REPORT FROM THE COMMISSION TO THE COUNCIL on the common organization of the market in raw tobacco
Date: 1996-12-18
Institutions: European Commission
Subjects: EU aid, EU production, common organisation of markets, tobacco, tobacco industry

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  18.12.1996 
COM(96) 554 final 

REPORT  FROM  THE  COMMISSION  TO  THE  COUNCIL 

on  the  common  organization  of the  market  in raw  tobacco 

TABLE  OF  CONTENTS. 

I. 

1. 
2. 

II. 

THE PRODUCT 

Origin 
Terminology 

4 

4 
4 

ECONOMIC  AND  SOCIAL  IMPORTANCE  OF  TOBACCO  PRODUCTION 
IN EUROPE 

5 

A. 

The  varieties  grown  in Europe 

B. 

Tobacco  growing  and  use 

1. 
1.1. 

A  demanding,  labour-intensive  crop 
Tobacco  cropping  calendar 

1.2. 

Employment  in tobacco  farming 

2. 

C. 

1. 
2. 
3. 
4. 
D. 

Tobacco  keeps  the  farms  on  which  it  is grown  alive 

Tobacco  is  planted  on  small  plots  in Europe,  hampering  mechanisation 

Small  holdings 
Intensive  mechanisation  does  not  seem  feasible  today 
Employment  in  the  tobacco  processing  sector 
Employment  in  the  tobacco  industry 
A  crop  that  keeps  the  rural  fabric  of  regions  in  difficulty  alive 

III. 

ANALYSIS  OF  THE  QUALITY  OF EUROPEAN  TOBACCO  AND  ITS 
RANK  IN  WORLD  PRODUCTION 

A. 

Quantitative  changes  in  European  tobacco  production 

B. 

The  low  internal  prices  show  that  the  quality  of  most  of  the 

varieties  produced  in  the  Community  is very  low 

6 

7 

7 
7 

8 

9 

10 

10 
11 
11 
12 
12 

13 

13 

14 

Production  does  not  cover  the  Community's  qualitative  consumption  needs 

15 

C. 

D. 

The  world  market 

18 

21 

CONCLUSIONS  OF  PARTS  I,  II  AND  III 

1A. 

IV. 

THE  COM'S  FUNCTIONING  AFTER  THE  1992 REFORM 

A. 

Budget  and  budget  control 

1. 

2. 

B. 

1. 

2. 
3. 

Budget  expenditure  under  control 

Fewer  risks  of  fraud 

The  sector's  economy 

Market  prices  that  are  much  too  low  in  comparison  with  the  premiums 

a) Pre-  and  post-reform  prices 
b) Price/premium  ratio  per  variety 
c) Price/premium  ratio  per  country 
d)  Why  such  an unsatisfactory  ratio? 
A  processing  industry  in  the  midst  of  restructuring 
The  processors  continue  to  be  solidly  implanted  in  the  Community 

22 

22 

22 

22 

23 

23 
23 
24 
24 
25 
25 
25 

C. 

Management 

1. 
2. 
3. 
4. 

The  current  scheme  is  characterised  by  a certain  inflexibility 
The  scheme  is  also  somewhat  complex 
Transitional  period 
Reconversion  programmes 

CONCLUSIONS  OF  PART  IV 

V. 

A. 

B. 

1. 

2. 
3. 

PROPOSALS  FOR  THE FUTURE  OF  THE  COM  IN  TOBACCO 

The  Commission's  choices 

Scenarios  for  the  future 

Scenario  1  -  Gradual  disengagement 
a)  Social  and  economic  impact 
b)  Alternatives  to  tobacco  farming 

Other  rejected  scenarios 
Scenario  2  -  Commission  proposal  : fundamental  reform  of  the  sector 
(1)  Modifying  the  premium  scheme  to  improve  the  quality  of  the  tobacco 
produced  -  a major  challenge 

(a)  Why  change  the  current  scheme  of  premiums? 
(b)  Proposal:  Modulate  Community  aid  according  to  tobacco 

quality  so  as to  encourage  better  quality 
(bl)  The  principle  of  modulated  Community  aid 
(b2)  Implementation:  modulation  through  increasing  aid 
to  producers'  groups 
(b3)  Advantages/disadvantages  of  modulation  via  aid 
to  producers'  groups 
(b4)  Setting  up  this  modulation  does  not  entail  changing 
the  current  levels  of  premiums  and  quotas 

(2)  Making  it  easier  to  leave  the  sector  voluntarily 
(3)  Making  the  quota  and  guarantee  threshold  scheme  more  flexible 
(4)  Simplifying  the  scheme's  administrative  management 
(5)  Encouraging  better  remuneration  for  quality 
(6)  Taking  account  of  environmental  protection 
(7)  Less  harmful  varieties  on  the  market 
(8)  Stepping  up  supervision 

C. 

Other  elements 

CONCLUSIONS  OF  PART  V 

26 

26 
26 
27 
27 

28 

29 

29 

30 

30 
30 
30 
32 
34 

34 
34 

35 
35 

36 

36 

37 
37 
40 
40 
41 
41 
42 
42 

43 

45 

I. 

1. 

THE  PRODUCT 

Origin 

Tobacco is a subtropical  plant that was brought to Europe from  South America in the  16th 
century.  It  has  numerous  varieties  that  are adapted  to  a very  wide  range  of  climatic  and 
soil  conditions.  As a result,  tobacco is grown  on all  six inhabited  continents  and  is  found 
from  Poland  to  Cuba  and  from  the United  States  to  China. 

2. 

Terminology 

Tobacco  undergoes  two  types  of  post-harvest  processing  before  becoming  a  finished 
product  (cigarette,  pipe  tobacco,  cigar  or  cigarillo).  Indeed,  there  are  three  main  phases 
in  the  processing  of  tobacco: 

Tobacco is first  grown and harvested,  then  dried by tobacco farmers  or planters on 
the  farm.  This  is leaf  tobacco. 

Leaf  tobacco  is then  delivered  to  companies  or processors  who  prepare,  bale  and 
process the leaf tobacco so that it is warehousable  and usable by tobacco  factories. 
The  result  of  this first processing  is  called processed  or  baled  tobacco. 

The  processed  tobacco  then  undergoes  second processing  in  the factories,  which 
transform  it  into  a final  product. 

So,  we  differentiate  between  leaf  tobacco,  processed  tobacco,  and  the  finished  product, 
which  are treated  by three different  economic  operators:  the farmer,  the processor  and the 
factory.  Whilst these three economic activities are distinct, they  may be carried  out by  the 
same undertaking,  in  the  legal  sense  of  the  term. 

These  three  activities  make  up  the  tobacco  sector,  which  is  characterised  by  the 
interdependence  of  the  economic  sectors  of  tobacco  production  and  processing. 

Tobacco  industry  professionals  also  subdivide  tobacco  into 

aromatic tobacco, the smell  of which will  give the mixture  used to make  cigarettes 
its  desired  characteristics;  and 

filler,  i.e.,  the  neutral  tobacco  that  makes  up  the  bulk  of  the  mixture. 

Only  raw  tobacco  (whether  leaf  or  baled)  is  an  agricultural  commodity  (Annex  II  to  the 
Treaty  of  Rome).  The  finished  products  are  industrial  goods  (non-Annex  II). 

H. 

ECONOMIC AND SOCIAL IMPORTANCE  OF TOBACCO  PRODUCTION 
IN  EUROPE 

Raw  leaf tobacco production  in Europe  ('000 tonnes) 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

385.2 

387.5 

411.2 

419.9 

429.7 

407.8 

342.7 

327.9 

333.2 

EUR 
12 

The European Union, with 4.6% of global  tobacco production  in  1994, is the world's  fifth 
ranking  producer  of  raw tobacco. 

Community tobacco production has been declining steadily since reaching its peak in 1991. 
By  instituting  a  production  quota  scheme,  the  entry  into  force  of  the  new  Common 
Organization  of  the  Market  (COM)  in  this  sector  in  1992  effectively  has  reduced  the 
production  of  certain  types  of  tobacco  for  which  there  was  no  real  market. 

Share  of each  Member  State  in Community  production  of raw  leaf  tobacco 
in 1995 

_  ^ 
Portugal 

, Germany 

. 
A  . 
Austria 

1% 

0,1%  France 

Belgium 
0,3% 

Italy  and Greece are by far the Community's  main producer countries, with  39% and 36%, 
respectively,  of  the  Community's  production  in  1995,  followed  by  Spain  (13%)  and,  in 
decreasing  order,  France,  Germany,  Portugal,  Belgium  and  Austria. 

This  report  concerns  tobacco  production  in  the  previous  12-member  European  Union,  as 
Austria  (600-tonne  quota)  is  the  only  one  of  the  new  members  to  produce  tobacco. 

A. 

The varieties  grown  in Europe. 

Types of tobacco  grown  in Europe  in 1995 

Dark air cured 
13,2% 

^ ^^ 

Flue cured 
36,6% 

Sun cur?d 
26,7% 

Light air cured 
21,2% 

Despite  their  enormous  diversity  and  specific  characteristics,  tobacco  varieties  can be 
grouped  according to the technique used to cure (dry) their leaves.  Thus,  according to  an 
internationally  recognised  classification,  we have 

Flue-cured  tobacco 

This is tobacco  cured  in ovens where ventilation,  temperature  and degree of humidity are 
controlled.  This group is made up of the light tobaccos, the best-known  variety  of which 
is Virginia (called 'bright' in Italy), which is used in the manufacturing  of milder cigarettes, 
including the mild-tasting  American-style  blends. 

Light  air-cured  tobacco 

These  tobaccos  are  air-cured  in  sheds  without  being  allowed  to undergo  fermentation. 
They  are part  of the  category  of light  tobaccos  that  is represented  in the Community by 
the Burley  and Maryland  varieties. 

—>  Provided  that  they are high  quality,  there  is a great  demand  for flue-cured and 
light air-cured  tobaccos, which are basic ingredients  of the American-style  mild-taste 
cigarettes,  the popularity  of  which  is  tending  to  increase  in  all  countries,  but the 
competition  on this  market  is  fierce. 

Sun-cured  tobacco 

This type of tobacco  is cured  in the sun,  as the classification  indicates.  It consists  of the 
Turkish or Oriental  tobaccos, which the industry  subdivides  into the Oriental  tobaccos per 

se  -  basically,  Basmas,  Kaba  Koulak  and  Katerini  -  the  value  of  which  hinges  on  the 
quality  of their aromas, and the semi-Oriental  varieties, i.e., the Italian  sun-cured  tobaccos 
and most  of  the  other  Greek  Oriental  varieties. 

—>  Sun-cured  tobaccos, which  are used  in almost  every tobacco  mixture  because  of 
their  exceptional  aromatic  qualities,  are  in  high  demand  on  the world  market.  The 
Community  varieties  are  of  excellent  quality  on  average. 

Dark  air-cured  tobacco 

These tobaccos  are dried  in similar fashion  to light air-cured  tobacco,  except that they  are 
allowed  to undergo  natural  fermentation  before  they  are sold.  They  consist  of the  raw  or 
dark tobaccos, the main  representatives  of which are Paraguay, Badischer  Geudertheimer, 
Havanna,  and  fermented  Burley. 

—>  As  dark  air-cured  tobaccos  are  more  specifically  ingredients  of  dark  cigarettes, 
sales  of  which  are  falling,  the  global  demand  for  dark  air-cured  tobacco  has  been 
dropping  sharply. 

Fire-cured  tobacco 

The  main  representative  of  fire-cured  tobacco  in  the  Community  is  Kentucky  tobacco, 
which  is  produced  and  smoked  primarily  in  Italy  (Tuscan  cigars). 

—-> Global  demand  for  this  variety  has  fallen  off  sharply. 

B. 

1. 

Tobacco  growing  and  use. 

A  demanding,  labour-intensive  crop. 

1.1. 

Tobacco  cropping  calendar. 

Although  tobacco  cultivation  in  Europe  varies  according  to  the  variety  and  country,  the 
main  stages  are  as  follows: 

late  winter: 
seedbed  preparation,  tilling  of  fields 

early  spring: 
soil  preparation  (weeding,  watering,  fertilizing,  etc.). 

spring: 

transplanting  of  seedlings  from  seedbeds  to  fields  (by  hand  or  with  a  planting 
machine). 

spring/summer: 
crop maintenance,  soil  treatment,  watering,  hoeing,  weeding  and  mounding. 

summer: 
harvesting,  basically  by  hand, leaf by  leaf,  by  successive  leaf  stages  starting  from 
the bottom  of the  stem,  and  curing. 

autumn/winter: 
tobacco  sorting,  baling  of  the  harvest,  and  delivery. 

One  of  the  main  features  of  tobacco  cropping  is  that  it  requires  very  meticulous  care. 
After  starting  his  seedlings  in  a  shed  or  under  cover,  the  farmer  will  transplant  the 
seedlings to the field,  where in most cases in Europe the leaves will  be harvested  by  hand, 
one  by  one,  as  they  quickly  reach  maturity.  While  soil  preparation,  weeding  and 
transplanting  are  often  mechanised,  tobacco  is  harvested  and  sorted  basically  by  hand. 

—>  Tobacco  farming  is  very  labour  intensive,  especially  in  the  transplanting  and 
harvesting  phases. 

1.2. 

Employment  in  tobacco  farming. 

