Why are Cuban Cigars so Expensive? Part 2
by David "Doc" Diaz
Friday, March 23, 2012
In part 1 of this series, I provided a backdrop of the world cigar market, then discussed the environmental and political factors that positioned Cuba as a world-renowned grower of fine tobacco and maker of fine cigars. To further understand why premium Cuban cigars cost so much, it is important to also understand the recent rise in popularity of premium hand made cigars. In this article I will explain how, when and why cigars first declined in popularity and the subsequent two cigar booms that have brought us to today’s rather robust market for premium hand made cigars.
The Decline and Resurrection of Premium Cigars
Prior to 1920, consumption of tobacco in the U.S. was mainly in the form of cigars, pipe tobacco, chewing tobacco, and snuff. By 1901, 6 billion legally taxed cigars were sold versus just 3.5 billion cigarettes (Hyman, HISTORY 1878-1915). By 1905, 7 of 10 men smoked cigars in the U.S. (Armenteros, 2009 p. 8). In short, prior to 1920, cigars were enjoying their heyday. This era came to be known as the “Golden Age of Cigars.” But before long, cigar smokers would see a long drought, as cigar consumption would drop off for the next 40-years, helped on its way by another tobacco product: cigarettes.
Several developments led to the rise in popularity of the cigarette and subsequent decline of the cigar (Nelson). The invention of the automated cigarette machine in 1880 and its enhancement in 1884 by James Duke allowed cigarette supply to skyrocket while costs plummeted. Another factor was the change in the 20-year old Civil War excise tax, which was instituted in 1862 to help pay for the costs of the war. In 1883 the U.S. reduced the tax from $1.75 to 50 cents per thousand pieces and the ability of cigarette manufacturers to cheaply supply nearly unlimited numbers of cigarettes, and at a lower tax, meant that volume sales would allow profit margins to soar.
(Photo below courtesy of Tony Hyman, National Cigar Museum)
World Wars were a major factor in the expansion of cigarette use. Encouraged by ease of use, low cost, and their effects on energy level and morale, the U.S. military rationed cigarettes to the soldiers during World War I. The Salvation Army, the Red Cross and the YMCA all distributed free cigarettes to the troops in France. By the end of the war in 1918, an entire generation of young men returned home to England, France, Australia and the U.S. with a firmly entrenched cigarette habit (Hyman, HISTORY 1916-1962 Machine Age).
A similar pattern would ensue during World War II. As part of the war effort, Roosevelt made tobacco a protected crop and cigarettes were included in GI's C-Rations as tobacco companies sent millions of free cigarettes to GI's abroad (Borio). By the end of the war, cigarette sales were at an all-time high, further eroding cigar consumption and sales.
The U.S. embargo against Cuba in 1962 made all Cuban products illegal for sale or purchase by American citizens. To fill the cigar and tobacco void left by Cuba in the wake of the embargo, the U.S. pressured countries other than Cuba to increase their exports of tobacco and cigars.
Even before the embargo, Cuban tobacco growers and cigar makers fled from what they considered to be an oppressive regime under Castro and moved to other areas in the Caribbean, taking with them their knowledge of crop science, and tobacco production techniques. At the time of the embargo, the Dominican Republic produced and exported tobacco, but had only an embryonic cigar industry. Today, the Dominican Republic is one of the world’s largest producers of premium, hand-rolled cigars. Nicaragua and Honduras have also picked up cigar production to fill the void for premium cigars in the U.S.
Medical Science Contributes to Resurgence of Cigars
With all the negative influences leading to the decline in cigar sales, the industry received a boost from the unlikeliest of sources: the office of the Surgeon General. In the mid-1960s, the U.S. would witness the, first ever, Surgeon General’s report on Smoking and Health (Smoking and Health, 1964). This report implicated cigarettes in causing a variety of health disorders and shortening the life expectancy of cigarette smokers. However, cigar smoking was an unexpected beneficiary of this report, which claimed that, “men smoking less than five cigars per day have death rates about the same as non-smokers.”
The Surgeon General’s report seemed directly responsible for producing a temporary boom in the domestic and imported cigar industry. Nineteen sixty-four was a record year in the United States. Cigar production in the U.S. alone reached a peak of 8.7 billion units in that landmark year (Perry, et al 1998), as people steered away from cigarettes and many turned toward cigars.
