1
Memorandum
From:
James
Covington,
III
USEPA/
OW/
OST
To:
Public
Record
for
the
2006
Effluent
Guidelines
Program
Plan
EPA
Docket
Number
OW­
2004­
0032
(
www.
epa.
gov/
edockets/)

Date:
August
10,
2005
Re:
Tobacco
Manufacturing
Industry:
Economic
Profile
1.
INTRODUCTION
This
memo
describes
the
tobacco
manufacturing
industry
in
the
United
States
from
an
economic
perspective.
Information
contained
in
this
memo
is
drawn
from
public
sources,
site
visits,
and
discussions
with
industry.

The
results
are
summarized
in
Section
2.
Section
3
describes
the
North
American
Industry
Classification
System
(
NAICS)
and
Standard
Industrial
Classification
(
SIC)
codes
for
this
industry.
Whether
a
source
reports
the
data
according
to
NAICS
or
SIC
can
depend
on
the
date
of
publication.
While
the
Small
Business
Administration
shifted
from
SIC
to
NAICS
in
2000,
older
EPA
databases
(
such
as
the
Toxic
Release
Inventory
and
Permit
Compliance
System)
classify
facilities
according
to
SIC
code.
The
Securities
and
Exchange
Commission
(
SEC)
still
uses
SIC
codes
on
its
10­
K
forms.

Section
4
describes
the
facility
counts,
geographic
distributions,
company
counts,
and
other
information
as
identified
from
publicly
available
sources.
Section
4.6
contains
most
of
the
new
material
concerning
market
structure,
Master
Settlement
Agreement,
and
the
ability
of
companies
to
pass
through
costs
to
the
consumers.
Section
5
compares
this
information
with
what
EPA
found
when
compiling
a
facility
list.
Section
6
is
a
small
business
analysis.
Section
provides
additional
information
on
resolving
inconsistencies
in
between
data
sources
on
the
number
of
companies
and
facilities
operating
in
the
stemming
and
re­
drying
sector.

1.
Differences
Between
Engineering
and
Economic
Views
of
the
Industry
This
memo
and
the
accompanying
spreadsheet
seek
to
identify
all
tobacco
producing
facilities
in
the
United
States.
Not
all
of
these
facilities
are
likely
to
generate
significant
amounts
of
wastewater.
Many
employ
small
numbers
of
people
and
produce
very
small
amounts
of
tobacco
products.
This
is
especially
true
in
certain
sectors,
such
as
cigar
production,
where
there
are
a
number
of
single
employee
facilities.

EPA
has
collected
significant
amounts
of
process
and
technical
data
on
the
tobacco
production
industry.
Much
of
this
data
was
obtained
in
site
visits,
or
through
discussion
with
industry
representatives.
This
process
information
has
allowed
EPA
to
focus
on
a
small
number
of
facilities,
in
certain
sectors
of
the
industry,
that
EPA
believes
are
direct
dischargers
generating
the
majority
large
amounts
of
waste
water
in
2
this
industrial
sector.
EPA's
technical
documents
examine
this
smaller
number
of
facilities
rather
than
the
entire
industry,
as
explored
in
this
memo.

2.
SUMMARY
AND
OBSERVATIONS
EPA
identified
118
facilities
and
82
companies
in
the
tobacco
manufacturing
industry.
Of
the
82
companies,
14
are
large,
2
belong
to
Native
American
Nations,
and
the
remaining
66
are
small.
Nearly
70
percent
of
the
small
businesses
(
46
of
67
companies)
are
in
NAICS
31229
 
Other
Tobacco
Manufacturing
 
and
reflect
a
wide
range
in
products
such
as
smokeless
tobacco,
cigars,
and
loose
tobacco
for
pipes
and
roll­
your­
own
cigarettes.
EPA
prepared
a
spreadsheet
)
that
contains
all
118
facilities.

The
industry
is
extremely
concentrated,
particularly
in
the
cigarette
segment,
with
most
production
controlled
by
large
international
companies.
In
addition,
these
companies
concentrate
their
manufacturing
in
very
large
facilities
to
capture
economies
of
scale
in
production.
For
example,
the
six
largest
facilities
(
in
terms
of
employment)
account
for
about
60
percent
of
total
industry
employment.
The
large
facilities
are
concentrated
in
North
Carolina
(
which
has
three)
while
one
each
is
located
in
Florida,
Georgia,
and
Virginia.
Five
of
the
six
very
large
facilities
manufacture
cigarettes
while
the
sixth
manufactures
cigars.
This
implies
that
there
are
a
limited
number
of
facilities
in
the
United
States
with
operations
large
enough
to
involve
direct
discharge
of
process
waste
water.
This
finding
is
consistent
with
the
engineering
search
for
NPDES
permits
for
tobacco
manufacturing
facilities.
It
is
unlikely
that
a
two­
person
hand­
rolling
cigar
operation
would
generate
enough
wastewater
to
be
of
interest
even
as
an
indirect
discharger.

