Cigar Economics

The Wall Street Journal has an interesting article about the Cuban cigar industry and the problems it will face with increased demand from the US. The short takeaway is that the industry is not going to be able to meet the demand.

The cigar industry, like the rest of the Cuban economy, is mired in government-imposed inefficiency. Production has declined in recent years. Attempts to ramp up production will run into several problems.

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.

Reduction in quality is one of the problems Cuba will likely face. Fine cigars are rolled by hand, not by machine.

[C]igar 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.

According to the article, an experienced roller can produce about 100 cigars a day. At 25 cigars a box, that is four boxes of cigars. There’s a limit to what most people will pay for a box of cigars, and the cost of the rolling is only one of many costs that must be recovered in the sales price. Cigar rollers will never live an American-style middle-class life.





End of the $100 Bill?

Is it excessively cynical to note the coincidence of talk about abolishing the $100 bill and talk about negative interest rates?

Not having $100 bills would make it much more difficult to take your money out of the bank and hold it in cash. Of course, abandoning banks is not practical for most people. Still negative interest rates will bring out a lot of scam artists offering to “help”and maybe a few interesting alternatives. The price of bitcoins will probably bump a little.