2.3 ANALYSIS OF CHANGES IN PRODUCTION, AREA AND YIELDS

2.3.1 Factors affecting production, area and yields

Brazil is a major tobacco producer, ranked second in the world after China, and therefore is sensitive to changes in international tobacco trade. Recent improvements have upgraded Brazilian tobacco to a new quality status, and production capacity has been expanded, mainly for export.

In the northeast, labour costs are the lowest in the country, if not in the world. As long as labour remains relatively cheap, tobacco production, a labour-intensive activity, will remain profitable. The primary difference between the south and northeast regions is that the south is devoted to production of tobacco leaf for cigarette manufacture, while the northeast specializes in black tobacco and tobacco leaf for cigar wrapping.

There has been a significant growth in area and production in recent years. Tobacco companies have been encouraged to improve the quality of Brazilian tobacco, resulting in better quality and productivity. Production increased at about 3.5 percent per year over the last 25 years, mostly attributable to yield increases (2.3 percent per year) and less to growth in area harvested (0.8 percent per year). Average yields show a consistent upward trend over the last two decades, but with fluctuations, as tobacco is a rainfed crop. Part of this improvement can be attributed to improved varieties, but, cultivation practices are the main factor underlying the growth in yield, among the highest in the world. In the south, the widespread adoption of improved cultivars and improved cultural practices, as recommended by the major tobacco companies, have boosted yields to unprecedented levels in the in the last decade.

Figure 2.1 shows the effects on production of the export boom in the early 1990s. Export-driven demand led to a sustainable growth in production. Trends in production, area and yields indicate prospects for sustainable growth in tobacco production in Brazil in the coming years. Of course, a lot will depend on developments in the foreign markets for Brazilian tobacco. Table 2.3 and Figures 2.1, 2.2 and 2.3 show trends in tobacco production.

Table 2.3: Production, harvested areas and average yields in Brazil

Source: IBGE.

Figure 2.1: Trends in total tobacco harvests in Brazil, 1975-2000

Figure 2.2: Area of tobacco harvested in Brazil, 1975-2000

Figure 2.3: Average yield of tobacco leaf in Brazil, 1975-2000

From the mid-1970s, the area planted to tobacco expanded until it reached 354 000 ha in 1998, around 2.7 percent of the area under annual crops, and 0.2 percent of the total area cultivated in Brazil. The area under tobacco is strongly influenced by prices. The area grew from 1974 to 1979, as prices went from $R 3.75 to $R 4.50/kg, and grew again from 1990 to 1993, when prices increased from $R 2.90 to $R 4.55/kg. At other times, prices have been around $R 2.50/kg.

2.3.2 Improvement of tobacco quality and grading

Improvement in tobacco quality

Some measures were introduced in anticipation of any restriction or tightening of control measures that might challenge Brazil’s position in the global tobacco trade in terms of chemical properties of the tobacco and the need to apply cultivation practices that are environmentally sustainable. In line with these policy decisions, the tobacco companies have campaigned to reduce contaminants. Tests of chemical - particularly alkaloid - levels have become routine, and agrochemicals are used in smaller amounts and the empty containers are collected and sent to a central recycling plant. An effective programme - The Future is Now - prevents children and youngsters under the age of 16 from working with tobacco on farms and in processing plants.

Guidance from industry has improved crop management to produce tobacco with lower alkaloid levels to meet international market demands, combined with better timing to harvest at optimum maturation and use of recommended varieties.

Varieties of tobacco grown in Brazil

Only a few tobacco varieties are grown in Brazil, and Virginia accounted for over three-quarters of total domestic production in 2000 (Table 2.4).

Table 2.4: Tobacco production in Brazil by variety (tonne)

Source: Afubra.

The Comum (Common) is sold only in domestic markets. Consumers’ preferences have changed drastically in the last decade, from “regular” quality tobacco, such as Comum, to other, fuller-flavoured varieties. Virginia and Burley are high quality varieties for both domestic and foreign markets. The “Other” category consists mainly of leaf for cigars and cigarillos, and is produced in the northeast.

Virginia and Burley tobacco are mostly dried in special ovens (flue-cured) and drying hangars (dark air-cured). The other varieties are dried in the open air (sun cured). In the south, an increasing number of tobacco growers are investing in facilities to produce flue-cured tobacco. The southern states have adequate soil fertility and rainfall, with the long periods of high relative humidity needed for curing.

