Minispike: Tobacco economics

[Welcome to a new Spike series, Minispike, in which I don’t have to get out of my purple velour armchair to pontificate.] 

A kind reader scratched an investigative itch with the simple question, “If Japan Tobacco (JT) no longer wants to buy leaf tobacco from Fukushima, what do you think their preferred alternative is?”

JT is the developed world’s third largest cigarette company, thanks in part to its 1999 takeover of RJ Reynolds International. At home, it has around two-thirds of the market. It’s the privatized 1985 incarnation of the 1949 tobacco, salt, and camphor monopoly (name three modern uses for camphor—I can’t), and according to the 1984 Tobacco Business Law, it’s required to buy every last leaf of the domestic tobacco crop. A monopsony situation, then, with only one buyer but many sellers, but given the strictures of the law, Japanese tobacco growers must be making nicotine hay, no?

No. Japan Tobacco lays it out for the curious in its annual report (on p138-p139 here). Domestic tobacco grower numbers fell from 23,000 in 2001 to 12,000 in 2010. The area under tobacco cultivation fell from 24,000ha to 15,000ha. Domestic tobacco production volume fell from 60,000 tonnes to 36,000 tonnes. The value of the domestic tobacco leaf crop fell from Y117bn to Y68bn, even though the price per kilo remained roughly flat, at Y1,800-Y1900 or so. JT has managed to achieve this because, by its own admission, it stuffs the Leaf Tobacco Deliberative Council, the price and acreage setting commission, with members it appoints, as it admits on p59-60 of its annual report with a delicious footnote:

Contracts stipulate the area to be cultivated and the prices of leaf tobacco for the subsequent year, and in this regard JT respects the opinion of the Leaf Tobacco Deliberative Council*

(*Footnote: The Leaf Tobacco Deliberative Council is a council which confers on important matters concerning the cultivation and purchase of domestically grown leaf tobacco in response to inquiries by JT representatives. The council consists of no more than 11 members, appointed by JT with the approval of the Minister of Finance from among domestic leaf tobacco growers and academic appointees.)

The last Leaf Tobacco Deliberative Council reported on November 17, 2010, here:  

The Council was in general agreement with JT’s proposal (surprise!), and determined that in 2011, the domestic tobacco cultivation area will be set at 14,301 hectares. The leaf tobacco grower price will be set at an average of JPY 1,869.28 per kilogram for all leaf types.

While the price is stable, the acreage is down 6.5% YoY.

It doesn’t take a supersleuth to work out what is happening: JT, faced with a domestic market that is shrinking dramatically, is trying to get rid of the domestic leaf tobacco industry as fast as it can without causing too many political hiccups, or—to be fair—too much domestic grower dislocation, as tobacco farmers are no doubt mostly on the far side of 60. It’s a very orderly arrangement in many ways, but it does nothing to help the economy of Fukushima’s Tamura, which is where we came in.

All I knew at the beginning of this tale was that Tamura, according to the city’s website, accounted for more than a third of the tobacco grown in Fukushima. But how big a tobacco-growing prefecture is Fukushima? It turns out that it’s no higher than seventh on the national rankings, according to the Japan Leaf Tobacco Growers Association (Japanese only pdf here), although tobacco growing is fairly evenly distributed from north to south. I would guesstimate now that only 10% of Tamura farmers are left in the evil weed business.

The domestic leaf tobacco industry is an overlooked template for the unfortunate inefficiencies and protectionisms of Japanese farming as a whole.

This is all academic, though, as Fukushima’s leaf tobacco crop this year will not be see the smoky light of day, sadly, as on April 9, the prefectural growers’ association decided to suspend operations because of Fukushima Daiichi (Japanese only link here). No need to tell me about the carcinogenic ironies.

Why is Japanese leaf tobacco uneconomic? Well, to JT the domestic industry sells at around $25/kg. The prices in Malawi and Zimbabwe are about a tenth of that.

So in answer to my kind reader’s question—where does JT want to buy tobacco from—the answer is Africa (and Brazil), as you can see from the leaf grower acquisitions it made in 2009 on p39 of the annual report.

[P.S. I am genuinely touched and astounded by the messages of support in the last 24 hours–many, many thanks to you all. I’ll witter on.]