Summary: At the end of the Golden Age of cigars and after a long period of decline, an unwitting ally, the Surgeon General’s office, rekindled the U.S. cigar market. The 1964 Report on Smoking and Health created a boom in cigar sales that would last 6-years.
A Boom in the 1990s
The temporary cigar boom wrought by the first Surgeon General’s report would be short-lived as cigar sales in the U.S., including imports, reached a peak of 8.9 billion in 1970, then fell by more than 50 percent through 1990.
However, in 1996, sales levels climbed 29 percent in the U.S., while Germany showed essentially the same pattern. France and the United Kingdom also experienced an increase in cigar consumption, with a slightly later peak. No one seems to know for sure what factors were chiefly responsible for an increase in cigar sales in the mid-1990s.
A booming U.S. economy in the mid-1990s, low levels of unemployment, and high levels of disposable personal income were most likely predisposing factors behind the cigar boom. From 1993, and for several years after, real disposable personal income followed a clearly upward trend.
In addition to the robust economic growth that sustained disposable income during that time, there were also substantial wealth effects. The “wealth effect” is an economic term that, in this case, refers to an increase in spending that accompanies an increase in perceived wealth (Darby). During the mid-1990s the U.S. economy was exploding and consumer confidence was high. It also may be important to point out that cigar consumption in the United States is most common among males who are 45 to 64 years old, that is, those who are in their peak earning years (Perry, et al).
Another prime factor is the role that the U.S. plays in the world economic market. It has been suggested that the U.S. economy–its production and consumption practices in specific–dictates the world pattern. So, for example, when the U.S. produces and consumes more cigars, there is an associated increase of production and consumption in the worldwide market (Perry, et al). Whatever the cause, by the mid-1990s, consumers were rediscovering large, premium cigars and the demand for these higher priced cigars began to increase.
Filling the Demand: The Supply and Demand Equation
The cigar boom of the mid-1990s started a demand for high-quality hand made cigars. While the Dominican Republic, Honduras, and Nicaragua, among others, ramped up production to meet this demand, Cuba faltered. The Cold War and the eventual breakup of the Soviet Union (after 1990) caused severe economic problems in Cuba. The supply of fertilizer, pesticides, and other crop supplies dwindled, while the U.S. embargo continued to affect the trade balance and economy in Cuba. To top it off, Hurricane Lili hit the island in October 1996, doing damage to cash crops across the island, including tobacco (Perry, et al).
The Cuban hand made cigar industry attempted to respond to the burgeoning demand for premium cigars by training new rollers and expanding its production for export. In 2005, Manuel García, then vice president of Habanos S. A. (the Cuban cigar agency), said that the world demand for premium Cuban cigars at that time was between 115 and 120 million cigars per year, “Still greater than the current level of Cuban production,” he added. Cuba learned a hard lesson in 2001, when they exported approximately 180 million cigars, but at the expense of quality, a fact that García acknowledged (Haas, 2005). More recently, in 2010, Cuba rolled out a more modest 81.5 million cigars (The Telegraph), which was clearly far below world demand.
In contrast, in 2007, the Dominican Republic shipped 178 million premium cigars to the U.S., while Honduras shipped 84.6 million and Nicaragua followed with 69.3 million premium cigars (Hoyt, 2008).
Cuba’s position in the international cigar market is complicated by the fact that U.S. citizens may not normally buy or possess cigars produced in Cuba. This is an important factor considering that the U.S. is the single biggest country in the consumption of premium cigars. Cigar output from Cuba therefore affects the worldwide cigar market, but impinges on U.S. production and consumption primarily through smuggling.
Smuggled Cuban cigars do reach smokers in the United States. The actual amount is uncertain, but the number of smuggled cigars is variously estimated at 5 to 10 million per year, a figure that has been acknowledged by three top executives of Cuba's national cigar company (Mott, p. 4).
Even if U.S. smokers could legally buy Cuban cigars, there is still no way Cuba would be able to fulfill the current demand. In a post-embargo economy, U.S. consumers would likely be buying from secondary sources (i.e., re-exports from countries other than Cuba), and the result would be higher premium cigar prices.
