False Friends: Report Details U.S. Cigarette Companies’ Betrayal of American Tobacco Growers

U.S. Companies Sharply Cut Purchases of U.S.-Grown Tobacco as They Move Operations Overseas, Help Foreign Growers and Increase Foreign Content of American-Made Cigarettes

Dec. 14 1999

Washington, DC - American tobacco farming is in crisis today because the U.S. cigarette companies have sought to increase profits and cut costs by moving their operations abroad, and not because of gradual smoking declines in the United States, according to a new report, False Friends: The U.S. Cigarette Companies’ Betrayal of American Tobacco Farmers. “While the interests of the American tobacco farmer and the American tobacco manufacturer were once the same, this is no longer true,” the report states. “The U.S. cigarette companies have chosen to maximize their profits by relying on less-expensive foreign labor and cheap foreign-grown tobacco, while sacrificing the economic well-being of the American tobacco farmer.” The report was sponsored and released today by the American Heart Association, the American Cancer Society and the Campaign for Tobacco-Free Kids. The 89-page report comprehensively documents the decisions of U.S. cigarette companies to manufacture more of their products overseas, use more foreign-grown tobacco in the cigarettes they make both domestically and abroad, and aggressively finance the development of new and cheaper foreign sources of tobacco to replace U.S. growers. As a result of these decisions: From 1997 to 1999, the U.S. cigarette companies reduced their purchases of U.S.-grown tobacco for domestic manufacturing by roughly 35 percent, far more than the 4 to 5 percent reduction in demand caused by smoking declines in the United States. Since 1996, exports of American-made cigarettes have declined about 30 percent, and they now account for significantly less than one-fourth of all U.S. company brands sold overseas. Since 1980, the U.S. share of global tobacco exports has been cut in half, to less than 11 percent. Since the 1960s, the percentage of American-grown tobacco used in American-made cigarettes has declined from about 90 percent to less than 60 percent. Today, nearly 90 percent of all American-style cigarette tobacco is grown by foreign farmers in at least 78 countries. U.S. cigarette companies today manufacture more cigarettes per year in the United States than in the early 1970s, but they use about a third less U.S.-grown tobacco in the process. This move abroad has meant increased profits for U.S. cigarette companies, but shrinking incomes for American tobacco farmers. Between 1980 to 1998, growers’ share of every dollar spent on cigarettes in the United States declined from seven cents to less than two cents, while cigarette companies’ share increased from 36 cents to 49 cents. The report extensively documents cigarette company decisions and actions based on economic data, cigarette company filings with the Securities and Exchange Commission, statements from cigarette companies and leaf dealers, and reports from the cigarette companies’ own trade journals. In addition to detailing cigarette company decisions and actions that have harmed U.S. tobacco farmers, the report describes the growing alliance between U.S. growers and the public health community to address their common concerns: “Today, growers and the public health organizations are actively working together in the tobacco states to direct tobacco settlement funds both to reduce tobacco use and to provide transitional aid to growers and tobacco-dependent communities.” "This report shows that tobacco manufacturers have relentlessly pursued profit at the expense of the American tobacco farmer," said M. Cass Wheeler, CEO, American Heart Association. "For years, tobacco manufacturers have tried to blame the plight of the American tobacco farmer on declining smoking rates. The problem is clearly coming from the manufacturers. They are raking in billions of dollars in profits...profits that are made off the backs of cheap labor in foreign countries. "We hope this report will set the record straight on the problems of the American tobacco farmer and help us continue the public health community's dialogue with growers on how to break their dependence on tobacco," Wheeler continued. “The cigarette manufacturers like to paint a picture of the tobacco industry as one big happy family. This picture is a 20-year-old myth,” said Matthew L. Myers, President-designate of the Campaign for Tobacco-Free Kids. “The reality is that the economic interests of cigarette manufacturers and U.S. tobacco farmers are no longer the same, and the cigarette manufacturers are aggressively fostering the foreign competition that is