There  are  about  135  000  tobacco  farmers  in  the  Community,  of  whom  52%  work  in 
Greece  and  31%  in  Italy.  The  number  of  people  who  earn  their  livings  farming 
tobacco  exceeds  this  figure  of  135  000  producers.  An  estimated  170  000  full-time 
labourers  are  required.  Many  other  jobs  are  also  linked  indirectly  to  tobacco 
farming. 

Tobacco  is  one  of  the  most  labour-intensive  crops  in  the  European  Community.  On 
average, one hectare of tobacco calls for  2 200 hours of work a year per European  tobacco 
farmer  compared  with  147 hours  of  work  for  farmers  in  the  'general  crops'  group. 

For  most  varieties  labour  accounts  for  between  50  and  70%  of  the  production  cost,  with 
the  percentage  varying  with  the  country  and  variety  produced.  Greece's  share  of  the 
employment  figure  exceeds  its  share  of  the  production  figure.  This  is  because  a  large 
share  of  the  tobacco  grown  in  Greece  consists  of  Orr.ital  varieties,  the  cultivation  of 
which  requires  a great amount  of hand  labour (labour  ae  ounts for  85% of  the  production 
costs for  the Basmas variety).  In Italy,  in  contrast,  tobacco  farmers  grow  a large  amount 
of  air-  or  flue-cured  bright  tobaccos,  the  cultivation  of  which  requires  less  manpower 
(labour  accounts  for  45% of  the  production  costs  of  flue-cured  tobacco). 

More  than  80% of this huge  manpower  requirement  is met by  the family  workforce.  The 
entire  family  is  often  involved  in  growing  the  tobacco  and  -  especially  in  Greece  -
harvesting  and  sorting  the  leaves. 

Tobacco  farmers  are  relying  increasingly  on  seasonal  labourers  for  transplanting  and 
harvesting  their  crops. 

—>  Tobacco  farming  is  a major  source  of  employment,  particularly  in  Greece  and, 
to a lesser  extent, Italy.  In some areas  it procures  the entire  population  a livelihood, 
thereby  helping  to  keep  the  rural  population  in  work. 

2. 

Tobacco  keeps  the  farms  on which  it  is grown  alive. 

Farmers  who  grow  tobacco  often  cultivate  several  crops.  Thus,  even  if  tobacco  farming 
is,  if not the only,  at least the main source of  employment  and  income  for  a large  number 
of  the  people  who  grow  this  crop,  many  of  them  also  are  also  engaged  in  sidelines  that 
could  not  in  themselves  keep  these  family  farms  running. 

Raw  tobacco,  which  brought  in  about  ECU  7  700  per  hectare  in  1995  (including 
Community  aid,  at around  ECU  6 380  ha), is one  of the highest-paid  crops  per  hectare in 
Europe,  but  given  the  high  manpower  requirements  the per  capita  income  remains  below 
the  Community  farming  average. 

Tobacco  is  often  the  financial  mainstay  of  the farm,  despite the  small  amount  of  acreage 
planted.  On  average,  tobacco  brings  in  more  than  half  of the  income  of  the  farmers  who 
grow this crop.  What  is more,  it offers  high margins per  hectare and  is a relatively  stable 
source  of  income  for  the  farmer,  since  he  is  assured  of  a  market. 

The  certainty  of  finding  buyers  for  the  crop  that  results  from  the  specific  organization  of 
the tobacco  chain,  with  its tight  links between  tobacco  producers  and  processors,  enables 
some  producers  to  invest  in  other  activities.  For  example,  the  development  of  rural 
tourism  in  certain  regions,  such  as Périgord  in France,  has been  financed  to  a great  extent 
by  the  income  earned  from  tobacco  farming. 

—> Without tobacco, practically  all of the farms  that grow  this  crop would  no  longer 
be  economically  viable. 

C. 

1. 

Tobacco  is  planted  on  small  plots  in Europe,  hampering  mechanisation. 

Small  holdings 

The total  acreage under  tobacco  in Europe  was  158 954  in  1994.  Planting  commitments 
for  1995 totalled  149  578  hectares. 

Tobacco  type 

Average  area 
per  producer 

Flue-cured 

3.87  ha 

Light  air-
cured 

Dark  air-
cured 

0.97  ha 

0.83  ha 

Fire-cured 

1.85  ha 

Sun-cured 

0.67  ha 

Greek  oriental 

0.84  ha 

TOTAL 

1.11  ha 

Member  State 

Average  area 
per  producer 

Greece 

Italy 

0.92  ha 

1.20  ha 

Spain 

2.07  ha 

France 

Germany 

Portugal 

Belgium 

1.05  ha 

1.70  ha 

3.16  ha 

1.18  ha 

The  mean  acreage  under  tobacco  per  producer  is low  (about  1.11 ha).  This  figure  varies 
according to the variety  and country  (the average acreage under Virginia tobacco per  farm 
in  Italy  is  7.88  ha,  compared  with  an  average  of  0.74  ha  under  sun-cured  tobaccos  in 
Greece).  The mean  production  per producer  is about  2.4  tonnes, but varies  by  a factor  of 
from  1 to  10  between  Basmas  and  Virginia  and  is  five  times  higher  in  Spain  than  in 
Greece. 

These  statistics  show  that,  with  the  help  of  public  support,  a  farm  devoted  primarily  to 
tobacco  can  be  viable  with  a very  small  acreage  and  small  production  figure. 

It  must  be  added  that  the  acreage  maintained  by  most  of  the  farmers  practising 
multicropping  greatly  exceeds  the  acreage  reserved  for 
Indeed, 
multicropping  is adopted  to use the land  freed  up by the lengthy  rotation  required  to grow 
tobacco  (the  rotations  can  extend  to up  to  seven  years between  two  tobacco  crops  on  the 
same  soil  so  as  to  prevent  soil  depletion  and  specific  diseases  of  the  tobacco  plant). 

tobacco  alone. 

Moreover,  the main forms  of environmental  pollution from  tobacco farming  are the  effects 
of  excessive  fertilizing,  over-irrigating,  and  unreasonable  pesticide  use. 

10 

—>  As  tobacco  is  generally  grown  on  small  plots,  the  possibilities  for  mechanising 
transplanting  and  harvesting  operations  are limited.  Consequently,  the  mean  yield 
per  hectare  has  increased  but  slightly  over  the  past  ten  years  or  so. 

2. 

Intensive  mechanisation  does  not  seem  feasible  today. 

Certain  phases in the cropping  of the flue-cured  and light  air-cured  varieties  of tobacco  -
notably  harvesting  and  transplanting  -  are  much  more  highly  mechanised  in  the  United 
States than  in Europe.  The use  of  machines  has become  feasible  technically  because  the 
fields  there  are  larger  and  the  varieties  that  are  grown  allow  mechanisation;  it  is 
economically  viable  because  the  product's  added  value  remains  very  high. 

Such  a  degree  of  mechanisation  is  not  a  medium-term  possibility  in  the  European 
Community  because: 

firstly,  production  costs  are  already  very  high  (wages  for  labourers,  purchases  of 
equipment  necessary  for  curing  the  leaves,  e.g.  ovens,  driers,  etc.)  and  the  profits 
would  not  be  sufficient  to  buy  new  machines; 

secondly,  the  small  size  of  European  holdings  (1.11  ha  on  average)  makes  using 
and  recouping  the  cost  of  sophisticated  machinery  more  difficult;  and 

finally,  for  some  varieties,  such  as  Greek  sun-cured  tobaccos,  readiness  for 
harvesting  may  be judged  only  by  examining  the  colour  and  texture  of  the  leaves 
of  each  plant,  which  cannot  be  done  by  machines. 

More  intensive  mechanisation  can  be  envisioned  only  within  the  context  of  more 
cooperative  farms. 

—> So, tobacco  is a very  demanding  crop.  It  requires  a large  amount  of hand  labour 
that  would  be  difficult  to  replace  by  machinery  in  the  medium  term. 

3. 

Employment  in  the  tobacco  processing  sector. 

Tobacco harvesting automatically  creates jobs in the tobacco processing  sector.  The leaves 
have  to be  sorted,  cleaned,  stemmed,  and  finally  baled  for  sale to the  factories.  The  first 
processing  is  a  seasonal  activity  that  is  concentrated  over  a five-month  period. 

The  survival  of  this  activity  in  Europe  is  linked  directly  to  the  continuation  of  tobacco 
farming  in the Community.  The transport  of raw tobacco is extremely  expensive,  making 
its importation  for  processing  in Europe  unprofitable.  A European  processor  cannot  earn 
a  living  by  processing  imported  tobacco  (except  for  cross-border  trade).  Being  close  to 
the  production  site  is  thus  one  of  the  keys  to  the  processor's  success.  As  a  result,  most 
processing plants are located  in the very regions where the tobacco is grown.  Even  though 

11 

a  large  proportion  of  the  processing  is  mechanised,  it  continues  to  require  a large  labour 
force,  especially  for  sorting  the  leaves. 

A  study  carried  out by a private institute1 in  1992 estimated  that  some 30 000 people were 
employed  in  the  first  processing  of  tobacco  in  1990  (this  figure  includes  stable  and 
seasonal jobs). 

—>  Tobacco  processors,  whose  economic  activity  is  directly  dependent  on  tobacco 
farming  in  Europe,  employ  a large  number  of  people. 

4. 

Employment  in  the  tobacco  industry. 

The  above-mentioned  study  set  the  number  of  people  employed  directly  by  the  tobacco 
industry  in  Europe  in  1990  at  83  400.  The  vast  majority  of  these  jobs  are  in  private 
companies  that  are  not  economically  dependent  on  tobacco  farming  in  Europe. 

It  is different  when  the jobs  are  provided  by  firms  which  are  or were  publicly  owned,  as 
is  largely  the  case  in  France,  Italy,  Portugal  and  Spain.  Undertakings  of  this  type,  which 
are  still  publicly  owned  except  in  France,  have,  for  reasons  of  public  service,  tobacco 
buying  policies which  ensure that  a major  proportion  of their  supplies  consists  of  tobacco 
grown  on the territory  of their Member  State. They  are therefore  wedded  to the  existence 
of  Community  subsidies  which  support  local  production. 

Tobacco  industries  are  established  in  practically  all  the  Member  States,  with  some  areas 
of  specialization  as  in  the  case  of  cigar  manufacturing  in  the  Canary  Islands. 

—>The  competitiveness  of  publicly  owned  or  formerly  publicly  owned  tobacco 
manufacturers  depends  directly  on  the  continuation  of  tobacco  growing  in  Europe. 

D. 

A  crop  that  keeps  the  rural  fabric  of  regions  in  difficulty  alive 

While  tobacco  accounts  for  only  0.7%  of  the  Community's  total  gross  agricultural 
production,  which  is  a  rather  small  amount,  tobacco  farming  often  has  major  economic 
importance  locally,  in  the  region  where  the  crop  is  grown.  Tobacco  farming  keeps  the 
rural  fabric  of  the  regions  in  which  it  occurs  alive,  for  this  crop  calls  for  a  large  family 
workforce.  In  this  way,  it  enables  whole  families  to  live  in  rural  areas.  By  helping  to 
keep  the  population  in the  area,  tobacco  generates  considerable  economic  activity  (shops, 
public  services)  and  thus  contributes  to  the  survival  of  areas  threatened  by  ageing  and 
desertification. 

It  is  striking  to notice  that  tobacco  production  is very  largely  concentrated  in  Objective  1 
regions.  It  contributes  very  significantly  to  the  economies  of  Thrace  (the  mountainous 

1 

"L'industrie  du  Tabac  dans  la  Communauté  européenne  1990",  Pieda,  January  1992. 

12 

regions  of  northern  Greece),  Campania  and  Puglia  (southern  Italy),  and  Extremadura 
(Spain). 

All  the  economic  activity  and jobs  generated  by  the  processing  sector  likewise  depend 
directly  on tobacco  farming.  Most  of the time the processing  activities  are located  in  the 
regions where tobacco  is grown.  They  consequently  help give these regions  an  industrial 
framework. 

—>  Small,  low-yield  farms  that  generate  industrial  activity  provide jobs  for  a  large 
workforce  and  prevent  the  exodus  of  numerous  families  in  regions  that  are  often 
characterised  by  developmental  lags.  For  proof  of  this,  note  that  46%  of  the 
Community's  tobacco  producers  are  Greek  farmers  who  grow,  with  their  families, 
very  promising  sun-cured  tobacco  varieties  on  small  farms  averaging  0.8  ha  under 
soil  and  climatic  conditions  that  make  all  other  alternative  crops  very  difficult,  and 
all  of  this  occurs  in  Objective  1  regions.  Community  aid  for  tobacco  farming 
contributes  significantly  to  spatial  planning  in  the  producer  countries. 

m. 

ANALYSIS  OF  THE  QUALITY  OF  EUROPEAN  TOBACCO  AND  ITS 
RANK  IN  WORLD  PRODUCTION 

Tobacco  produced  in Europe  is low-priced  compared  with  the  same varieties  obtained  on 
other  markets,  such  as Zimbabwe  or Malawi.  While  the  processors'  mean  purchase  price 
of  raw  tobacco  produced  in  Europe  is  low  (ECU  0.6  kg  for  the  1995  harvest),  it  should 
be stressed that this was double the figure for the previous crop.  This situation  shows that 
the  average  quality  of  the  leaf  produced  by  certain  Community  varieties  is  very  low.  It 
also  reflects  a global  market  that  is  currently  rising  after  a  period  in  the  doldrums. 

