Select Committee on European Communities Thirteenth Report


Tobacco production in the European Community [2]

  4.    In 1994 the European Community produced 4.6 per cent of the global harvest of raw leaf tobacco. The 1995 harvest in the European Community was 333,180 tonnes. Eight Member States contributed to this total, with Italy at 39 per cent, Greece at 36 per cent, Spain at 13 per cent and France at 8 per cent. The remaining 4 per cent was grown, in descending order of output, by Germany, Portugal, Belgium and Austria.

  5.    Tobacco production is concentrated in Objective 1 regions[3] of the Community, such as Thrace in northern Greece, Campania and Puglia in Italy, and Extremadura in Spain. Tobacco is often grown in conditions of terrain, soil and climate which make it difficult to cultivate profitable alternative crops. It is mostly produced on very small holdings: the mean area under tobacco per producer is 1.11 hectares, on a lengthy crop rotation of up to seven years.

  6.    Tobacco is a very labour-intensive crop, requiring much work to be done by hand, particularly in harvesting and sorting. The sector is therefore a major source of employment, accounting for 135,000 tobacco farmers, with a great deal of seasonal work often performed by the family workforce. In addition, employment of some 30,000 people in the first processing of tobacco is dependent on local production. (Employment in second processing in factories is, by contrast, largely dependent on imported tobacco.)

  7.    Tobacco varieties differ widely in their characteristics, cultivation needs and popularity, and a diverse range is grown in the Community. While some Greek Oriental tobaccos are of good quality and sell for reasonable prices, the majority of production is of a low grade and commands a very low price. The generally poor quality is demonstrated by the low selling prices, usually well below the prices for the same varieties from Malawi, Zimbabwe and the United States. The Commission acknowledges that most of the Virginia and Burley varieties grown in Greece and Italy depend for their production on a Community subsidy that is sometimes 99 times their purchase price.

  8.    As a result, much of the Community's production is exported to lower income countries where price is more important than quality, while demand within the Community is largely met by imports. This pattern has been reinforced by changes in consumption patterns in the Community, as more consumers have switched to light, American-style cigarettes, and is reflected in the reduction in the amount of Community-grown tobacco which is consumed in the Community, from roughly 219,000 tonnes in 1991 to roughly 119,000 tonnes in 1994[4].

Support for tobacco production under the Common Agricultural Policy

  9.    The common organisation of the market in raw tobacco was established in 1970[5]. This provided for intervention purchases; for export refunds; and for the payment of a flat-rate premium to the first buyer of leaf tobacco. The scale of the regime grew with the accession to the Community of Greece in 1981 and Spain and Portugal in 1986. Budget over-runs resulted, and fraud became widespread.

  10.    The regime was significantly reformed in 1992[6]. Intervention and export refunds were abolished; premia were limited to production within a quota; the number of premium rates was reduced from 34 to 8, thus simplifying administration and reducing the scope for fraud; payment procedures were simplified; and monitoring procedures were strengthened. The results of these reforms have been considerable. Budget expenditure has been brought under control, dropping from 1,329.6 million ECU in 1991 to 993 million ECU in 1995. Production has been reduced from a peak of 430,000 tonnes in 1991. The scope for fraud has also been somewhat reduced, as we were told in evidence by the Ministry for Agriculture, Fisheries and Food (MAFF) (Q 5). However, neither Italy nor Greece has yet set up the national supervisory agencies provided for in the 1992 reform.

Problems facing the tobacco sector

  11.    Various factors external to the sector mean that the medium- and long-term prospects for tobacco production in the European Community are not promising. These include likely pressures from the World Trade Organisation (WTO), changes in world markets, and the implications of further enlargement of the Community.

  12.    It seems inevitable that trends towards greater trade liberalisation, begun under the General Agreement on Tariffs and Trade (GATT), will continue under the WTO. It is likely that the process of switching agricultural support systems away from market intervention and towards direct payments for social and environmental purposes, that is "decoupling" of support from production, will continue. MAFF predicted that "support which remains linked explicitly to production levels . . . will come under very strong pressure in the next WTO round" (Q 45). The high levels of premia paid for tobacco, together with quota restrictions, make this a particularly vulnerable sector.

  13.    The world market in tobacco is undergoing substantial changes. While global demand has remained more or less constant, developing countries such as China, Brazil, Zimbabwe, Malawi and India have significantly increased their output. At the same time they have pursued improved quality, achieving a favourable quality/price ratio because of their low labour costs. This has meant increased competitiveness and increased market share. These developments are bound to have an adverse effect on the market for tobacco grown in the European Community, where growers have no incentive to improve quality and, because of the small scale of holdings may have no capital to invest in improving efficiency.

  14.    Finally, the implications of proposed enlargement of the Community are such that the tobacco regime cannot realistically be expected to survive in its current form. Of the earliest likely entrants, the so-called Visegrad Four, three produce tobacco. In 1996 Poland, Hungary and Slovakia produced a total of about 61,000 tonnes (Q 14). It seems unlikely for budgetary reasons that the quota could be raised to that extent, so more radical reform of the regime will be necessary.

The rationale for Community support of tobacco production

  15.    The Commission makes plain in its report that the rationale for Community support of tobacco production is a social one. A few quotations will demonstrate this:

    "Tobacco farming is a major source of employment . . . in some areas it procures the entire population a livelihood" (page 9);

    "Without tobacco, practically all of the farms that grow this crop would no longer be economically viable" (page 9);

    "Tobacco farming keeps the rural fabric of the regions in which it occurs alive . . . contributes to the survival of areas threatened by ageing and desertification" (p 12).

  16.    The Spanish Embassy in London also emphasised the social importance of tobacco production. We were told that the sector provided employment for over 15,000 people in Spain, largely in disadvantaged areas where unemployment was as high as 30 per cent and where alternative economic opportunities were limited (p 16).

Tobacco production and levels of smoking

  17.    Publication of the Commission's report was preceded by widely-publicised disagreement between Commissioner Fischler (with responsibility for agriculture and rural development) and Commissioner Flynn (employment and social affairs). Mr. Flynn was reported to have argued that Community subsidies for tobacco production undermined the credibility of Community measures to discourage smoking on public health grounds. Subsequently the Commission published a communication to the Council and the European Parliament on the present and proposed Community role in combating tobacco consumption, setting out a number of possible new initiatives (5058/97).

  18.    The Commission's report on the tobacco regime acknowledges the harmful effects of smoking on human health, and the apparent contradiction between supporting tobacco production on the one hand and promoting anti-smoking measures on the other. But the report concludes that "aid to tobacco growers has no impact on the level of tobacco consumption" (page 28). A reduction in European tobacco production would simply result in demand being met by production elsewhere.

2   The statistical material in this section is drawn from the Commission's report. Back

3   Objective 1 regions are areas which qualify for expenditure from EU Structural Funds because development is lagging. Such areas are determined broadly as those with a per capita GDP of less than 75 per cent of the EU average. Rural areas where development is to be promoted are eligible for expenditure under Objective 5(b). See Council Regulation 2052/88 EEC; OJ L 185, 15th July 1988. Back

4   These figures are derived from the levels of production detailed in the Commission's report, and the levels of exports detailed in the Commission's annual publication, The Agricultural Situation in the EU. Back

5   Council Regulation 1727/70 EEC; OJ L 191, 27th August 1970. Back

6   Council Regulation 2075/92 EEC; OJ L 215, 30th July 1992. Back

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Prepared 12 April 1997