Indian flue-cured Virginia burns bright under a smokescreen

As a signatory to the World Health Organisation’s (WHO) Framework Convention on Tobacco Control, the government of India is keen to show its credentials and credibility by bringing down tobacco cultivation. Sheer size and value of India’s tobacco crop and especially FCV (flue-cured Virginia), comprising the bulk of home-grown unmanufactured tobacco and export revenue earned, is stopping GOI from taking the step too far. That is, forcing its farmers out of tobacco and into other less lucrative crops.

The government is stuck between ‘a rock and a hard place’ and continually forced to adopt a ‘fence sitting’ posture to placate the international tobacco control lobby on

one hand and hundreds of thousands of farmers and family members reliant on tobacco on the other. And rely on it these farmers can and do, because year after year India’s rich and varied soils turn in huge high quality yields of FCV with a variety of sought after characteristics (depending on soil type), which is why the product appeals to such a wide geographic and cultural range of cigarette consumers.

Indian FCV is fought over by manufacturers worldwide who pay princely prices for the privilege of purchasing a commodity that burns bright under the smokescreen of tobacco control put up by the government and the Indian Tobacco Board. Paradoxically there are stringent controls over area planted and quantity of leaf that can be marketed each year, but that is all about balancing supply and demand to ensure Indian farmers continue to receive high prices.

Tobacco under a smokescreen

This doesn’t stop those in government charged with the health of the nation from making the right noises and in all sincerity too, but their protestations continue to fall on deaf ears. Who at the end of the day in the Ministry of Agriculture wants to “kill the goose that lays the golden egg” and which generates massive rural employment and huge foreign exchange earnings for the national exchequer.

In October 2010 Dinesh Trivedi, Minister of State for Health and Family Welfare, told the international press how his ministry was saying “no” to tobacco farming in India, and how he hoped the agricultural ministry would support his initiative to discourage tobacco farming by finding an alternative crop.

In a letter to Agriculture Minister Sharad Pawar, Trivedi said he was trying to find an “out of the box” solution to the [tobacco] problem. “Keen involvement of different sectors of the government is required so that practical steps can be taken to reduce supply of tobacco and also in turn find an alternative crop for the tobacco farmers,” he added.

Statistics on smoking and health suggest he may have a point. According to a 2010 study tobacco use in India has directly caused the death of around 1 million people.

Armed with such statistics, why does the national and international tobacco control lobby find it so hard to get the government, through the Indian Tobacco Board, to come down off the fence?

Reason is that Indian tobacco is too big, economically valuable and socially useful in the context of rural India [through employment and social cohesion] although the latter suggestion may seem a contradiction in terms given that we are talking about tobacco. It clearly follows that tobacco is politically important too.

India has close on 100,000 registered tobacco farmers and around 0.25 per cent of India’s cultivated land is used for tobacco production, which may not sound like a lot but India is a big country.

How vast and valuable?

Massive and hugely important is not an understatement. India is the world’s biggest combined producer/exporter of tobacco, producing over 700 million kg of unmanufactured tobacco annually of which over 200 million kg is exported to more than 80 countries worldwide. FCV occupies pole position in these figures. Annual FCV production now tops 300 million kg with over 50 per cent exported and accounting for between 75 and 80 per cent of all unmanufactured tobacco exports from India.

Total quantity of unmanufactured tobacco and tobacco products exported in the financial year 2009–2010 at 259,566 tonnes was 15 per cent up on a year-on-year basis. At USD 928 million it set an all-time record, being up 26 per cent (30 per cent in INR terms) on a year-on-year basis. The governmen does not set targets for the value of tobacco exports but its projection of a 30 per cent increase on 2008–2009 was in line with final results.

Unmanufactured leaf exports comprised the bulk of total tobacco exports accounting for 88 per cent in volume and 83 per cent in value. Leaf exports in 2009–2010 increased 16 per cent in volume and 35 per cent in value on a year-on-year basis. FCV continues to retain the “lion’s share” with 76 per cent by volume and 82 per cent in value of all exported unmanufactured leaf. In 2009–2010, 174,274 tonnes of FCV worth USD 630 million was exported, up 16 per cent by volume and 30 per cent and 34 per cent, respectively, in USD and INR terms.

Belgium, Russia and South Korea with 33,825, 13,077, and 11,468 tonnes remain the top three “takers” of Indian FCV. Vietnam rises from 5th to 4th with 9,918 and France from 11th to 5th with 8,939, while Germany drops from 4th to 6th at 8,165 tonnes. The European Union (EU) and Association of South East Asian Nations (ASEAN) are the two biggest trading blocs importing Indian FCV with member countries in these blocks importing at least 65,746 and 19,668 tonnes, respectively, in 2009–2010.

The relentless rise of Indian FCV since 2005 has seen the quantity marketed by farmers rise by 30 per cent in spite of the board’s efforts to control area planted and thereby quantity harvested using seemingly strict tobacco control legislation.

Virtually every year since 2005/6 FCV production in AP and Karnataka, the top two tobacco growing states, exceeded authorised production by substantial amounts. The board has tried to play ‘catch-up’ by raising authorised production for the following crop season to a figure just below that achieved in the preceding season.