A. 

Quantitative  changes  in  European  tobacco  production. 

Community  production of raw tobacco rose steeply until  1991, then dropped by about 24% 
between  1991  and  1995.  This  trend  is  explained  by  two  main  factors: 

'premium  hunting1,  especially  for  Virginia  and  Badischer  tobacco,  under  the  old 
COM,  that  is,  up  until  1992,  which  led  to  a  boom  in  speculative  and  fraudulent 
tobacco  farming. 

the  setting  up  in  1992  of  the  new  COM  in  the  tobacco  sector,  which  makes  it 
possible  to  limit  production  through  the  institution  of  quotas. 

While  the  overall  tendency  has  been  one  of  falling  production  for  all  of  the  varieties 
produced  in  Europe,  the  major  element  in  Community  production  patterns  is  the 
impressive,  almost  threefold  rise  in  the  production  of  flue-cured  tobacco  in  the  Union 
between  1986 and  1992.  Flue-cured  tobacco  is now the leading  type  of tobacco grown  in 
the Community, where it accounts for 36% of tobacco production.  The most striking jump 

13 

took place in  Greece,  where production  of flue-cured tobacco  increased  72-fold  over  six 
years. 

The developments in flue-cured tobacco production reflect global market trends on the one 
hand  and the  tendency  to  go  for  a speculative  tobacco  crop  in  the  Community  that was 
motivated, until  1992, more by 'premium hunting' than by the real needs of the Community 
market on the  other hand. 

Since  1992  the  production  level  has been  dependent  for  the  most  part  on  the  guarantee 
thresholds.  Thus,  after  peaking  at  430  000  tonnes  in  1991,  European  Union  tobacco 
production  stood  at  328  000  tonnes  in  1994  and rose  slightly  to  333  180  tonnes  for  the 
1995  harvest. 

1996  and  1997 guarantee  thresholds  (in  tonnes) 

I 
Flue  cured 

II 
Light  air 
cured 

III 
Dark  air 
cured 

rv 
Fire  cured 

V 
Sun  cured 

Other 

VI 
Basmas 

VII 
Katerini 

VIII 
K.  Koulak 

TOTAL 

Italy 
Greece 
Spain 
Portugal 
France 
Germany 
Belgium 
Austria 

48  000 
30  700 
29  000 
5  500 
9  000 
3  000 

30 

46  500 
12  400 
2  470 
1  200 
6  600 
4  500 
200 
470 

17 900 

6  900 

10  800 

30 

13 500 
15  700 

26  100 

22  250 

19  550 

12  000 

4  500 
1  700 
100 

132  800 
126  700 
42  300 
6  700 
27  600 
12  000 
1  900 
600 

125  230 

74  340 

47  000 

6  930 

29  200 

26  100 

22  250 

19  550 

350  600 

—>  The Community  raw tobacco  production  picture was  characterised  in  part  by a 
hunt  for  premiums  that  bloated  production  artificially.  To  date,  the  quota  scheme 
that  has  been  set  up  has  held  production  in  check. 

B. 

The  low  internal  prices  show  that  the  quality  of  most  of  the  varieties 
produced  in  the European  Union  is very  low 

Market prices in Europe are not high enough to cover tobacco producers' production  costs. 

The average price at which processors  purchase Community tobacco is extremely low 
(ECU  0.6  kg in  1995).  While the drop  in European  prices was  greatly  influenced  by the 
drop  in world  prices,  the level  they  have  reached  in Europe  is well  below  the  price  of  a 
kilo  of  tobacco  quoted  on the  markets  of Malawi,  Zimbabwe  and  the United  States. 

14 

The low prices of  Community  tobacco are explained  first  of all by the poor  quality  of  the 
tobacco  produced  in  Europe.  Although  the  average  quality  of  tobacco  produced  in 
Europe  is  low,  a  finer  analysis  shows  that  most  of  the  Greek  Oriental  tobaccos 
(Groups VI, VII and VU)  are of good quality  and are sold  at high  prices.  In  contrast, 
good-quality  tobaccos  account  for  but  a  small  share  of  production  in  the  other  groups. 
This  poor  quality  is  particularly  clear  for  most  of  the  Greek  and  Italian  Virginia  and 
Burley  tobacco,  the  production  of  which  depends  on  a  Community  premium  that  is 
sometimes  99  times  the  purchase  price  of  a  kilo  of  tobacco.  The  only  market  for  such 
tobacco  is  as  filler  in  cheap  mixtures. 

This price drop has been offset  by the steady prices of certain Greek Oriental varieties and, 
to  a lesser  extent,  the  good  prices  fetched  by  dark  air-cured  tobacco. 

Analysis  of  the  mean  price  levels  in  the  two  main  producer  countries  shows  that: 

production  in  Greece  is marked  by  a strong point,  namely,  a  specialisation 
in top-of-the-line products (Basmas, Katerini, Kaba Koulak and 36% of sun-
cured  tobacco)  sold  at high  prices that  raise the national  average  above  the 
Community  average and  offset,  to a certain  extent,  the  country's  poor  flue-
cured  tobaccos.  Note  should  be  taken  of  the  fact  that  prices  jumped 
significantly  for  the  1995  harvest  in  Greece  (they  doubled  for  Basmas  and 
quadrupled  for  flue-cured  tobacco). 

in Italy, unlike Greece, there is no particularly  strong variety  fetching  well-
above-average  prices.  On  the  contrary,  90%  of  the  production  of  each 
variety  fetches  less  than  ECU  0.442  kg  and  more  than  75%  of  the 
production  of flue-cured,  light, dark and sun-cured tobacco is sold at a price 
more  or  less  below  ECU  0.088  kg.  Nevertheless,  Italy  produces  good-
quality  flue-cured  tobacco,  especially  in the  north.  The  purchase  prices  of 
this variety  were the only  ones to increase in  1995 and  thus take  advantage 
of  the  improvement  in the world  market,  unlike  the  other  Italian  varieties, 
the  purchase  prices  of  which  remain  extremely  low. 

—>  With  the  exception  of  some  very  specific  varieties  (notably  the  Greek  Oriental 
tobaccos),  the  very  low  purchase  prices  of  raw  tobacco  in  Europe  testify  to  the 
generally  poor  quality  of  Community  tobacco. 

C. 

Production  does  not  cover  the  Community's  qualitative  consumption 
needs. 

Although  the  level  of  Community  tobacco  production  is  high  enough  potentially  to  meet 
close  to half  of  consumption,  the tobacco  that  is  produced  in  the Union  covers  only 23% 
of  our  consumption  needs.  The  rest  is  imported. 

15 

Our production has been unable to react satisfactorily to the far-reaching changes that have 
occurred  in  Community  consumption  patterns over the past fifteen years.  The  erstwhile 
compartmentalised  national  markets that were supplied primarily  by local  producers have 
been shorn of their protection.  At the same time,  consumption has become more uniform 
and shifted towards American-type tobaccos.  Some of the local  producers were unable to 
reconvert  and adapt to  consumers'  changing  tastes.  This is  especially  true in  the  case  of 
Group V tobaccos. 

16 

All varieties of raw tobacco combined, In 
tonnes/year 

Be port* 

200000 

100000 1 

0 

-100000 

-200000 

-300000 

-400000 

-500000 

hports 

Tl • 

•  Balance 

•  Exports 

Imports 

Even  though,  to  meet  its  consumption 
needs,  the  Community  will  in  any  event 
continue to have to import  certain  types of 
tobacco  that  it  cannot  produce  profitably 
on  its  own  soil  in  order  to  meet  internal 
consumption needs, it must be stressed that 
the  volume  of  our  imports  is  well  above 
the volumes of EU production  and exports. 
The  difference  in  value  is  even  clearer: 
the value  of  the tobacco  imported  into  the 
Community 
the 
that 
twice 
is 
Community  tobacco  we  export. 

of 

This  negative  balance  applies  across  the  board  to  all  the  types  of  tobacco  grown  in  the 
Community  except  the  Greek  Oriental  varieties.  The  problem  is particularly  acute  in  the 
case  of  flue-cured  tobacco. 

Destinations of  EU  tobacco  exports,  all  varieties  of 
raw  tobacco  combined,  in  % of  total 

Other countries 
25,2% 

The  main  markets  for  the  poor-
quality  tobacco  are  exports  to  areas 
(CEEC,  North  Africa, 
former 
USSR)  where  living  standards  are 
so  low  that  the  quality  of  the 
tobacco  smoked  is  less  important 
than  its  price.  Attention  must, 
however,  be  drawn 
the  one 
exception,  sun-cured  tobacco.  This 
is  the  only  type  of  tobacco  for 
which  the EU's balance  of trade  (in 
volume)  is  positive. 

to 

Tobacco  benefits  from  an  ad  valorem  import  scheme  bound  under  GATT.  Recent 
developments  in  external  market  protection  have  not  had  a  significant  impact  on  the  EC 
market. 

Tobacco  comes under the general  rule  of reduced  tariff  protection  that was revised  during 
the Uruguay  Round. 

It  should  be  pointed  out  that  under  the  Lomé  Convention  ACP  countries  (for  example, 
Zimbabwe  and  Malawi)  may  export  tobacco  to  Europe  subject  to  a  zero  duty.  Special 
concessions  are granted  under  the  GSP  agreements. 

—>  The poor  quality  of a large  proportion  of the production  and  the growth  and,  in 
certain  cases,  maintenance  of  production  that  is  not  attuned  to  the  Community's 
market  needs  explain  why  the  self-sufficiency  rate  is  so  low. 

17 

D. 

The  world  market. 

The  world  market  for  raw  tobacco  is very  special  in  that  there  is  no  world  market  price 
for  the  commodity  and  the market  is  dominated  by  four  US  and  British  multinationals  -
Philip  Morris,  BAT  Industries, RJ Reynolds  and Rothmans  International. 

Global production  of raw  leaf  tobacco 

Other  regions 
1-1% 

MddleEast 
4,2% 

North America 
13,2% 

Central and South 
America 
9,6% 

European Union 
5,4% 

Eastern Europe and 
former  USSR 
5,0% 

sub-Saharan  Afrika 
6,1% 

China 
35,6% 

Asia  minus China 
19.7% 

China,  with  42%  of  global  production,  is  by  far  the  leading  producer,  followed  by  the 
United  States and India.  The European Union  ranks fifth, with 4.6% of global  production 
in  1994.  On  the  other  hand,  it  is the world's  leading  importer  of  tobacco. 

World and  Chinese production  of raw  leaf tobacco  in  J, 000  tonnes 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995* 

World 

6000.5 

6130 

6710.6 

7200 

7053.1 

7607.8 

8324.9 

8306.1 

6515.3 

7239.3 

China 

1707 

1943 

2620 

2870 

2627.5 

3030.7 

3499 

3451 

2320 

3100 

USDA estimates 

The  major  rise  in  global  production  of  raw  tobacco  that  occurred  from  the  late  eighties 
until  1993, notably  for  flue-cured  and  Burley  tobacco,  reflected  a  spurt  in  production  in 
developing  countries  (China,  India, Brazil, Zimbabwe, Malawi,  Turkey,  etc.) that was not 
absorbed  by  a  proportionate  increase  in  global  consumption.  The  result  was  an  increase 
in  global  reserves  and  depressed  prices  until  1993.  Since  then,  lower  production  levels, 
increased  global  consumption,  and falling  reserves have led to rising  prices,  although  they 
have  not  yet  reached  their  1991  levels. 

1! 

The  trend  in  developing  countries  is  toward  increasing  quality.  In  addition,  with  wages 
accounting  for  the  biggest  share  of  the  cost  of  tobacco  farming,  these  countries  have  an 
obvious advantage.  The improvement in the quality /price ratios of these countries' tobacco 
crops  has  resulted  in  increased  competitiveness  and  gains  in  their  export  market  shares. 
It is  significant  in  this  respect  that  in  1993 Malawi  and  Brazil  overtook  the United  States 
as the world's  leading  exporters  of Burley  and  flue-cured  tobaccos. 

The  overall  trend  is  one  of  stiffer  price  competition  on  the  world  market.  Interestingly, 
the United  States,  which  is  the  second  world  producer,  does  not  seem  to  have  been  able 
to meet the challenge of increased  competition,  despite the excellent quality  of its tobacco. 
US  tobacco  prices  remain  high,  the  United  States'  shares  of  the  export  market  are 
declining, domestic market shares are following  suit, and cheaper imports of flue-cured  and 
Burley  tobaccos  are  increasing,  despite  the  fact  that  these  tobaccos  are  grown  by  US 
farmers. 

To wrap  up, we  must  mention  the  uncertainty  plaguing  the world  market  due  to  Chinese 
tobacco, which  alone  accounts  for  40%  of world  production.  So  far,  the  rise  in  Chinese 
tobacco  production  has  served  above  all  to  meet  the  steadily  rising  domestic  demand. 
However,  the  sharp  increase  in  the  country's  stocks  and  sizable  investments  by  major 
multinationals  could  prompt  China  to  export  more.  Confirmation  of  this  currently 
burgeoning  tendency  would  have  major  impact  on  the  world  market  and  would  be  a 
particularly  serious  threat  for  European  producers,  a  large  share  of  whose  production 
likewise  is  intended  for  use  as  cheap  filler. 