The
large
cigarette
companies
that
operate
almost
all
of
the
largest
facilities
have
the
ability
to
pass
all
regulatory
costs
through
to
costumers.
Evidence
from
the
Master
Settlement
Agreement
signed
in
1998
shows
that
these
companies
have
passed
on
all
tax
and
legal
settlement
costs
incurred
directly
to
the
consumer.
This
suggests
that
these
companies
could
also
pass
on
costs
incurred
by
an
EPA
rule.

3.
NAICS
AND
SIC
CODES
The
NAICS
codes
identifying
the
tobacco
manufacturing
industry
and
their
definitions
are:

#
312210
Tobacco
Stemming
and
Redrying
#
312221
Cigarette
Manufacturing
#
312229
Other
Tobacco
Product
Manufacturing
In
its
raw
form,
tobacco
is
a
highly
perishable
product.
It
must
be
stemmed
and
re­
dried
soon
after
harvest
to
create
a
product
that
can
be
stored
until
it
is
needed
for
use
in
cigarettes,
cigars,
and
smokeless
tobacco.
Companies
in
NAICS
312210
stem
and
re­
dry
green
 
recently
harvested
 
tobacco.
These
facilities
are
located
close
to
tobacco
farms.
Stemming
and
re­
drying
operations
thus
show
seasonal
employment
patterns
relating
to
the
harvest
cycle.
Stemming
and
re­
drying
companies
purchase
tobacco
to
meet
the
specific
needs
of
end­
product
manufacturers
with
whom
they
have
long
standing
relationships.
After
purchase,
the
company
grades,
blends,
and
removes
the
stems
from
the
leaves
then
re­
dries
the
leaves
to
remove
moisture
and
ensure
they
can
be
stored.
Both
stems
and
leaves
are
shipped
to
the
end
product
3
manufacturer
(
Gale,
2001).
Based
on
information
collected
from
industry,
EPA
does
not
believe
that
this
industry
is
associated
with
significant
volumes
of
wastewater
(
USEPA,
2005a).

NAICS
312210
corresponds
primarily,
but
not
entirely,
to
SIC
2141.
The
overlap
is
about
94
percent.
NAICS
312221
corresponds
completely
to
SIC
2111.
NAICS
312229,
however,
combines
activities
that
were
separate
SIC
codes;
see
Table
1.
That
is,
NAICS
312229
contains
all
of
SIC
2121
(
cigar
manufacturing),
SIC
2131
(
non­
smoking
tobacco),
SIC
7389
(
tobacco
sheeting
services),
imitation
tobacco
products,
and
the
remainder
of
SIC
2141.

Table
1
Correspondence
Between
NAICS
312229
and
SIC
Codes
2002
NAICS
1987
SIC
Corresponding
Index
Entries
312229
2131
Chewing
tobacco
manufacturing
312229
2121
Cigar
manufacturing
312229
2131
Pipe
tobacco,
prepared,
manufacturing
312229
2141
Reconstituting
tobacco
312229
2131
Smoking
tobacco
(
e.
g.,
cigarette,
pipe)
manufacturing
312229
2131
Snuff
manufacturing
312229
2131
Tobacco
products
(
e.
g.,
chewing,
smoking,
snuff)
manufacturing
312229
Tobacco
products,
imitation
(
except
cigarettes)
manufacturing
312229
7389
Tobacco
sheeting
services
Souce:
http://
www.
census.
gov/
epcd/
naics02/
def/
NDEF312.
HTM#
N31221,
accessed
28
December
2004.

4.
INFORMATION
FROM
PUBLIC
SOURCES
4.1
Facility
Counts
EPA
used
several
sources
to
obtain
a
preliminary
estimate
of
the
number
of
facilities
in
the
tobacco
manufacturing
industry:

#
Census
Bureau
­
2002
Economic
Census,
Industry
Series
S
Tobacco
Stemming
and
Redrying:
2002,
EC02­
31I­
312210,
August
2004
(
Census,
2004a).

