Required Report - public distribution

**Date:** 4/29/2004

**GAIN Report Number:** PK4008

PK4008

**Pakistan**

**Tobacco and Products**

**Annual**

**2004**

**Approved by:** Michael Henney, Regional Director![](media/image1.wmf)
U.S. Consulate, Dubai

**Prepared by:** Ikram Chaudhary, Ag Specialist U.S. Embassy, Islamabad

**Report Highlights:**

Pakistan\'s CY 2004 tobacco production is forecast to increase to 95,600
metric tons. Cigarette companies have started programs introducing
sunflower and hybrid maize as alternative crops for tobacco. Most of
tobacco trade is unrecorded. Cigarette production and consumption
continue to rise despite government efforts to dissuade people from
smoking. Imports of U.S. leaf tobacco expected to remain strong due to a
demand of better quality cigarettes among Pakistan consumers.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Islamabad \[PK1\]

\[PK\]

Table of Contents

[TOBACCO 3](#tobacco)

[Production 3](#production)

[Table 1. Tobacco Area and Production (Farm Weight)
3](#table-1.-tobacco-area-and-production-farm-weight)

[Table 2. Total Unmanufactured Tobacco PS&D
4](#table-2.-total-unmanufactured-tobacco-psd)

[Production Policy 4](#production-policy)

[Table 3. Tobacco Support Prices for Major Varieties (Rupees/Kilogram)
4](#table-3.-tobacco-support-prices-for-major-varieties-rupeeskilogram)

[Table 4. Tobacco Requirements of Major Cigarette Companies (MT)
5](#table-4.-tobacco-requirements-of-major-cigarette-companies-mt)

[Table 5. Average Farm Gate Prices (Rupees/kilogram)
5](#table-5.-average-farm-gate-prices-rupeeskilogram)

[Consumption 5](#consumption)

[Trade 5](#trade)

[Stocks 6](#stocks)

[CIGARETTES 6](#cigarettes)

[PRODUCTION 6](#production-1)

[CONSUMPTION 6](#consumption-1)

[Table 6. Cigarette Production Supply and Demand
6](#table-6.-cigarette-production-supply-and-demand)

[TRADE 7](#trade-1)

# TOBACCO 

# Production

MY 2004 tobacco production is forecast at 95,600 metric tons (MT), on
the strength of a 9 percent increase in area planted to tobacco in lieu
of sugar cane, its primary competitor cash crop. Market expectations are
for expansion in cultivation of Oriental varieties to service stronger
demand from manufacturers of cigarettes and chewing tobacco. To preserve
market returns, the Pakistan Tobacco Company (PTC) and Lakson Tobacco,
in collaboration with multinational seed companies, have launched a
campaign to introduce Hybrid Maize and Sunflower as alternative cash
crops. MY 2003 tobacco production declined to 86,411 MT due to weak
demand from cigarette companies.

Tobacco, an important cash crop, is grown mainly in the North West
Frontier Province (NWFP) and Punjab. Flue-cured and burley tobaccos are
used primarily in higher-quality cigarettes. Oriental varieties (known
locally as White Patta) are used in low-quality cigarettes and in chew
tobacco. Dark air-cured varieties are used mainly as filler, while light
air-cured varieties are used primarily in traditional Pakistani tobacco
products. Yields in Pakistan are about twice those for neighboring
countries due largely to the industry supported extension service.
Quality, however, is improving very slowly due to constraints posed by
climate and soil fertility.

## Table 1. Tobacco Area and Production (Farm Weight)

  ------------- ------------ --------- --------- ------------ -------- ---------
                AREA                             PRODUCTION            
                (Hectares)                       (Metric               
                                                 Tons)                 

  Tobacco Type  2002         2003      2004      2002         2003     2004

  Flue-cured    24,570       20,748    21,000    59,615       51,311   51,800

  Dark          751          489       425       1,940        1,420    1,200
  Air-Cured                                                            

  Oriental      4,749        5,469     9,250     9,380        10,830   18,400

  Light         16,916       19,800    20,000    21,000       20,700   22,000
  Air-cured                                                            

  Burley        432          933       925       945          2,150    2,200

  Total         47,418       47,439    51,600    92,880       86,411   95,600
  ------------- ------------ --------- --------- ------------ -------- ---------

Source: 2002 and 2003 - Pakistan Tobacco Board, 2004 (F) -
FAS/Islamabad.