—>  The  world  raw  tobacco  market 
rising 
quality/price  ratios  of  the  tobacco  produced  by  developing  countries,  the  export 
market  shares  of  which  are  increasing  significantly.  China  is  a  major  source  of 
uncertainty;  it could  upset  the world  market  balance seriously,  especially  if it  exports 
more  flue-cured  tobacco. 

is  characterised  by 

the  steadily 

19 

CONCLUSIONS  OF  PARTS  I,  H  AND  m 

The  production  of  some  very  specific  varieties,  such  as  Greek  Oriental  tobaccos, 
aside, we can say that the medium-term  survival  of Community tobacco is  contingent 
on  an  improvement  in  quality. 

If the  quality  of EU tobacco  does not  improve, Europe's  raw tobacco  production  sector  is 
doomed  in  the medium  term. 

Indeed,  the  current  markets  for  our  tobacco  are  temporary.  The  great  demand  from 
the  former  Eastern  Bloc  countries,  which  is  currently  swallowing  up  the  bulk  of  our 
exports, is soon likely to be partially  met by restructured  traditional  local tobacco  farming. 
In  addition,  as living  standards  rise,  these  markets  will  demand  increasing  quality.  This 
demand  for  increasing  quality  underlies  the world  market  as a whole.  This trend  goes 
hand  in hand  with  the growing  popularity  of  cigarettes with  an  American  taste  and,  more 
generally, the shift  towards  ever milder tobaccos and increasingly  strict health  regulations. 

The  EU's  current  specialisation  in  the  production  of  cheap  filler  may  face  stiff 
competition  from  countries with very low production  costs, especially  China, which could 
well  cut Europe  out  of  the  market  if  it  gives  free  rein  to  its  export  impulses. 

Lastly,  we must underscore that the purchase prices that processors pay  in Europe  account 
for  a  mere  20.7%  or  so  of  the  premium  paid  to  growers.  This  figure  shows  well  how 
dependent  the  sector  is  on  public  subsidies.  The  only  way  to  weaken  the  sector's 
dependence  on  subsidies  is  to  improve  the  crop's  value  and  decrease  the  amount  of  the 
premium  paid  out  for  low-priced  tobaccos. 

EU  tobacco  production  can  change 

Without  claiming  to  produce  tobacco  of  the  quality  produced  in Zimbabwe  or the United 
States,  all  of  the  sector's  professionals  agree  that  the  European  Union  has  the  potential 
needed  to  produce  a mid-range  tobacco  that  currently  sells  for  much  higher  prices  on  the 
world  market,  for  example,  more than US$3.00/kg  for  baled  flue-cured  tobacco.  Such  an 
objective  is  all  the  more  attainable  in that  certain  types  of tobacco grown  in Europe,  such 
as the Italian  and  Spanish  sun-cured  and French Burley tobaccos, never  mind  a large  share 
of the Greek  sun-cured  tobaccos, have already  reached  completely  acceptable  prices.  The 
techniques  and  conditions  for  growing  quality  tobacco  thus  do  exist  in  Europe, 
provided  that  official  support  is  maintained. 

20 

IV.  THE  COM'S  FUNCTIONING  AFTER  THE  1992  REFORM 

The  1992  reform  put  an  end  to  a  scheme that  was  highly  vulnerable  to  fraud,  to  the  rise 
in  output  of  dubious  market  quality,  and  to  budget  overruns  that  worsened  in  the  late 
eighties. 

A.  Budget  and  budget  control. 

1.  Budget  expenditure  under  control. 

By  making  it possible to put  a lid  on budget  expenditure,  the  1992 reform  of the  tobacco 
COM put an end to the overruns of the former  COM.  This control  of expenditure has first 
of  all  been  a  direct  consequence  of  the  proper  implementation  of  the  production  quota 
scheme.  Production  (343 000 tonnes in  1993, 328 000 tonnes in  1994 and  333  180 tonnes 
in  1995) has been  consistently  lower than the quotas, which were brought  down  from  370 
000 tonnes  in  1993 to 350 000 tonnes as of  1994 following  a rise in production  under  the 
old  scheme  that  had  peaked  at  430  000  tonnes  in  1991.  Expenditure  has  also been  held 
in  check  by  the  abolition  of the  export  refund  and  intervention  mechanisms. 

Budget  expenditure 

EUR 12 

(in million  ECU) 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

782,2 

917,9 

987,1 

1.138,9 

1.232,1 

1.329,6 

1.233,1 

1.165,1 

1.057,4 

993,0 

—>  The  new  COM  set  up  in  1992  has  stabilised,  even  lowered,  budget  expenditure 
by  reducing  production  and  dismantling  some  expensive  mechanisms. 

2.  Fewer  risks  of  fraud. 

The  risks  of  fraud  have  been  greatly  reduced  by  the  new  COM's  entry  into  effect  due  to 
the  following: 

the  complex  measures  that  facilitated  fraud  in  the  old  COM  have  been 
abolished. 
Indeed,  the  new  COM  no  longer  provides  for  intervention, 
export  refunds,  factoring  in  of  percentages  of  losses  or  reference  moisture 
contents,  nor  any  of  the  expenditure-generating  events  that  formerly 
encouraged  monetary  speculation.  On  the  other  hand,  the  reform  has 
reduced  the  number  of  groups  of  varieties  eligible  for  premiums  from 
thirty-six  to  eight  by  eliminating  an  unverifiable  host  of  varieties  eligible 
for  differentiated  premiums. 

21 

the premium payment procedures have been  simplified:  the premium  may 
henceforward be paid out to the producer directly without going through the 
processor. 

In addition, monitoring procedures have been  strengthened in line with the progress  of the 
reform's  implementation  through 

simplification  of the premium  payment  procedure; 
stepped-up  checks  of  planted  acreage; and 
publication  of  each  producer's  quota  so  as  to  combat  the  phenomenon  of 
fictitious growers who unduly benefit  from  the situation  without  producing 
any  tobacco. 

Nevertheless,  the  setting  up  of  national  supervisory  agencies  in  Italy  and  Greece  that  is 
provided  for  and  encouraged  by  the  reform  has  not  yet  been  achieved  for  a  variety  of 
reasons. 

—>  The  nature  and  scale  of  the  irregularities  ascertained  after  the  reform  are 
completely  different  compared  with  the previous  situation.  Most  of  them  are due  to 
the  drastic  changes  in  the  rules,  the  complexity  of  managing  the  quota  scheme,  and 
lack  of  supervision  (fake  producers). 

B.  The  sector's  economy 

While the reform  has been an undeniable  success from  the budgetary  standpoint,  its results 
with regard to the sector's economy  are more mitigated.  Indeed,  to the extent that the pre-
1992  reform  situation,  which  was  highly  opaque,  can  be  compared  with  the  more 
transparent  post-reform  situation,  the  market  prices  do  not  seem  to  have  improved.  The 
drops  and  sluggishness  in  market  prices  have  been  partly  offset  by  the  change  in  the 
support  scheme  (direct  payment  of  premiums  to  producers)  as  well  as  by  a  few  one-off 
increases  in  the  premiums.  However,  a squeeze  on the  earnings  of  specific  categories  of 
producers,  notably  in  northern  Europe  (France,  Germany  and  Belgium),  has  been  felt. 

1. Market  prices  that  are  much  too  low  in  comparison  with  the  premiums. 

a) Pre-  and post-reform  prices 

It is not  easy  to  compare  the  situations  prior  to  and  after  1992.  Prior  to  the  1992  reform 
the  prices  that  processors  paid  to  producers  already  included  the  premiums  paid  to  these 
same  processors.  The  processors  also  benefited  from  other  types  of  official  aid,  e.g., 
intervention  and  export  refunds.  In  addition  to  such  aid,  a mechanism  for  converting  the 
premium,  which  was  set  in  ecus,  into  the  local  currency  was  used  by  certain  processors 
to reap  huge  speculative  profits  by  gambling  on  the  differences  in  the  exchange  rates  in 
effect  at  the  times  of  the  premium's  payment  and  reimbursement.  Still,  the  above-
mentioned  difficulties  hampering  comparison  of Community  tobacco market  prices  before 

22 

and after  the  1992 reform  cannot  hide the fact  that the market prices  are very  low  and  for 
most  varieties  correspond  to  a  tiny  fraction  of  the  premiums  that  are  paid  out  (here  by 
'premium' we mean the total  of the premium per  se,  the supplementary  amount  granted  in 
the northern  countries, and the aid paid to the producers' groups, to which  99% of tobacco 
growers  belong).  So,  if  we  take  the  1995  harvest,  the  market  prices  (premiums  not 
included)  are  equal  to  only  20.1%  or  so  of  the  premiums  paid. 

While the overall  situation is not satisfactory,  it does not apply uniformly  across the board: 
there  are  noticeable  differences  from  one variety  or  country  to  the  next. 

b) Price/premium  ratio per  variety 

The  lowest  price/premium  ratios  are  posted  by  flue-cured,  light  air-cured  and  sun-cured 
(Group V) tobaccos.  For these types they do not reach  10%.  In contrast, they  consistently 
exceed  39%  for  the  Greek  Oriental  tobaccos.  The  ratios  for  the  brown  and  fire-cured 
tobaccos  are  19 and  24.6%,  respectively. 

This ratio  deserves  a finer analysis.  The  mean  Community  price, which  is dragged  down 
by  a  large  proportion  of  very  low  prices,  must  not  camouflage  a  few  clearly  more 
favourable  situations,  even  concerning  the tobaccos with  the lowest  price/premium  ratios. 
Thus,  the  top-quality  flue-cured  tobaccos  post  market  prices  that  revolve  around  50%» of 
the  premium  and  the  best  qualities  of  light  air-cured  tobacco  posted  market  prices  that 
were  around  75% of  the  premium  in  1993  and  1994  and  above  100% of  the  premium  in 
1995. 

Premiums for  1995 harvest  leaf  tobacco 

I 
Flue  cured 

II 
Light  air  cured 

III 
Dark  air  cured 

IV 
Fire  cured 

V 
Sun  cured 

VI 
Basmas 

VII 
Katerini 

VIII 
Kaba  Koulak 

Ecus/kg 

2,70965 

2,16748 

2,16748 

2,38362 

2,16748 

3,75415 

3,18541 

2,27615 

For  Belgium,  France  and  Germany  supplementary  amounts  ranging  from  ECU  0.1847  to  0.6786  are  allowed  for  Group  I,  II  and  III 
varieties.  These  amounts are equal to half of the difference  between the current year's premium  and the premium  applicable to the  1992 
harvest. 

c) Price/premium  ratio per  country 

It  should  be  pointed  out  that  the  northern  countries  also  benefit  from  an  additional 
premium  that  allows  for  their  higher  production  costs,  which  are  due  to  their  markedly 
higher  labour  costs.  Analysis  of the price/premium  ratio by  country  reveals that  there  are 
roughly  two  groups  of  countries,  the  northern  countries  (France,  Belgium,  Austria  and 
Germany)  and  the  southern  ones,  with  higher  market  prices  in  the  northern  group.  This 
difference  is explained  by  the better  adaptation  of  the  northern  countries'  smaller  growers 
to  the  industry's  needs.  Thus,  the  price/premium  ratio  in  1995  exceeded  20%  for  the 

23 

northern  group  (even  exceeding  30% for  France,  Austria  and Belgium)  but  did  not  reach 
10% for the southern group comprising Italy,  Spain and Portugal. In  Greece the weight  of 
the  more  expensive  Oriental  tobaccos  raised  the  average  price/premium  ratio  to  36.2%, 
which  was  one  of  the  highest  in  the  Community  in  1995. 

d)  Why such an  unsatisfactory ratio? 

This  situation  is  explained  by two  reasons,  one  structural,  the  other  dependent  on  market 
trends. 

First of all, the scheme of relatively  high premiums that are independent  of 
the  quality  and  yield  does  not  provide  any  incentives  for  increasing  the 
quality  of  the  production  and  thus  market  prices  in  a  context  of  relatively 
low  market  prices  overall.  At  the  current  stage,  a  producer  does  better  if 
he  grows  a  low-quality  high-yielding  variety,  such  as  flue-cured  tobacco, 
that  entails  less  cost  and  effort. 

Secondly,  the  global  bear  market  since  1991  has  forced  prices  in  the 
European  Community  down.  The turnaround  in prices  in the  Community, 
which  lag one year behind  world  market prices, was not felt  until  the  1995 
harvest,  which  posted  significant  price  rises,  especially  in  Greece. 

2.  A  processing  industry  in  the  midst  of  restructuring 

Although  less  detailed  information  is available  concerning  the  situation  of  the  processing 
industry  in Europe, it can nevertheless be said that this sector is currently  being  revamped. 
Europe's  processors  no  longer  benefit  from  the  support  granted  under  the  old  scheme 
(intervention  and  export  refunds),  production  has  fallen  by  some  15%, and  even  though 
processors have been  able to pass the lower market prices on to producers,  their  economic 
situation  today  is  precarious. 

Processing  overcapacity,  which  is  particularly  clear  in  certain  regions  and  for  certain 
groups  of  tobacco  varieties,  is  leading  to  and  will  lead  to  even  further  rationalisation  of 
the industry's capacity.  This rationalisation,  which has begun without too much  strife,  has 
also  made  it  possible  to  eliminate  some  rather  parasitic  undertakings.  This  can  only  be 
beneficial  for  the  sector's  overall  economy. 

The  ongoing  rationalisation  of  industrial  capacity  may  enable  tobacco  growers  to  adapt 
better  to  market  demand.  It  may  also lower  average  processing  costs, which  should  have 
favourable  repercussions  on  the  prices  paid  to  producers. 

