Brazilian Growers Sell Tobacco to Philip Morris International Inc.
Philip Morris International Inc. is bringing American-style direct-from-growers purchasing of tobacco to one of the world’s biggest producers, Brazil — but it doesn’t signal the international giant is pulling back from the U.S. leaf market. 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.
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 the moves, Philip Morris International is offering to hire more than 200 Universal and Alliance One employees in Brazil, mainly in-house farming experts. It also will acquire some assets. The financial terms will depend on exactly which contracts it acquires when the deal closes.
“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.
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