Authorised production of 267.9 million kg (Andrah Pradesh 170 million kg and Karnataka 97.9 million kg) set for 2009–2010 was eventually exceeded by 18 per cent (Andrah Pradesh 205 and Karnataka 113 million kg). This was clearly a breach too far for the Tobacco Board, which capped authorised production for 2010–2011 at the same 267.9 million kg in spite of protestations by farmers.

A five per cent penalty imposed by the board for the 2008–2009 tobacco season on those farmers producing more export quality FCV tobacco than the quota allotted to them, had already failed to stop overproduction. This was subsequently raised to a hefty 15 per cent for the following tobacco season.

Tobacco Board protects farmers

Quantity of FCV leaf harvested by farmers has risen spectacularly, but prices paid by dealers and importers are the sparks which ignited the FCV market that essentially doubled in value in just three years (2007–2010). Concern about maintaining high prices for farmers is the reason behind the board’s new and heavier handed approach to control of FCV production in India. They remember 2000 when a huge quantity of quality FCV languished in dockside stores, rather than rolled up in cigarettes in Singapore, South Africa or France. Protecting the prices secured by farmers, through managing supply and demand in the context of world market movements, is what tobacco control by the government and the board is all about.

In October 2010 Kamalvardhana Rao, newly appointed chairman of the Tobacco Board announced clamping crop size in Andrah Pradesh for 2010–2011 at 170 million kg, (same as for 2009/10) due to falling global prices and thereby refusing a request from the Indian Tobacco Association to raise the figure by 10 million kg. The Board had earlier restricted Karnataka’s crop size to the same 97.95 million kg set for 2009–2010, thus restricting the combined Andrah Pradesh and Karnataka crop to around 270 million kg. “There is a glut of tobacco globally and if we allow farmers to grow more they may end up getting lower returns,” said the new chairman.

Rao also made an important statement about the future introduction of electronic-auctions (“e-auction”) at all 31 platforms, 20 in Andhra Pradesh and 11 in Karnataka to ensure transparency and offer better prices for farmers. “It is taking 4–5 months for auctions to complete which is keeping the farmers engaged for 4–5 months,” he told the national press. “The bidding process is so fast that farmers are unable to grasp the situation. The e-auction process will drastically reduce the auction time. We have completed two pilots, one each in Andrah Prades and Karnataka,” he said.

From 2005 to 2009 Indian FCV exports burgeoned on the back of a booming world economy and increasingly tightening supplies of quality FCV tobacco due in part to political trouble in competitor countries. Zimbabwe’s FCV production had fallen dramatically from 237 million kg in 2000 to a 56 million kg rump by 2009.

Political troubles of an entirely different kind in Europe following economic decoupling of tobacco blew big holes in volumes available from erstwhile significant EU producing countries like Spain and Italy. But now is a different ball game with the world economy only recovering slowly and FCV in Zimbabwe staging a comeback almost as startling as its previous demise.

Is FCV losing its edge?

The new chairman of the Tobacco Board appears to have read the situation right because the most recently published 2010 export figures for Indian FCV in quantity and revenue already show a distinct fall on the same period in the previous financial year, from 119,796 to 101,499 tonnes and USD 427 million to USD 359 million.

Latest auctions in Karnataka and Andrah Pradesh have proceeded with considerably less certainty than during the past 5 years. Tobacco prices at the Karnataka auctions fluctuated between INR 5 per kg and INR 10 per kg on a weekly basis (EUR 0.08 to 0.11, USD 0.11 to 0.22). These swings left some farmers holding onto their crop, confused as to when to sell their produce said Vikram Raj Urs, a tobacco grower and secretary to the Federation of Karnataka Tobacco Growers’ Association.

At the end of the auction some 83.67 million kg of FCV had been marketed in Karnataka fetching an average price of INR 96.10 per kg. This is double average price achieved in 2007–2008 but perceptibly down on the last two years when average prices topped INR 100 per kg. About 15 to 20 million kg of low grade and perished leaf was left unsold.

AP auctions opened on 24 February 2011 with farmers nervous after last year’s INR 20 per kg fall in average price, due to low quality leaf, and back down to around INR 85 per kg after suddenly spiking at around INR 105 per kg in 2009. A big problem this year is significant crop loss due to heavy rains in November and December 2010 with yields virtually halved in some areas. Observers say 2011 will be first time for many years that authorised production is not exceeded in Andrah Pradesh, due to these inclement weather conditions.

Jagnnatha Rao, Tobacco Board member and a tobacco farmer from Guntur reported leaf quality as generally good and international demand is rising. Buoyed by relatively good prices being obtained for quality leaf in Karnataka the AP auctions opened in an optimistic mood. However, they were suspended early on following protests by farmers over low prices and re-started in March after intervention by the board to secure improved prices. A recent study by the board shows cost of tobacco production in India rising substantially between 2009 and 2010 from INR 91.53 per kg to INR 100.68 per kg.

Indian tobacco farmers reaped rich rewards for three consecutive years beginning 2007 but may now be forced to adjust to new and tougher market conditions. The ‘wheels have not come off wagon’ but the ‘shine’ on Indian FCV leaf is not as bright as before.

Dr Terry Mabbett

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