October 2004, Congress legislated the end of tobacco quotas in exchange for a one-time buyout. This will affect North Carolina substantially. One-third of the buyout money is going to 10% of the owners, some being paid over $7 million due to the size of their quota holdings. Most experts predict that these huge farms will prosper after the buyout because of their size. However, smaller farms will most likely start to disappear.9

Many farmers are responding to these and other competitive challenges by diversifying some of their crop production. In 1997, 95% of farmers interviewed responded that they had grown or raised a commodity other than tobacco within the past year. The commodities included a variety of livestock, grains, fruits, and vegetables. Only a small percentage of these farmers, however, reported a profit from these enterprises. This is, in part, due to the high profitability per acre that tobacco provides.10 There were internal and external barriers to diversification, including rates of personal tobacco use, high relative income from tobacco, lack of college education of many farmers, and the size of their farms. As imports continue to climb and smoking rates in the general population fall, farmers should prepare themselves for declining demand by diversifying their crops. By finding the commodities that are a good fit for their fields as well as profitable on the market, this could prepare them for the future decline of tobacco.

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Globalization's Effects on the NC Tobacco Industry

Globalization allows for competition with both domestic and international growers, and tobacco imports have increased in recent years. Compounded with the buyout and the decline in tobacco consumption, all segments of the tobacco industry are facing challenges to competitiveness. Cigarette companies will most likely have to find new markets in other countries if the U.S. market is declining. Once these companies begin concentrating their marketing efforts abroad, they may find it necessary to create more brand loyalty by establishing facilities in these countries. As with many other U.S. industries, the cigarette and tobacco industry must come up with innovative methods that will reduce the negative effects of globalization.

As a whole, over the past 25 years, imported tobacco use in the United States has increased dramatically; by one 2006 estimate, the percentage has risen from 2% to 47%. The top source of U.S. imported tobacco is Brazil, representing $242 million in tobacco products in 2006. The top countries in 2006 are scattered around the globe; in addition to Brazil, Turkey, Argentina, Malawi, Bulgaria and Thailand all exported at least $20 million in tobacco to the U.S. Overall imports of tobacco, however, have decreased over time, though not in an even fashion. While the U.S. imported more than $1.1 billion in tobacco products in 1997, that number declined to $710 million in 2001 and has fluctuated around that figure since. In 2006, U.S. imports from the world measured $714 million.11

This leveling off may be due to greater excise taxes that could be discouraging manufacturers from purchasing abroad. North Carolina increased excise taxes to 25 cents per pack, effective in 2005. Additionally, ten other states approved raising taxes, which resulted in an at least $1.00 excise tax per pack in 18 states and $2.00 per pack in four states.

One reason manufacturers began looking abroad was cost per pound of the flue-cured tobacco. In 1997, North Carolina farmers received about $1.80/ pound on the warehouse floor for tobacco. However, in Zimbabwe and Brazil, flue-cured leaf was sold for about $1.33/pound and $0.97/pound, respectively. Most U.S. tobacco farmers believe that foreign tobacco industries represented a major competitive threat, especially as many other countries are looking to expand the amount of land under cultivation for tobacco. In Zimbabwe specifically, the land used for tobacco production was expected to increase at least 17% between 1996 and 1997.10

In terms of specific tobacco manufacturer's international involvement, only two firms located in North Carolina have significant ties abroad. Phillip Morris is the largest. It has an international division which employs over 80,000 people and holds about 15.4% of the global cigarette market.11 Standard Commercial Corp. purchases and processes a tobacco in foreign countries, and also sells to manufacturers in 85 countries.

The exportation of tobacco via North Carolina has declined significantly over the past five years and only shows a slight comeback in 2005. Countries with growing tobacco markets will likely be more attractive to importing countries because of their lower price per pound.

In 2006, the top countries the U.S. exported un-manufactured tobacco to were Germany, Netherlands, Switzerland, the Dominican Republic, and China. Each of these imported more than $50 million in US tobacco.12

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References

  1. William Wise and Dixie W. Reaves, "Tobacco's Important Role in the Economy of Southside Virginia," Blacksburg, VA: Virginia's Rural Economic Analysis Program 30, 1997. [http://www.reap.vt.edu/publications/reports/r30.pdf]
  2. North Carolina Department of Agriculture and Consumer Services, "North Carolina Tobacco," Last accessed July 27, 2007.
  3. US Department of Agriculture (USDA), Economic Research Service, Tobacco Situation and Outlook Yearbook, 2007. Washington, DC, December 2006. Last accessed August 7, 2007. [http://usda.mannlib.cornell.edu/usda/ers/TBS-yearbook//2000s/2007/TBS-yearbook-01-12-2007.pdf]
  4. Op cit. North Carolina Tobacco (fn. 2).
  5. USDA and the National Agricultural Statistics Service, Agricultural Statistics 2004. Washington, DC: United States Department of Agriculture. pp. II-27 - II-44.
  6. Philip Morris, Philip Morris Corporate Web Site, Various pages. Last accessed July 27, 2007. [http://www.phillipmorris.com]
  7. Lorillard Tobacco Company. Lorillard Tobacco Company Web Site Last accessed July 27, 2007.
  8. Melinda Penkava, "Big Tobacco Buyout. Interview with David Rice, Billy Yeargin, and Cynthia Hill." Radio Program. National Public Radio; State of Things. Aired 12 October 2004. Audio Archive
  9. Ibid.
  10. David G. Altman, Daniel J. Zaccaro, Douglas W. Levin, David Austin, Carol Woodell, Betty Bailey, Michael Sligh, Gerry Cohn and James Dunn, "Predictors of Crop Diversification: A Survey of Tobacco Farmers in North Carolina (USA)." Tobacco Control, No. 7, 1998. pp. 376-382. [http://tc.bmj.com/cgi/reprint/7/4/376]
  11. Philip Morris, Philip Morris Corporate Web Site, Various pages. Last accessed July 27, 2007. [http://www.phillipmorris.com]
  12. US Department of Commerce, International Trade Administration, "TradeStats Express Home." Last accessed July 27, 2007. [http://tse.export.gov]

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INDUSTRY SECTION LAST UPDATED: August 20, 2007