1995 KEY AREA PAPER: SECURITY AND ECONOMY OF LEAF
SUPPLIES
Mission Statement
Growing: To produce a domestic crop of tobacco of
acceptable quality with a
lower in stock cost than comparable grades of
imported tobaccos
and thereby provide a distinct competitive edge.
Exports: To secure long term profitability of the
business; protect BAT's
sources of supply; and ensure a cost advantage to
BAT vis a vis
the competition.
Purchasing: To coordinate all buying to ensure
security ofsupply; and equal
or lower cost than the competition (grade for
grade).
Blending To ensure superior smoking quality of our
blends compared to
competition; that leaf stock durations meet
security of supply and
ageing requirements; to have professional and well
trained
blending specialists for the future.
Overall: To protect and use our No I position in
leaf worldwide to leverage
the business to our advantage and wherever
possible to place our
competition at a disadvantage vis a vis security
of supply, quality
and price.
1. Domestic Tobncco Production
1.1 Quantity: Plans for domestic crop must reflect
the Operating Companies
requirements for domestic use (based upon the
individual Operating Company
duration policy) and for exports (see later
section on exports). Uncontrolled
expansion with "the hope" ofexporting any
surpluses (ie no comir~t-ment) is not
acceptable
1.2 Quality: Plans must show quality improvements
and how these wiU be obtained,
particularly with regard to improving grade
turnout.
1.3 Yield: Minimum target yieldsfha must beset for
the next crop (1996) for each
rypegrown. Yields must show progressive
improvement. However. these must
not be to the detriment of quality.
1.4 Price: annual cost ofproduction surveys
(tobacco and competing crops) must
be carried out to estabUsh realistic and
competitive purchase prices so that
farmers' returns stimulate the required production
without adversely affecting
essential food crop production. Export pricing
implications must also be
considered.
Net returns to 5.rmers should be competitive with
returns ach.ievable a.- no.-
tobacco crops. Returns should be increased by a
combination ofimproved
yields, reduced real cost ofinputsilabour etc (ie
efficiency) rather than having to CY\
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resort to automatic price increases-, our farTner
base and hence our key source of
raw material must be protected and managed
effectively and efficiently.
You should compare the cost ofyour domestic
tobaccos to the cost of
comparable quality leaf available from the
International market.
Your objective must be "to produce a domestic crop
ofrobacco with an in
stock/in warehouse cost (per kg) lower than
imported tobaccos of comparable
quality" - otherwise why grow when you could buy
tobacco from outside
cheaper. However, care must be taken not to
over-react to the volatile. world
market situation by looking at your position over
the medium term (ic ive yews).
(Obviously freighE/dury/e-xchange rates/forex
availability have to be ta~ken into
consideration and it should also be remembered
that International prices are now
beginning to rise over the Plan period, as
previously forecast.)
1 _4 N12Ster Farmer Schemes: Each Operating
Company must have an established
scheme for identifying and rewarding (prizes,
greater range of crop inputs
available, etc) the better farmers. It is
appreciated that these farmers will have
higher yields and better grade ourturn. Plans must
clearly show your scheme
Naster farmer, category A farmers. etc), how You
intend to identify -hese
farmers and actions to support and motivate them
to achieve betTer quailty and to
provide a greater percentage ofyour purchases.
1.6 Afforestation: Every Operating Company using
woodfuel (for 311 or part of the
curine - flue/fire - and for barn construction,
etc) must have an afforestadon
programmiewith the objectives ofachieving
selfsufficiency in wood supply over
the shortest realistic time period. Plans must
show target dates for self
sufficiency The BATCo Policy on Afforestation must
be adhered to.
.Afforestation schemes should be based around
farmer plantings, and where
feasible, be supplemented by company managed
plantations. Improvements in
specific fuel consumption (amount of fuel used to
cure one kg of tobacco) must
be achieved. ie Eargets set and actions shown.
