Cuba’s Cigar Industry Isn’t Ready for Its American Moment

Smoked: Cuba's Cigar Industry Isn't Ready for Its American Moment
Cuba is trying to boost cigar production in anticipation of the end of
the U.S. trade embargo, but tobacco fields lie fallow, and the country
won't likely be ready for the demand boom
By Tripp Mickle
Journal

SAN LUIS, Cuba—The fertile soil here in the Pinar del Río valley has
long produced a richly flavored, slow-burning tobacco that is, without
exaggeration, the envy of the world.

Some of Cuba's best-paid workers roll the cured leaves by hand into
cigars carrying the names Cohiba and Montecristo and Partagás, luxury
brands as coveted by aficionados as the sparkling wines of Champagne or
the single malt whiskies of Scotland.

For more than 50 years, Cuba hasn't been able to sell its cigars to its
giant neighbor to the north, the world's largest cigar market. Now, with
the U.S. moving to restore trade with Cuba, excitement is building that
a great opportunity is at hand.

If the trade embargo is lifted anytime soon, however, Cuba is unlikely
to be ready.

The amount of tobacco under cultivation in Cuba declined 65% between
2009 and 2014, to 21,733 acres, and annual tobacco production declined
21%, to about 20,000 tons, according to the most recent data from Cuba's
national statistics office. Cuba exported 91 million cigars in 2014,
down 58% from 2006.

On a recent sun-soaked afternoon, tobacco grower Frank Robaina grimaced
as he surveyed a 50-acre stretch of mostly fallow farmland down the road
from his own fields. It used to be one of Cuba's finest tobacco
plantations. Now thorny 8-foot bushes known as marabú choke the rich,
red soil. A hulking German irrigation pump that once watered crops sits
idle and rusting.

Mr. Robaina, a member of one of the country's leading tobacco-growing
families, says two problems loom large: "resources and getting paid."
Farmers don't always get what they need from government-supported
cooperatives that supply them with fertilizer, fuel and other
necessities. And the government, which buys all the tobacco farmers
grow, is paying too little in relation to other crops, he says.

The result, he says, is that many farmers, including the owner of the
weed-covered fields, have decided it isn't worth planting tobacco.

The U.S. trade embargo can only be lifted by an act of Congress, but the
Cuban government and its state-owned cigar-production company, Tabacuba,
want to be ready. They are taking steps to boost production, including
paying more for cured tobacco leaves and training more workers to roll
cigars by hand.

Taste of CubaDemand for Cuban cigars is expected to surge when the U.S.
trade embargo ends, but it isn't clear the industry will be ready. An
attempt to increase production in the 1990s fizzled. Government figures
suggest the current effort to boost tobacco growing and cigar production
won't be easy.

The goal is to increase production about 20% annually over the next five
years, says Inocente Nùñez Blanco, co-president of Corporación Habanos
SA, a joint venture between the Cuban government and British tobacco
company Imperial Brands PLC to exclusively market Cuban cigars
world-wide. He said the company is working hard to meet the expected
surge in demand.

Tabacuba executives couldn't be reached for comment.

It is a pivotal moment not just for Cuba's cigar industry, but for its
tourism and rum industries as well. Both stand to benefit from the
world's largest market restoring economic ties with Cuba. Companies from
Starwood Hotels & Resorts Worldwide Inc. to Paris-based liquor producer
Pernod Ricard SA are making investments designed to capitalize on
renewed commerce between Cuba and the U.S.

Each faces its own challenges. Cuba's hotels are aging, and Havana's
harbor can only accommodate two cruise ships a day. Ownership of Cuba's
signature rum brand, Havana Club, is contested in the U.S. because
assets were seized years ago by the Cuban government without
compensation. And Cuban law prevents foreign firms from widespread,
direct hiring of Cuban workers.

Any growth in Cuba's cigar industry would be a welcome boost for its
economy. Cuba has a gross domestic product of just $77.2 billion, and
the median income is only about $25 a month.

Cigar lovers credit the country's soil and climate for its richly
flavored, slow-burning tobacco. Cuban brands account for about one-fifth
of the roughly 500 million handmade cigars sold world-wide each year.