S
Cigarette
Manufacturing:
2002,
EC02­
31I­
312221,
July
2004
(
Census,
2004b).

S
Other
Tobacco
Product
Manufacturing:
2002,
EC02­
31I­
312229,
August
2004
(
Census,
2004c).
4
#
Census
Bureau
­
2002
County
Business
Patterns
by
NAICS
S
CenStats
database
at
http://
censtats.
census.
gov/
cbpnaic/
cbpnaic.
shtml
(
Census,
2004d).

#
Harris
InfoSource
International.
Tobacco
Production
Industry
Report.
2003
data.
Published
2004
(
Harris
InfoSource,
2004).

The
Harris
InfoSource
data
present
the
counts
as
"
firms"
even
when
the
same
company
name
appears
as
multiple
entries
in
their
list
of
major
companies.
We
therefore
suspect
the
Harris
counts
correspond
more
closely
to
facility
counts
rather
than
firms.

These
data
are
compared
in
Table
2.
We
have
no
explanation
for
the
difference
of
19
facilities
from
the
two
sources
of
Census
data.
The
range
is
from
16
to
20
tobacco
stemming
and
redrying
establishments,
15
to
23
cigarette
manufacturing
establishments,
and
83
to
90
other
tobacco
product
manufacturing
establishments.
In
total
numbers,
the
Harris
data
fall
between
the
two
estimates.
However,
they
follow
a
very
different
distribution.
The
Harris
data
have
about
twice
as
many
facilities
in
tobacco
stemming
and
redrying
and
cigarette
manufacturing
and
half
as
many
in
other
tobacco
product
manufacturing.

Table
2
Different
Sources
for
Facility
Counts
Facility
Counts
NAICS
Census:
2002
Census
Census:
2002
CPB
Harris
InfoSource
312220
Tobacco
Stemming
and
Redrying
16
20
41
312221
Cigarette
Manufacturing
15
23
42
312229
Other
Tobacco
Product
Manufacturing
83
90
45
Totals
114
133
128
Sources:
Census,
2004a­
2004d
and
Harris
InfoSource,
2004.

4.2
Facility
Locations
Census
2004a­
2004c
do
not
present
state­
by­
state
information
for
reasons
of
confidentiality.
Census
2004d
 
County
Business
Patterns
 
provides
a
count
of
establishments
by
county
and
state.
Table
3
compares
the
counts
by
state
for
Country
Business
Patterns
and
Harris
InfoSource
(
2004).
Although
the
overall
counts
between
the
two
sources
differ
only
by
five
facilities,
there
are
substantial
differences
in
the
number
of
facilities
in
a
particular
state.
The
Census
data
show
24
more
facilities
in
Florida
and
Pennsylvania
than
those
reported
by
Harris
InfoSource.
5
4.3
Facility
Size
Table
4
crosstabulates
the
number
of
facilities
by
state
and
the
number
of
employees.
The
data
are
taken
from
County
Business
Patterns
so
the
total
estimated
number
of
facilities
is
133.
What
is
evident
from
Table
4
is
that
over
half
the
facilities
have
fewer
than
20
employees.
That
is,
the
six
facilities
in
the
final
category
(>
1,000
employees)
account
for
about
60
percent
of
total
industry
employment.
The
large
facilities
are
concentrated
in
North
Carolina
(
which
has
three)
while
one
each
is
located
in
Florida,
Georgia,
and
Virginia.
That
is,
the
industry
is
marked
by
a
few
very
large
facilities
that
account
for
the
bulk
of
the
production
with
a
plethora
of
small
widely­
dispersed
facilities
accounting
for
the
rest.
Comparing
Table
4
with
Table
5,
we
see
that
the
five
of
the
six
largest
facilities
in
terms
of
employment
are
in
cigarette
manufacturing.

4.4
Number
of
Employees
Census
presents
slightly
different
numbers
for
total
employees
in
tobacco
manufacturing
in
the
industry
surveys
and
county
business
patterns.
Table
6
shows
the
number
of
employees
by
sector
as
reported
in
the
industry
surveys
for
a
total
of
24,560
employees.
County
Business
Patterns
reports
a
total
employment
of
24,031
which
is
about
2
percent
fewer
than
that
reported
in
the
industry
surveys
(
Census,
2004d).

