1 OVERVIEW

This is the second of two volumes to be published from the FAO project Tobacco Supply, Demand and Trade by 2010: Policy Options and Adjustment, which was supported by the Government of Sweden through its international development cooperation agency SIDA. The first volume, directed at providing projections to the year 2010 of tobacco production, consumption and trade, contains also a review of developments in the global patterns of production, consumption and trade since 1970. This present volume is intended to provide a closer look at the tobacco economies of a few selected countries.

In order to better understand the economic contribution of tobacco production, and the likely impact which tobacco control might have on producing and exporting countries, detailed studies were conducted of a number of countries in which tobacco plays an economically important role. The countries so studied were Brazil, China, India, Malawi, Turkey and Zimbabwe.^[1]

Four million deaths annually are attributed to tobacco by the WHO. The illnesses associated with tobacco impose a major cost on the health care services of all countries and illness and death are a significant source of lost input to the workforce. At the same time, however, tobacco makes an important contribution to incomes and food security in the agricultural sector of producing countries.

As tobacco plays a significant role in the economies of many countries, a global reduction in demand for tobacco^[2], such as might be brought about by successful international efforts to control tobacco, could have a significant impact on farmers' incomes and on the economies of tobacco producing countries. Even in countries where tobacco production is relatively unimportant at the national level, farmers in particular regions may nevertheless suffer significantly should their markets for tobacco contract.

The extent of the impact of any weakening in demand for tobacco would depend on the capacity of the agricultural and other sectors to absorb labour and other resources displaced from agriculture, and on the returns which can be realised in these alternative enterprises. In most, if not all, tobacco-growing areas, there are other crops which can be grown in place of tobacco, and there are non-agricultural enterprises which can absorb any labour displaced from agriculture. However, alternative crops typically return lower levels of remuneration to the farmers. In addition, the process of adjusting from production of tobacco to other crops is likely to take some time, and to require considerable investment and expertise which may not be readily available. Thus, even if reasonably remunerative crops do exist, there could be significant losses during a transition period.

These studies suggest that, while it is clearly the case that some people in some countries may suffer, the impact of any moderate contraction in the tobacco market, particularly if it were to occur slowly, might have only a limited impact on most tobacco producing countries.

In Brazil, for example, some 135 000 family farmers produce tobacco as their main economic activity. In the 2000/2001 crop year average gross income per family farmer reached R$ 9 165 (US$5 000). Tobacco is regarded as one of the few crops that generate income on small plots of land and, because it effectively utilizes family labour, it helps to mitigate the rural exodus which has become a major problem in recent years. Tobacco producers who own their properties are smallholders, with areas of around 43 acres where 4.7 acres are taken up with tobacco.

However, total household income from tobacco farming has shown substantial volatility over the years. It reached a peak of almost US$1 billion in 1997, and subsequently contracted to remain around $600 000 in the past 3 years.

Tobacco represents an important source of permanent jobs, including jobs for women for specialized work, both at farm and local industry levels. The total employment generated by the tobacco industry is around 2.2 million (3.2 percent of the total work force of Brazil), with around 500 000 employed in agriculture, 200 000 in farming related activities, such as tobacco processing at farm level and a further 1.5 million in other activities such as transportation, input production and distribution to agriculture and manufacturing, wholesale and retail labour force, processing tobacco for export, etc.

Brazil’s state governments depend heavily on revenues raised from the value added tax on tobacco.

Tobacco in Brazil provides higher net returns per hectare than corn or edible beans. A few remunerative crops do exist that may compete with tobacco, such as vegetables and legumes, but markets for those crops are relatively well supplied. Other opportunities for diversification away from tobacco include crops such as garlic and asparagus, which may compete with tobacco, but are demanding in terms of natural soil fertility. In some conditions, such as hilly terrains of the South of Brazil, topography makes cultivation of alternative crops very difficult.

As in many other countries, tobacco production in Brazil is attractive not only because of relatively high levels of returns, but because of the guaranteed purchase of production, not available to other crops. The insurance available for other crops is much less favourable.

In China, tobacco is an important source of income for the government, particularly as the government operates tobacco businesses. Thus profits as well as taxes contribute to government revenue.