putting American growers out of business. Until we acknowledge the true cause of the problem, real solutions will continue to evade the growers.” John R. Seffrin, Ph.D., chief executive officer of the American Cancer Society, said, "The tobacco farming community and the public health community share the common goals of reducing disease caused by tobacco products and ensuring the economic stability and prosperity of tobacco farmers, their families and their communities. Tobacco producers and public health groups are allied in their commitment to these goals. Unfortunately, Big Tobacco companies, through their actions, have shown no commitment towards either. The sad irony is that those in the public health community have shown more concern and commitment for the economic well-being of tobacco farmers than have their false friends at Big Tobacco." Andrew Shepherd, a tobacco farmer from Blackstone, Virginia, and a member of the Board of Directors of the Flue-Cured Tobacco Cooperative Stabilization Corporation, also submitted a statement that was read at the press conference releasing the report. Shepherd said, “For years farmers have believed and done pretty much what the tobacco companies told them. They have been told that their future rests with the future of the tobacco companies and that they, as farmers, should therefore be supporting the companies’ political agenda. They have told that as part of the ‘tobacco family’ they would be protected by the tobacco companies who could be counted on to represent their interests in Washington and in state houses. Those days are now past and farmers need to start looking out for themselves. “This report makes very clear in my mind – the U.S. companies have been playing both sides of the fence, using U.S. farmers to carry their political water here in the U.S. by claiming to be their friend, while at the same time building facilities and operations overseas that will allow them to abandon the U.S. tobacco farmer in the future…. For the last several years, I and many others in both the flue-cured and burley tobacco producing states have been dialoguing and working with many in the public health community to see if we can find ways to resolve our differences. But our real work is only beginning. We need to identify options and work towards putting real longer-term solutions in place – solutions that protect public health and the health and welfare of the people who live and work in the tobacco producing communities,” Shepherd said. (Copies of the report may be obtained on the Internet at www.tobaccofreekids.org. Please feel free to link your media web sites to this site.) ### FALSE FRIENDS: SUMMARY OF FINDINGS The American tobacco grower is facing increasingly hard times. The number of small family tobacco farms has declined from more than 500,000 in the 1950s to fewer than 85,000 today, with a drop of more than 100,000 since 1980. Purchases of U.S.-grown tobacco leaf are down, farming costs are up, prices are not keeping up with inflation, and grower incomes have shrunk steadily. The reduced purchases of U.S.-grown tobacco leaf have little to do with the gradual smoking declines in the United States. Instead, they are tied almost entirely to the decisions of the U.S. cigarette companies to manufacture more of their products overseas and use more foreign-grown tobacco in the cigarettes they make both here and abroad. These decisions have allowed the U.S. cigarette companies to dramatically increase their overall sales, revenues and profits. As a direct consequence of these decisions, the major cigarette companies now manufacture cigarettes in more than 100 foreign countries. Since 1995, Philip Morris, R.J. Reynolds, and British American Tobacco have established manufacturing capacity in Switzerland, Hungary, Tanzania, Poland, Cambodia, Mexico, Romania, Russia, Bulgaria, Ukraine, China, and elsewhere. Accordingly, exports of U.S.-made cigarettes now account for significantly less than one-fourth of all U.S. company brands sold overseas and have declined about 30 percent since 1996. By itself, this decline in cigarette exports has reduced the annual amount of U.S. tobacco leaf used in cigarette manufacturing by about 10 percent in just the past three years. To supply their growing base of foreign manufacturing facilities, the U.S. tobacco companies and the U.S.-based leaf dealers have turned to foreign sources of tobacco and have provided direct financial, technical and material assistance to foreign growers. Their goal has been to increase the amount and quality of American-style leaf available, while reducing costs. As a result, nearly 90 percent of all American-style cigarette tobacco (flue-cured and burley) is now grown by foreign farmers in at least 78 countries. While many U.S. tobacco farmers have had to take out loans or invest large sums of their own money to maintain or modernize their operations, U.S. cigarette companies and U.S.