3.  The  processors  continue  to be  solidly  implanted  in  the European  Community 

As  far  as  the  processors  are  concerned,  the  large  multinationals'  direct  dependence  on 
changes  in  Community  tobacco  production  is weak,  for  their  supply  strategies  are  global. 
However,  having  stable  qualities  of  tobacco  at  competitive  prices  is  in  their  interest,  too. 
Community  production  can  interest  them  in this  respect.  That  being  said,  their  presence 

24 

in the Community  is marked by  stability, whether with regard to purchases  of  Community 
tobacco  or  industrial  production. 

In  contrast,  Europe's  modern  and  old  State-owned  factories  are  in  the  throes  of  a  more 
delicate  process  of  privatisation  and  severe  rationalisation  of  production  facilities. 

—>  Except  for  some  very  specific  tobaccos,  market  prices  are  very  low  compared 
with  the  premiums  being  paid  out. 

C.  Management 

1. The  current  scheme  is characterised  by  a certain  inflexibility 

A  quota  scheme  is  always  characterised  by  a  certain  inflexibility  and  administrative 
complexity.  The  COM  in  tobacco  is  no  exception  to  the  rule.  The  possibilities  for 
transferring  quotas  are  very  limited.  To  protect  traditional  producers  -  a  praiseworthy 
objective  in  itself  -  all  definitive  transfers  of  quotas  are  practically  ruled  out  unless  the 
grower  ceases  operation.  This  being  so,  measures  were  adopted  in  1996  to  allow 
temporary,  annual  transfers  of  the  unused  portions  of  certified  quotas. 

This  inflexibility  is  also  seen  in  the  varietal  group  quotas'  failure  to  adapt  to  changing 
demand  and  meteorological  conditions.  While  setting  quotas  for  one year  or  more  gives 
growers  a  stable  framework,  changes  in  demand  and  the  weather  do  not  heed 
administrative  orders.  This  simple  truth  has  moreover  led  the  Community  to  adopt 
arrangements for transferring  quotas between groups of varieties and production  carry-over 
in  order  to  cope  with  such  above-mentioned  fluctuations. 

2.  The  scheme  is  also  somewhat  complex 

The  complexity  of  the  scheme's  administration  is  linked  above  all  to  the  calculation  and 
distribution  of individual  quotas and  registration  of  cultivation  contracts.  Despite  the  fact 
that  growers  are  strongly  encouraged  to  band  together,  the  quotas  are  still  distributed  to 
individual  growers.  Now, this multiplies the various administrative operations required  by 
several  hundred. 

The  individual  quotas  are  calculated  each  year  on  the  basis  of  actual  deliveries  over  the 
previous three years.  In addition  to these thousands  of annual  operations,  the unused  part 
of each quota certificate  must be sent back to the respective national  administration,  which 
then  proceeds  with  a  second  distribution  of  the  available  quantities.  It  must  be  stressed 
that  each  distribution  of  quota  certificates  is  followed  by  a  period  for  concluding  the 
cultivation  contracts,  which  must  obligatorily  be  registered. 

Up  until  the  1996  harvest  the  complexity  of  these  administrative  procedures  was 
exacerbated  by  the  existence  of  cultivation  certificates,  which  replaced  quota  certificates 
in  the  case  of  tobacco  producing  and  processing  cooperatives. 

25 

J F ~ ' j r-

All  this has been  compounded  by  the normal  difficulties  of  transition  from  the  old  to  the 
new  scheme,  the  exclusion  of  1992  as  a  reference  year  for  calculating  quotas,  and  the 
taking  of  new  producers  into  account. 

The  current  quota  system  is too  restrictive,  for 

it  does  not  facilitate  adapting  production  to  the  market's  needs,  and 
given  its  complexity,  it  is  cumbersome  for  the  administrations  to  manage. 

3.  Transitional  period 

For  a  transitional  period  running  from  the  1992  reform  to  the  end  of  1994  it  was  still 
possible to sell tobacco grown prior to the  1993 crop to intervention  agencies or be eligible 
for  export  refunds.  As this  transitional  period  has  come  to  a  close,  only  a  small  amount 
of  tobacco  remains  in the  intervention  stock.  It  should  be  sold  in  the  course  of the  1996 
fiscal  year. 

4.  Reconversion  programmes 

Growers  of the Mavra  and  Tsebelia  varieties  in  Greece and  the Forchheimer  Havanna  lie 
variety  and  Geudertheimer  hybrids in Italy  have been given  the possibility  of  switching  to 
other  varieties  or  agricultural  crops.  A particularly  large  number  of  growers  have  signed 
up  for  these programmes  in  Greece.  Given  the market problems  plaguing  these varieties, 
the  reconversion  programmes  must  nonetheless  be  backed  up  by  appropriate  measures 
described  later  in  this  report. 

26 

CONCLUSIONS  OF  PART  IV 

First  of  all  the  analysis  shows  that  the  overall  situation  is  positive.  The  reformed  COM 
has  worked  well,  budget  expenditure  has  been  held  in  check,  frauds  limited  to  a  great 
extent,  and, despite its complexity, the administrations involved  have managed,  albeit with 
delays,  to  overcome  the  various  barriers  to  its  implementation. 

Secondly,  weaknesses  calling  for  appropriate  corrective  measures  have  emerged.  These 
are,  firstly,  the  low  market  price-to-premium  ratio,  which  is  liable  to  jeopardise  the 
efficacy  of  public  support  for  growers;  secondly,  the  scheme's  lack  of  flexibility,  making 
access  to  the  sector,  transfers  of  production  quotas  and  adaptation  of  the  guarantee 
thresholds  to  market  demand  difficult;  and  thirdly,  the  complexity  of  its  management, 
given  the  host  of  operations  involved  in  calculating  and  distributing  individual  quotas. 

If  official  support  for  producers  is  maintained,  the  future  will  hinge  on  improving  the 
sector's  economic  situation  by  raising  the  quality  and  consequently  the  market  prices  of 
the  tobacco  that  is  produced,  by  rendering  management  more  flexible  by  allowing 
definitive  transfers  of  quotas  and  broadening  the  possibilities  for  transferring  guarantee 
thresholds between varieties, and by simplifying  the administrative procedures so as to  free 
the  operators  and  national  administrations  from  excessive  red  tape. 

27 

V. 

PROPOSALS  FOR  THE FUTURE  OF  THE  COM  IN  TOBACCO 

A.  The  Commission's  choices 

—>  A prior  political  decision 

Tobacco  farming  is  no  different  from  any  other  agricultural  activity.  However,  one  has 
to  admit  that  tobacco  consumption  has  harmful  effects  on  human  health.  The  fifteen 
Member  States of the European Union  are in the forefront  of the countries that  encourage 
smoking  prevention  campaigns  and  restrict  the  advertising  of  tobacco  products. 

Article  129  of  the  Treaty  provides  that  health  protection  requirements  shall  form  a 
constituent  part  of  the  Community's  other  policies. 

The anti-smoking campaigns  sometimes elicit a certain amount of puzzlement over the fact 
that  the  Community  is  continuing  to  help  tobacco  producers  While  participating  in  the 
promotion  of  anti-smoking  measures.  The  Commission  has  always  stressed  the  fact  that 
aid to tobacco growers has no impact on the level of tobacco consumption  in the European 
Union  and  the  'only'  real  effect  of  ending  support  for  tobacco  growers  would  be  an 
increase  in  tobacco  imports,  as virtually  the  entire  EU  tobacco  crop  would  be  doomed  if 
support  were  withdrawn. 

The  great  majority  of  these  tobacco  farmers  live  in  disadvantaged  rural  areas  where 
alternatives  to  traditional  occupations  are  rare.  The  reason  for  organizing  the  tobacco 
market  is  to  support  these  farmers.  On  no  account  must  it  be  considered  support  for 
smoking.  While  this  distinction  has  clearly  been  made  by  the  Commission,  it  is  no  less 
true that certain  segments of public opinion  and political  circles have a negative  perception 
of  this  Community  aid. 

—>  involving  a  choice  between  two  scenarios 

First  scenario 

In  this  scenario,  the  decision  would  be  gradually  to  disengage  the  Community  from  this 
sector.  Specific  measures  would  then  have to be  taken  to  ease  the  growers'  switching  to 
other activities or ceasing their activity  and to lessen the impact  of such  disengagement  on 
the  processing  industry  farther  down  the  chain  and  on  the  local  economies  in  general. 

Commission  proposal: 

Since the  decision  is to  continue  supporting  tobacco  farmers,  then  the future  of the  COM 
in  tobacco  must  be  decided  on  the  basis  of  past  experience  and  the  Community's  market 
forecasts. 

Sticking  to the status  quo  must  be  rejected,  for,  despite the  overall  positive  effects  of  the 
1992  reform,  official  funds  still  are  not  used  very  effectively  if  one  considers  the  mean 

value  of Community  tobacco.  Measures  that  include  a  share  of  continuity  and  a  share  of 
reform  so as to shore up the positive aspects of the  1992 reform  and correct its weaknesses 
are  justified. 

The  aim  should  be  to  enhance  the  sector's  economic  productivity  by  increasing  the  final 
value of the output.  This calls for  higher-quality  as demanded  by the market.  This is the 
only  way  to  increase  both  growers'  incomes  and  the  effectiveness  of  official  aid  for  the 
sector  without  budget  overruns. 

It  is  also  necessary  to  make  it  easier  to  leave  the  sector  voluntarily. 

B.  Scenarios  for  the  future 

1.  Scenario  1 -  Gradual  disengagement 

To analyse the  consequences  of the Community's  gradual  disengagement  from  the  market 
it  is  necessary  both  to  assess  the  economic  and  social  impact  of  such  a  measure  and  to 
study  the possible alternatives.  In addition,  it must be  stressed  that this would  be the  first 
time  the  Community  dismantled  a COM. 

a) Social  and  economic  impact. 

Cutting  off  aid  to  the  growers,  whose  incomes  as  a  rule  are  highly  dependent  on  the 
Community's  budget,  would  doom  most  of  the  Community's  tobacco  production  to 
disappear  in  the  short  run,  with  the  possible  exception  of  a  few  pockets  of  high-value 
tobacco  (Oriental  varieties)  in  northern  Greece.  Downstream,  the  processing  industry 
would  also  be  doomed,  for  processing  imported  leaf  tobacco  in  the  Community  is  not 
economic.  As  a reminder,  some  135  000 jobs  in  tobacco  production  and  18 000 jobs  in 
the  processing  sector  (likewise  concentrated  in  the  tobacco-growing  regions)  would  be 
affected.  To this must be added the impact of losing the indirect  economic effects  of these 
activities.  On  the  other  hand,  a  segment  of  the  manufacturing  industry  might  be  less 
affected.  The multinationals would  be able to change their  global  sources of raw  material 
without too much  difficulty  and continue operating in the Community.  In contrast,  the old 
State  undertakings  (Monopoli  di  Stato,  SEITA,  Tabacalera  and  Tabaqueira)  would  be 
affected,  for  they  traditionally  get a large proportion  of their  supplies from  their  domestic 
markets. 

The first question to ask is therefore  what would be the alternatives to tobacco farming  and 
processing. 

b) Alternatives  to  tobacco  farming. 

First  of  all,  one  must  realise  that,  as  a rule,  tobacco  is  grown  on  soil  that  is  suitable  for 
growing  other  crops.  The  Greek  Oriental  (and,  to  a  lesser  extent,  Italian  semi-Oriental) 
varieties are exceptions to this rule, for they are grown  on poorer,  dry, hillside plots  where 
growing  other  crops  is  riskier. 

29 

While  there  are  no  purely  agronomic  obstacles  to  reorienting  tobacco  farms  toward 
different  crops,  such  conversion  raises  problems  of  economic  viability. 

Today,  converting  some  150 000  ha  of a highly  labour-intensive  crop  that  generates  high 
gross  profit  margins  per  hectare  without  endangering  the  economic  equilibria  of  the 
replacement  crops,  especially  of market garden  crops, which  have  similar  agricultural  and 
labour  requirements  to  those  of  tobacco,  does  not  appear  to  be  feasible. 

There  are  no  real  alternative  crops  which  would  make  such  small  farms  economically 
viable. 

Switching  to  other  crops,  such  as  field  crops,  or  livestock  would  also  come  up  against 
market  equilibria  or  quantitative  restrictions  on  Community  support  as  in  the  milk, 
livestock  and  field  crop  sectors.  Moreover,  as  field  crops  demand  much  less  manpower, 
they  would  never  be  able  to  absorb  the  labour  surpluses  generated  by  the  cessation  of 
tobacco  farming.  Unemployment  would  consequently  rise. 

Forestry would  offer  some advantages from  this point of view, for  market forecasts  are for 
demand  exceeding  supply.  However,  given  the  small  size  and  high  labour-intensiveness 
of  the  typical  tobacco  farm,  afforestation  would  be  economically  inefficient  and  in  any 
event  unable  to  absorb  the  lost jobs. 

Consequently,  wholesale compulsory  conversion would entail  more far-reaching  and  faster 
adjustment  than  voluntary  departure  and  therefore  any  real  alternative  to tobacco  farming 
would  have  to  be  sought  outside  agriculture  in  the  broad  sense,  that  is,  in  other  areas  of 
economic  activity.  The  same  applies  to  the  processing  industry,  which  would  have  to 
undergo  radical  conversion. 

