Oriental Leaf Markets: Declining but in Equilibrium

ORIENTAL LEAF

Oriental Leaf Markets: Declining but in Equilibrium

Privatization in Turkey in 2008 put the market in a tailspin.

By Dr. Iqbal Lambat, CEO Star Agritech International

The four traditional producer countries of the Oriental heartland—Turkey, Macedonia, Greece and Bulgaria—have seen a further decline in their 2018 crop with a combined production of 116 million kgs, declining 25 percent over the past 5 years.

Part of the reason for the decline has been rising prices paid by processing companies to farmers. Another has been the expensive leaf offered to cigarette manufacturers, causing a change in the overall game. But that is not all: Politics, demographics and economics have played a big role in this decline.

To put the Oriental Tobacco world into perspective the table below provides a global overview of both Heartland Orientals and Semi Orientals.

All Oriental of one origin

It would be fair to say that all Oriental Tobaccos are of Turkish origin. The Ottoman Empire was an imperial power centered on the borders of the Mediterranean Sea. It existed from either 1281 or 1299 to 1923—more than six centuries. At the height of power, it included Anatolia, the Middle East, parts of North Africa and much of southeastern Europe and the Balkans. The Empire was established by a tribe of Oghuz Turks in western Anatolia and ruled by the Osmanli dynasty, the descendants of those Turks.

The Turks took with them to their new worlds their language, their culture and tobacco cultivation with Turkish tobacco seeds, among many other things. Turkey has always been the largest cultivator in the world of Oriental tobacco, with historic crop outputs exceeding 400,000 tons per year. There are a vast range of varieties—eight in total now: Izmir, Basma, Bitlis, Yayladag, Samsun, Sark, Adiyaman and Trabzon. So, the crops produced in Greece, Macedonia and Bulgaria all started during the Ottoman Empire.

Where can Oriental be grown?

Oriental tobacco requires a sandy, infertile soil to allow the plant to develop small palm-sized leaves with low nicotines and high sugars. When grown in fertile soils, the leaves produced are larger and with higher chemistries. That results in their classification as semi-Oriental Tobaccos. Oriental tobacco is sought after for its high aromatic characteristics and sweet taste.

The world of Oriental tobacco was transformed significantly when the State Tobacco Monopoly for Tobacco and Alcohol (TEKEL) was privatized in 2008 by the Turkish Government. Some 650,000 Tobacco farmers in Turkey were faced with the new reality that TEKEL was no longer there to guarantee offtake at subsidized prices.

And the new owners of TEKEL— BAT—were certainly in no mood to take on any responsibility for leaf other than that required to make the Oriental brands it had acquired. The Turkish crop fell dramatically over the next three years from a high of 275 million kgs to less than 50 million kgs, which was less than a fifth of recent historic production.

The Turkish declining position proved to be the catalyst for development in neighboring Macedonia to accelerate the output of its Oriental crop. Greece suffered from the elimination of government subsidies which had a double effect—raising prices to levels where its leaf was not competitive as well as drying up crop financing as banks could no longer collateralize the subsidies farmers would receive.

In Bulgaria, the status quo prevailed as it struggled to meet stricter rules from its new family—The European Union.

Production report 2018

Among the four heartland producers, 2018 statistics were as follows:

Turkey saw an output at 60 million kilograms. The Izmir variety achieved 53 million kilograms, of which 52 million were exported.

The other two main varieties produced are Samsun and Basma. Before, there were many more varieties, but most have completely disappeared.

Macedonia saw Prilep and Yaka production decline to an estimated 28 million kilograms versus 33 million in the year prior. Stll, Macedonia is now ranked as the number two Oriental tobacco producer in the world. It produces at 47 percent of Turkish total output, which is 75 percent larger than the world’s number three producer, Greece. Top quality processed and packed Prilep AB has been fetching prices above EUR 6.00/Kg, making it a strong alternative to top Turkish Izmir AB processed and packed at USD 10.00/Kg.