-based leaf dealers have provided extensive assistance to foreign growers. To give but a few examples, U.S. tobacco companies have provided funding for fertilizers, pesticides and other infrastructure in Vietnam; established a growers’ fund in southern Poland to improve the quality of Polish tobacco; and introduced new “American-blend” plant varieties in Russia. U.S.-based leaf dealers have made cash advances and guaranteed loans for growers, sometimes agreed to purchase their entire crop, and directly subsidized tobacco production through education, training, and technological modernization. As a result, the U.S. share of global leaf exports has been cut in half since 1980, to less than 11 percent. Without this decline, annual U.S. tobacco exports would be about three times current levels. While exports of American-made cigarettes and American-grown tobacco have declined, the cigarette companies have increased their import of foreign-grown tobacco for use in American-made cigarettes. Since the 1960s, the percentage of U.S.-grown tobacco used in U.S.-made cigarettes has declined from about 90 percent to less than 60 percent. As a result, while U.S. cigarette companies today manufacture more cigarettes per year in the U.S. than in the early 1970s, they use more than one-third less U.S. tobacco leaf in the process. Because of increased foreign sales and domestic price hikes, the U.S. cigarette companies’ revenues and profits have soared since the 1980s. For example, from 1985 to 1998, Philip Morris’ annual cigarette revenues more than quadrupled, to $42.7 billion, and its profits from cigarettes have roughly tripled, to $6.5 billion (even after deducting $3.4 billion to cover costs associated with the state tobacco settlements). At the same time, U.S. tobacco growers’ sales, revenues and profits have stagnated or declined. As a result, the growers are receiving a smaller and smaller piece of the pie. Between 1980 and 1998, growers’ share of every dollar spent on cigarettes in the United States declined from seven cents to less than two cents, while cigarette companies’ share increased from 36 cents to 49 cents. The cigarette companies blame U.S. smoking declines for their reduced purchases of U.S. tobacco leaf. But that is not the case. From 1997 to 1998, cigarette consumption by U.S. smokers declined by only about 3 percent, and industry analysts expect that the cigarette companies’ recent price hikes, totaling more than 80 percent per pack, will cause a further decline of 6 to 10 percent from 1998 to 1999. Because domestic consumption accounts for only 40 percent of total demand for American-grown tobacco, these declines should reduce the overall demand for U.S. cigarette tobacco by only 4 to 5 percent – a small fraction of the 35 percent reduction in U.S. cigarette companies’ domestic leaf purchases over the same period. The real culprit in the reduced demand for U.S.-grown tobacco is the U.S. cigarette companies’ increased use of foreign-grown tobacco in both foreign and domestically manufactured cigarettes and their shift in manufacturing abroad. Several new developments make it likely that the plight of the American tobacco farmer will not improve and could get much worse. To escape the current tobacco auction system and reduce U.S. tobacco farmers’ independence, the cigarette companies are trying to force the farmers to grow their tobacco under direct contract with the companies. These and other cigarette company efforts could destroy the U.S. tobacco price-support program and replace small family-owned tobacco farms with large company-controlled agribusinesses. In addition, new international competitors are emerging. In Mexico, the elimination of tariffs and fees on cigarettes and tobacco under the North American Free Trade Agreement has already opened the door to increased Mexican tobacco leaf imports into the United States and could lead to the Mexican production of cigarettes for sale in the U.S. In China, U.S. cigarette company efforts have already dramatically improved the quality of the tobacco grown there, and China’s admission into the World Trade Organization could enable it to realize its obvious potential and become the largest supplier of American-style tobacco leaf in the world. In India, which is already a member of the WTO and a significant tobacco exporter, similar cigarette company efforts could quickly increase its global exports of American-style tobacco by as much as 600 percent.

 

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