At the regional level, particularly in the tobacco-dependent provinces such as Yunnan and Guizhou, tobacco production and cigarette manufacturing have played much more important roles in government finance and provincial development. In particular, many local governments rely on the Special Agricultural Crop Tax for their revenue. Since this tax is based solely on revenue from tobacco leaves, a decline in tobacco production would result in lower tax revenue.

Cigarette manufacturing is a key generator of revenue for local governments. For instance, the 1 429 state-owned enterprises in Yunnan had total sales of about RMB 69.1 billion (US$8.3 billion) in 1998 while 8 cigarette manufacturing plants accounted for about 53 percent of total provincial industry sales at RMB 36.2 billion. Cigarette manufacturing was the single largest sector in the province, ahead of chemical manufacturing which had revenue of only RMB 5.1 billion. Cigarette manufacturers are among the few profitable state-owned industries.

In China, contrary to the situation in many countries, tobacco may not be more profitable to farmers than other crops which could be grown on the same land. Although tobacco leaf prices reached a peak in 1997, the gross profit of tobacco production per hectare of land was lower than cotton and sugarcane production. Income per man-day of labour in producing tobacco (RMB 14.7, US$1.8) was lower than for soybeans (RMB 26.9), sugar-cane (RMB 22.0), rice (RMB 21.1) and cotton (RMB 20.4). A major factor behind farmers' decisions to plant tobacco is the limited market risk. Tobacco is sold on contract at a guaranteed price, while other agricultural crops carry larger price risks, and the State Tobacco Monopoly Administration has had no difficulty in paying cash to farmers following delivery of tobacco.

Tobacco production in China does not employ more workers than other crops, so any substitution of tobacco by other crops would apparently not result in significantly lower employment in agriculture. Furthermore, adjustment from tobacco to other crops would probably take place relatively easily. Small growers dominate agricultural production, and produce tobacco along with other crops. There are very few specialized tobacco producers, and thus farmers have skills for producing not only tobacco but also other crops. Also, as tobacco production is undertaken largely by manual labour with little fixed capital, the costs of adjustment in switching between crops is small.

However, tobacco growers in some regions, such as those with poor agronomic conditions and without irrigation could face significant difficulties if they had to produce alternative crops in place of tobacco. Those near urban areas would face less income risk because off-farm employment would continue to offer alternative income opportunities.

In India, tobacco makes a significant contribution to the economy in terms of employment, income and government revenue. It generates nearly Rs. 20 billion (US$0.45 billion) of income per annum.

There are an estimated 850 000 growers of tobacco in the country, with farming characterized by small family farms. Nearly 6 million farmers and workers depend on this sector for their sustenance. In addition, the tobacco sector provides direct and indirect livelihood to a large number of people in many connected and ancillary industries. Studies on the Tobacco Industry in Andhra Pradesh found that marginal and small tobacco farmers depend on this crop as the main source of their family income and of livelihood, particularly for food which accounted for about 67 percent of the annual household expenditure.

Excise duty is imposed on the entire range of manufactured tobacco products. In 1998/99 tobacco excise contributed about Rs. 59.4 billion (US$1.4 billion) to the central government’s revenue, in addition to Rs. 18 billion distributed to the three tobacco growing states, Andhra Pradesh, Gujarat and Karnataka.

Tobacco contributed Rs. 7 790 million (US$180 million) to export earnings in 1998/99, which was around 5 percent of the foreign exchange earnings from agricultural products. In addition, the Central Government also realized on an average around Rs.2 billion per annum from tobacco enterprises in the form of corporate tax during the last three years.

As in many other countries, tobacco in India generally provides higher net returns per unit of land than most other cash crops and substantially more than food crops. In the light of over-supply of Flue-cured Virginia (FCV) tobacco in recent years, some comparisons have been carried out on profits from growing tobacco or other crops in FCV-growing areas. A few remunerative crops have been identified in different areas. However, they may not remain remunerative if supply to the market were to increase, driving down prices. Some of these alternative crops require high levels of irrigation. Tobacco has an advantage in that it is drought resistant and grows under non-irrigated conditions. As in many other countries the institutional arrangements for marketing tobacco, and for providing inputs including crop insurance, encourage its production. The assured market and prompt payment of sale proceeds through the Tobacco Board make more difficult the task of replacing the FCV tobacco crop.

