SIC 2141
TOBACCO STEMMING AND REDRYING



Establishments in this industry classification are primarily engaged in the stemming and redrying of tobacco or in manufacturing reconstituted tobacco. Establishments that sell leaf tobacco as merchants, wholesalers, agents, or brokers, and which may also be engaged in stemming tobacco, are classified in SIC 5159: Farm Product Raw Materials, Not Elsewhere Classified. Leaf tobacco warehouses that also may be engaged in stemming tobacco are classified in SIC 4221: Farm Product Warehousing and Storage.

NAICS Code(s)

312229 (Other Tobacco Product Manufacturing)

312210 (Tobacco Stemming and Redrying)

Industry Snapshot

According to the U.S. Census Bureau, 25 establishments were engaged in the stemming and redrying of tobacco in late 1990s. These firms employed 3,553 people in 2000, including 2,543 production workers who were paid an average hourly wage of $9.70. Shipments in this industry were valued at $2.42 billion in 2000. The cost of materials was $1.9 billion that year. All but two of the companies in this industry had at least 20 employees.

In the late 1990s tobacco processors, like the tobacco industry as a whole, faced an uncertain outlook in the United States. Domestic cigarette consumption was down, owing to higher prices, tougher restrictions on smoking in public places, greater awareness of the health risks of tobacco use, and declining social acceptance. Cigarette companies were roundly criticized for promoting smoking among teenagers and tough rules went into effect to reduce teen smoking. Thousands of tobacco farmers, whose families had often been in the business for generations, were shifting out of the product and into other crops, such as cotton.

Tobacco processing is truly an international business, however, and all of the major companies in the segment have extensive growing, processing, and sales operations overseas. Foreign markets expanded during the first half of the decade but had flattened by 1999.

Organization and Structure

The global processing and distribution of tobacco is dominated by three companies—Universal Corp., DIMON Inc., and Standard Commercial Corp.—which have large operations in the important tobacco-growing regions of the world. These companies buy the farmers' tobacco at auction (common in the United States) or contract to buy tobacco from the farmer. In certain overseas markets where the firms have contracted to buy the farmers' entire crop, they will often provide financial and technical assistance as well to ensure the tobacco's quality. In the United States most of the processors' tobacco purchases at auction are made to fill specific orders from the major domestic and overseas cigarette producers, with whom they often have relationships extending over many years.

After purchase, the tobacco is processed to meet the specific needs of the cigarette manufacturer, whose representatives are frequently at the processor's facilities to monitor the work on their orders. At the factory the tobacco is reclassified according to grade; blended to meet customer requirements regarding color, body, and chemistry; and threshed to remove the stem from the leaf (although some tobacco is processed in whole leaf form). The processed tobacco is redried to remove excess moisture so it can be held in storage for a long time. The companies also perform most of the processing of tobacco that is not bought at auction and thus enters the U.S. stabilization pool, under the auspices of the U.S. Department of Agriculture (USDA). The companies generally do not make cigarettes or other consumer tobacco products.

In the United States two major types of tobacco are grown: flue-cured and burley. Flue-cured is one of the most widely grown tobaccos in the world. It is cured by the grower, usually with gas- or oil-generated heat, and it serves as the basic ingredient in light blended or "American type" cigarettes. In the United States flue-cured tobacco is grown on the east coast from Virginia to Florida and especially in North Carolina. Burley tobacco, on the other hand, is air cured and is grown primarily in Kentucky and Tennessee. Mature tobacco is a perishable commodity that must be processed quickly to prevent fermentation or deterioration. Tobacco processors thus locate their facilities near the principal sources of the crop.

Background and Development

While domestic consumption of tobacco products continued to slow in the early to mid-1990s, the major processors remained relatively unscathed. One reason was that the manufacturers imported more foreign tobacco, which was inexpensive but more profitable than domestic tobacco. Between 1989 and 1992 U.S. tobacco imports—the bulk of which were from Brazil, Zimbabwe, Argentina, Thailand, and Malawi—had more than doubled, while domestic output had risen 26 percent.

