Farmers in South Africa seek higher share of tobacco production chain profits

Guess how many packets of 20 cigarettes are made from 1kg of flue-cured Virginia tobacco? One answer is 64, but it really depends on whom you ask, and on how much lower-grade filler tobacco is used, but these variables are negligible. When times are good and farm-gate prices high, South African farmers can expect about R18,50/kg ($2.64/kg) from British American Tobacco SA (BAT SA), which buys 85% of South African tobacco. It means the street value of tobacco is 64 times that paid to farmers for the raw material in cigarette manufacturing.

Considering the cost of packaging and distribution, and the marketing difficulties antismoking legislation has created for cigarette companies, a rather large markup between farm gate and smoker is to be expected. It may also be that farmers exaggerate how far a kilogram of high-grade tobacco will stretch, but anything approximating their estimate means that someone is making a great deal of money from tobacco.

Government duties on tobacco products in SA make up about 50% of the retail price, reflecting an increase of about 440% over the past 20 years and 215% between 1993 and 2001.

A study shows that although aggregate cigarette consumption has decreased by a third within a decade and smoking prevalence has decreased, government revenue from cigarette excise tax has increased. Farmers are entitled to their share of the business, says SA Golden Leaf (SAGL ) acting CEO Richard Baird. He speaks for what he describes as a growing number of Lowveld (and some Vaalwater, Limpopo) farmers.

Their problem is that their terms of trade — the ratio between the rate of increase in input costs and the rate of increase in farm-gate prices — are deteriorating. They want to improve them by benefiting from the downstream phases in the value chain.

Deteriorating terms of trade are, in fact, a feature of South African farming. As with tobacco, farmers’ profitability is decreasing, while agribusinesses return handsome profits to their shareholders. Farmers also face a host of other threats — reams of new labour laws and black empowerment regulations and increasing international competition from protected agriculture elsewhere in the world. These factors show that when considering the reasons for a drop-off in tobacco production, it would be inappropriate to blame it all on uncompetitive farm production.

SAGL is the farmer-owned company whose job it has been to add value to farm-gate tobacco by threshing and sorting in preparation for sale to cigarette manufacturers. Now SAGL wants to take this further by reviving the co-operative business model to allow even the smallest farmers to benefit from a threshing operation proportionate to their contributions, over and above their farm-gate revenue.

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