Bidi tobacco is generally less remunerative to farmers than is FCV tobacco. Some studies have shown other crops, such as chilli, cotton and combination of soybean and rabi sorghum as well as groundnut and rabi sorghum could give higher returns than a sole crop of tobacco. However, other studies have concluded that tobacco was more remunerative than all alternatives.

The reduction in net income which might result from a decline in tobacco prices and a shift to the next most profitable crop would be expected to reduce the demand for hired labour. This would result in increased economic and food insecurity not only among a large section of the landless in rural areas but also among the marginal and small farming families.

Given Malawi’s predominantly agricultural economy, limited resource base, and slow growth in the national economy and government revenue, tobacco production has a major role in national economic growth, employment and income of rural households and government.

Exports of agricultural commodities, of which tobacco constitutes around 60 percent, are virtually the only source of export earnings and foreign exchange for Malawi’s economy. Tea, the second largest export commodity, brought only about 14 percent of the revenue generated by tobacco. However, the dominance of tobacco in Malawi’s exports has weakened slightly since 1995, as exports of tea, sugar, cotton and rice grew faster than those of tobacco. Tobacco production is estimated to contribute 6 percent of total GDP and 17 percent of agricultural GDP.

Employment in the tobacco industry accounts for about 20 percent of the total labour force of 5 million.

Consequently, tobacco is the major source of cash income for many rural households, particularly in the major tobacco producing regions. Sales of tobacco contributed 65 percent of rural households’ cash income in Lilongwe, 89 percent in Kasungu and 95 percent in Dowa, and a large proportion is used for purchasing food. Most food expenses were for basic food such as cereal and cereal products, vegetables and meat, which accounted for more than 50 percent of total food expenses for many regions.

Malawi has been pursuing a diversification strategy for more than 30 years, and a number of crops have been identified which could potentially be produced. However, market opportunities for many products are limited. Malawi has a comparative advantage in the production of tobacco, and many farmers have continued to produce and expand tobacco production. Apart from other agricultural products, food processing, services and textiles have some potential for expansion based on resources which might be shed from tobacco production in the event of a downturn in demand for tobacco. The development of secondary and tertiary sectors may provide Malawi with greater stability based on diversity, but in an economy which is primarily agricultural; their development will not be easy.

However, given the dominance of tobacco in Malawi's economy, apparently reflecting comparative advantage in that product, it is likely that, in the event of a contraction in the tobacco market, Malawi will continue to specialise in tobacco production while adjustment to other crops is concentrated in other countries. In such a situation, however, Malawi may suffer a considerable loss of export earnings and farm income.

Turkey is the fifth largest tobacco producer in the world, with about 1.5 percent of its total cultivated area under tobacco.

There are approximately 600 000 small tobacco growers in Turkey, with total employment in tobacco production employing some 1.5 million persons. More are employed in other tobacco-related activities, such as transportation, storage, trade and cigarette manufacturing. The latter employed more than 20 000 of Turkey's 1.1 million manufacturing workers in 1997.

Turkey is a major trader of tobacco on world markets, exporting about 150 000 tonne (60 percent of its total production) and importing about 50 000 tonne of processed and unprocessed tobacco. Turkey ranks fourth among tobacco exporting countries, with a share of 6-8 percent in total world exports. In 1999, total tobacco exports amounted to US$561 million, 23 percent of total agricultural export value.

Cigarette taxes amounted to US$2 300 million in 1998, which was more than one eighth of total indirect tax revenue.

Zimbabwe is the largest producer of tobacco leaf in Africa and the world’s fourth largest producer of flue-cured tobacco after China, Brazil and the United States.

Tobacco production, 98 percent of which is exported, makes an important contribution to GDP and to export revenue, and plays a major role in the national economy. The crop normally accounts for more than 50 percent of agricultural exports, 30 percent of total exports and nearly 10 percent of GDP. Total annual sales at auction since 1990 have ranged between US$270 to US$593 million. Tobacco sold through the auctions then undergoes further processing by merchant companies to remove stems and tips from the leaf before being shipped abroad. This adds 30 percent to 50 percent to the crop’s final export value.

