The growth of the Brazilian tobacco industry is going to be faced with many challenges as countries put in place strong regulations to fight the health effects of consuming tobacco. This article will cover the changes and challenges this sector is going through.
The tobacco industry in Brazil has experienced strong growth in past years aided by high sales of cigarettes in the country. The Brazilian tobacco industry has witnessed strong regulations recently with new players in the market finding it hard to establish themselves.
Tobacco Cultivation in Brazil
Despite the importance of tobacco cultivation to Brazil’s economy, its tobacco crop occupies less than 1 per cent of the country’s total land area. Cultivation of tobacco is highly concentrated in the Northeast - Bahia and Alagoas - as well as in Southern States - Rio Grande do Sul, Santa Catarina and Paraná.
Brazilian production is focused on two distinct and contrasting areas of the country that differ in terms of types of tobacco grown.
Different types for different regions
Brazil’s Flue Cured Virginia (FCV) and Burley crops are spread across three industrialized and relatively rich Southern states: Paraná, Santa Catarina and Rio Grande do Sul. In these states, the production of tobacco is done on small farms of up to 16 hectares. It is estimated that around about 200.000 farms are cultivating tobacco in this region.
The importance of tobacco to farming and farmers in South Brazil is not just about the actual size of the harvested crop. Tobacco is one of few crops capable of generating sufficient income for the survival of farmers who own or rent such a small area of land. FCV accounts for the majority, 82% of the total production. For Burley, the production accounts for 17% and the remaining 1% is the Common tobacco for the domestic cigarette market.
In the Northeast, tobacco has an important role in the agricultural economy. This includes rich and high quality Dark Air-Cured tobacco grown in states such as Bahia and Alagoas, destined mainly for the manufacture of higher value cigars and cigarillos, and also dark cigarette tobacco.
Growing tobacco is an extremely profitable activity, specially in comparison to other crops. Just as a comparison, tobacco grown on just 16% of the land area accounted for 65% of farm income.To match the gross income per hectare of tobacco would require 6.5 hectares of maize or 9.6 hectares of beans. In other words, it is almost impossible to replace tobacco in terms of income generation for small landowners.
Size of Production Market
Since 1990, Brazilian tobacco production grew 94%, totaling 851,000 tons in 2013. The cultivated area destined for tobacco production is of 405,000 hectares, roughly 1 million acres, as of 2013.
The position reached by Brazil as second largest producer of tobacco is due to factors such as low production cost, since the production is concentrated on family properties, and non mechanization of farming, and the best quality product thanks to manual handling and harvesting. Tobacco farming employs 52,000 people, specially in periods of planting, harvesting, sorting and drying.
Farmers and cigarette producers are bound by contracts through which the companies provide technical assistance and supplies, endorse funding, and pay for the production and transport fees of the previously bought crop.
Despite the number of smokers continually dropping over the past ten years, the tobacco industry is still very profitable: in 2010, their total revenue was of BRL 17 billion. It is also one of the main taxpayers to the Brazilian government: with a tax burden of nearly 80%.
Comparing with other major markets
Brazil produces approximate 100 million kg of Burley tobacco, with production size similar to the United States. Brazilian production of dark sun-cured and air-cured tobacco for cigars and dark cigarette tobacco is still relatively high and only exceeded by Cuba and the Philippines.
However, it is Brazil’s massive 706 million kg of Flue-Cured Virginia leaf tobacco that catches the eye and continues to outshine the country’s nearest competitors among the world’s tobacco top producers and exporters. India and United States, the next biggest FCV producers, harvest around 275 million kg and 220 million kg respectively, but even their combined annual total is still significantly less than the numbers produced on Brazilian soils.
Major players in Brazil
The Brazilian tobacco market is concentrated on two major companies: Souza Cruz - with 62% of the market share - and Philip Morris - with 15% of the market share. Other major players of the tobacco industry in Brazil are Menendez Amerino, Associated Tobacco Company Brasil and Continental Tobacco Alliance.
Consumption in Brazil
Tobacco consumption in Brazil is relatively low comparing to the rest of the world. While 33% of all adults in the world consume tobacco in any of its forms, only 16.9% of the Brazilian adult population consumes tobacco and its derivatives. There is also a normal disparity between the number of males and the number of females consuming tobacco: 21% for men and 13% for women against 42% for men and 24% for women in developed countries. Also, the average age of smoking initiation is 17 years old.
Figures released by SindiTabaco in 2013 show that Brazil exported 85% of all its tobacco production. Out of the total 634 million kg of tobacco exported from Brazil, which accounted for USD 3.26 billion, nearly 100% was harvested in the South region. Tobacco export corresponds to 1.35% of the overall country’s export of all goods and services.
Brazilian tobacco is now exported to over 100 countries. Its main destination is the European Union with 42%, followed by Southeastern Asia 27% and North America 13%. The single biggest country purchasing tobacco from Brazil is China, which bought USD 478 million worth in tobacco. China is also the largest producer of tobacco in the world.
For the Southern Region of Brazil, tobacco crops are one of the main agroindustrial activities. In the state of Rio Grande do Sul, tobacco had a share of 9.3% on the total value of exports and in Santa Catarina, tobacco represented 10.2%.
Tobacco consumption is strongly influenced by massive marketing. The major players of the tobacco industry are conscious of the side effects of nicotine consumption and thus direct the advertisement specifically towards young people. The cigarette pack is presented as a passport to the adult world, success, sensuality and liberty.
Brazil is a signer of the World Health Organization Framework Convention on Tobacco Control, the first international treaty about public health, recognizing tobacco use as a disease caused by chemical dependence. As a signer, Brazil agreed to forbid advertising of tobacco products and to heavily regulate its market by increasing taxes and by raising awareness on the side effects of tobacco consumption. Another measure to reduce consumption of tobacco is supporting alternatives for income generation activities for the tobacco farmers.
Regulations by the government
Prohibition of flavored additives
After several postponements, in March 2012, Anvisa, the sanitary regulatory agency in Brazil, decided to ban the additives that add flavor to cigarettes, such as menthol and clove. This measure also prohibits the importation of such products, but does not prohibit the manufacturing in Brazil of products with additives for export. The cigarette industry has until September 2013 to adopt this standard, while producers of smoking tobacco and cigars have until March 2014 to end the production of smoke with flavor additives.
Further increase in Cigarette tax
As a strategy of the Ministry of Health to combat the advance of smoking in the country, a plan to gradually increase tobacco tax is expected to be implemented by the year 2015. Under this new system, the IPT, Industrialized Products Tax, will have a higher rate year by year. With this new plan being implemented since January 2013, if tobacco manufacturers pass on the full the increase of the IPT to the final consumer, it is expected to increase the price of cigarettes by up to 55%.
Prohibition of smoking in specific places
The Ministry of Health issued on June 2014 new rules concerning tobacco consumption in different places, as well as regulating its advertising. Now, smoking areas in collective places are forbidden, further enforcing the previous local law forbidding consumption of tobacco indoors, except for tobacco shops and in religious cults where smoking is a part of the ritual.
The only places allowed to advertise tobacco products are tobacco products points of sale. Warnings on the health effects of tobacco consumption got bigger too, present on tobacco advertisements in points of sale and in cigarette packs as well.