4.5
Number
of
Companies,
Industry
Concentration,
and
Value
of
Shipments
The
Census
Bureau
develops
concentration
ratios
by
industry
from
the
5­
year
industry
census.
The
data
from
the
2002
Census
are
not
yet
available
but
we
can
compare
the
number
of
companies
for
1997
and
2002
with
the
concentration
ratios
for
1997.
These
are
shown
in
Table
7.

For
the
stemming
and
re­
drying
industry
(
NAICS
312210),
the
number
of
companies
remained
the
same
at
13
from
1997
to
2002.
The
total
value
of
shipments
dropped
by
nearly
two­
thirds
from
$
3
billion
in
1997
to
$
1
billion
in
2002.
While
the
value
of
shipments
for
this
segment
is
down
substantially
from
1997
to
2002,
the
profitability
of
firms
has
not
changed.
This
drop
in
revenue
yet
retention
of
profit
is
attributable
to
structural
changes
in
the
way
tobacco
is
purchased
in
the
US;
see
"
Changes
in
Market
Structure
in
Section
4.6.1
for
more
details.
The
industry
is
concentrated
with
the
four
largest
companies
accounting
for
nearly
84
percent
of
the
value
of
sales.
The
top
eight
companies
account
for
nearly
all
(
98
percent)
of
sales.
6
Table
3
Geographic
Distribution
of
Tobacco
Manufacturing
Facilities
State
Counts
Census,
2004d
2002
CBP
Harris
InfoSource,
2004
Difference
AL
2
3
­
1
CA
1
2
­
1
CT
1
2
­
1
DE
1
0
1
FL
22
13
9
GA
4
4
0
IA
1
0
1
IL
1
1
0
IN
1
1
0
KY
9
12
­
3
LA
2
0
2
MA
1
1
0
MD
0
1
­
1
MI
0
1
­
1
MO
2
3
­
1
NC
17
26
­
9
NE
1
1
0
NJ
5
4
1
NV
3
1
2
NY
5
8
­
3
OK
1
1
0
OR
0
1
­
1
PA
25
10
15
SC
2
0
2
TN
8
10
­
2
TX
4
2
2
VA
11
19
­
8
WI
1
0
1
WV
1
1
0
WY
1
0
1
Total
133
128
5
7
Table
4
Facilities
by
State
by
Employment
NAICS
3122­
All
Tobacco
Manufacturing
Number
of
Establishments
Area
Name
Total
1­
4
5­
9
10­
19
20­
49
50­
99
100­
249
250­
499
500­
999
1,000
or
more
Alabama
2
0
0
0
0
0
1
1
0
0
California
1
1
0
0
0
0
0
0
0
0
Connecticut
1
0
0
0
1
0
0
0
0
0
Delaware
1
1
0
0
0
0
0
0
0
0
Florida
22
17
1
1
1
0
0
1
0
1
Georgia
4
1
0
1
0
0
0
1
0
1
Illinois
1
0
0
0
0
0
0
1
0
0
Indiana
1
0
0
0
1
0
0
0
0
0
Iowa
1
1
0
0
0
0
0
0
0
0
Kentucky
9
2
0
2
1
1
2
1
0
0
Louisiana
2
1
0
1
0
0
0
0
0
0
Massachusetts
1
0
0
0
1
0
0
0
0
0
Missouri
2
0
1
0
0
1
0
0
0
0
Nebraska
1
0
0
1
0
0
0
0
0
0
Nevada
3
1
1
0
1
0
0
0
0
0
New
Jersey
5
4
1
0
0
0
0
0
0
0
New
York
5
2
2
0
0
1
0
0
0
0
North
Carolina
17
4
0
0
2
1
5
0
2
3
Oklahoma
1
0
0
0
0
1
0
0
0
0
Pennsylvania
25
11
2
5
4
1
0
1
1
0
South
Carolina
2
2
0
0
0
0
0
0
0
0
Tennessee
8
0
0
0
2
3
2
1
0
0
Texas
4
2
0
0
0
2
0
0
0
0
Virginia
11
0
1
0
1
3
3
2
0
1
West
Virginia
1
0
0
0
0
0
1
0
0
0
Wisconsin
1
0
0
1
0
0
0
0
0
0
Wyoming
1
1
0
0
0
0
0
0
0
0
Counts
133
51
9
12
15
14
14
9
3
6
Source:
Census,
2004d.
8
Table
5
Facilities
by
State
by
Employment
NAICS
312221­
Cigarette
Manufacturing
Number
of
Establishments
Area
Name
Total
1­
4
5­
9
10­
19
20­
49
50­
99
100­
249
250­
499
500­
999
1000
or
more
Georgia
1
0
0
0
0
0
0
0
0
1
Kentucky
2
1
0
1
0
0
0
0
0
0
Nebraska
1
0
0
1
0
0
0
0
0
0
Nevada
1
1
0
0
0
0
0
0
0
0
New
York
3
1
1
0
0
1
0
0
0
0
North
Carolina
8
2
0
0
0
0
2
0
1
3
Oklahoma
1
0
0
0
0
1
0
0
0
0
Pennsylvania
1
0
0
1
0
0
0
0
0
0
South
Carolina
2
2
0
0
0
0
0
0
0
0
Virginia
2
0
0
0
0
0
1
0
0
1
Wyoming
1
1
0
0
0
0
0
0
0
0
Counts
23
8
1
3
0
2
3
0
1
5
Source:
Census,
2004d.

