A crop holiday for tobacco

Print edition : May 13, 2000

Will the break in cultivation announced by the Tobacco Board with the support of the growers stabilise the demand and supply situation?

PARVATHI MENON RAVI SHARMA

HUGE stocks of tobacco accumulated from last year's inventory that are lying with traders and exporters, a fall in domestic prices, and a depressed international market for the crop appear to be the reasons behind the unprecedented decision of the Indian Tobacco Board to declare a crop holiday for the growing season of 1999-2000. While various segments of the industry in Andhra Pradesh and Karnataka, the two States that account for almost all the tobacco cultivation and trade in the country, have reacte d differently to the decision, it is somewhat ironic that the growers of Andhra Pradesh favour a crop holiday; in fact, they were partly instrumental in getting the decision through.

India is the third largest producer of tobacco in the world, after China and the United States. It produces around 550 million kilograms (mkg) of tobacco every year. Of this only about 200 mkg is cigarette or FCV (Flue Cured Virginia) tobacco. The rest c onsists of mainly bidi tobacco and other varieties used for snuff and zarda, and hooka and chewing.

At a tobacco leaf processing centre, a file photograph.-

The crop holiday declared early this year is limited to Andhra Pradesh, which produced around 140 mkg in the current season. In Karnataka, where a superior variety of tobacco is cultivated and last year's crop was fully lifted, the Board has capped produ ction at 25 mkg for the next season. This is far short of the 45 mkg that Karnataka produced in the current season for which the auctions are over. It is Andhra Pradesh, with its powerful grower, trader and exporter lobbies, that determines tobacco poli cy. An indication of the sluggishness of the tobacco market is that by April 22, the auctions in Andhra Pradesh, which began in February, saw an offtake of around 5.32 mkg as against an offtake of 34.19 mkg on the same date last year; there were only 12 buyers as against 23 in 1999. "It is estimated that the tobacco market has carried forward stocks of around 150 mkg from the previous crops," an industry-watcher told Frontline in Guntur. "By end-2000, it is estimated that the total surplus avail able with traders will be about 120 mkg." The scenario in the international market is also not favourable for Indian exports, which are normally in the range of Rs.850 crores to Rs.1,000 crores every year. It is estimated that the global surplus stocks i s about 750 mkg. Anti-smoking campaigns by public health activists and litigation in many Western countries have depressed sales. The countries of the Commonwealth of Independent States (CIS), which are going through a recession, have been unable to fund their imports. The repeated devaluation of the currencies of tobacco-producing countries, such as Brazil, Zimbabwe, Argentina, Malawi and China, have made their exports more competitive than those of India.

Behind the sluggish offtake in Andhra Pradesh is the standoff between growers and traders over the price issue. The growers have held back from taking their produce to the auctions in the hope of getting a higher price, while traders have held back from buying hoping that the prices will drop. "The cultivators have their backs to the wall," said Dr.Y. Sivaji, honorary president of the recently formed Virginia Tobacco Growers Association of India, which represents growers from all the 21 national auction platforms. He said: "Traders gave an indent to the Tobacco Board for 103 mkg for this season. They have refused to enter the market because they want to push prices rock bottom. Tobacco cannot be stocked for very long by farmers."

The State Trading Corporation (STC) entered the market in April and started purchasing top grade tobacco at Rs.50.51 a kg in order to push up prices. The STC, however, has quantitative restrictions placed on it in respect of purchase. According to Sivaji , it may not lift more than 10 mkg this season.

At Thattekere in Hunsur taluk of Karnataka, a grower tends to tobacco saplings recently.-RAVI SHARMA

"The crop holiday was declared with the support of the growers in the hope that it would fuel demand and make the industry buy at higher prices," said C.H. Narendranath, managing director of Delta Tobacco Ltd, a leading export firm. (According to Sivaji, growers from each of the 21 auction platforms passed resolutions in support of a crop holiday and presented a joint memorandum to the Board.)

Narendranath said that farmers felt the STC's entry into the market would improve auction prices significantly. The prices set by the STC are what the industry would have in any case offered. "While the average realisation prices may come down to around Rs.34 a kg, prices for top grade tobacco will hold at around Rs.48. The tempo of sales is now moving up," he said. The prices exporters offer, he argued, are dependent on the export markets, which are depressed. "In Zimbabwe, for example, which has just opened auctions, markets opened at U.S. 90 cents a kg as against $1.4 last year."

HOW would a year's break from cultivation benefit a tobacco grower? Sivaji explains that if the crop holiday is observed properly then the grower can reap the benefits of two crops. He could sell half his produce in the first year at the prevailing rates and the rest at the end of the next season at a rate that would double owing to the increase of demand over supply. Sivaji claims that the grower can do the processing needed to store the stock. An alternative option that the Board could exercise in ord er to hold the price level is for it to buy around 40 mkg of low grade tobacco at a minimum support price ("We are even prepared to accept Rs.12 a kg"), hold its stocks for seven to eight months until prices go up, and then sell. "The final proceeds coul d then be distributed among the farmers on a pro-rata basis," he said. "The Tobacco Board is statutorily obliged to lift stocks at a minimum support price. Only this sort of measure can break the deadlock that now exists between the traders and growers."