No matter which way you look at this issue, a key factor determining cost of Cuban cigars is the law of supply and demand. The current demand for premium hand made Cuban cigars outstrips the ability of Cuba to meet the supply needs of those countries that want their cigars.
And yet, there is really no shortage of premium cigars in the U.S. due to the volume being exported from countries other than Cuba. There are a great variety of premium cigars from the Dominican Republic, Nicaragua, Honduras and elsewhere. Many of these cigars are as good as, if not better than, their Cuban counterparts.
So then, why all the fuss about Cuban cigars? In short, because we can’t get them. The problem is not that there are insufficient numbers premium cigars in the world, it’s that there aren’t enough premium cigars of Cuban origin to meet the worldwide demand. The Cuban supply chain does not, and currently cannot, adequately meet the world demand, which is unlikely to change any time soon.
Forbidden Fruit Phenomenon
Another factor that drives demand for premium Cuban cigars, at least with U.S. citizens, is the “Forbidden Fruit Phenomenon.” U.S. citizens live in a country that values freedom and we react strongly whenever we sense that our freedom is being unfairly limited. Indeed, we often react to perceived constraints on our choices by taking (or even just wanting to take) the forbidden fruit option. Psychologists call this desire to maintain (the perception of) control, “reactance,” or more popularly, the Forbidden Fruit Phenomenon (Engs, R. and Hanson, D. J. 1989). During Prohibition, the forbidden fruit was alcohol, since the embargo, it is the elusive cigar that is made on an island less than 100 miles from the shores of the U.S. Because of the 50-year old Cuban embargo, U.S. citizens are restricted from getting their hands, legally, on Cuban hand made cigars and that creates a certain type of demand. And so, our ever-present thirst for the forbidden fruit will likely remain unquenched until the now 50-year-old embargo reaches its conclusion.
I am eagerly waiting for the day when I can legally purchase Cuban cigars. But even more, I look forward to the day when cigars will be a blend of the best Cuban with the best non-Cuban cigar tobacco. That is what keeps me interested and that is what I hope to see and experience in my lifetime.
Demand for premium Cuban cigars worldwide will also likely remain high until the supply/demand equation can be successfully addressed. Even after the embargo ends, it will be quite some time before we see any substantial change in the quantities of Cuban cigars in the marketplace. It will take a while to build up the Cuban cigar industry so that it can, not only export more cigars, but also keep the quality of those cigars at the highest level.
Only then will we see an effectual change in the demand versus supply chain. Theoretically, a decrease in demand or an increase in supply could lead to a corresponding decrease in price. Until such time as market conditions change (i.e., supply matches demand, or until economic conditions improve) and until the U.S. embargo of Cuba ends, we will likely continue to see inordinately high prices for premium Cuban cigars.
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Darby, M. R. (1987). "wealth effect," The New Palgrave: A Dictionary of Economics, v. 4, pp. 883-4.
Engs, R., and Hanson, D. J. Reactance theory: A test with collegiate drinking. Psychological Reports, 1989, 64, 1083-1086
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Perry, J. M., Woods, L. A.,Shapiro, S. L., and Jeffrey W. Steagall (August 6–8, 1998). The Cuban Cigar Industry as the Transition Approaches. Retrieved on Feb. 11, 2012 from the Web, http://www.ascecuba.org/publications/proceedings/volume8/pdfs/42perry.pdf
Smoking and Health: Report of the Advisory Committee to the Surgeon General of the Public Health Service (1964) Retrieved on Feb. 11, 2012 from the Web, http://profiles.nlm.nih.gov/ps/access/NNBBMQ.pdf
The Telegraph, (June 14, 2011). Cuban cigar sales on the rise again. Retrieved on Feb. 11, 2012 from the Web, http://www.telegraph.co.uk/news/worldnews/centralamericaandthecaribbean/cuba/8576329/Cuban-cigar-sales-on-the-rise-again.html
About the Author
David "Doc" Diaz is the publisher and the editor of the Stogie Fresh Cigar Publications. He has served as an educator, researcher and writer and has taught in the Health Education and Health Science field for over 30 years. He possesses an earned doctorate from Nova Southeastern University. Doc is a Certified Master Tobacconist (CMT), having received this certification from the Tobacconist University and is a member and Ambassador of Cigar Rights of America (CRA).blog comments powered by Disqus