Cigarette manufacturers warn of a 3% drop in global tobacco sales this year and more declines to come. However, one in every five adults worldwide smokes. The U.S. represents a large number of smokers, but the percentage of adult smokers in the U.S. declines every year.
American tobacco production is declining and along with it, American tastes. European and Asian markets want Oriental tobacco. The wealthy countries of Europe and Asia have larger percentages of their adult population smoking.
It seems counterintuitive to invest in a product so many people are quitting. But there’s wisdom in going against the tide. Is an investment in one of the world’s oldest types of tobacco the right call?
Read on to learn more.
What Is Oriental Tobacco?
Oriental tobacco, or “Turkish” tobacco (Nicotiana tabacum), is an aromatic, mildly-flavored variety of tobacco. It’s a small-leaved variety.
It’s so-named because of its cultivation and curing in the former Ottoman Empire. This tobacco is sun-cured.
Oriental tobacco is still grown in Bulgaria, Egypt, Greece, Lebanon, North Macedonia, and Turkey. You can find small crops of Oriental tobacco in Thailand, China, Albania, Russia, and India.
Demand for Oriental tobacco remains high. It’s a part of many popular brands of cigarettes, pipe tobaccos, and hookah tobaccos. Despite high demand, the capacity to grow and cure Oriental tobacco remains limited.
Other Types of Tobacco
Oriental tobacco is one of the most expensive types of tobacco in cigarette blends. Early cigarette brands like Murad were 100% Oriental tobacco. The fashion for modern brands is a more economical blended tobacco.
Tobaccos such as shade-grown, Sumatra, Cavendish, flue-cured, fire-cured, Perique, etc. each have unique characteristics. These are prized by different manufacturers for flavor, aroma, and texture.
Most American-style cigarettes are now a blend of Virginia tobacco and White Burley tobacco. Other tobacco types may be blended for flavor and nicotine. Pipe tobacco, chewing tobacco, or cigars may have 5 or more types of leaf and curing.
Market Forces at Work
Production shortfalls cause scarcity. Turkey is the world’s largest supplier of Oriental tobacco. Around 32% of the world supply comes from Turkey, but this percentage is dropping.
Until 2008, the supply of Turkish export tobacco was steady. A state resource collective managed production and subsidized prices. After 2008, privatization reduced state subsidies.
Crop output in Turkey dropped from 250 million kg per year in 2008 to 51 million kg in 2017. Poor crops in other countries compounded the shortage.
The 2018 worldwide production was around 185.5 million kg. Simultaneously, demand for Oriental tobacco in new products increased.
A Delicate Balance
Although cigarette consumption is on the decline, new products like heated tobaccos (glo and IQOS) demand Oriental tobacco. Liquids for electronic cigarettes also use Oriental tobacco in their flavor profile.
Because of past market volatility, major tobacco players have purchase orders for Oriental crops. They have locked in orders for several years into the future.
Supply just meets demand. Industry experts note a 5% increase in consumption of Oriental tobacco is disastrous. That increase in the Chinese market would wipe out the entire production capacities of Turkey, Greece, Bulgaria, and North Macedonia.
Oriental tobacco is an ideal crop in sunny, fairly dry climates. Processing and curing Oriental tobacco is labor-intensive. Without subsidies, growing tobacco in places where labor is expensive is unprofitable.
Not Just Cigarettes
Flavored tobacco products are enjoying rising consumption. With them, the highly-aromatic yet mild Oriental tobacco is much in demand. Many countries that grow tobacco find that their entire crop is used within their borders.
Companies that focus on different forms of tobacco consumption also demand Oriental tobacco for distinctive, mildness, and smoothness. Traditional tobacco companies for shisha (nargile or hookah) are growing in popularity. Shisha demands Oriental tobacco.
The global market for shisha will reach $386 billion by 2025. The large players in this market are dwarfed by the large tobacco companies, but enjoy an astounding 26.6% profit margin.
Investing in Tobacco Stocks
Historically, tobacco stocks have been winners for investors in the long term. However, the adverse health impacts of tobacco continue to attract the ire of consumers and regulators. Tobacco companies are actively exploring diverse business lines to protect their core.