Table
6
Number
of
Employees
Number
of
NAICS
Industry
Employees
312210
Stemming
&
Redrying
2,721
312221
Cigarettes
15,190
312229
Other
Tobacco
6,649
Total
24,560
Source:
Census,
2004a­
c.
9
Table
7
Concentration
Ratios
Number
of
Companies
Value
of
Shipments
Percent
of
Value
NAICS
Industry
Year
(
Millions)
Top
4
Top
8
HH
Index
312210
Stemming
&
Redrying
13
2002
$
1,077
13
1997
$
3,263
83.7
97.8
2320
312221
Cigarettes
13
2002
$
34,563
9
1997
$
29,253
98.9
D
D
312229
Other
Tobacco
70
2002
$
3,628
56
1997
$
3,559
62.4
83.5
1846
Notes:
HH
Index:
Herfindahl­
Hershmann
index
for
the
50
largest
companies.
D:
not
disclosed
due
to
confidentiality.
Source:
Census,
2004a­
c
and
2001.

The
cigarette
manufacturing
industry
(
NAICS
312221)
shows
an
increase
of
four
companies
from
1997
to
2002.
The
additional
companies,
however,
are
unlikely
to
strongly
dilute
the
intense
concentration
of
this
industry.
The
top
four
companies
accounted
for
about
99
percent
of
the
value
of
sales
in
1997
and
Census
could
not
report
the
information
for
the
top
eight
companies
or
the
Herfindahl­
Hershmann
index.
That
is,
cigarette
manufacturing
in
the
United
States
is
an
oligopoly.
Note
that
the
value
of
cigarette
sales
increased
from
$
29
billion
in
1997
to
$
35
billion
in
2002
even
though
the
Master
Settlement
Agreement
(
MSA)
was
signed
in
1998.
The
MSA
requires
the
tobacco
industry
to
pay
$
200
billion
over
25
years
to
reimburse
states
for
healthcare
costs
related
to
smoking.
The
increase
in
the
value
of
sales
might
be
indicative
of
the
ability
of
the
industry
to
push
regulatory
costs
through
to
the
consumers.
A
side
effect
of
the
MSA
is
the
emergence
of
small
cigarette
manufacturers
that
are
not
part
of
the
settlement.
These
new
companies
tend
to
be
discount
manufacturers
that
sell
cigarettes
for
40
percent
to
50
percent
below
the
cost
of
premium
cigarettes
(
S&
P,
2004).

The
number
of
other
tobacco
manufacturers
increased
by
25
percent
(
from
56
to
70
companies)
from
1997
to
2002
even
though
the
value
of
sales
remained
at
about
$
3.6
million.
The
four
largest
companies
accounts
for
less
than
two­
thirds
of
the
value
of
sales.
The
eight
largest
companies
account
for
about
84
percent
of
the
value
of
sales.
This
industry
appears
to
be
much
less
concentrated
than
the
other
two
sectors
but
this
may
be
an
artifact
of
merging
several
SIC
codes
within
a
single
NAICS
code.
When
the
two
main
components
pieces
of
other
tobacco
manufacturing
 
cigars
and
smokeless
tobacco
 
when
examined
individually,
they
are
just
as
concentrated
as
the
rest
of
the
tobacco
industry.
Because
few
companies
compete
in
both
segments,
combining
them
makes
the
overall
concentration
ratio
lower.
Concentration
statistics
for
the
smokeless
and
cigar
segments
are
detailed
more
fully
in
Section
4.6.3.
1The
contract
included
provisions
for
the
construction
of
a
large
stemming
and
re­
drying
plant
in
Nash
County,
North
Carolina.
At
1.2
million
square
feet,
this
factory
is
a
third
larger
than
the
next
largest
Universal
plant.