Virginia tobacco for flue curing is the most common variety in south, with 408 200 tonnes (81 percent of total production). The remainder was air-cured varieties: Burley and Comum (17.5 percent (88 600 tonne) and 1.5 percent (7 600 tonne), respectively). Yields in the 2000/01 season reached 2 047 kg/ha for Virginia, 1 826 kg/ha for Burley, and 1 770 kg/ha for Comum. The areas planted were similar between years.

Although tobacco occupies only some 0.2 percent of the cultivated area, it gives $R 1.23 billion in farmer income, or roughly $R 9 200 per family. About 60 percent of the tobacco produced in the south is exported, the remainder being used domestically to make cigarettes.

Tobacco grading in Brazil

Thanks to a strict quality control system, good curing, modern machinery for processing, and advanced technology in manufacture and preparation of tobacco leaf for export, Brazil has became a reliable source of high quality tobacco. This quality is maintained by a system that rewards quality, stimulating growers to invest in quality. The quality is clear from the relatively high proportion of Virginia (41.3 percent) and Burley (33.5 percent) classed as the high quality type “B”, with 54.7 percent of FCV tobacco in sub-class “O”. In terms of type, 34.6 percent of the FCV is graded Type 1, and 47.8 percent of the Burley is also Type 1, with 58 percent of Burley in sub-class “O”, a dark brown, highly valued tobacco, and 36.9 percent in sub-class “R”, a light brown tobacco (not top quality).

Table 2.5: Profile of tobacco grading in Brazil

Source: Afubra.

Prices are negotiated between farmers and industry representatives each year, with quality the major determining factor. According to estimates from Afubra, each tobacco-farming family earned an average gross income of $R 9 240 in 2000/2001, an increase in gross revenues of 15.6 percent from $R 7 990 earned from the 1999/2000 crop. Profit for tobacco growers jumped from 22 percent to 47 percent. Table 2.5 shows the profile of the tobacco grading in Brazil, within the classes and sub-classes.

2.3.3 Fuelwood as a major constraint in production

One of the priorities for tobacco production is the supply of fuelwood for curing tobacco. Legislative restrictions on cutting natural forest require all farms to preserve 20 percent of their farm area as native forest, and this was seen as a threat to tobacco production. However, the tobacco companies implemented a programme to restore forest coverage on production areas. This programme was intended to preserve native forests and to reforest as a means of supplying growers with fuelwood for curing and lumber for building, such as curing barns, while at the same time maintaining ecological balance. The tobacco companies, the producers’ associations and industries invested heavily in campaigns based on their joint proposal to plant idle areas with native (acacia) and exotic (eucalyptus) species, reaching around 140 000 growers in the south, with the agreement covering all related supplies of services and necessary inputs, such as financing, licensing of nurseries supplying low-cost seedlings for reforestation, technical assistance and field research. Industry has committed itself to not purchase tobacco cured with fuelwood from irregular sources, and no grower will be registered without a commitment to reforesting part of their property.

2.3.4 Crop substitution possibilities

Tobacco in Brazil yields higher net returns per hectare than either maize (an important food crop) or beans (an important cash crop). A few crops might potentially compete successfully with tobacco, such as vegetables and other legumes, but markets for those crops are already well supplied. Table 2.6 compares tobacco with alternative crops.

Other profitable crops, such as garlic and asparagus, that might compete with tobacco are demanding in terms of natural soil fertility, while tobacco is not. There are opportunities to diversify and move away from tobacco, but it depends on research and the economics of those alternative crops.

To match the gross income per hectare of tobacco requires 6.5 ha of maize or 9.6 ha of beans. On those terms, it is almost impossible to replace tobacco, in terms of income generation, on small farms. If maize and edible beans were to be cultivated in the south, new land would have to be brought into production, which implies opening new land and deforestation, with damage to the environment.

Table 2.6: Estimated costs, revenue and net income from tobacco and competing crops

Source: Afubra.

Tobacco is suitable for the hilly terrain in the south, where cultivation of alternative crops would be difficult.

In addition, it is very difficult to replace tobacco by other crops because of the current comprehensive crop insurance, sponsored by Afubra. For 45 years, it has remained reliable and improved over the years. Without increasing rates, a recent innovation has been financial help for reconstructing curing barns damaged by fire, wind, hail or lightning during the tobacco curing process. There is also support for crop damage by hail or wind.