This  assessment  highlights  the  need  for  well-integrated  accompanying  measures  if 
to  be  avoided. 
economic  depression  ' and 
Consequently, 
the  Community's  disengagement  should  be  accompanied,  during  a 
transitional  period,  by  support measures for  the economic conversion  of tobacco farms  and 
processing. 

its  possible  social  consequences  are 

Once the problem  is stated  in these terms, the more dynamic  and  economically  developed 
the  tobacco-farming  areas  are,  the  easier  their  economic  conversion.  Unfortunately,  this 
is but  rarely  the  case  - quite  the  contrary  - for  some  80% of  production  is  in  Objective  1 
regions and often  the least developed  of the Objective  1  group (Thrace and Central  Greece, 
Puglia  and  Campania  in  Italy,  and  Extremadura  and  Andalusia  in  Spain). 

The  Commission  rejected  this  scenario  for  the  following  reasons: 

Community  disengagement from  the sector would  have no effect  on tobacco 
consumption; 
the  economic  and  social  consequences  would  be  likely  to  be  very  serious 
in  regions  already  experiencing  major  economic  problems; 
the  Community  market  organization  might  be  replaced  by  national  ones. 

30 

J Fw ,j r-

2.  Other  rejected  scenarios 

The  above  analysis  of  the  tobacco  sector  and  functioning  of  the  COM  shows  that  the 
scheme set up after the  1992 reform  can be given an overall  positive assessment,  especially 
as  regards  controlling  the budget,  creating  a  sounder  market,  and  combating  fraud.  On 
the other hand,  economic  incentives to encourage the production  of higher-value  varieties 
more in  line with  the  market's  needs  and  ways to render  the  COM's  management  simpler 
and  more  flexible  must  be  instituted. 

a)  Alternatives  to  the  current  support  model 

(i) 

The  first  alternative  would  be  to  replace  the  production  quota  and  aid 
system  with  a  system  of  aid  per  hectare. 

Such  a system  applied  to the tobacco  sector would  be very  difficult  to monitor  and  would 
be  likely  to  attract  "premium  hunters". 

The  introduction  of  a  per-hectare  aid  scheme  would  require  accurate  checking  of  areas, 
which  would  be  very  difficult  to  achieve  on  account  of  the  small  areas  involved  (1.1  ha 
on average  per holding,  with  much  smaller  plots), the number  of holdings  (over  135  000) 
and  the  rotation  between  plots. 

Community  aid  accounts on average for  80%» of growers' income from  tobacco  (over 95% 
in the case of  some varieties in some Member  States). In these circumstances  a per hectare 
aid  scheme  carries  a  real  risk  that  growers  will  plant tobacco  without  actually  harvesting 
it.  In  order  to  deal  with  this  problem  it would  be  necessary  to  keep  a check  on  deliveries 
in  addition  to  accurately  monitoring  areas, which  would  make the  scheme  more  complex 
and  cumbersome  to  administer. 

(ii) 

The other alternative  model  would  consist in paving tobacco  farmers  direct 
income  support  equivalent  to their  mean  net  income. 

According to the Court of Auditors, which  suggested  such a scheme in its  1994 report,  this 
would  halve  the  current  budget  for  the  sector. 

The Court calculated  that if every  farmer  who pulled  out  of tobacco farming  had  received 
over  the  three-year  period  running  from  1988  through  1990  compensatory  aid  from  the 
Community  instead of the above-mentioned  mean net income per hectare, i.e., ECU  2 655, 
the total  cost for the Community  budget would  have been ECU 595 m and the  Community 
could  have thus  saved ECU  520 m under this  scheme.  In  addition,  it contended  that  such 
a scheme would  have had the merit  of cutting tobacco production,  which would  have been 
in  line  with  the  Community's  efforts  to  reduce  smoking  for  health  reasons. 

31 

There  are,  however,  two  major  flaws  in  this  analysis: 

First  of  all,  the  Court  of  Auditors  made  a  methodological  mistake  in 
calculating the mean net incomes.  This mistake is very  simple but has huge 
consequences,  for  the  Court  did  not  weight  the FADN's  income  data.  As 
a  result,  the  lowest  income  figures  in two  small  producer  countries  totally 
skewed  the mean.  Tobacco growers' mean  net  income over the three years 
analysed by the Court was actually  ECU 4 275 ha, not ECU 2 655 ha.  The 
compensatory  aid would  accordingly total ECU 954 m, which is fairly  close 
to  the  current  expenditure. 

Next,  claiming,  as  the  Court  does  in  its  1994  report,  that  the  reduction  in 
Community  tobacco  production  would  make  a  positive  contribution  to  the 
war  on  smoking  is  tantamount  to  saying  that  imports  from  the  rest  of  the 
world  would  not  fill  the  gap  or  that  the  level  of  smoking  depends  on  the 
place  where  tobacco  is  grown.  Such  claims  do  not  appear  to  be  founded. 
The true  consequences  of  a drop  in  Community  tobacco  production  would 
be an increase in imports from  outside the EU and  a negative impact  on the 
economies  of  the EU's  tobacco-growing  regions. 

In  addition,  paying direct income support,  as the Court  suggests, to  farmers 
who  gave  up  growing  tobacco  would  create  an  extraordinary  situation  in 
which farmers would be financed  by public funds  provided that they  did not 
farm.  This  would  go  well  beyond  set-aside  payments.  The  social  and 
political  acceptability  of  such  a  situation  is  doubtful. 

(iii) 

Another  alternative  would  be  to  lower  the  premiums  significantly  to 
encourage farmers  to improve the quality  of their crops, as they would  then 
be  much  moFe dependent  on  market  prices. 

In  this  case,  however,  the  incomes  of  a  large  number  of  producers  would 
plummet,  forcing  many  of  them  out  of  the  sector  without  any  other 
compensation,  for  they  would  not  be  able  to  increase  the  value  of  their 
crops  and  would  find  themselves  much  worse  off  financially.  This  would 
be even truer  in some regions that are currently  producing very  low  market 
value  varieties  and  would  not  have  any  support  to  switch  to  better  quality 
tobaccos.  This  alternative  would  reduce  support  for  the  sector  along  two 
avenues,  first  by  lowering  the  premiums,  then  by  reducing  the  number  of 
growers. 

—>  The  solutions  examined  by  the  Court  of  Auditors  in  its  1994  report  are  not 
realistic,  lasting  responses  to  the  economic  and  social  problems  confronting  the 
tobacco-growing  sector  in  Europe. 

32 

(iv) 

Retaining  the  scheme  in  its  present  form  must  clearly  be  ruled  out  for  the 
reasons  set  out  in  the  conclusions  of Part  IV. 

Firstly,  the  low  market  price-to-premium  ratio  is  liable  to  jeopardise  the 
efficacy  of public  support  for  growers;  secondly,  the  scheme's  inflexibility 
makes access to the sector,  transfers  of production  quotas and adaptation  of 
the  guarantee  thresholds  to  market  demand  difficult;  and  thirdly,  the 
complexity  of  its  management  must  be  borne  in  mind,  given  the  host  of 
operations  involved  in  calculating  and  distributing  individual  quotas. 

b)  Scenario  2  -  Commission  proposals  :  fundamental  reform  of  the  sector 

The continuation  of  support for tobacco farmers  should be based  on the current COM with 
some  substantial  improvements.  The  modifications  required  would,  however,  go  further 
than  the arrangements  provided  for  in  the basic regulation  and  which  concerned  Titles I -
Premium  System  and  II  -  System  of Production  Limitation. 

(1) Modifying  the  premium  scheme  to improve the  quality  of the tobacco  produced  -

a  major  challenge 

(a) Why  change  the  current  scheme  of  premiums? 

The changes made to the way the premium  system  currently  operates must be  equal  to the 
criticism  levied  against  it. 

The main  criticism  is that  the Community  is financing a low-quality  product  - in  the  case 
of  the  bulk  of  the  tobacco  -  for  which  there  is  no  true  demand  inside  the  Community. 
Consequently,  financing  tobacco farming  is a waste of public monies.  While this criticism 
is  not  justified  for  certain  products  (Greek  Oriental  tobaccos),  it  is  founded,  on  the 
contrary,  where  a  good  proportion  of  the  tobacco  produced  is  of  very  low  quality  and 
value.  Having  said  this,  we  must  nevertheless  point  out  that  there  is  currently  a  market 
for  even this tobacco,  as proven by exports without refunds  to the CEEC and North  Africa 
in  1993,  1994  and  1995. 

Analysis of the current  situation  shows that measures must be taken to improve the quality 
and  value  of  the  tobacco  produced  in  Europe  so  as  better  to  meet  the  internal  market's 
needs  and  increase  the  sector's  added  value.  Such  an  approach  is  all  the  more  necessary 
as  the  current  outlets  for  the  Community's  low-quality  tobacco  do  not  have  long-term 
prospects, consumers  are becoming  fussier,  and growers will  face  suffer  competition  from 
the  low-end  tobaccos  produced  by  less  developed  countries. 

As  already  explained  in  this  report,  paying  a  set  price  regardless  of  the  tobacco's  quality 
in  a  context  in  which  the  other  part  of  the  producer's  earnings,  i.e.,  the  market  price,  is 
generally  marginal  compared  with  the  premium,  does  not  create  any  incentives  to  grow 
tobacco  with  a better  quality/price  ratio. 

33 

Thus, while improving the quality of the tobacco produced is the main aim of the proposed 
amendments,  it  also  presents  us  with  a  major  challenge.  Old  habits  die  hard,  and  the 
changes  sought  can  only  come  about  gradually. 

—>  The  proposed  changes  are  intended  to  improve  the  economic  situation  of  the 
sector,  to  render  the  quota  scheme  more  flexible  and  simplify  its  administrative 
management,  to  step  up  supervision,  to  take  account  of  environmental  protection, 
and,  finally,  to  organize  a system  for  getting  out  of  the  sector. 

We  must  stress  in  particular  that  the  success  of  these  proposals  is  an  indispensable 
condition  for  continuing  to  provide  support  for  tobacco  growers. 

(b)  Proposal:  Modulate  Community  aid  according  to  tobacco  quality  so  as  to 
encourage  better  quality 

(bl)  The  principle  of  modulated  Community  aid 

The  Council  of  Ministers,  being  aware  of  this  situation,  asked  the  Commission  to  study 
the possibility  of  modulating  support  for  tobacco  according  to quality  (conclusions  of  the 
June  1995  Council). 

The  Court  of  Auditors  had  already  raised  this  question,  which  is  the  key  to  the  good 
functioning  of  the  sector's  economy,  in  its  1983  and  1987  reports,  claiming  that  if  the 
premiums  varied  according  to  the  tobacco's  quality,  growers  and  processors  would  have 
an  incentive  to  raise  quality.  Given  the  advantages  that  might  be  gained  from 
implementing  differentiated,  quality-dependent  premiums,  the  Court  of  Auditors  felt  that 
the  generalised  or  selective  institution  of  such  a  system  deserved  serious  examination. 

Modulating  support  means linking  the payment  of part of the premium  to the value  of  the 
tobacco  produced.  The  modulation  system  would  thus  comprise  a  fixed  portion  and  a 
variable  portion  so as to combine the social  function  of Community  aid, which  is to give 
tobacco farmers  a minimum  income,  and its economic function,  which  is to encourage  the 
production  of quality  tobacco better  suited to the internal  market's needs.  Any  modulation 
that  linked  part  of  the premium  to  subjective  assessment  of the tobacco's  quality  (experts' 
appraisals  or  administrative  classification)  must  be ruled  out,  for  such  a system  would  be 
extremely  complex  and  very  difficult  to  oversee.  The  Commission  thus  proposes 
modulating  the  Community  aid  according  to  the  raw  tobacco's  purchase  price,  since 
this  is the  only  objective  datum  in  our  possession  that  indicates  the  product's  quality. 

—>  What  part  of  the  support  should  be  modulated? 

The variable  portion  of the  premium  should  be  larger  for  the varieties that  currently  have 
low  price/premium  ratios.  Consequently,  the  modulation  would  not  necessarily  be  of  the 
same  magnitude  for  all  the  groups  of  varieties.  The  amount  of  the  fixed  portion  of  the 
premium  should  be  close to the old  intervention  price in  the case of low-quality  tobaccos, 

34 

as  this  amount  has  already  proven  valid  as  a  minimum  income.  The  aim  is  to  avoid 
encouraging  the  production  of  low-quality  tobacco.  The  combination  of  all  these  criteria 
leads us to propose  a modulatable  fraction  ranging from  35 to 45% of the total  amount  of 
support,  compared  with  today's  ineffectual  9 to  10%  figure. 

(b2)  Implementation:  modulation  through  increasing  aid  to  producers'  groups 

The  instrument  would  consist  of  the  specific  aid  instituted  under  the  current  COM, 
whereby  a  supplemental  premium  is  paid  by  the  producers'  group  to  its  members.  The 
proposal  consists in increasing  this aid, which  must  henceforward  be paid  by the group  to 
its  members  as  a  function  of  the  prices  at  which  their  individual  crops  were  sold.  The 
increase  in  this  specific  aid  would  be  financed  by  a  decrease  in  the  premium  set  in 
ECU/kg  and  paid  out  regardless  of  the  quality  of  the  product. 