## Table 2. Total Unmanufactured Tobacco PS&D

  ----------------- ------------- ---------- ------------- ---------- ------------- ----------
  **Commodity**     **Tobacco,                                        (HA)(MT)      
                    Unmfg.,                                                         
                    Total**                                                         

                    2002          Revised    2003          Revised    2004          Forecast

                    USDA\[Old\]   Estimate   USDA\[Old\]   Estimate   USDA\[Old\]   \[New\]

  **Market Year                   01/2002                  01/2003                  01/2004
  Begin**                                                                           

  Area Planted      46897         46897      48150         47439      0             51600

  Beginning Stocks  51160         51160      55250         55250      59639         50936

  Farm Sales Weight 92880         92880      94700         86411      0             95600
  Prod                                                                              

  Dry Weight        84721         84721      86389         78971      0             87420
  Production                                                                        

  U.S. Leaf Imports 125           125        200           50         0             100

  Other Foreign     37            37         50            47         0             100
  Imports                                                                           

  TOTAL Imports     162           162        250           97         0             200

  TOTAL SUPPLY      136043        136043     141889        134318     59639         138556

  Exports           3632          3632       3500          7385       0             6000

  Dom. Leaf         77000         77000      78500         75900      0             79000
  Consumption                                                                       

  U.S. Leaf Dom.    124           124        200           50         0             100
  Consum.                                                                           

  Other Foreign     37            37         50            47         0             100
  Consump.                                                                          

  TOTAL Dom.        77161         77161      78750         75997      0             79200
  Consumption                                                                       

  TOTAL             80793         80793      82250         83382      0             85200
  Disappearance                                                                     

  Ending Stocks     55250         55250      59639         50936      0             53356

  TOTAL             136043        136043     141889        134318     0             138556
  DISTRIBUTION                                                                      
  ----------------- ------------- ---------- ------------- ---------- ------------- ----------

# Production Policy

To safeguard farmer interests, the Government of Pakistan (GOP) supports
tobacco production via a support price mechanism. Generally, the Price
and Grade Revision Committee of the Pakistan Tobacco Board (PTB) set the
support price well below market-clearing levels, effectively setting a
floor or minimum guaranteed price. As a result, the government generally
does not procure tobacco and the support program does not require
government expenditure. For the MY 2004 crop, the support price for all
tobacco varieties will likely be increased by 5 percent to help offset
rising producer input costs.

## Table 3. Tobacco Support Prices for Major Varieties (Rupees/Kilogram)

+------------------+----------------+----------------+----------------+
| Tobacco Type     | 2002           | 2003           | 2004           |
+------------------+----------------+----------------+----------------+
| Flue-cured       | 20.90 to 47.02 | 21.95 to 49.37 | 23.04 to 51.83 |
+------------------+----------------+----------------+----------------+
| Dark Air-cured   | 13.83 to 14.78 | 14.52 to 15.52 | 15.24 to 16.29 |
+------------------+----------------+----------------+----------------+
| Oriental         | 10.10 to 38.60 | 10.60 to 24.52 | 11.13 to 25.74 |
+------------------+----------------+----------------+----------------+
| Burley           | 24.13 to 38.60 | 25.34 to 40.53 | 26.60 to 42.55 |
+------------------+----------------+----------------+----------------+
| Avg Exchange     | 59.60          | 57.75          | 57.80          |
| Rate             |                |                |                |
|                  |                |                |                |
| (\$1 = Pak.      |                |                |                |
| Rupee)           |                |                |                |
+------------------+----------------+----------------+----------------+

Source: Pakistan Tobacco Board

The PTB, in effort to regulate tobacco supplies, attempts to coordinate
production based on the expected demand by tobacco companies using a
price support mechanism. Traditionally, tobacco companies contract
directly with growers prior to planting. The PTB price support program
is generating over production, conversely, greater price competition
among suppliers as it offers support based on faulty projections of
supply requirements of the industry. At best only 80-85 percent of
industry requirements are believed reported to the PTB because of duty
considerations. MY 2004 contract intentions of major cigarette companies
shows a continuation of the trend to lock in prices as buyers realize
they can reap better returns from a market constrained by poor market
information.

## Table 4. Tobacco Requirements of Major Cigarette Companies (MT)

  ------------------------- --------------- -------------- ---------------
  Tobacco Type              2002            2003           2004

  Flue-cured                45,095          37,182         34,836

  Dark Air-cured            1,550           1,030          855

  Oriental                  2,100           1,655          1,050

  Burley                    1,115           2,055          2,165

  TOTAL                     49,860          41,922         38,906
  ------------------------- --------------- -------------- ---------------

MY 2004 farm gate prices are expected to increase 5-7 percent over last
year, driven mostly by higher production costs and higher support price.
MY 2003 farm gate prices averaged about 20-25 percent above the PTB
published price support level.