Greece is estimated to have grown about 16 million kilograms of classical Oriental Tobacco in 2018, made up of about 12 million Kgs of Basma and about four million Kgs of Keterini. But yields of both Basma and Keterini were reportedly down because of dry weather, which, by way of compensation, nevertheless created excellent quality Keterini crop and above-average quality Basma.

Bulgaria saw its 2018 crop output of Krumovgrad and Bulgaria North continue its downward spiral to reach a low of 12 million Kgs, roughly 50 percent of where it was a decade ago. Pricing has been low in the absence of a clear government policy on tobacco growing subsidies. Farmers had been demonstrating against the low prices, which they claimed to be below their production cost.

Future questionable

Pricing and preferences. Demand for the crop has been on a continuous decline. This has been provoked primarily by the significant reduction in supply (mostly by Turkey) which has driven up prices to make Turkish Izmir the most expensive of cigarette-style tobaccos. Oriental Tobacco has been a key ingredient in creating American blend brands. The leading one is Marlboro; its manufacturer PMI continues to use Oriental tobacco in their American blends despite its very high cost. Other manufacturers of American blend, by and large, have modified their blends towards American “Flavor” by removing the expensive Oriental Tobacco component and using Oriental tobacco flavor in most of their production. They still use small quantities of Oriental tobacco for some of their blends. Interestingly, the same increasing pricing phenomena can be seen in Indonesian Cigar wrapper tobaccos, once the mainstay of all Cigar manufacturers. As prices soared, the Indonesian Sumatra variety has all but disappeared and the Besuki variety has been reduced to one third of what it used to sell a decade ago.

Politics. The ruling party in Turkey remains very anti-tobacco from “seed to pack.” Whilst most of the Turkish Oriental Tobacco produced is for export, the government remains adamant on controlling and regulating quantities produced annually by setting production quotas. Bulgaria remains in a quagmire as subsidies paid to tobacco farmers were eliminated when Bulgaria joined the European Union and had to adopt the Common Agricultural Policy.

In Greece, the loss of the growing subsidies coupled to economic collapse saw many growers unable to sustain their farms due to a lack of bank credit. The only government that remains pro-tobacco is Macedonia which pays a subsidy of EUR 1/Kg produced to farmers.

Demographics. The average age of Oriental farmers in Turkey (45,000 farmers) and Greece (15,000 farmers) is 55 years plus. In Bulgaria (25,000 farmers), it is somewhat younger and falls in the age bracket 45 to 55 years of age. And the youngest Oriental tobacco farmers are to be found in Macedonia (25,000 farmers) in the age group 35 to 40 years of age. In Turkey, the younger generation of tobacco farmers has migrated to the cities to participate in the accelerated economic development. Entire regions such as Samsun and Trabzon, much sought-after Oriental varieties, have completely disappeared.

This rural to urban migration was also seen in Greece up until recession.

Attempts by new producers

Much of the discussion in this article has been about the heartland Oriental tobacco producers of Turkey, Macedonia, Greece and Bulgaria, but it is worth pointing out that serious efforts have been made at growing Oriental tobaccos in other tobacco growing countries.

In Africa, there were efforts to grow Oriental in Malawi and Zimbabwe, but they were unsuccessful.

Efforts were made in Pakistan, and they showed promise but became an unstable project due to the territory (North West Frontier Province) falling under the control of elements of the Taliban.

Oriental continue to be grown in India and China (Turkish Izmir and Basma seed). But both countries produce a mediocre product that does not come close to the real thing!

What’s next?

So where do we go from this complex crossroad? Predictability is the mother of sustainability. Apart from PMI, other multinational manufacturer demand for Oriental tobaccos is low.

There are sporadic purchases from Indonesia for high grade Turkish Orientals. Government monopolies also target Oriental tobacco, but generally they take the lower quality Bulgarian type (with the exception of Taiwan which purchases annually top-grade Turkish Oriental).

At the beginning of the marketing season in Bulgaria last year, the Chinese Monopoly sent in a large delegation to evaluate its Oriental tobaccos. But there has been no concrete outcome, yet.

All of this suggests that there are pockets of demand and interest for Oriental tobacco but insufficient to recreate a return to accelerating output of these tobaccos.