If you invest, tobacco stocks to your well-rounded portfolio offer steady high-margin profitability and limited volatility. Choosing individual cigarette stocks is not for the faint-hearted though.
Deep analysis of the industry and major shot callers takes some time. Select the tobacco company stocks that meet your investment expectations and your view of the industry.
Criteria for Investment in Tobacco Stocks
You will first determine your priorities. For long-term investment, you look for strong fundamentals.
Look for increasing revenues and earnings over time. A company with high relative strength in leading sectors is superior to others.
If your strategy is to short sell stocks, look for tobacco stocks with weak fundamentals or market instability. Pick stocks the opposite of the advice for long-term investment.
Look for declining earnings and low relative strength. Also, look for regulatory environment changes.
Many tobacco stocks trade in exchanges other than the New York Stock exchange. Legitimate information may be hard to obtain. Find a trustworthy source to provide financial information or accept additional risk.
One Stock or a Portfolio of Tobacco Stocks?
If you’re purchasing tobacco stocks as a way to diversify your portfolio, choosing one stock for a modest allocation keeps things simple. However, this approach is foolhardy if your stock portfolio isn’t already widely invested.
Should you choose international, domestic, or a mixture of both exposures? Sure, the domestic market is declining, but it’s still highly profitable.
International markets remain steady and are even growing in some areas. Some companies are focused on the domestic market only, others on the international market only, and some companies do business in both worlds.
Look out for multiple sins. Many tobacco companies also have investments in cannabis, alcohol, or gambling. Check your views on their whole book of business.
Cannabis, for example, is a huge opportunity to use the expertise of the tobacco industry to expand. It’s also morally objectionable to a portion of the population and still illegal in most of the world.
Pick out Newer and Niche Players
Did you know that some tobacco stocks don’t even have a presence in traditional cigarettes? For example, some companies focus on growing leaf tobacco only. Other companies supply cigarette rolling machines, rolling papers, vaping juice, or hookahs.
Consider companies that specialize in tobacco testing or farmland leasing. Supply chain improvement is a niche to look into. A direct connection between growers and manufacturers is a unique way to alleviate some of the supply and demand challenges.
How does this address the Oriental tobacco supply problem? As the supply of tobacco from Turkey grows limited, new players enter the market to connect bulk tobacco buyers with growers and processors. Without a state support system to coordinate the market, the market is inefficient and disorganized.
Increasing Oriental Tobacco Supply
Without state-run monopolies and centralized planning, individual farmers have little incentive to grow and process Oriental tobacco in Turkey. Private collectives and tobacco supply companies step into the vacuum to provide seed, equipment, and connections to the buyers.
Skipping the middleman merchants, a tobacco supplier contracts directly with growers to plant and process particular strains of Nicotiana tabacum. They provide seed, financing, and advice as necessary. Oriental tobacco grown outside of the traditional areas is a small crop, but getting larger.
Areas of Southeast Asia, Afghanistan, South America, and other climate-appropriate areas welcome tobacco investments.
Vetting Appropriate Investments
You’ve decided that an investment in tobacco is for you and that Oriental tobacco holds your interest. Where do you go from there?
Just like any first-time stock investment, it’s a matter of gathering information and history:
- Plan your amount of risk and allocate your portfolio accordingly.
- Determine your strategy: Growth? Income? Both?
- Pick one stock or fund and then analyze the results over some time.
- Understand stock price movement and the overall market.
- Don’t panic over one quarter or one year’s results.
- Stick to your investment plan.
If you’re investing for day-trading or swing-trading, your outlook and examination of stocks vary greatly from long-term investors. Don’t let that difference keep you from the performance of due diligence.
Invest in Oriental Tobacco
There are many opportunities to put money into the Oriental tobacco industry. Pick a company stock that meets your investment needs and personality. Don’t feel limited by anything other than your ability to absorb risk.
Keep your strategy simple. Choose just one stock or fund at a time. Make tobacco a portion of your portfolio and diversify widely.
Look at fundamentals like scarcity, growing or declining markets, increasing revenues, and regulatory environment. For investments in Oriental tobacco, certain companies look very promising.
Ready to learn more about tobacco, tobacco supply, and the market? Contact a local office today!