## Table 5. Average Farm Gate Prices (Rupees/kilogram)

  ----------------------- --------------- --------------- ---------------
  Tobacco Type            2001            2002            2003

  Flue-cured              45.94           46.19           47.53

  Dark Air-cured          20.21           21.08           21.19

  Oriental                25.40           25.48           25.50

  Burley                  39.92           41.85           44.21
  ----------------------- --------------- --------------- ---------------

Source: Pakistan Tobacco Board

## 

# Consumption

MY 2004 tobacco consumption is forecast to increase 3 percent on higher
demand for tobacco-based products. Two-thirds of production is utilized
for cigarettes, the remainder is used in other tobacco products.

# Trade

MY 2004 tobacco imports are expected to decline. The bulk of imports
should remain flue-cured leaf tobacco from the U.S. which is used to
finish higher-quality cigarettes. The U.S. share of the import market is
increasing gradually in response to growing consumer demand for
higher-quality cigarettes. MY 2004 tobacco exports are forecast at 6,000
MT, mainly to Bangladesh, Egypt, Germany and United Kingdom.

Export of tobacco and products are not restricted; however, most such
trade is unrecorded. To fulfill World Trade Organization (WTO) and the
International Monetary Fund (IMF) commitments, the GOP is scheduled to
reduce the import duty on raw tobacco, from 20 to 10 percent, starting
in July 2004. Imported raw tobacco, when sold, is assessed a 20-percent
sales tax.

# Stocks

No official data is available. Estimates are that cigarette
manufacturers maintain supplies to cover 8-10 months' production
requirements.

# CIGARETTES

# PRODUCTION

Official data issued by the Pakistan Tobacco Board (PTB) on Pakistan
cigarette production is not very reliable. Because cigarette
manufacturers are taxed based on declared production, data submitted to
the PTB is suspect. Estimates are that Pakistan produces 60 to 65
billion cigarettes annually. Currently, 24 manufacturers are known to
operate in Pakistan, 20 of which reportedly do not register production
with the Tobacco Board. Lakson Tobacco Company and Pakistan Tobacco
Company, two of the largest cigarette manufacturers, are believed to
account for 40 and 38 percent of total cigarette production,
respectively.

# CONSUMPTION

Official data on cigarette consumption is not available. However, by
using sales as a proxy, MY 2004 consumption is projected at 65 billion
pieces. The GOP prohibits smoking in offices and airplanes and has
launched a radio and television campaign to discourage smoking. Recently
the GOP announced that it would be prohibiting smoking in all public
places. Even so, smoking continues to grow in popularity. In effort to
increase sales, major cigarette companies have announced a 50-percent
price reduction for their medium-priced brands.

## Table 6. Cigarette Production Supply and Demand

  ---------------- ------------- ---------- ------------- ---------- ------------- ----------
  Country          Pakistan                                                        

  Commodity        Tobacco,                                          (MIL PCS)     
                   Mfg.,                                                           
                   Cigarettes                                                      

                   2002          Revised    2003          Estimate   2004          Forecast

                   USDA\[Old\]   Estimate   USDA\[Old\]   Estimate   USDA\[Old\]   Estimate

  Market Year                    01/2002                  01/2003                  01/2004
  Begin                                                                            

  Filter           60000         60000      62000         62000      0             63000
  Production                                                                       

  Non-Filter       80            80         90            90         0             90
  Production                                                                       

  TOTAL Production 60080         60080      62090         62090      0             63090

  Imports          2100          2100       2200          2200       0             1600

  TOTAL SUPPLY     62180         62180      64290         64290      0             64690

  Exports          400           400        450           450        0             500

  Domestic         61780         61780      63840         63840      0             64190
  Consumption                                                                      

  TOTAL            62180         62180      64290         64290      0             64690
  DISTRIBUTION                                                                     
  ---------------- ------------- ---------- ------------- ---------- ------------- ----------

# TRADE

Because a major portion of cigarette trade is unrecorded (i.e., smuggled
through Afghanistan), a large discrepancy exists between official and
unofficial trade data. Trade data displayed in the PS&D table are
unofficial estimates. Cigarette smuggling involves most popular
international brands. As with raw tobacco, the import duty on cigarettes
will be reduced to 10-15 percent starting in July 2004 and, as with raw
tobacco, a 20-percent sales tax will be assessed on downstream
commercial activity.