June 23, 2010 - Philip Morris International Inc. (PMI) today, June 21st announced that its affiliate, Philip Morris Brasil Industria e Comercio Ltda. (PMB), will begin directly sourcing tobacco leaf from approximately 17,000 tobacco farmers in Southern Brazil. The New York-based tobacco firm said yesterday that it will begin directly buying about 10 percent of its worldwide leaf needs directly from Brazilian growers.
This initiative enhances PMI's direct involvement in the supply chain and is expected to provide approximately 10% of PMI's global leaf requirements. The vertically integrated structure was made possible following separate agreements with two current leaf suppliers in Brazil, Alliance One Brasil Exportadora de Tabacos Ltda. (AOB), a subsidiary of Alliance One International, Inc., and Universal Leaf Tabacos Ltda. (ULT), a subsidiary of Universal Corporation, to each assign around 8,500 contracts with tobacco farmers to PMB.
Philip Morris International, which was spun off from Altria Group Inc. in 2008 and makes and sells cigarettes outside the United States, will take over 8,500 grower contracts from each of Richmond-based Universal Corp. and North Carolina-based Alliance One International Inc. Both had been supplying the company.
"With this strategic integration, PMI will further ensure the sustainability of its leaf supply in Brazil, improve cost efficiencies and enable us to better align leaf supply and demand," said Martin King, Senior Vice President, Operations, PMI.
"We are confident that through our direct involvement with the farmers, as well as the wider tobacco growing communities, we can have a greater impact on improving their long term economic sustainability," he added.
Under the new leaf procurement structure, PMB will offer employment to more than 200 employees, most of them agronomy specialists, and will acquire related assets in Southern Brazil. AOB and ULT will continue to process the tobacco grown by PMB contracted farmers and also supply additional PMI leaf purchase requirements.
The transactions, which are subject to approval by the Brazilian competition law authority CADE, are expected to be completed by the end of the third quarter 2010.
"I don't think this tells us whether PMI is buying more or less leaf in Brazil. It may be that they just want a direct relationship with farmers, like they have in the U.S.," said Blake Brown, a North Carolina State University economist who specializes in tobacco. "With the currency situation, I would be surprised if buyers shift towards Brazil."
Currency swings in Brazil in the past have had a big impact on leaf dealers like Universal, which reported $50 million of currency-related losses in the fiscal year that ended March 31, 2009. Lower currency costs boosted its results in the following fiscal year.
Philip Morris International has been cutting back leaf purchases in the U.S., but that's probably because of a drop in demand in Europe, Brown said.
Universal and Alliance, meanwhile, said they would continue to process Brazilian leaf for Philip Morris International. Processing traditionally has been a profitable business -- and also less risky than contracting and financing growers. For Universal, the deal involves about 20 percent of its current volume.
Alliance One Chief Executive Robert E. Harrison said the agreement means a long-term processing agreement while reducing the company's working capital requirement for its Brazilian operation.
Top Ten Tobacco Countries China, India & Brazil Among Top Tobacco Nations, Daniel Workman, 11/17/2006..
References: Philip Morris International Inc. (PMI) announces strategic direct leaf purchasing initiative in Brazil, SOURCE: Philip Morris International Inc., BusinessWire, 6/21/2010; Philip Morris International to buy tobacco directly from Brazilian growers by Staff Reports (Contact David Ress at email@example.com) Richmond Times-Dispatch, 6/22/2010.
Philip Morris Brasil Industria e Comercio Ltda PMB), with business headquarters in Curitiba, has approximately 2,400 employees in its offices and facilities around the country and in its factory in Santa Cruz do Sul. PMB is the second largest cigarette company in Brazil, manufacturing and distributing leading international brands such as Marlboro and L&M, as well as local brands such as Shelton and Dallas.