PROCESSING COSTING AND QUALITY CONTROL

COSTING

Tobacco Producer Development (Pty) Ltd. contracts 91 commercial farmers to produce nearly 12 million kg’s of South African Flue Cured Virginia (cigarette) tobacco. The total crop is sold to domestics buyers such as British American Tobacco South Africa (BATSA) which utilizes the majority for local consumption.

In September of every year LTP negotiates prices for the following year with buyers and once agreement is reach, producer prices are determined based on the sales prices. Prices are fixed for the calendar year irrespective of exchange rate fluctuations and market conditions.

LTP will forward crop size and quality indications in February which buyers will use to determine their requirements from other sources. These indications will vary slightly during the first four months of the year and is communicated regularly who will adjust their other supply sources to accommodate the changes from LTP.

Domestic buyers place an order for 14 different “styles” from LTP, each with its own price and volume. These volumes are based on the crop estimate received from LTP. Producer prices are then calculated for every grade bought from producers. The buyers styles comprises of several individual grades mixed together to make up a blend that matches the requirements and specifications set by them. (See attached example) The price of each style (blend) is based on the chemistry and smoking characteristics of the tobacco and generally the higher the leaf on the tobacco plant, the higher the price.

Green tobacco (unprocessed) bought from producers generates different products once processed. These are:

Lamina (leaf): ±66%

Long Stem: ±22%

Short Stem: ±2, 5%

Big Fines: 2.00%

Small Fines: 1.00%

Fiber: 0.5%

Total: 94%

The missing 6% is made up of moisture loss (5%) and other volatiles (1%). Lamina is the most expensive part of the processed product whilst the others are regarded as by-products but also used in the manufacturing of the cigarette.

Summary: Once sales prices are finalized, LTP can determine “voorskot” prices for tobacco procured from producers based on the percentages blended into customer’s styles. Voorskot prices are 80% of the customer’s blended prices less factory costs. The remaining 20% is paid back to the producers once the crop is sold and all funds were received. This is called the “agterskot” or bonus payment.

OPERATIONS

LTP designed a grade structure for 120 different producer grades based on the leaf’s plant position, colour, and degree of breakage, ripeness and general appearance. These characteristics determine every leaf’s value and subsequent price based on the sales prices negotiated for the style in which the leaves will be used. Producers grade their tobacco according to the above requirements and present it in a 50 kg carton box at various buying stations across the producing areas to a qualified and experienced LTP valuator. The valuator will determine a suitable grade for every box of tobacco presented to him, with a corresponding list price offered to farmers prior to the buying season. Every producer has the opportunity to discuss the valuation with the valuator and if not agreed, the producer can return the carton tobacco to his farm for re-grading.

All tobacco bought from producers at remote buying stations are transported by road to the central buying station in Rustenburg where a second check is done on every carton. Producers are paid electronically on a weekly basis for tobacco sold to LTP.

The Limpopo Tobacco Processors (LTP) factory in Rustenburg processes all South African tobacco. Once tobacco is processed for customers it is stored in secured warehouses on the LTP premises. Customers inspect packed tobacco on a monthly basis in Rustenburg. Packed cartons are opened for visual inspection and smoke trails are carried out to confirm the smoking characteristics of every blend. Processing results and chemistries are presented and once the inspectors are satisfied, the tobacco is shipped to the customer’s cigarette factory for further processing.

BATSA pays LTP according to payment schedule agreeement.

The LTP factory meats the highest standards set by cigarette manufacturers and is able to process any type of tobacco with a capacity of 30 million kg’s per annum. A fully equipped lab generates all required processing results necessary to determine processing standards and leaf quality. The factory can store up to 2,000,000 kg of unprocessed and 9,000,000 kg of processed tobacco.