Tobacco Stemming and Redrying

SIC 2141

Companies in this industry

Industry report:

Establishments in this industry classification are primarily engaged in the stemming and redrying of tobacco or in manufacturing reconstituted tobacco. Establishments that sell leaf tobacco as merchants, wholesalers, agents, or brokers, and which may also be engaged in stemming tobacco, are classified in SIC 5159: Farm Product Raw Materials, Not Elsewhere Classified. Leaf tobacco warehouses that also may be engaged in stemming tobacco are classified in SIC 4221: Farm Product Warehousing and Storage.

Industry Snapshot

Starting in the late 1990s, tobacco processors--like the tobacco industry as a whole--faced an uncertain outlook in the United States. Domestic cigarette consumption was down, owing to higher prices, tougher restrictions on smoking in public places, greater awareness of the health risks of tobacco use, and declining social acceptance. At 376 billion cigarettes in 2006 (down from 388 billion in 2004), U.S. consumption continued to decline steadily--at a rate of about 2 percent annually since the 1990s. Cigarette companies were roundly criticized for promoting smoking among teenagers and tough rules went into effect to reduce teen smoking. In 1998, the Master Settlement Agreement (MSA) was signed, finally settling years of litigation against the tobacco industry for various alleged wrongs, including a conspiratorial misrepresentation to consumers about the true health risks of cigarette smoking.

Thousands of tobacco farmers, whose families had often been in the business for generations, were shifting out of the product and into other crops, such as cotton. The type of leaf tobacco used for cigarettes accounted for the vast majority of tobacco sales (about 92 percent), with cigar leaf accounting for another 1 percent, and the remaining dark tobaccos (used mostly for chewing) constituting the remaining 7 percent. As of 2005, all quotas and subsidies in the tobacco industry ceased, and because of high federal and excise taxes, the domestic industry began to import more tobacco than it grew. This necessarily impacted the tobacco stemming and redrying sector of the tobacco industry.

Although some larger U.S. tobacco farmers increased their acreage in 2008, a number of smaller farmers planted less tobacco or have ceased production all together. Still, tobacco farmers produced 400.6 million pounds of tobacco in 2008, an increase of 1.7 percent compared to 2007.

Organization and Structure

The global processing and distribution of tobacco is dominated by two companies that have large operations in the important tobacco-growing regions of the world--Universal Corporation and Alliance One International, which formed in May 2005 from the merger of DIMON Inc. and Standard Commercial Corp. These companies buy the farmers' tobacco at auction (common in the United States) or contract to buy tobacco from the farmer. In certain overseas markets where the firms have contracted to buy the farmers' entire crop, they will often provide financial and technical assistance as well to ensure the tobacco's quality. In the United States most of the processors' tobacco purchases at auction are made to fill specific orders from the major domestic and overseas cigarette producers, with whom they often have relationships extending over many years.

After purchase, the tobacco is processed to meet the specific needs of the cigarette manufacturer, whose representatives are frequently at the processor' facilities to monitor the work on their orders. At the factory the tobacco is reclassified according to grade; blended to meet customer requirements regarding color, body, and chemistry; and threshed to remove the stem from the leaf (although some tobacco is processed in whole leaf form). The processed tobacco is redried to remove excess moisture so it can be held in storage for a long time. The companies also perform most of the processing of tobacco that is not bought at auction and thus enters the U.S. stabilization pool, under the auspices of the U.S. Department of Agriculture (USDA). The companies generally do not make cigarettes or other consumer tobacco products.

In the United States two major types of tobacco are grown: flue-cured and burley. Flue-cured is one of the most widely grown tobaccos in the world. It is cured by the grower, usually with gas- or oil-generated heat, and it serves as the basic ingredient in light blended or "American type" cigarettes. In the United States flue-cured tobacco is grown on the east coast from Virginia to Florida and especially in North Carolina. Burley tobacco, on the other hand, is air cured and is grown primarily in Kentucky and Tennessee. Mature tobacco is a perishable commodity that must be processed quickly to prevent fermentation or deterioration. Tobacco processors thus locate their facilities near the principal sources of the crop.

Background and Development

While domestic consumption of tobacco products continued to slow in the early to mid-1990s, the major processors remained relatively unscathed. One reason was that the manufacturers imported more foreign tobacco, which was inexpensive but more profitable than domestic tobacco. Between 1989 and 1992 U.S. tobacco imports--the bulk of which were from Brazil, Zimbabwe, Argentina, Thailand, and Malawi--had more than doubled, while domestic output had risen 26 percent.