This  solution  nevertheless  has various  specific  advantages  and  drawbacks: 

(b3)  Advantages/disadvantages  of  modulation  via  aid  to  producers'  groups 

It  must  be  pointed  out  right  from  the  start  that  the  only  risks  of  fraud  presented  by  the 
modulation  system  concern  the  assignment  of the  Community  aid  amongst  the  producers 
and  would  not  have  any  impact  on  the  amount  of  the  budget  expenditure.  While  it  may 
be  tempting  for  a producer,  in  league with  a processor,  to  raise  the  purchase  price  of  his 
crop  artificially  in order to collect  a larger premium,  such fraud  would  deflect  Community 
aid  away  from  other  producers.  This type  of behaviour  would  thus  constitute  a zero  sum 
game  in  which  the  producers  would  be  cheating  each  other.  The  system's  proper 
implementation  thus  depends  on  the veracity  of  the  prices  as well  as the  administration's 
and  producers'  abilities  to  check  them. 

Advantages 
This  system  has the  advantage  of being  easier  to check.  Indeed,  each  producers'  group  is 
responsible  for  paying  the  specific  aid  out  to  each  of  its  members  and  based  on  the 
average  market  price  obtained  by  each  member  (and  for  each  variety)  compared  with  the 
mean  of  the  prices  obtained  by  the  other  members.  This  market  price  is  already  known 
today,  for  it  results  from  the  procedure  of  delivering  and  putting  the  tobacco  under 
supervision.  Moreover,  as  all  payments  of  aid  and  market  prices  must  obligatorily  be 
effected  by  bank  or  postal  transfer,  it  is  easy  to  check  the  facts.  The  only  way  to  get 
around the system  is for  all the group's members and the processor  to engage in an  entente 
under  which  the  quality  of  all  the  producers'  deliveries  would  be  said  to  be  identical. 

In terms of management,  this alternative  obviously  has the advantage  of being  simpler  for 
the administration  to manage, because it would be up to each  producers'  group  to  perform 
the  calculations  necessary  for  modulating  the  specific  aid. 

Simpler  to set up:  the  specific  aid  is already  part  of the current  scheme,  in  which  it  is set 
at  10% of  the  premium. 

Disadvantages 

35 

Experience  has  shown  that  the  specific  aid  as  it  currently  exists  has  failed  to  improve 
quality.  It should already  be paying for quality,  as this is the  purpose  of between  90  and 
100% of the specific  aid.  However,  we  are forced to acknowledge  that no positive  effect 
on  quality  has  emerged.  The  reason  is  that the  current  specific  aid  contains  two  flaws: 
the amount of the aid is too small truly to encourage higher-grade varieties, and the criteria 
for valuing  quality  are too  lax,  making  it possible  to  pay  well  for  tobacco  of  too  low  a 
quality,  by  changing both the amount and the aid allocation  criteria, the proposed  reform 
would  correct the weaknesses  in  the current  system. 

This system  compares  the value of the tobacco produced  within  a given group  of  growers 
only.  So,  the  amount  of  the  specific  aid  received  by  each  producer  will  depend  on  the 
mean price calculated  for  his own group.  Consequently,  a grower who produces a cheaper 
tobacco  than  that  of  another  grower  belonging  to  another  group  could  have  higher  total 
earnings. 

However,  there  are ways  to  increase  the  efficacy  of  this  system.  They  consist  in  setting 
stricter  conditions  for  recognising  growers' groups by  increasing  the minimum  number  of 
members  and  the  minimum  quota  amounts  for  eligibility. 

(b4)  Setting  up  this  modulation  does  not  entail  changing  the  current  levels 

of  premiums  and  quotas 

We  propose  not  changing  the  premiums'  current  levels,  for  experience  shows  that  the 
current  distribution  of the  premiums  by  group  of varieties  is equitable  on the whole.  The 
varieties  for  which  the  demand  is  highest  are  being  produced  and  no  significant 
overproduction  has  been  ascertained.  On  the  contrary,  only  some  95%  of  the  350  000-
tonne  quota  is  used. 

The volume of the quota can also remain at its current  level.  The most important  aim, 
without  spilling  over  the  current  budget,  is  to  increase  the  economic  efficacy  of  the 
Community  aid  by  modulating  the premium.  The  apportionment  of the  quota  by  country 
and  by  group  of  varieties  is generally  correct. 

However,  something must be done to boost the quotas for  the best varieties, i.e., those that 
have sure markets  and  fetch  high market prices, to the detriment  of the quotas for  varieties 
that  are  hard  to  dispose  of  and  have  intolerably  low  market  prices. 
In  particular,  the 
volume  of  the  quota  for  Group  V  -  sun-cured  -  tobaccos  must  be  decreased  and  the 
corresponding  quantities  transferred  to  other  groups,  such  as  Groups  VI  and  VII,  in 
observance  of  the  principle  of  budget  neutrality. 

(2)  Making  it  easier  to  leave  the  sector  voluntarily 

The  Commission  has  ruled  out  compulsory,  wholesale  disengagement.  Since  the  real 
opportunities  for  conversion  are limited,  this scenario, which  would  involve  finding  some 
190 000 jobs  in  other  sectors,  could  only  be  implemented  at  extremely  high  social  cost. 

36 

On  the  other  hand,  it  is  possible  to  assist  the  conversion  of  tobacco  growers  on  an 
individual, voluntary  basis, or even to organize the conversion  of  all  producers  on  a local 
scale. 

In addition, the fundamental  reform,  and in particular the modulation  of the premium,  will 
face  the  sector  with  a  major  challenge  resulting  in  the  consolidation  of  holdings  and 
inciting  growers  who  are  unable  to  improve  the  quality  of  their  production  to  leave  the 
sector. 

In order to facilitate  conversion,  it would be appropriate to adopt  accompanying  measures 
such  as  local  development  aid  and  a  permanent  scheme  for  buying  back  quotas  with  a 
corresponding  reduction  in  the  size  of  the  overall  quota. 

Possible  conversion  measures. 
The  key  element  of  these  accompanying  measures  should  be  the  promotion  of  strategic 
local  development plans that reorient growers towards other activities.  These plans should 
be  drawn  up  at  the  level  closest  to  the  areas  concerned.  They  should  involve  closely  all 
those  who  are  directly  affected,  starting  with  the  producers'  groups.  These  plans  should 
have an integrated  approach to development  such as is found  currently  in the  development 
programmes  for  Objective  1  and  5(b)  regions  that  are  financed  by  the  EU's  Structural 
Funds.  They  could  include  a  range  of  information,  advisory,  training  and  organizational 
measures  focussed  on  possible  local  alternatives.  They  should  help  to  mobilise  available 
resources,  notably  those  of  the  structural  and  other  programmes  co-financed  by  the 
Community,  such  as  early  retirement  schemes. 

Several  measures  could  be  taken  : 

transition  {e.g.  aid  for 

to  ensure  the  viability  of  the  farms  and  processing  facilities  likely  to 
weather 
investment  and  environmental 
the 
conservation). 
In  this  context,  the  programmes  for  switching  to  other  crops,  which  have 
been  particularly  successful  in  Greece  (see  point  IV.4),  could  be  taken  as 
a  model  provided  that  there  is  a  corresponding  reduction  in  the  overall 
quota volume. Aid was paid  for three years to tobacco growers who wished 
to  give  up  tobacco  growing  and  switch  to  other  crops. 

to  facilitate  abandoning  non-viable  tobacco farming  by  means  of  measures 
aimed  at  the  individual  and  the  community. 

(a)  individual  aid 

This  aid  could  take  the  form  of  buying up  quotas  over  a sufficiently  long timespan  (7-10 
years) coupled with a degressive payment mechanism  or, alternatively,  issuing the  affected 
tobacco  farmers  bonds,  on  the  basis  of  which  the  Community  would  pay  out  annual 
annuities until  the bond's maturity  (7-10 years).  The tobacco farmers  would  be free  either 
to  keep  the  bonds  and  collect  the  corresponding  annuities  or  sell  them  on  the  private 
market. 

37 

j p w ,J r, 

Early  retirement,  set-aside  and  afforestation  aids  are  additional  possibilities.  Attention 
should  be paid to the question  of how to make the early  retirement  measures provided  for 
in Regulation  2079/92  more  attractive  to  producers,  particularly  by  assessing  the  reasons 
why  the  measures  have  not yet  had  any  success. 

(b)  Community  (regional/local)  aid 

* 
* 

information,  training,  advice and technical  assistance to ease the  transition; 
economic development  measures designed  to offer  alternative  occupational 
activities. 

This entire set of measures should be part of a strategic local development  plan that would 
rely  on  various  legal  bases  and  sources  of  financing,  depending  on  the  nature  of  the 
measures  involved: 

certain  measures  needed  to  draw  up  the  plan  (information,  analysis, 
technical  assistance),  intended  to  facilitate  its  implementation  (training, 
advice,  publicity),  or  that  are  integral  parts  of  the  operational  phase  (for 
example,  quota  buy-back)  could  be  financed  by  the  EAGGF  Guarantee 
Section; 
in  other  cases  the  authorities  responsible  for  implementing  the  various 
programmes  should examine the possibility  of assigning part of the budgets 
allocated  to  them  to  the  following  measures: 

* 

* 

other  measures  would  have  their  legal  basis  and  thus  be  financed 
within  the  framework  of  Structural  Funds  Objectives  1  and  5(b) 
assistance  (most  of  the  regions  involved  are  in  this  category).  The 
mid-term  review  planned  for  1997  provides  an  opportunity  to 
examine  which  specific  measures  could  be  adopted  in  the  coming 
years  to  help  tobacco  growers  switch  to  other  economic  activities. 
Suggestions  along  these lines  could  be  made  to the Member  States 
and  monitoring  committees  involved. 

still other measures, such as early retirement, afforestation  and agro-
environmental  measures,  and  Objective  5(a)  measures,  can  rely  on 
an  already  established  legal  and financi-al framework. 

If  these  measures  are  applied  over  a  sufficiently  long  period  they  should  facilitate  the 
search  for  alternative  activities  and  support  the  local  social  and  economic  fabric. 

Special  attention  should  also  be  paid  to  the  processing  industry's  reconversion  so  as  to 
cushion  any  major  negative  impacts  on  the  local  economies. 

38 

(3)  Making  the  quota  and  guarantee  threshold  scheme  more  flexible 

The  other  aspect  of  the  current  COM  that  must  be  perfected  is  the  management  of  the 
stabilizer  scheme,  especially  its  lack  of  flexibility. 

Flexibility  must  be  enhanced  on various  levels. 

First  of  all,  the  volumes  of  the  quotas  by  country  and  group  of  varieties 
must  not  be  fixed,  for  it  must  always  be  possible  to  adjust  the  supply  to 
meet  the  demand.  To  do  this,  the  possibilities  of  transferring  quotas 
between groups of varieties without increasing the budget must be boosted. 
Such  transfers  are  already  allowed  for  quotas  that  are  not  bound  to 
cultivation  contracts.  Organizing  such  transfers  prior  to  the  quotas' 
allocation  and,  to this end,  encouraging the  sector to forecast  market  needs 
more  accurately,  would  be  an  important  positive  achievement. 

As mentioned  earlier, transfers  from  cheaper varieties with more  precarious 
markets  to  more  valuable  varieties  for  which  there  is  a  greater  market 
demand  must  also  be  encouraged. 

Finally,  transfers  of  quotas, whether  they be annual  or permanent,  within  a 
group  of  varieties  should  be  facilitated.  Market  mechanisms  should  be 
chosen  to  achieve  this  end.  The  definitive  transfer  of  quotas  between 
traditional  producers  should  be  facilitated,  as  such  transfers  would  be 
appropriate  solutions  for  a  host  of  individual  situations  and  would 
encourage  the  most  motivated  operators  to  build  economically  viable 
undertakings. 

Besides this,  special  provisions  must  be adopted  to  allow  the  creation  of  a national  quota 
reserve.  This  would  also  make  the  scheme  more  flexible. 

Making  the  quota  scheme  more  flexible  and  modulating  the  premium  will  thus  give 
growers  a powerful  incentive  to  consolidate  holdings,  the  average  size  of  which  is  set  to 
rise  while  the  number  of  growers  will  continue  to  fall,  as  the  current  pattern  of 
fragmented  holdings  is  difficult  to  sustain. 

(4)  Simplifying  the  scheme's  administrative  management 

Simplifying  the  scheme's  management  is  also  a  concern  of  the  public  authorities.  The 
degree  of  complexity  reached  by  the  tobacco  production  management  scheme  leads us  to 
propose  the  revision  of  a  series  of  procedures  with  the  aim  of  streamlining  the  scheme's 
administration. 

First  of all, one must  recognise that calculating  and  distributing the quota certificates  each 
year to tens of thousands  of farmers,  sometimes followed  up by  a second  allocation  in  the 
course  of the year,  is a cumbersome  managerial  task.  The  obvious  solution  is to  manage 
the  quotas  through  the  producers'  groups,  rather  than  dealing  directly  with  the 

39 

individual  producers.  This would  slash the administrative work from  tens of thousands  to 
only  a  few  dozen  operations,  even  in  the  largest  producer  countries.  The  group  itself 
would then be responsible for  distributing the individual  quotas and performing,  under the 
administration's  supervision  and  as  required  by  the  Community's  regulations,  all  of  the 
relevant  calculations.  We  must  underscore  in  this  respect  that  managing  the  scheme  via 
individual 
the  producers'  groups  would  not  invalidate  the  existence  of  unaffiliated, 
producers  (their  existence,  however,  is already  marginal,  given,  amongst  other  things, the 
incentive  of benefitting  from  specific  aid), nor would  it  cancel  each  group's  obligation  to 
register  the  deliveries  of  each  of  its  members,  thereby  enabling  them  to  leave  the  group 
as well,  if  they  so  desire. 

