Tobacco prices surge on exports, hurt domestic buyers

A worker removes dust from tobacco grains at a tobacco factory in Hyderabad May 30, 2007.

MUMBAI (Reuters) - A global shortfall in tobacco output has boosted demand for the Indian leaf, pushing up prices in the domestic market to new records, hurting Indian cigarette makers and challenging the government's plan to cut acreage.

The average price of Flue Cured Virginia (FCV), a premier grade used for cigarette-making, has risen more than 50 percent to 71.37 rupees per kg, from 47.47 rupees a year ago.

"Internationally, the supply situation is not very comfortable. Especially Brazil, which is competing with India, there is shortage of 70 to 75 million kg," J Suresh Babu, chairman of the Tobacco Board, told Reuters.

Domestic FCV production is also expected to fall 6.5 percent in FY08 to 251,500 tonnes from 269,000 tonnes a year ago, due to adverse weather and unseasonal rains in mid-January, he said. Out of total output of FCV, India usually exports around 55 percent, while the domestic market consumes the rest.

Babu said in the year ending March 2008, tobacco exports are seen rising 11.39 percent to $425 million, from $381.54 million in 2006/07. India will export the same quantity in 2008/09 as exporters are buying actively, he said.

India is the second biggest producer of tobacco after China and the fourth-biggest exporter of unmanufactured tobacco.

"Domestic cigarette makers are facing problems due to higher (prices in the) international market. They can't import. So they have to buy, competing with exporters," said Bellam Kotaiah, president, Indian Tobacco Association.

ITC Ltd, a Kolkata based company, is a leading Indian buyer in the domestic market.

Kotaiah said exporters were buying, anticipating demand from the big multinationals, leading to premiums of 60-70 percent over last year's price.

British American Tobacco (BATS.L), Japan Tobacco Inc. (2914.T), Philip Morris International, Imperial Tobacco Plc (IMT.L) and other big companies buy Indian tobacco.

Exporters were anticipating multinationals will buy at higher prices but prices are bound to ease by 15 to 20 percent if they delay purchases, Kotaiah said.

The higher local prices will also challenge the government's efforts to reduce area under tobacco, said Kotaiah.

The Tobacco Board fixes crop size for FCV every year, but farmers often violate rules and cultivate the leaf on a larger area. The board has set a crop size of 260 million kg for FY09.

"There is temptation to cultivate more (tobacco). But we are advising them not to cultivate more," said Babu.

The Indian government is trying to reduce area under the crop in line with developed countries to cut tobacco consumption in India.

Kotaiah said a sharp rise in prices will encourage farmers for cultivating the leaf as returns in tobacco cultivation are very high compared to other crops.