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Growers face cuts in tobacco contracts

Posted 2/25/19

Tobacco growers are facing large cuts in the volume of contracts offered by leaf dealers this year.

“There are cuts from 30 to 80 percent depending on the particular company, depending on the …

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Growers face cuts in tobacco contracts

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Tobacco growers are facing large cuts in the volume of contracts offered by leaf dealers this year.

“There are cuts from 30 to 80 percent depending on the particular company, depending on the particular individual and their performance history, but a huge cut among leaf dealers,” said Pender Sharp of Sharp Family Farms, a grower in Wilson County. “All this could result in the smallest U.S. crop that is grown in modern U.S. history.”

Sharp, who recently received the 2019 Excellence in Agriculture Award presented by N.C. Agriculture Commissioner Steve Troxler, pointed to trade issues with China as the leading area of concern for tobacco growers in 2019.

“The tariffs with our major customer China has caused them to withdraw from the U.S. market,” Sharp said. “They were buying nearly 30 percent of our production in the United States, so when you immediately take out the 30 percent that they were buying because they are buying none now with the tariffs, then a little bit (of a) decline in smoking, a little bit of decline from ‘heat, not burn,’ some pricing issues because of the currency exchange and our tobacco costing more than Brazilian tobacco, all those factors create a very unfavorable environment going into 2019.”

Sharp said there are enough people leaving the tobacco growing industry to offset decreases in demand from manufacturers.

“There is not a lot of change in the manufacturers,” Sharp said. “This would be your R.J. Reynolds, Philip Morris, JTI, those people that are making Marlboros and Winstons around the world. Where you are seeing the huge cuts in contracts are in leaf dealers, leaf dealers such as Alliance One and Universal that are both located in Wilson and Nash County, worldwide companies that buy tobacco from farmers and resell it around the world, they were the major suppliers of tobacco going to China and when we lose all of that Chinese market, it really diminishes the amount of volume that those leaf dealers can purchase.”

Tommy Bunn, director of government relations for the U.S. Tobacco Cooperative, based in Raleigh, said his company contracts with growers from Florida to Virginia.

“All of them were cut across the board 80 percent,” Bunn said. “The reason they were cut is because China did not buy the ‘18 crop and have not given us an indication they want a ‘19 crop. We still have the ‘18 crop that China said they wanted in the storage warehouse. What happened was that they gave us the indication of how much tobacco they wanted for 2018 and then when the tariffs were imposed by the president, China sent word back to us that they were suspending all purchases until the issue was resolved. China is our largest customer. We had contracted for the ‘18 crop with the farmers and bought it and it is sitting in storage. And for 2019, we have no indication what they want and apparently they want zero until the trade issues are resolved.”

Bunn said his company had to decide what to do with the tobacco on hand if it couldn’t sell it.

“And of course, along the way, the banks have something to say about how much inventory you carry. We had to cut back to what we thought we had a market for, what we have been told by our other customers that they need for 2019,” Bunn said. “So that’s why there was an 80 percent cut.”

“As far as an industry, it’s in turmoil,” said Mann Mullen, owner of Big M. Tobacco Warehouse in Wilson. “I’m speaking about the contracts and the cuts.”

Grower David Blalock of Blalock Farms in Lucama is planting about 1.5 million tobacco seeds in the greenhouse in preparation for the upcoming year.

“This tobacco business has always had its ups and downs,” Blalock said. “It’s about as bleak right now as I remember it being as long as I have been farming. Your volume is going to depend on which company you are aligned with and their place in the market. It appears right now that the growers that are contracting with the manufacturers are in a better position than the growers that are contracting with leaf dealers.”

Norman Harrell, director of the N.C. Cooperative Extension office in Wilson County, said growers are still in the process of signing contracts and it isn’t clear yet how deep the cuts in volume will be.

“The good thing for Wilson County growers is a lot of our growers have multiple contracts with different companies, so maybe that can help somewhat soften the blow of these reductions,” Harrell said. “If they are with one company that is not that bad and then another company where there are some cuts, I am hopeful that that will minimize the impacts to Wilson County. But make no mistake about it, we will feel the impact of reduced tobacco contracts.”

Harrell said it’s common for Wilson County growers to have three to four contracts with different companies.

“That kind of spreads your eggs into more baskets,” Harrell said.

Harrell said about a dozen or more companies buy tobacco in Wilson. The company that had the 80-percent cut is the same one that sells the majority of its tobacco to the Chinese.

“That is why their cuts are more significant than other cuts,” Harrell said,

“China was purchasing tobacco through direct contracts with growers and they have been purchasing tobacco through leaf dealers,” Harrell said. “I think the tobacco got caught up in these trade disputes and tariffs and it’s probably just a pawn in it because in the big scheme of things, it’s very small compared to other commodities. I think it is estimated that around 65 million pounds of tobacco would go to China and if there is any going now, it has been significantly reduced.”

While tobacco growers are influenced by the strength of the dollar, cheap tobacco coming from the U.S.’ biggest competitor Brazil, decreasing smoking rates and the rise of popularity of “smoke, not burn” products and e cigarettes, the largest impact is the trade complication with China.

“Since 1974, the first surgeon general’s report that declared that smoking was bad for your health, the industry has had to learn how to survive through a no-smoking environment and a constant barrage of cigarette prices that have increased the price of the product to consumers,” Sharp said. “We fought those battles for 50 years and still managed to have a viable industry. Tobacco company stock performed well. Farmers that chose to stay in this industry were able to grow tobacco and make a reasonable profit on the tobacco they were growing. Companies that were buying it and reselling it were making money. Cigarette manufacturers were certainly making money. But the tariffs have done more damage in the last few months than all through history everybody that was trying to destroy tobacco. The tariffs did more damage in a short period of time than the 50 years of history trying to get rid of tobacco.”

Sharp said it is not the end of the tobacco industry in Wilson County.

“Certainly not,” Sharp said.

“We are having a correction,” Harrell said.

“There is hope that at some point in time that we’d regain that Chinese market,” Sharp said. “There is hope, not necessarily optimism, that some compromises would be reached on the tariffs. The tariffs really have nothing to do with tobacco. They were more about steel and intellectual property and electronics.”

Tariffs on tobacco and other agricultural crops China used were just a retaliation against the United States.

“There is hope, not necessarily optimism, but hope that those issues can be resolved and we can regain a portion of that market and if we do, it would certainly have a positive impact on not only tobacco farmers but tobacco farmers and their contributions into local communities right here in Wilson,” Sharp said.

“It is a tough transition year,” Harrell said. “We have to be thankful for what Commissioner Steve Troxler did to move forward with getting our farmers some disaster assistance from the state of North Carolina,” Harrell said. “That was very crucial in keeping the cash flow with our farmers going forward and that will hopefully allow for the transition to go into 2019. Our growers are going to know what their contracted pounds are. If Mother Nature will cooperate — and that is a tough thing in farming — but if we can have a good crop season, that will really take the pressure off. We have just been dealing with so many things that Mother Nature has presented us, it’s made a lot of challenges. A good year will not do everything we need, but it will really help take the pressure off this financial position we are in right now.”

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