The U.S., the world's largest cigar market with $4 billion in sales, has
been officially off limits since 1962, when President John F. Kennedy
signed a trade embargo after the Bay of Pigs invasion failed to
overthrow Fidel Castro's communist government. Americans still can get
their hands on Cuban cigars by ordering them online from foreign
vendors, which is technically illegal, or from visitors to the island,
who are allowed to bring back $100 worth.

Still, only about 3% of premium cigars consumed in the U.S. are Cuban,
industry experts estimate. Habanos, Cuba's cigar-sales joint venture
with Imperial, has projected that the embargo's end would enable it to
capture as much as 30% of the American premium-cigar market, boosting
its annual revenue by up to 60%, or $680 million.

Just how much Cuba would be able to boost production—and how quickly—is
difficult to predict. Most land is farmed either with oxen or tractors
built in the 1940s. Farmers say fertilizer must be imported from
Venezuela. Often cigar shipments are held up because cigar boxes don't
show up in time, workers say.

The Cuban government has a hand in every aspect of production. It
funnels the supplies needed by tobacco growers through the farming
cooperatives, which farmers say set tobacco quotas for members and
retain 2% of farm revenue. Farmers say they must apply to the government
to buy tractors, irrigation systems or other expensive equipment, and
Tabacuba, the government cigar-production company, decides who gets what.

The government buys all the harvested tobacco and sends it to 40-plus
factories to be rolled into cigars for export. Habanos, the joint
venture with Imperial, sells the finished product world-wide. In 2000,
Imperial signed a 100-year agreement to be Cuba's exclusive partner,
says Fernando Domínguez, director of Imperial's premium-cigar business.

That deal could hamstring the government's ability to secure additional
foreign help to boost production.

Oettinger Davidoff AG, a Switzerland-based cigar maker and luxury-goods
company that once had a cigar-making partnership with the Cuban
government, has had discussions with Cuban officials about growing
tobacco and making cigars in Cuba, according to Chief Executive
Hans-Kristian Hoejsgaard. He says the company has no interest in
producing cigars there and being forced to sell them to a rival,
Imperial, only to later buy them back for resale to its customers.

"A lot of things have to change before the rest of us come back there,"
he says. "In the race to join the world economy, these [Cuban]
monopolies at some point have to be more dissolved or become more
flexible. It's a long run ahead."

At the moment, Cuba's farmers aren't especially eager to grow tobacco.
Miguel Veloz, who leases farmland near Frank Robaina's, says he grows
cucumbers, not tobacco, because they grow twice as fast and he can make
40% more money. Vegetable growers like him are eligible to increase
their income by exceeding cultivation quotas—a bonus designed to boost
production on an island that imports more than 60% of its food. Tobacco
growers aren't eligible for any such payments, he says.

The Robaina family has stuck with tobacco. Its tobacco farms are among
many in the Pinar del Río valley that remain family-owned. After Mr.
Castro came to power, large farms were nationalized. Some of the
families that had owned them started growing tobacco in Nicaragua and
Honduras. Small farmers such as the Robainas were allowed to keep their
land and farm as part of cooperatives.

Frank Robaina's uncle, the late Alejandro Robaina, brought the family
renown for growing some of the world's finest "capa"—the smooth, wrapper
leaves that become the outer layer of every cigar.

Toward the end of each year, workers on the Robaina farm erect a canopy
of white cheesecloth over the young tobacco shoots to shield them from
the sun, which helps produce wrapper leaves that are thin, mild and
unblemished. The leaves are plucked by hand, one by one as they mature,
from the bottom to top of the plant, over a span of about 30 days.

Frank Robaina says his cooperative, which has more than 100 farmers,
isn't always dependable and often is bureaucratic. Last December, he
says, when it was time to plow his land so he could plant this year's
crop, the cooperative couldn't provide fuel for his tractor because it
owed money to the state-owned petroleum company.

"For one week, we couldn't plant tobacco, and one week is important in
tobacco," he says. Because the seedlings were ready and "would die if I
didn't plant them," he says, he found a truck driver who sold him fuel
at an inflated price.

"Because of our country's repeated economic problems, which take a toll
on agriculture, these things happen," says his cousin, Hirochi Robaina,
who farms next door.

Picking tobacco is grueling, so finding workers is difficult. Hirochi
Robaina pays pickers 1,680 pesos a month, or about $70, nearly triple
the median monthly income. He offers a bonus of about 125 pesos, or
about $5, to workers who come every workday for a month. Even with the
bonus, some workers don't return.