Alternative Fuels - Each Operating Company must
review the use of alter-native
fuels to ensure that opportunities are not lost in
terms ofcost/efficiency and/or
replacement ofwoodfuel to ease the pressure on
afforestation issues. Plans must
reflect current situation and plans for
alternative fuels ifapplicable.
1.7 CropChemicals: The selection of and need for
crop chemicals must be
critically evaluated and updated. BATCo policy on
safety in the use and storage
of such crop chemicals must be stringently
followed.
1.8 Food Crops: Tobacco production must not affect
food crop production but
should also seek to enhance it through increased
yields from residual fertilisers,
rotations. improved agricultural techniques etc.
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1.9 Crop Expenses: Must be monitored and
controlled effectively. Increases in
crop expenses (on a per kg green weight basis)
should be less than domestic
inflation (ie real savings). These cart be
achieved by, for example, reduced
manning levels, improved loan recovery, improved
yields and perhaps even
reorganisation of the extension function to
achieve same or better coverage.
However, tobacco quality must not be prejudiced.
Crop expansion automatically reduces crop expenses
(on d per kg basis) which
can sometimes hide inefficiencies. It is therefore
extremely important to obtain
real savings and to ensure that we are competitive
even without any crop
expansion.
1,10 Crop Advances and Capital Loans: Many
Operating Companies still fund
crop 'Inputs and cash advances themselves and/or
guarantee local bank advances.
The objective should be to not only utilise bank
loans and do away with the
guarwitee, but also to reduce and eventually
eliminate loans to farmers. It is Uly
appreciated that this is not currently feasible in
all operations, but you must
senously investigate how far you can go to meeting
these objectives and to
clear],- state what you intend to do and by when.
Crop !nputs/cash advances and capital loans to
farmers can, depending on the
t~?e cfgroNking programme, vary from 10% ofthe
value oftobacco -.o be
purchased up to 601/a. There have been cases in
the past where this was even
higher and the growing programme almost collapsed
with excessive debts and
dernotivation of farmers. Each company growing
tobacco must cleariv state in
their plan outstanding loans/debts carried forward
from previous crops, planned
adva.nces/loans for the budget year, the value of
these loans as a percentage of
the vajue of the crop to be purchased and recovery
targets. (Further details will
be for-varded with each Company's specific
Guidelines.) The objective must be
to reduce advancesiloans (as a ". of the value of
the crop to be purchased) to
red,-,ct-- risk. Targets and actions required
should be clearly stated.
1.11 Safery: Agricultural/extension safery is a
key issue (e2 chemical use, tractors,
storage etc) and BATCo's policy on safm must be
stringently followed. A zero
accident target must be set and will become part
ofthe normal performance
appraisal assessment.
2. Extiort of Domestic Tobnccos
2.1 Quantity: Domestic requirement must first be
fully met. Quantities zrowri/
produzed for export should be based on firm
indications from dealers; customers
(these should be wrirten indications in which case
they may not be legally
binding, or part of the contractual agreement in
which case they could be
consi"ered legally binding). Any production over
and above firm indicated
orders must be approved by LeafDepartment and the
RBU. It is therefore
extremely important to know your customers and
have tight contracts with
deale.-s. With the new scenano on world supply
(shortage developing) and prices
(Increasing) there is an opportunity to
consolidate and recover export markets
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and profitability. This must be well managed with
the objective of securing long
term sales.
2.2 Run of Crop: Exports should be run ofcrop
otherwise there is a danger of
debasing your domestic cigarette quality which is
unacceptable in any market and
even more serious in a competitive market.
Ifexports are not run ofcrop it is
difficult to truiv cost these exports and we would
question your profit figures.
2.3 Price/Proritability- Exports must be
profitable on the accounting basis
established by BATCo Finance (paper circulated
December 199 1), unless there is
an overriding need for forex earnings, however if
the latter is the case this must
be clearly stated in the plans and agreed by your
Regional Director. Exports
must be profitable even without any local currency
devaluations. Devaluations
are a bonus and not a realistic reason for pushing
exports.