Moreover, primarily because of increased smoking in Asia, worldwide tobacco consumption had jumped 75 percent in the 1970s and 1980s and was continuing to rise by 1 to 2 percent a year. Demand for American-blend cigarettes, which tasted milder compared with the stronger and harsher cigarettes smoked in most of the world, was increasing, even in countries where overall demand was flat or down. U.S. processors were well positioned to supply the flue-cured and burley tobaccos that are used to make the relatively low-tar, low-nicotine American-blend cigarette.

The industry experienced temporary downturns in the mid-1990s due to new legislation that required U.S.-produced cigarettes to contain at least 75 percent domestically grown tobacco (the "75/25 Rule"), lower-than-expected initial demand for imported tobacco products in Central and Eastern Europe and the former Soviet Union, and an oversupply attributable to record foreign tobacco crops.

By the mid-1990s the demand and supply imbalance in world tobacco markets improved. Leaf tobacco production outside the United States was curtailed, the 75/25 Rule was replaced by a string of less stringent import quotas, and U.S. cigarette manufacturers began to buy more tobacco from outside the United States.

Nevertheless, U.S. tobacco farmers remained wary and uncertain. As Kentucky Farm Bureau president William Sprague told the Lexington Herald Leader in 1996, "It's a paradox: we have an increasing world demand for something we can produce in this state very well. But all farmers are seeing and reading about is the ill effects of tobacco. It has our farmers gun shy." The long-term downward trend in domestic consumption had forced some growers to switch to alternative crops such as cotton. The number of tobacco farms in North Carolina, which grows about two-thirds of the country's flue-cured tobacco, dropped from about 100,000 in the mid-1980s to 42,000 in 1991.

While their own segment remained profitable, the processors, like other industry participants, were concerned about the increasingly strong steps being taken to limit tobacco use. Dozens of localities around the country had passed measures that curtailed smoking in offices, restaurants, and other public places, and nationwide restrictions were being suggested in Congress. Studies that determined secondhand cigarette smoke could cause lung cancer gained credence. States sued the cigarette manufacturers to pick up their health care costs and gained significant court victories. In March 1997 bipartisan legislation was unveiled that would hike federal cigarette taxes 43 cents per pack to pay for health insurance costs for children and reduce the deficit. The outlook for the domestic tobacco industry was bleak.

The U.S. tobacco industry continued to suffer setbacks into the late 1990s, and hundreds of workers lost their jobs as processing facilities closed or reduced production. Hurricane Floyd caused widespread crop damage in 1999. Tobacco companies were sued in court for marketing products that were considered to be health hazards. The federal government and other groups continued their campaigns to discourage tobacco use. Cigarette consumption dropped 7 percent to 465 billion pieces in the late 1990s, while production dropped 6 percent to 680 billion pieces. As a result, the value of tobacco stemming and redrying shipments dropped from $3.567 billion in 1998 to $2.418 billion in 2000.

Cigarette makers launched line extensions and repositioned established brands, emphasizing "ultra-light" varieties that contained less tar and nicotine. A new method of curing tobacco was devised to reduce or eliminate the formation of nitrosamines, which were thought to be the substances in tobacco smoke that were most apt to cause cancer.

According to the U.S. Census Bureau, only 16 establishments operated in this category (which also includes chewing and smoking tobacco and snuff along with reconstituted tobacco) for part or all of 2004. The Annual Survey of Manufactures reported that overall shipments for the tobacco stemming and redrying manufacturing industry were valued at nearly $774 million in 2005, a slight decrease from the 2004 total of nearly $856 million but a greater drop from the 2002 total of $1.1 billion. Additionally, for the overall industry a total of 1,547 employees worked in production in 2005, putting in nearly 3 million hours to earn wages of nearly $29.8 million.

According to the U.S. Census Bureau, only 16 establishments operated in this category (which also includes chewing and smoking tobacco and snuff along with reconstituted tobacco) for part or all of 2004. The Annual Survey of Manufactures reported that overall shipments for the tobacco stemming and redrying manufacturing industry were valued at nearly $774 million in 2005, a slight decrease from the 2004 total of nearly $856 million but a greater drop from the 2002 total of $1.1 billion. Additionally, for the overall industry a total of 1,547 employees worked in production in 2005, putting in nearly 3 million hours to earn wages of nearly $29.8 million.

In October 2004, President George W. Bush signed into law the "American Jobs Creation Act of 2004," which contained Title VI, the Fair and Equitable Tobacco Reform, also referred to as the tobacco quota buyout. Both tobacco quota owners and producers were compensated for the changes pursuant to the termination of the prior program. The cost of the buyout was to be borne by assessments levied upon manufacturers and importers of tobacco products. As of 2005, growers were free to produce any quantity of any type of tobacco, anywhere, without quotas.