Moreover, primarily because of increased smoking in Asia, worldwide tobacco consumption had jumped 75 percent in the 1970s and 1980s and was continuing to rise by 1 to 2 percent a year. Demand for American-blend cigarettes, which tasted milder compared with the stronger and harsher cigarettes smoked in most of the world, was increasing, even in countries where overall demand was flat or down. Overseas demand for milder cigarettes, coupled with reduced trade barriers in important markets such as Japan, helped U.S. exports surge to 260 billion cigarettes in 1995, compared to 100 billion in 1987 and 59 billion in 1985. U.S. processors were well positioned to supply the flue-cured and burley tobaccos that are used to make the relatively low-tar, low-nicotine American-blend cigarette.

The industry experienced temporary downturns in 1993 and 1994 due to new legislation that required U.S. produced cigarettes to contain at least 75 percent domestically grown tobacco (the "75/25 Rule"), lower-than-expected initial demand for imported tobacco products in Central and Eastern Europe and the former Soviet Union, and an oversupply attributable to record foreign tobacco crops.

By the mid-1990s the demand and supply imbalance in world tobacco markets improved. Leaf tobacco production outside the United States was curtailed, the 75/25 Rule was replaced by a string of less stringent import quotas, and U.S. cigarette manufacturers began to buy more tobacco from outside the United States.

Nevertheless, U.S. tobacco farmers remained wary and uncertain. As Kentucky Farm Bureau president William Sprague told the Lexington Herald Leader in 1996, "It's a paradox: we have an increasing world demand for something we can produce in this state very well. But all farmers are seeing and reading about is the ill effects of tobacco. It has our farmers gun shy." The long-term downward trend in domestic consumption had forced some growers to switch to alternative crops such as cotton. The number of tobacco farms in North Carolina, which grows about two-thirds of the country's flue-cured tobacco, dropped from about 100,000 in the mid-1980s to 42,000 in 1991.

While their own segment remained profitable, the processors, like other industry participants, were concerned about the increasingly strong steps being taken to limit tobacco use. Dozens of localities around the country had passed measures that curtailed smoking in offices, restaurants, and other public places, and nationwide restrictions were being suggested in Congress. Studies that determined secondhand cigarette smoke could cause lung cancer gained credence. States sued the cigarette manufacturers to pick up their health-care costs and gained significant court victories. In March 1997 bipartisan legislation was unveiled that would hike Federal cigarette taxes 43 cents per pack to pay for health insurance costs for children and reduce the deficit. The outlook for the domestic tobacco industry was bleak.

Current Conditions

The U.S. tobacco industry continued to suffer setbacks into the late 1990s, and hundreds of workers lost their jobs as processing facilities closed or reduced production. Hurricane Floyd caused widespread crop damage in 1999. Tobacco companies were sued in court for marketing products that were considered to be health hazards. The federal government and other groups continued their campaigns to discourage tobacco use. Cigarette consumption dropped 7 percent to 465 billion pieces in the late 1990s, while production dropped 6 percent to 680 billion pieces. As a result, the value of tobacco stemming and redrying shipments dropped from $3.567 billion in 1998 to $2.418 billion in 2000.

Some types of tobacco products became more popular, however. Output of large cigars and cigarillos reached an estimated 2.9 billion in the late 1990s as the average adult male consumer bought 37.8 cigars per year. Cigarette makers launched line extensions and repositioned established brands, emphasizing "ultra-light" varieties that contained less tar and nicotine. A new method of curing tobacco was devised to reduce or eliminate the formation of nitrosamines, which were thought to be the substances in tobacco smoke that were most apt to cause cancer.