The "BATCo LeafExpon Policy", circulated to all
exporting Companies on
September 1. 1993, clearly states the direc-.ion
the Group is taking with regard to
exports- The policy must be followed and any
exceptions can only be approved
by LeafDepartment and :he RBU.
Margins in a normal year should be sufficiently
larize enough to cater for
fluctuating export prices (ic the world tobacco
surplus depressed prices in 1994 -
,he 199 5 re-cm, ery is expected to carry on
through to the 1996 crop - for 1997
we will have to assess the reaction to increased
prices on crop volumes and
suppiv/demand
2.4 Other Factors: Tobacco quality must be
acceptable, continuity ofsupply must
be assured, c-:op chemical residues must be below
pem-ined levels, processing
specifications must be met, and infestation
controls well established.
2.5 Export Contracts: LeafExport Contract
Guidelines have been circulated. Each
Company must incorporate the
recommendations/points made in these Guidelines
when their respective Export Contracts are next
renewed (usually every year).
Again it is important to take advantage of a
rising export market to negotiate
lonzer term sales secutiry to protect our business
ifand when the next downturn
occurs
3. GLT Processins
3.1 Quality Control Protocols: All Operating
Companies have already received the
new quality control protocols (ie methods for
measuring processing
specifications). These must be implemented so that
youlwe have confidence in
the various specification measurements reported
and that the figures are
comparable over our 'industry. The new
International Coresta screens must be
used as thev are an integral part ofthe protocol,
and a BAT QC Audit Team has
been formed to ensure compliance.
3.2 Processing Specifications: All Operating
Companies will be receiving the
updated processing specification targets (move to
redried targets with upper and C-\
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lower limits to achieve uniformity/minimise
variability). Whilst these are for
tobaccos purchased intemationey by the total BAT
Group, they should be used
as a standard by ail Operating Companies. Most
companies must plan to meet
and even exceed these standards and the targets
must be clearly shown in the
forthcoming Company Plans. Some companies, with
older equipment, may have
difficulties in the short term. However, in these
cases, progressive improvements
must be shown/stated, actions required to achieve
this improvement and a target
date set or mneetln~;`exceedinrz BAT standards.
Expor- zustomers processing specifications must be
met.
It is important to remember that the domestic
cigarette factory is also a
customer just like any export customer.
3.3 Processing Costs: Whilst it is fully
appreciated that we need to upgrade plant
and ec'-_-ipmera with :he knock-on effect
ofdepreciation increasing processing
costs. we -nust remain fully competitive-
Processing costs in some operations are
still too ii2h and every effort must be made to
reduce these, targets must be
shown and ac-.~cns clearly stated to achieve these
targets.
3.4 Infestation Control: Good housekeeping and
cleanliness are the basis ofgood
infestation control The selection, use and storage
ofinfestation control
chernicais must be stnctly in accordance with
BATCo policy (issued February
1992 -lEh updated additions
4. IMDOrTed Tobnccos
4.1 Purchase Requirements: AJI orders/requirements
for imported tobaccos must
be placed through BATCo LeafDepartment, Woldniz,
who are responsible for
coordinating, supenising and negotiating prices
for Group purchases.
4.2 Buying Commission: The BATCo Board have agreed
to a stanclardised
woridv-ide bu~,iniz commission of3% which is now
applicable to all tobaccos
from all supply sources. Wherever possible the
commission will be built into the
aereed -~nces to allow proper comparisons to be
made. Otherwise it will be
charizedi directly to the customer.
4.3 Import Restrictions: Where imported tobaccos
are essential to enhance the
smokin quality of domestic tobaccos and thus
provide a competitive advantage,
Go-verttrn ent pressure to reduceieliminate
imports must be resisted.
4.4 World SupplyiStocks: With :he end ofthe world
surplus situation in sight, a
dramatic shift to a shortage position is imminent
for ry
all pesoftobacco. Prices
reached cheir low point in 1994 and an upturn,
necessary to support and
stimulate the farmer and tobacco production, is
now in progress. However, the
dramatic change in the economic situation In
Brazil (a major plaver/supplier to
the world market) is exacerbating the price
scenarios the exceptions are those
sources -xith a market support system (eg USA,
Canada).