However, according to the Tobacco Situation and Outlook Yearbook published by the USDA's Economic Research Service, tobacco acreage rose to about 334,300 acres in 2006, an increase of about 12 percent from the 2005 figure. Production for 2006 was expected to be approximately 734 million pounds, a jump of about 86 million pounds from the previous season (which has plunged by 230 million pounds from 2004).

Current Conditions

According to the U.S. Census Bureau, 17 establishments operated in this category (which also includes chewing and smoking tobacco and snuff along with reconstituted tobacco) for part or all of 2008. The Annual Survey of Manufacturers reported that overall shipments for the tobacco stemming and redrying manufacturing industry were valued at nearly $1.2 billion in 2008, increasing slightly to $1.18 billion in 2009. Additionally, a total of 2,068 employees worked in production in 2008 (of 2,415 employees), putting in more than 3 million hours to earn wages of more than $42.6 million. During 2009 the total number of employees that worked in production fell to 1,420 (of 1,924 employees), as did the total number of hours worked to 2.7 million hours, thus wages fell to $37.4 million.

Elevated cigarette taxes and anti-tobacco campaigns continued to place strain on the overall U.S. tobacco industry. In fact, "�major cigarette manufacturers have moved more of their operations overseas where they perceive the business climate to be less hostile." cited from the Tobacco Reporter in March 2009.

According to the USDA, tobacco acreage totaled 354,490 acres in 2008 before falling slightly to 354,040 acres in 2009 then dropping to 337,450 acres in 2010. Production reached 800 million pounds in 2008 and more than 822 million pounds in 2009 before trending down to nearly 720 million pounds in 2010.

Industry Leaders

Phillip Morris USA of New York City was the dominant leader in the industry with 2005 sales of $18.1 billion. Universal Corp., of Richmond, Virginia, came in second with $2.0 billion in fiscal year 2007 sales with about 25,000 employees. Alliance One International Inc. of Morrisville, North Carolina--formed by the merger of DIMON Inc. and Standard Commercial Corp. in 2005--had fiscal year 2006 sales of nearly $2.0 billion and 5,400 employees. Other industry leaders included R.J. Reynolds Tobacco Co., of Winston Salem, North Carolina and UST Inc., of Greenwich, Connecticut. One of the largest independent companies in the industry was Flue-Cured Tobacco Cooperative Stabilization Corp., of Raleigh, North Carolina.

Phillip Morris USA reported revenues of $18.7 billion in 2009 with 7,300 employees. R.J. Reynolds Tobacco Co. reported revenues of $9 billion in 2007, falling to $8.4 billion in 2009 with 6,550 employees. Universal Corp. posted revenues of $2.4 billion in 2010 with 28,000 employees. Alliance One International Inc. had sales of $2.3 billion in 2010 with 5,000 employees.

Workforce

In the United States, tobacco processors buy flue-cured tobacco from July through November and burley tobacco from late November until January or February. Processing takes place throughout the buying season and is usually finished within two to three months after purchase. During these periods, the industry's workforce swells. Some seasonal employees are covered by union collective bargaining agreements. Seasonal labor also is used extensively in overseas operations.

America and the World

The tobacco balance of trade (the value of manufactured and unmanufactured exports minus manufactured and unmanufactured imports/arrivals) continued to spiral downward in 2004, slipping $112 million in one year to just $1.5 billion. However, the industry was rebounding in this area in 2005 with a 19 percent gain. In terms of supply and demand, the U.S. tobacco processing industry was increasingly looking abroad. The elimination of trade barriers and the rising popularity of lighter, American-blend cigarettes expanded overseas markets. Following the fall of the Berlin Wall in 1989, new markets for U.S. exports sprang up in the former Soviet republics and in Eastern Europe. Demand in some countries grew enormously. Cigarette consumption in China, for example, was more than five times greater than in 1965. U.S. cigarette exports tripled between 1985 and 1992, owing to the popularity of American tobacco products and reduced trade barriers in countries such as Japan. The trend continued into the mid-1990s. In the mid-2000s, the leading importers of the 113.3 billion (2005 figure) U.S. cigarettes were Japan, Saudi Arabia, Iran, and Lebanon with the majority going to Japan (77 percent).

As international suppliers of tobacco, the processors also were selling tobacco grown overseas for cigarette manufacture in non-U.S. factories. The large processors had major operations in Brazil, Zimbabwe, Malawi, and other tobacco-growing countries. In several countries the processor will contract directly with tobacco farmers, in some cases before harvest, and thus take the risk that the delivered product will meet the market's quality requirements. In some countries the major processors also provide agronomy services and advances for fertilizers and supplies.

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