Industry Leaders

Some of the largest firms that stemmed and redried tobacco were also involved in endeavors as diverse as the manufacturing of cigarettes, the bottling of soft drinks, highway construction, and the sale of groceries and flowers. These companies included Philip Morris Inc., of New York, with 1998 sales of $11.5 billion; Universal Corp., of Richmond, Virginia, with sales of $4.3 billion; DIMON Inc., of Danville, Virginia, with sales of $2.2 billion; Brown and Williamson Tobacco Corp., of Louisville, Kentucky, with sales of $1.7 billion; Standard Commercial Corp. of Wilson, North Carolina, with sales of $1.5 billion; UST Inc., of Greenwich, Connecticut, with sales of $1.4 billion; and Brown and Root International Inc., of Louisville, Kentucky, with sales of $675 million.

Many companies whose primary business was the stemming and redrying of tobacco were subsidiaries of the larger firms. They included Dibrell Brothers Inc., of Danville, Virginia; Monk-Austin Inc., of Farmville, North Carolina; Standard Commercial Tobacco Co., of Wilson, North Carolina; Universal Leaf Tobacco Company Inc., of Richmond, Virginia; and K.R. Edwards Leaf Tobacco Company Inc., of Smithfield, North Carolina. One of the largest independent companies in the industry was Flue-Cured Tobacco Cooperative Stabilization Corp., of Raleigh, North Carolina, with sales of $100 million.

Workforce

In the United States, tobacco processors buy flue-cured tobacco from July through November and burley tobacco from late November until January or February. Processing takes place throughout the buying season and is usually finished within two to three months after purchase. During these periods, the industry's work force swells. Some seasonal employees are covered by union collective bargaining agreements. Seasonal labor is also used extensively in overseas operations.

America and the World

In terms of supply and demand, in the 1990s the U.S. tobacco processing industry was increasingly looking abroad. The elimination of trade barriers and the rising popularity of lighter, American-blend cigarettes expanded overseas markets. Following the fall of the Berlin Wall in 1989, new markets for U.S. exports sprang up in the former Soviet republics and in Eastern Europe. Demand in some countries grew enormously. Cigarette consumption in China, for example, was more than five times greater than in 1965. U.S. cigarette exports tripled between 1985 and 1992, owing to the popularity of American tobacco products and reduced trade barriers in countries such as Japan. The trend continued into the mid-1990s. Exports of domestically produced cigarettes in 1995 totaled 35.1 percent of production, up from 31.8 percent in 1994 and 30.9 percent in 1993.

As international suppliers of tobacco, the processors were also selling tobacco grown overseas for cigarette manufacture in non-U.S. factories. The large processors had major operations in Brazil, Zimbabwe, Malawi, and other tobacco-growing countries. In several countries the processor will contract directly with tobacco farmers, in some cases before harvest, and thus take the risk that the delivered product will meet the market's quality requirements. In some countries the major processors also provide agronomy services and advances for fertilizers and supplies.

Further Reading

Bickers, Christopher. "Quotas Go Begging, But Imports Rise." World Tobacco, November 1996.

"Cigarettes with Low-Nitrosamine Tobacco an Exciting Prospect." World Tobacco, May 1999.

Bridges, Roger. "Record Exports Set to Continue." World Tobacco, September 1995.

"DIMON Announces Acquisition of Intabex." PR Newswire, 14 February 1997.

Frazier, Shirley. "Tobacco." U.S. Distribution Journal, May 1999.

Lucke, James. "Kentucky Farmers Fear Tobacco Shortage May Harm State in World Markets." Knight-Ridder/Tribune Business News, 15 July 1996.

United States Census Bureau. "Statistics for Industries and Industry Groups: 2000." Annual Survey of Manufacturers. February 2002. Available from http://www.census.gov .

U.S. Department of Agriculture, Economic Research Service. "U.S. Tobacco Crop Down 11 Percent in 1999." Washington, D.C.: GPO, 1999. Available from http://www.usda.gov/nass/pubs/estindx3.htm#tobacco .

U.S. Department of Commerce, U.S. Census Bureau. 1997 Economic Census. Washington, D.C.: GPO, 1999. Available from http://www.census.gov/prod/ec97/97m3122a.pdf .

"Zimbabwe." World Tobacco, November 1996.



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