SA tobacco: necessary monopoly?

Like many other South African agricultural products, tobacco had to overcome huge difficulties when thrown into the free market. The tobacco industry devised a solution to ensure its survival, but under the new system, tobacco farmers seem to have lost the control they had over their product and the profits they shared from processing it. Alita van der Walt takes a closer look at this controversial industry.

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Before 1994, government controlled the marketing of agricultural products. Then, both smoking legislation and illicit trade were minimal. However, after 1994, South African growers suddenly had to compete in a free, global market against growers who still benefited from government subsidies.

Tobacco farming is labour intensive at the best of times. The average farmer, farming on 25ha, needs about 50 workers. According to one tobacco farmer, workers are paid R5,70 per hour. In countries like Zimbabwe they get paid US (about R7) a day.

Government’s 440% increase in tobacco taxes didn’t help, nor did the resulting 20% increase in illicit trade, which led to a 3% annual decrease in legal cigarette sales. The results were disastrous, with the number of tobacco growers dropping from over 1 000 to just 300 today. Production of flue-cured Virginian (FCV) tobacco, used mostly for cigarettes, declined from over 30 million to 12 million kilograms, resulting in the loss of 20 000 (50%) of available jobs. Output of dark, aircured (pipe-smoking) tobacco halved, and another 2 000 jobs were lost. With costs rising while harvests declined, the processing plants were struggling. Magaliesberg Kooperatiewe Tabakplantersvereniging (MKTV ), which owned the processing plant in Rustenburg, finally went under in 2003.
According to F rancois van der Merwe, CEO and chairperson of the Tobacco Institute of South Africa (Tisa), MKTV owed over R200 million but reached a settlement agreement with its creditors. The biggest, Land Bank, wrote off R10 million. Shareholder farmers received 17c on the rand and other creditors, including Land Bank, 12c on the rand.

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Remedial measures
South African Gold Leaf (SAGL), owners of another processing plant in Nelspruit, were put in charge of managing the Rustenburg factory. The company, renamed Limpopo Tobacco Processors (LTP), was held in trust by the attorneys. This arrangement gave SAGL control of 98% of the FCV market. However, in 2004 SAGL withdrew from the LTP managing contract, apparently on the recommendation of Louis Smit, the then managing director of SAGL, and employed by Afgri.

The factory was in trouble again. In fact, it was clear that the entire tobacco industry was in trouble. It had to find a way to make itself globally competitive and ensure its long-term sustainability. The first thing the industry did was merge its two representative bodies: Tobacco RSA, which represented the primary tobacco industry in South Africa, including growers, leaf dealers and processors, and Tisa, which represented the non-commercial common interests of both the manufacturers of tobacco products and tobacco growers.

This process was finalised in 2006 and, according to Tisa’s website, has resulted in “a stronger, more focused industry body, representing the common interests of the entire South African tobacco industry”. Meanwhile the members of Tisa and Tobacco RSA focused on a drastic overhaul of the system. The most radical step was to scale down from three processing plants to one. Which of the plants to close down was a controversial question, but manufacturers were adamant: without the closures, buying from South African growers wouldn’t be profitable.

Manufacturers also insisted on what Van der Merwe calls a “Big Brother”, to provide stability, finance, professional management and shared services. In the meantime, Land Bank had agreed to refinance LTP; but on the condition, according to Van der Merwe, that it be managed by professionals, not farmers. Louis Smit, who was also a director at Afgri, was nominated. The other directors were Francois van der Merwe, a representative from KPMG , and two tobacco farmers. By June 2005 the entire industry was said to have agreed on the new model. Afgri would be the “Big Brother” and LTP the sole processing plant.

Afgri provided more than R100 million to finance farmers’ production costs and the factory’s running costs. They created a subsidiary, AfgriTobacco, to manage buying, processing and selling at LTP. Smit was made chairperson, and Christo van Staden, former SAGL factory manager, managing director. In exchange for their financing, Afgri has been promised 45% of LTP once LTP’s registration as a company has been finalised. Farmers will get another 45% share and 10% will go to BEE .

Complaint to the competition commission
However, SAGL walked away from the negotiations, saying the model would give Afgri and British American Tobacco (Batsa), which buys about 85% of locally produced FCV, a monopoly in the industry. Because the buyers, especially Batsa, solely supported AfgriTobacco, SAGL was forced to close down its operations in August 2006. It subsequently filed a complaint with the Competition Commission, accusing Afgri and Batsa of trying to take over the country’s tobacco industry. The outcome of the complaint is still pending.

Christo van Staden, managing director of AfgriTobacco, told Farmer’s Weekly that they have all the farmer contracts for FCV tobacco for 2007. With AfgriTobacco currently running the only processing plant in South Africa, and with the buyers supporting them, one wants to agree with SAGL that Afgri now controls the price of FCV tobacco. Van der Merwe disagrees, saying that AfgriTobacco manages LTP as a non-profit organisation, purely a contact point for buyers and sellers. One can’t miss the huge profit Afgri Operations is making from financing the farmers. Yet, on the other hand, they were financing farmers before they involved themselves in trading tobacco.

Buyers and markets
As a result of the restructuring, according to Van der Merwe, the price farmers receive for their tobacco has increased from R13,10 per kilogram to R18 per kilogram over the past two years. Despite this increase, Batsa told Farmer’s Weekly they are happy with the new model and satisfied that South African leaf is competitive “both in pricing and quality, hence the procurement of almost 85% of the local crop this year”. Trying to place an order with AfgriTobacco recently, Universal Leaf was told that there is no FCV left for them to buy. If Batsa is not taking everything, as Universal Leaf was told they are, who is buying the left over 15%? It may be China. The growing Chinese market holds huge
potential for South Africa.

Van Staden told AgriTV that AfgriTobacco has signed a protocol agreement with the Chinese government, enabling it to export tobacco to Chinese factories. The Chinese deal could be good news for FCV farmers worried about putting all their eggs in the Batsa basket. But it still doesn’t solve the problem for those who feel Afgri is holding all the cards. Still, Van der Merwe thinks that, despite all the grumbling, the restructuring has been effective, and that the increased prices farmers receive prove it.

“The foundation has been laid for a sustainable farming industry. It is now up to the farmers to concentrate on yield and quality to meet the requirements of the buyers,” Van der Merwe says. Do Afgri and Batsa currently have a monopoly over South Africa’s tobacco industry? If they do, the alternative may be no industry at all. Farmers can only hope that Afgri and its buyers understand the fragility of their symbiosis, and that no one tries to manipulate the market. Contact the Tobacco Institute of South Africa on 021 421 0011, e-mail tisa@tobaccosa. or visit