Next,  calculating  each  producer's  quota  annual  is  no  longer  justified,  given  the  quota 
system's  stability.  The  quotas  could  thus  be  revised  every  three  years, without  prejudice 
to  possible  annual  adjustments  following  transfers  between  groups  of  varieties. 

inspections  would  also  benefit  from  being  simplified. 

The  systematic 
Delivery 
measurement  of  the  moisture  content  of  each  batch  of  tobacco  delivered  has  proved 
ineffective  and difficult  to achieve.  This stipulation  should be dropped, with the inspector 
resorting to measuring moisture content only  in the event of doubts as to the quality  of the 
tobacco  delivered. 

Having  two  quota  distributions  (one of which  is residual)  and  consequently  two  periods 
for  filing  cultivation  contracts  in  the  same  year  no  longer  seems  necessary,  given  that 
allowing producers to transfer  quota  certificates  amongst  themselves would  create  enough 
flexibility  for  the  guarantee  thresholds  to be  used  fully. 

thousand  operations 
The  proposed  simplifications  would 
(calculations of quotas, duplicate mailing of quota certificates  to individual  producers,  and 
systematic  measurement  of  moisture  content  upon  delivery),  which  would  lighten  the 
administrative  load  substantially. 

thus  eliminate  several 

(5)  Encouraging  better  remuneration  for  quality 

The  cultivation  contract  should  be  maintained,  given  the  security  it  offers  the  sector  and 
the  fact  that  it can  be used  as  a lever  to improve  the  match  between  supply  and  demand. 
However,  the cultivation  contract  does blur market signals, as the prices are sometimes  set 
a  year  before  the  actual  sale.  A  well-supervised  system  of  bidding  for  contracts  could 
offer  a  solution  by  increasing  competition  between  processors  and,  consequently,  the 
market  prices  paid  to  the  growers. 

(6)  Taking  account  of  environmental  protection 

The  main  forms  of  environmental  pollution  from  tobacco  farming  are  the  effects  of 
excessive  fertilising,  over-irrigating,  and  unreasonable  pesticide  use. 

It must be stressed  that an economic  system  that encourages better  quality  produce will  be 
beneficial  for  the  environment,  for  the  quality  of  the  tobacco  leaf  is  linked  to  reasonable 

40 

fertiliser  applications.  Pesticides,  for  their  part,  are  still  indispensable  to  ensure  a  good-
quality leaf.  However, the use of integrated  pest management  (IPM) techniques  should be 
strongly  encouraged.  So should the practice  of picking up waste,  starting with  the  plastic 
sheets used  in  the  fields. 

To achieve this, the portion  of the specific  aid intended  for technical  assistance  should 
also  be  used  to  promote  environmental  protection  measures,  e.g.,  rational  fertiliser 
applications,  integrated  pest  management,  waste  pick-up,  and  more  efficient  irrigation 
techniques. 

The  promotion  of  these  environmental  protection  measures  should  be  monitored 
periodically  at the regional,  national  and  Community  level.  To ensure that  they  form  part 
of  a  coherent  policy,  they  should  be  carried  out  in  a framework  defined  by  the  Member 
States  and  approved  by  the  Commission. 

Training  and  information  sessions  should  be  organized  with  the  help  of  specialists  in  the 
various  fields. 

Finally,  a  system  for  assessing  these  measures  should  be  set  up  so  as  to  learn  from  the 
necessarily  diverse  experiences  of their  application  in  the  field. 

(7)  Less  harmful  varieties  on  the  market 

The  Tobacco  Research  and  Information  Fund,  which  is  financed  by  a  percentage  of  the 
growers'  premiums,  should  be  maintained.  One  of  its  tasks  is  to  search  for  varieties  and 
cultivation  methods which  are less harmful  to human  health  and in this field the Fund  can 
assist in the production  of tobacco  containing  less tar,  heavy  metals  or nicotine.  Research 
in  the  field  of  environmental  protection  should  also be  included. 

It is planned not only to continue the Fund's activities in the field of supplying  information 
on the  harmful  effects  of tobacco  consumption  but  to  provide  it with  increased  resources 
for  this  purpose  by  raising  the  percentage  withheld  from  the  premium  to  2%.  It  is  in  the 
tobacco producers' interest to show that they understand  the health problem, which  is quite 
separate  from  the  continuation  of tobacco  growing,  which  will  continue  on  a world  scale 
as  long  as there  are  tobacco  consumers. 

(8)  Stepping  up  supervision 

Supervising the COM must remain a key concern.  Chapter  II of this report  drew the  clear 
conclusion  that  the  level  of  fraud  that  prevailed  prior  to  the  1992  reform  had  fallen 
Indeed,  the  more  vulnerable  support  mechanisms  were  dismantled  (end  of 
sharply. 
intervention  and  export  refunds)  and  the  current  stability  of  budget  outlays  corroborates 
this  analysis. 

Experience  has  nevertheless  shown  that  risks  of  fraud,  linked  notably  to  the  existence  of 
phony  producers  (involved  in  a black  market  in  tobacco),  subsist.  Although  the  risks  of 

41 

fraud  are markedly  lower than  they were in the past,  they  still  exist.  That  is why  acreage 
checks have been stepped up and local  publicity of quota beneficiaries  has been  instituted. 

There is an additional  need to give a precise legal definition  of the term  'tobacco processor' 
so as to prevent broad interpretations of Community regulations that would  currently  allow 
middlemen  to  take  advantage  of  the  system. 

As  far  as  the  supervisory  agencies  are  concerned,  we  are  forced  to  admit  that  the 
Commission's  efforts  have not yet succeeded.  The two countries concerned,  namely,  Italy 
and  Greece,  have  been  unable  to  set  up  the  new  supervisory  agencies  called  for  in  the 
Regulation.  This  being  the  case,  the  monitoring  has  been  done  by  the  already  existing 
bodies,  AIMA  and  EOK.  In  future,  the  key  elements  of  the  current  supervisory  system 
should  be  kept.  These  are  checking  the  areas  to  weed  out  bogus  producers,  inspecting 
deliveries  to  verify  the  tobacco's  eligibility  for  the  premium,  and  inspecting  processing 
plants' warehouses to prevent the payment  of several  premiums for the same tobacco.  The 
field  inspections  could  be  stepped  up  efficiently  by  using  the  integrated  area  control 
system  that already  exists for  other  crops.  The mandatory  nature of  delivery  checks  must 
be upheld  (mandatory  presence  of  inspectors  for  all  deliveries,  written  permission  for  the 
delivery  and  transfer  of  the  tobacco under  the  supervisory  agency's  supervision)  and  that 
of warehouse  inspections  on the processor's  premises  stepped  up  (mandatory  minimum 
sampling). 
It  would  also  be  worthwhile  to  check  the  stocks  leaving  the  processing 
plants  so  as to  make  certain  that  the  tobacco  has  actually  been  processed. 

The  essential  aim  of  monitoring  the  COM  in  tobacco  must  always  be  to  control 
expenditure.  To  do this,  all  poorly  designed  economic  mechanisms  must  be  corrected  or 
eliminated.  This  has already  been  done to a great  extent by  the  1992 reform.  Next,  there 
must be a guarantee that the  appropriate  checks are actually  carried  out,  notably  by  taking 
the  necessary  action  in  the  clearance  of  accounts. 

For  the  Commission,  the  main  issue  is defining  the  types  and  frequency  of  the  checks  to 
conduct.  It will  then  be up  to the  national  authorities  to  choose  the best  way  to  organize 
such  checks  in  line  with  each  country's  particularities. 
In  this  respect  and  given  the 
experience  of  the  past  few  years,  the  Commission  feels  that  the  choice  of  the 
administrative  framework  (specific  supervisory  agency  or  organization  of  inspections  by 
pre-existing  bodies)  should  be  made  by  the Member  States. 

C.  Other  elements 

As for the rest, the  1992 reform  has proven well-founded.  Reinstituting  intervention  and 
export  refunds  is  out  of  the  question. 

Intervention  is not justified  in a sector with  a relatively  low degree of self-sufficiency  and 
relatively  high  aid  for  producers.  Moreover,  it  was  difficult  to  monitor. 

Export  refunds  are not justified,  either.  The  best  qualities  are  exported  without  problems 
or  sold  on  the  internal  market.  The  lowest  qualities  fetch  such  low  prices  that  refunds 

42 

make no economic sense.  Moreover, just as in the case of intervention, the refunds  were 
also too difficult  to monitor. 

The changes proposed, which are aimed at increasing the quality of the tobacco produced, 
will  also raise the quality  of the tobacco the Community  exports on the world  market. 

The inter-branch approach initiated by the 1992 reform should be bolstered and deserves 
encouragement.  In this respect the Commission considers it important that the entire sector 
take  concerted  action,  that  is,  that  growers,  processors  and  factories  consult  each  other 
more in order to strengthen their efforts  to improve the quality  of their  products and the 
supply's  responsiveness  to demand.  The rise in  quality  must  be market-driven.  In this 
context,  the  market's  needs  will  definitely  be  expressed  by  prices,  but  they  can  also be 
reinforced  to good  effect  by  contractual  means, notably  by  setting minimal  qualities and 
quality  grades.  In  addition, the contractual  approach  will  also make the industry's needs 
more transparent  and in this way facilitate  efforts  to adapt the supply  to the demand. 

The reformed COM should also undergo assessment  four years after its adoption.  On this 
occasion an analysis of the changes in the tobacco crop's value versus the support granted 
to this sector would  be indispensable. 

43 

CONCLUSIONS  OF PART V 

The  future  of  the  COM  in  tobacco was  made  contingent  on  choosing  first  whether  to 
continue  the  Community's  involvement  in this  sector. 

1. 

2. 

a) 

b) 

3. 

The  Community's  disengagement  from  this  sector,  which  would  doom 
most  of  the  Community's  tobacco  industry  in  the  medium  term,  has 
been  ruled  out.  Such  a  scenario would  mean  compulsorily  converting 
some  190  000 jobs  and  would  have  an  extremely  high  social  cost 
without  producing  any  effect  on tobacco  consumption. 

The  Commission  has  therefore  chosen  to  propose  that  Community 
support  to  producers  be  continued,  provided  the  COM  undergoes 
fundamental  reform. 

Continuing  the  Community's  involvement  would  also  involve  a  choice 
concerning  the best  model  to  follow.  At  all  events,  Community  aid  must 
always  benefit  only  producers. 

Setting  up  a  hectare-based  aid  system  or  a  scheme  of  direct  income 
support  for  tobacco  growers  would  not  solve  the  serious  economic 
problems  plaguing  the  sector.  The budgetary  costs  of  these  alternatives 
would  likewise  be  comparable  to those  of the  current  system. 

Lowering  the  Community  premium  significantly  would  have  the 
drawback  of  immediately  sounding  the  death  knell  of  a large  proportion 
of  Community  tobacco  without  allowing  it  to  shift  towards  higher 
quality. 

Keeping  the  current  scheme  unchanged  would  have  the  disadvantage 
of  perpetuating  the  current  situation,  that  is,  one  in  which  the  farmer 
stands  to  gain  more  from  producing  a low-quality  crop  by  reducing  his 
production  costs  than  from  investing  in  better  quality.  In  the  current 
COM  the  low  market  price-to-premium  ratio  is liable  to jeopardise  the 
efficacy  of  public  support  for  growers;  secondly,  the  scheme's 
inflexibility  makes  access  to the  sector,  transfers  of  production  quotas 
and  adaptation  of  the  guarantee  thresholds  to  market  demand  difficult; 
and  thirdly,  the  complexity  of  its  management  must  be  borne  in  mind, 
given  the  host  of  operations  involved  in  calculating  and  distributing 
individual  quotas. 

The  solutions  to  consider  must,  on the  contrary,  reverse  this  trend  and 
offer  incentives  for  producing  better  quality.  If  Community  involvement 
is  continued,  it would  be  advisable  to  modulate  part  of  the  Community 
aid  in  line  with  the  tobacco's  quality  as determined  by  its  market  price. 

44 

This  modulation  of  Community  aid  must  be  backed  up  by  measures  that 
facilitate  withdrawal  from  the  sector,  in  particular  by  buying  up 
individual  quotas. 

The  combination  of these  reforms  would  have the  effect  of  improving 
the  quality  of  the tobacco  produced  in  the  Community  and  drastically 
reducing  exports  of  poor-quality  tobacco. 

The  financial  resources  would  be  redistributed  within  the  overall  budget 
allocated  to the  sector,  thus  making  it  possible  to  increase  the  proportion 
of  expenditure  on  measures  to  facilitate  structural  adjustment,  in 
particular  voluntary  departure  from  the  sector. 

The  supervisory  measures  that  exist  under  the  current  Regulation, 
especially  those  affecting  the  first  processors,  must  be  reinforced. 

Finally,  the  proposed  reform  aims  to  simplify  the  sector's  management 
and  pay  more  attention  to  environmental  protection. 

45 

ISSN 0254-1475 

COM(96) 554  final 

DOCUMENTS 

EN 

03 

Catalogue  number  :  CB-CO-96-660-EN-C 

ISBN  92-78-13188-1 

Office  for  Official  Publications of the European  Communities 

L-2985  Luxembourg