As a leading independent leaf tobacco merchant, Alliance One International provides worldwide service to the large cigarette manufacturers. Multinational manufacturers of consumer tobacco products rely on independent merchants such as Alliance One to supply the majority of their leaf. We purchase tobacco in more than 45 countries and serve manufacturers of cigarettes and other consumer tobacco products in over 90 countries.
Alliance One proudly claims broad geographic processing capabilities, a diversified product offering, and an established customer base, which includes all of the major consumer tobacco product manufacturers. We select, purchase, process, pack, store, ship, and, in certain developing markets, provide agronomy expertise and financing for growing leaf tobacco.
Our revenues are primarily comprised of sales of processed tobacco and fees charged for related services to manufacturers of consumer tobacco products around the world. We do not manufacture cigarettes or other consumer tobacco products.
Alliance One’s global headquarters is located in Raleigh , North Carolina.
Alliance One deals primarily in flue-cured , burley , and oriental tobaccos that are used in international brand cigarettes, including American blend cigarettes. American blend cigarettes contain approximately 50% flue-cured, 37% burley, and 13% oriental tobacco; contain less tar and nicotine; and taste milder than locally-produced cigarettes containing dark and semi-oriental tobacco historically consumed in certain parts of the world.
Our Purchasing Network
Tobacco is purchased either at auction or directly from the grower. In the United States, flue-cured and burley tobacco crops were traditionally sold at public auction, but these markets have undergone a fundamental change in recent years. There has been a significant shift from auction markets to purchasing directly from growers (” direct contract buying “). A number of our significant U.S. customers now purchase green tobacco directly from the growers. Although the tobacco purchased directly from growers by our customers has continued to be processed in our U.S. facilities, we no longer take ownership of that tobacco and no longer record sales revenues associated with its resale.
Under the direct contract buying system, purchasers generally buy a farmer’s entire tobacco crop. The majority of our purchases of U.S. flue-cured and burley tobacco are made through the direct contract buying system, where we buy the farmer’s entire crop. With respect to tobacco purchased by us through this system (and to which we still take title), we assume the risk of matching the quantities and grades needed by our customers to the entire crop we must purchase under contract. As a result, we work closely with our customers in advance of the crop to estimate our customer requirements and use these estimates as the basis to contract tobaccos directly from farmers. However, this arrangement has increased the possibility that we may accumulate inventories of grades of tobacco that our customers do not need.
With respect to tobacco purchased directly by our customers (and to which we do not take title), the customer assumes the risk of loss of such tobacco while it is located at our facilities or en route to and from our facilities. When we purchase under an auction system, we continue to purchase tobaccos primarily to match specific customer orders.
Other principal auction markets include Canada , Malawi , and Zimbabwe . We usually purchase tobacco at those auction markets after receiving specific customer orders or indications of customers’ upcoming needs. Our network of tobacco buyers allows us to cover the major auctions of flue-cured and burley tobacco throughout the world. These buyers are experts in differentiating hundreds of grades of tobacco based on customer specifications and preferences that take into account, among other factors, the texture, visual appearance, and aroma of the tobacco.
In non-auction markets such as Argentina , Brazil , Bulgaria , China , Greece , Guatemala , Indonesia , Italy , Kyrgyzstan , Mexico , Tanzania , Thailand , and Turkey , we purchase tobacco directly from growers or from local entities that have arranged for purchase from growers. We often make these direct purchases based upon our projection of the needs of our long-standing customers rather than against specific purchase orders. Our arrangements with growers vary from locale to locale, depending on our predictions of future supply and demand, local historical practice, and availability of capital. For example, in Brazil, we generally contract to purchase a grower’s entire tobacco crop at the market price per grade at the time of harvest based on the quality of the tobacco delivered. Pursuant to these purchase contracts , we provide growers with fertilizer and other materials necessary to grow tobacco and may either directly loan or guarantee Brazilian rural credit loans to growers to finance the crop. Under longer-term arrangements with growers, we may also finance or guarantee financing on growers’ construction of curing barns . In addition, our agronomists maintain frequent contact with growers prior to and during the growing and curing seasons to provide technical assistance to improve the quality and yield of the crop.