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Most major supply countries cut production in 1994
and have not increased 1995
production to force the sale of'surplus stocks and
revitalise the world market. As
a result, the quantity to be traded in 1995 is not
likely to change and therefore
may well be below world trade requirements.
1996 production ofall types is likely to increase
in response to this shift in overafi
supply and reaction to higher prices. However, due
to the lead time ofan
agricultural crop, major supply problems could be
prevalent in 1996 forcing
prices to increase further.
It is essential to protect the supply of the raw
material and green leaf prices can
be expected to increase. Supp6ers/dealers margins
are also expected to be forced
up as they try to compensate for losses/low
profitability of 1993/1994.
Together these factors will have a major influence
on prices in 1996. The fear is
what will happen in 1997/1998 ifproper and
sensible management ofthis
situation does not occur.
The situation continues to be volatile and BATCo
LeafDepartment will provide
updated information through their quarterly review
4.5 Visits: BATCo LeafDepartment have to approve
and coordinate all visits from
BATCo Operating Companies to major producing
areas.
5. Stock Durition Policv,Stock Re--isters
5.1 Durations: BATCo Operating Companies must
establish stock duration levels
within the policy guide!ines given by the BATCci
Board, recognising the intrinsic
differences benveen "filler" and "flavour"
tobaccos, the ageing period required
and the use of rwo crop blending for flavour
grades - essential contributors to
smok~iniz quality and hence consumer acceptance.
However, ziven the volatile nature of sales in
certain markets and the tobacco
supply scenario (see above), BATCo Operating
Companies should work-within
the flexibilitv given in the zuidelines, to
maintain higher than normal stock
durations ofthose imported tobaccos considered to
be at risk or to take
advantace ofattraczively priced tobaccos.
Any decision to purchase extra tobaccos at attract
Ive prices against future years
requirements must be first approved by BATCo
LeafDepartment and the
Regional Direc-,or.
5.2 Stock Registers: Both the Imported Tobacco
Stock Register and a Domestic
Stock Reizister are now operational. BATCo
Operating Companies are required
to participate in returning information for these
schemes so that better control
and potential movement of stocks can be organised
within the Group.
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6. Functional Exaertise
6.1 Recruitment: BATCo Operating Companies must
continue to recruit high
calibre, high poten6al local national leafstaff.
Particular emphasis must be given
to recruitment for leafbiending and product
development.
6.2 Training: Trainingidevelopment programmes must
be drawn up and carried
through for all managers identified as having high
potential with particular
emphasis on the LeafFunctional Training Courses
being offered by Souza Cruz,
the Oriental Courses being offered by BATCo, the
Blending Courses being
offered by BATCo and a GLT train~ing/development
programme currently being
developed by a subconunittee of the LTG (Leaf
Trading Group). Allleaf
managers should at some stage oftheir career
attend a detailed finance course
and need to be fully aware of the financial impact
of their decisions on the
Company as a whole. All requests for training must
be channelled through
BATCo LeafDepartment who will approve and assist
companies with their
training requirements.
6.3 Regional Blenders: BATCo Operating Companies
should maintain close liaison
with their Regional Blender, calling on his
services when required.
6.4 Blenders: The TSG initiative on Career
Development for blenders emphasises
the need to reward blenders and produc-, managers
as specialists.
6.5 New Business Developments: The current
initiatives into Eastern Europm/the
Former Soviet Union and the Far East could well
result in an increased
requirement for experienced leafpersonnel. These
will first be sourced internally
from within the Group. It is therefore imperative
that you train and develop high
fliers as quickly as possible and that you have
succession plans in place to aflow
the Group to call upon Operating Companies to
provide leafpersonnel
(International staff and local staff for 2 year
attachments) if and when required.
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BATCO document for Province of British Columbia 23
April 1999