In Karnataka, the situation is somewhat different owing to a variety of factors. Here it is KLS (Karnataka Light Soil) tobacco, a traditionally superior variety, grown in about 22,000 hectares in the districts of Mysore, Hassan, Chickmagalur and Shimoga. Some 75 to 80 per cent of the total crop produced is exported. The State has eight auction centres, which are located in H.D. Kote, Hunsur, Periyapatna, Ramanathapura and Shimoga. The crop is planted in May, harvested in August, and marketed between Sep tember and January.

Bales of processed tobacco at an auction centre.-BY SPECIAL ARRANGEMENT

According to C.R. Chikkamath, Director (Auctions) of the Tobacco Board, unauthorised cultivation is one of the major reasons for the glut. One of the major duties of the Tobacco Board, established 25 years ago, is to ensure fair and remunerative prices f or the grower by regulating demand and supply. Based on the estimates of internal and external demand for the year, the Board decides upon the volume of tobacco that should be produced. Growers must register with the Board and get the authorisation for a fixed volume of production. Each year growers have exceeded their quotas in the full knowledge that they can put political pressure on the Board to allow these excess stocks to be brought for auctions. In 1998, while the Board fixed a target of 100 mkg for Andhra Pradesh, the actual sales, according to statistics available with the board, was 147.20 mkg. In Karnataka, the target was 40 mkg while the actual sales was 54.68 mkg. Chikkamath said: "There are two types of unauthorised growers, authorised gr owers going for greater acreage and totally unauthorised growers - who bring political pressure through elected representatives to sell their produce at the auctions."

The Frontline team visited tobacco-growing areas in Hunsur and Periyapatna and found that farmers who had piled up stocks hoping for a better price were disappointed as prices remained sluggish during the entire season. Farmers said that while the price for a kg of a good variety of tobacco opened at Rs.72 in November 1999, the start of the season, it fell to Rs.50 at its close, March 2000. Low tobacco grades, they said, went for as low as Rs.6 a kg (the average realisation price was Rs.42.07). F armers in Karnataka feel that they are being penalised for the problems faced by the traders. The growers believe that the tobacco-trader lobby is behind the crop holiday. All traders, including major cigarette companies such as ITC, Golden Tobacco Compa ny and Godfrey Phillips India Ltd, who purchase tobacco in Karnataka, are from Andhra Pradesh.

Several farmers blamed the Board for not taking action against unauthorised cultivators, although they can remove nurseries or destroy the crop under the Provisions of the Tobacco Board Act, 1975. Political pressure and the sheer numbers of unauthorised growers has also added to the problem in trying to weed them out. Board officials disclosed that the farmers planted 40,000 seedlings a hectare when the recommended norm was half that. "While there are around 24,000 licensed farmers in Karnataka, there a re between 12,000 and 13,000 unauthorised farmers in the State," S.M. Anantharamu, president of the Karnataka Tobacco Growers' Forum, said. According to him, they have been able to bribe or hoodwink the Board officials and secure the all-important card, which allows them to sell their produce on the auction platforms. "We want a check on unauthorised tobacco cultivation and not a crop holiday. Nowhere in the world has this succeeded," said Muddubasappa, a farmer and vice-president of the Tobacco Forum.

According to Chikkamath, the Board cannot be accused of laxity as it has no powers to destroy the crop, but can only issue notices and recommend to the Ministry of Commerce that it issue orders for the prosecution of the grower. "We conducted several sur veys at the auction centres and found that a majority of growers are seeking more powers for the Board. We have suggested amendments to the Act for confiscation of unauthorised crop, destruction of the crop at the nursery level, and checking the construc tion of unauthorised barns," he said. At a recent meeting called by the Commerce Secretary, several changes to the Tobacco Board Act were endorsed.

According to sources in the ITC (the cigarette manufacturer is by far the largest purchaser of FCV tobacco in India), the crop holiday would, in the long run, hurt both farmers and exporters. "India might lose its share of the highly competitive export m arket," a senior ITC official said. "World-wide importers look at FCV tobacco stocks from crop to crop. Once they turn to other sources it will be difficult to re-establish our markets and volumes."

It remains to be seen whether growers will actually abide by the declaration of a crop holiday. If political pressure has over the years been instrumental in forcing the Tobacco Board to allow unauthorised stocks to enter the auction platforms, how will the Board be able to enforce a crop holiday if even half the nearly 80,000 tobacco growers choose at some point to revert to cultivation?

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