In other non-auction markets, such as Argentina and China , we buy tobacco from local entities that have purchased tobacco from growers and supervise the processing of that tobacco by those local entities. We believe that our long-standing relationships with our customers are vital to our purchasing operations outside of the auction markets.
Our Processing Approach
We process tobacco to meet each customer’s specifications for quality, yield, chemistry, particle size, moisture content , and other characteristics. Unprocessed tobacco is a semi-perishable commodity that generally must be processed within a relatively short period of time to prevent fermentation or deterioration in quality. Accordingly, we have located our 24 worldwide processing facilities in proximity to our principal sources of tobacco.
Upon arrival at our processing plants, flue-cured and burley tobaccos are first re-graded to better define their characteristics. Most of that tobacco is then blended to meet customer specifications regarding color , body , and chemistry; threshed to remove the stem from the leaf ; and then further processed to produce strips of tobacco and separate out the smaller pieces, or scrap . We also sell a small amount of processed but un-threshed flue-cured and burley tobacco in loose-leaf and bundle form. Processed flue-cured and burley tobacco is re-dried to remove excess moisture so that it can be held in storage for long periods of time. After re-drying , whole leaves, bundles, strips, or stems are separately packed in cases, bales , cartons, or hogsheads for storage and shipment. Generally, packed flue-cured and burley tobacco is transported in the country of origin by truck or rail, and exports are moved by ship. Prior to and during processing, steps are taken to ensure consistent quality of the tobacco, including the re-grading and removal of undesirable leaves, dirt, and other foreign matter.
Customer representatives are frequently present at our facilities to monitor the processing of their particular orders. Increased consumption of discount and value-priced cigarettes, and competition among leaf merchants have led to improvements in processing designed to minimize waste and thereby increase yield. Throughout the processing, our technicians use laboratory test equipment for quality control to ensure that the product meets all customer specifications.
Seasonality of Our Business
The purchasing and processing activities of our tobacco business are seasonal. Flue-cured tobacco grown in the U.S. is generally purchased during the five-month period beginning in July and ending in November. U.S.-grown burley tobacco is usually purchased from late November through January or February. Tobacco grown in Brazil is normally purchased from January through July. Other markets around the world have similar purchasing periods, although at different times of the year. Mature tobacco, prior to being processed and packed, is a semi-perishable commodity. The production cycle for re-drying and packing is relatively short. For example, flue-cured tobacco in the U.S. is generally processed, packed, and invoiced within the same five-month period (July through November) that it is purchased. During this period, inventories of unprocessed tobacco, inventories of re-dried tobacco , and trade accounts receivable normally reach peak levels in succession. Current liabilities, particularly advances from customers and short-term notes payable to banks, normally reach their peak in this period as a means of financing the seasonal expansion of current assets. Increasing amounts of U.S.-grown burley and foreign tobacco are now being processed in periods other than July through November, reducing the seasonal fluctuations in working capital.
Our customers are the multinational manufacturers of cigarettes and other consumer tobacco products. We typically purchase most of our leaf tobacco according to customer orders, supply contracts, or customer indications of anticipated need. The tobacco is then shipped to our customers’ factories, which are located in approximately 90 countries around the world. Most of our sales throughout the world are denominated in U.S. dollars. While we can receive payment for the tobacco after we have processed and shipped it, most of the larger customers advance payments to us throughout the buying season as we purchase tobacco for their accounts.
Aside from Alliance One, there is currently one other major global competitor in the leaf tobacco industry: Universal Corporation. Competition among tobacco merchants is based primarily on the price charged for products and services, as well as the merchant’s ability to meet customer specifications in the buying, processing , and financing of tobacco. Additionally, competition exists to purchase the available leaf tobacco in the origin countries.