He still uses a 1949 Ferguson tractor once owned by his grandfather. He
replaced the engine long ago with a Russian one, and he repairs it with
parts he buys from the government or from friends.

The family doesn't own a truck, so he often uses the tractor to make the
nearly 2-mile trip to retrieve fertilizer from the cooperative.
Sometimes, when the tractor is being used in the field, a worker fetches
supplies by bicycle.

What the Robainas worry about most—the real weak link in Cuba's tobacco
industry, says Hirochi Robaina—is production.

High-quality cigars are rolled by hand, and cigar rolling is an art that
takes years to get right. Roll a cigar too loosely or too tightly and it
doesn't smoke properly. That is exactly what happened when Tabacuba
hired inexperienced cigar rollers, known as torcedores, as part of an
effort to boost production by 60% in the 1990s.

"It wasn't uncommon to have customers open a box of 25 cigars and find
six or seven that were bad," says Roberto Pelayo Duran, president of
Miami-based Duran Cigars, who worked for a Habanos distributor in Asia
at the time.

The reputation of the Cuban cigar worsened. After the government scaled
back production, quality gradually improved.

Now, rollers go through a nine-month training program that is
challenging enough that only 35% finish. Habanos says the program will
help maintain quality when Tabacuba increases production. It plans to
increase the number of rollers at its El Laguito factory in Havana to
150, from the current 90, by 2020.

On the third floor of the four-story La Corona factory in central
Havana, more than 300 cigar rollers sit at wooden tables bundling
tobacco inside delicate wrapper leaves. Each roller produces about 100
cigars a day.

Mercedes Lores, a 51-year-old roller at La Corona, earns $75 to $100 a
month, which, she and other workers say, is about twice as much as a
Cuban medical professional or professor. In fact, many nurses and
professors, she says, become rollers because of the pay.

After the cigars are rolled, they are sorted by color, labeled by hand
and boxed for delivery to Habanos. The company sells many of the cigars
in its 140 official Casa del Habano stores around the world. Habanos
co-president Luis Sánchez-Harguindey says once the U.S. embargo is
lifted, the company plans to open stores in major U.S. cities.

The future of U.S.-Cuba trade relations depends partly on the outcome of
the U.S. presidential election. Already, there are concerns that
increasing American demand will outstrip Cuba's ability to produce cigars.

Reynaldo González Jiménez, who manages the Casa del Habano cigar shop in
Old Havana, says international clients, worried about a potential supply
pinch or another quality crisis, are buying in bulk.

Reid Bechtle, an American Cuban cigar aficionado who lives near
Washington, is worried about quality problems. "As soon as the
floodgates open, we're going to get three to four years of absolute
garbage," he says.

Habanos co-president Mr. Núñez Blanco says the factories have eliminated
the problems of the 1990s by introducing new quality-control processes
and suction machines that test how a cigar will smoke. "We're never
going to sacrifice the quality of the product for higher volume," he says.

The Robainas hope that the end of the embargo will transform the family
business. Frank and Hirochi Robaina plan to seek government approval for
a new cooperative with only themselves as members. It would operate like
a small business, allowing them to replace their old tractors with John
Deeres, buy their own truck, secure fertilizer tailored for their soil
and even sue suppliers who are late with deliveries.

Their adjacent farms would become a destination like the Robert Mondavi
Winery in California's Napa Valley. American tourists arriving on cruise
ships in Havana would climb into 1956 Chevrolet Bel Airs and 1957
Mercury Montclairs and make the two-hour trip west to Pinar del Río.
They would tour the tobacco fields, as musician Jimmy Buffett did
recently, see the curing barns and then buy and smoke the Vegas Robaina
cigars—currently sold only by Habanos and the Cuban government.

Hirochi Robaina says his grandfather began dreaming of that decades ago.
Now, it finally seems possible.

"If we get started," he says, "there wouldn't be any stopping it."

Write to Tripp Mickle at Tripp.Mickle@wsj.com

Source: Smoked: Cuba's Cigar Industry Isn't Ready for Its American
Moment - WSJ -
http://www.wsj.com/articles/smoked-cubas-cigar-industry-isnt-ready-for-its-american-moment-1463767535