Crop insurance for other crops, PROAGRO, it is not as efficient as that for tobacco. PROAGRO is notorious for delays in payment of claims.

Little research has been done on crop substitution in the northeast. In the south the University of Santa Maria, in Rio Grande do Sul assessed tea, which has some advantages over tobacco production, although it would make a poor substitute: (i) in order to generate the same net income per family, it would require larger areas (certainly involving land clearing and deforestation); (ii) 30.6 percent of farmers have farms with less than 1 ha, which is insufficient for tea cultivation); and (iii) tea was potentially uneconomic under current market conditions.

Another possibility is forestation, planting indigenous species such as acacias. This is a viable substitute for tobacco. Acacia is valuable because it provides not only timber but also tannin from the bark. Difficulties with acacia are: (i) much of the appropriate land is already planted with exotic species to provide the fuelwood for curing tobacco; (ii) some tobacco areas have high fertility, suitable more for cash crops than permanent crops; and (iii) most of the existing plantations were established with farmers' own resources and fiscal incentives, when credit was also cheap, whereas credit is currently difficult to obtain and is expensive.

Farmers’ dependence on tobacco production

Small-scale farmers in the south are totally dependent on tobacco for economic survival. A quarter of the tobacco-growers farm less than 1 ha; another 30.5 percent have from 1 to 10 ha (see Table 2.7). The average farm is 17.5 ha, with 2.6 ha under tobacco.

Table 2.7: Size profile of farms growing tobacco in the south (1999/2000)

Source: IBGE.

A quarter of growers rent the land from landowners or are sharecroppers; the rest own their land. Small farms dominate, and since tobacco does not require a large area, renting and sharecropping is a natural mode of tenure, with the advantage that neither arrangement immobilizes the grower’s capital in the land.

Most of the farms rented are less than 5 ha (a minifundia in Brazil), with tobacco as a major source of income. Sharecropping is frequent among aged and retired farmers who share their land with new entrants.

2.3.5 Interviews at farm household level

In the south, according to a survey conducted by Afubra, farmers’ dependence on tobacco can be judged from the following:

• 88.4 percent of tobacco growers have grown it for at least 5 years, and would have difficulty in learning how to cultivate other crops;

• tobacco growers assert that tobacco is the only crop they know that could provide a living from 2 to 3 ha;

• farm planning assessment suggests that tobacco is the only crop cultivated on a large scale that has a market capable of absorbing all the production in the south;

• farmers think that all other crops are subsistence crops, not market oriented crops;

• the best combination of activities with tobacco are pig and poultry production, which farmers say would yield US$1 200 annually, but they are not options for globally replacing tobacco;

• all the farmers say that changing land use would cause losses through forgone income;

• 67.1 percent of farmers noted that in the absence of a market for tobacco they would have to clear land to introduce another crop mix.

• 79.9 percent of tobacco growers plant maize after harvesting tobacco;

• 32.2 percent of tobacco farmers combine tobacco with forestation, the wood being used to cure tobacco, resulting in a profitable combination;

• 29.5 percent of farmers noted that tobacco is an ideal crop because it does not require large plots of land;

• 28.9 percent of farmers noted that tobacco is an attractive crop because of the guaranteed purchase of produce, which no other crop currently provides;

• 28.2 percent of growers felt no other crop could be as profitable as tobacco;

• 13.4 percent of farmers noted that they would have no alternative occupation, either within or outside agriculture, should tobacco growing not be possible: and

• the average net annual income with tobacco could reach $R 8 000, while the net income in the next best alternative would not exceed $R 2 000.

The interviews indicated that alternatives already available, such as early retirement and an exit bonus, would only marginally reduce the number of producers. The bulk of producers in the south will remain in tobacco production. In the northeast, tobacco is the main (if not only) source of income in the economically depressed areas of Bahia and Alagoas.

2.3.6 Future developments in tobacco supply

Brazil can be expected to continue to grow tobacco efficiently. Production and income from tobacco will grow as the application of improved technologies expands, such as fertilization; seedlings produced with the float system that result in a more even crop and eliminates the need for fumigation with methyl bromide; the use of disease- and pest-resistant varieties suited to each region; and the adoption of direct planting.

Cigar production will grow driven by the prospects of a growing export market. There is a trend towards new investment, with introduction of foreign technology and expertise through mergers and alliances with major global companies. However, investments have been hampered by the increased taxes on cigars and cigarillos, now at 67 percent, and increased competition from low-quality contraband.