About 170 000 workers were engaged directly in tobacco production directly in 1998 in addition to 30 000 workers involved in tobacco research, marketing, service and manufacturing. Short-term hiring by the large commercial farms and small-holder farms employed a further 100 000. This full-time employment directly and indirectly of around 250 000 roughly equals 5 percent of Zimbabwe’s total labour force. Many other jobs also depend on forward and backward linkages between tobacco and other parts of the economy including input supply, transportation services, coal mining, and hospitality during the auction season and other consumer services.

A levy system in which growers and buyers each pay a fixed percentage of the value of crop sales generates several million US dollars annually, but to encourage production, the tax rates have been reduced since 1999. Based on the 2001 tax rate, flue-cured tobacco generates around $Z 7 260 (US$132) per hectare in government revenue.

Zimbabwe has successfully diversified its agriculture into many commodity export markets over the past few decades. Exports of flowers, cotton, tea, coffee and meat have all increased in recent decades, reducing the level of dependence on tobacco. At the farm level, tobacco is rarely grown as a sole crop with most tobacco growers being quite diversified.

Diversified production reduces the exposure of growers to income variability in the face of variable tobacco prices. A diversified pattern of production also provides the technical possibility for tobacco growers to shift away from tobacco production to other crops immediately because farmers already have the skills, equipment and marketing channels required.

Large tobacco growers who have dominated tobacco production in Zimbabwe have considerable fixed investment in buildings used for curing tobacco leaves, which could not readily be used for other purposes. Other capital such as trucks and tractors can easily be used for other purposes. Small-holders have a much lower level of capital, but may experience more difficulties in adjusting away from tobacco production as they lack experience in growing other crops and are more dependent on tobacco for their cash income.

Globally it is clear that in the event that demand for tobacco should weaken, lower prices to farmers would encourage a drop in production. Land, labour and other resources freed from tobacco production would be employed in other agricultural enterprises or in other industries. The evidence from the various case studies suggests that alternative crops and other forms of employment for these resources are available. However, the remuneration from these other activities would typically be expected to be lower than from tobacco, and thus there would be some loss of income.

In addition, the process of adjustment may not be easy. In some cases, the capital and skills required to expand production of other crops in place of tobacco may not be available, although in countries where tobacco is produced in mixed farming patterns with other crops, adjustment would not be as difficult.

This adjustment would depend on the magnitude of the weakening in demand and on the speed at which it occurred, and would be expected to vary from one country to another. It is likely that the developed countries, with more diverse agriculture and with ready availability of capital and skills, would be likely to adjust more than the developing countries, and that any contraction in global tobacco production might therefore become more concentrated in developed countries. Agricultural policies supporting tobacco production in the developed countries may sooner or later come under pressure to be eliminated or at least weakened, increasing further the shift of tobacco production from the developed to the developing countries.

The implementation of strict anti-smoking policies will have an impact on global trade patterns, as the extent to which the policy affects production and consumption of tobacco in different countries would vary according to consumer preferences and production possibilities. In general, it is expected that the demand for imported tobacco in developed countries could increase if production contracts faster than domestic demand. It is expected that net exporting developed countries will experience a decrease in net exports due to the decline in production. On the other hand, some developing countries in which consumers react to increases in price by reducing consumption and where producers have limited possibilities to switch to the production of an alternative commodity are expected to increase exports.

A consequence of any effective international tobacco control will be reduced returns to tobacco producers. In many situations, farmers will adjust to other forms of production, thereby maintaining, to some extent, their own livelihoods while reducing the supply of tobacco. In some countries, because of limited opportunities coupled with investment of capital and skills in tobacco production, adjustment will occur less readily.

It might be appropriate to consider, in general terms, the requirements that could arise for international assistance. Clearly the focus would need to be on those countries which currently have limited alternatives to tobacco production, and on those where the capital and skills required for adjustment to other crops are less readily available. The emphasis might be twofold, on providing assistance with skills and investment where these are needed to facilitate adjustment to other crops, and, in the longer term, to assist in the identification and development of alternatives in countries where these are not currently available. Such adjustment would help to minimise the economic damage arising from a weakening market for tobacco while at the same time encouraging a reduction in the supply of tobacco.