10
4.6
Companies
and
Recent
Developments
In
this
section,
we
use
four
sources
to
identify
companies
in
the
different
tobacco
sub­
industries:
D&
B,
2004;
Gale,
2001;
Harris
InfoSource,
2004;
and
S&
P,
2004.
We
report
the
findings
separately
for
each
sector.

4.6.1
Stemming
and
Re­
drying
Number
of
Companies..
Public
sources
differed
on
the
number
of
companies
and
facilities
that
exist
in
the
stemming
and
re­
drying
sector.
EPA
conducted
additional
research
to
clarify
the
number
of
companies
involved
in
stemming
and
re­
drying.
Additional
details
on
how
EPA
resolved
inconsistencies
can
be
found
in
Section
7
of
this
memo.

EPA
identified
10
companies
operating
17
facilities.
The
two
largest
companies
operating
in
this
sector
 
Universal
and
Alliance
One
International
 
operate
on
a
global
scale
and
sell
to
all
the
major
tobacco
companies.
Each
maintains
a
presence
in
all
important
tobacco
growing
regions
around
the
world.
Based
on
SEC
10K
filings,
both
operate
multiple
facilities
in
the
United
States.
However,
since
raw
tobacco
is
highly
perishable,
it
is
unlikely
that
stemming
and
re­
drying
plants
in
the
United
States
handle
foreign­
grown
tobacco.
The
remaining
eight
independent
stemming
and
re­
drying
companies
are
classified
as
small
businesses.
They
operate
only
in
the
United
States
and
typically
operate
only
one
facility.
A
full
listing
of
stemming
and
re­
drying
facilities,
along
with
their
corporate
ownership
is
listed
in
the
accompanying
spreadsheet,
tobacco_
sites.
wk4.

Change
in
Market
Structure.
Table
7
(
above)
indicates
that
the
value
of
shipments
from
the
stemming
and
re­
drying
NAICS
decreased
by
two
thirds
from
1997
to
2002.
This
decrease
in
revenues
is
tied
to
structural
changes
in
the
way
cigarette
companies,
which
consume
95
percent
of
tobacco
globally,
purchase
tobacco
(
Standard,
2004).
Traditionally
in
the
United
States,
tobacco
farmers
harvested
their
crop,
then
brought
it
to
an
auction
house
where
a
number
of
stemming
and
re­
drying
operators
would
bid
on
the
leaves.
These
companies
would
then
transform
the
leaves
into
a
form
usable
by
end
product
manufacturers,
such
a
cigarette
or
cigar
manufacturers.
Companies
such
as
Philip
Morris
would
then
purchase
the
tobacco
and
manufacture
cigarettes.

However,
in
recent
years
this
historic
chain
has
broken
down.
Large
manufacturers
attempted
to
cut
costs,
reduce
uncertainty,
and
gain
increased
control
over
the
tobacco
used
in
its
cigarettes
by
purchasing
tobacco
through
a
contractual
system
encompassing
both
farmers
and
stemming
and
re­
drying
firms.
In
2000,
Philip
Morris
began
constructing
an
alternative
supply
route,
bypassing
the
auction
system
by
contracting
directly
with
tobacco
farmers
to
purchase
tobacco.
Instead
of
entering
the
stemming
and
redrying
business,
Philip
Morris
contracted
with
existing
companies
to
stem
and
re­
dry
its
tobacco.
For
example,
in
2001,
Philip
Morris
signed
a
10­
year
contract
with
Universal
Corporation
to
stem
and
re­
dry
its
green
tobacco
into
a
form
usable
in
cigarette
manufacturing.
1
Since
then,
Reynolds
America
has
2Public
sources
identify
this
facility
as
belonging
to
the
cigarette
manufacturing
NAICS,
rather
than
the
stemming
and
re­
drying
NAICS.
EPA
has
followed
this
pattern.
At
this
time
it
is
unclear
if
the
cooperative
is
selling
any
re­
dried
tobacco.

11
created
a
similar
supply
system.
In
2004,
Standard
Commercial
Corporation
 
at
the
time,
the
3rd
largest
stemming
and
re­
drying
company,
now
part
of
Alliance
One
International
 
estimated
75
percent
of
the
U.
S.
tobacco
crop
was
sold
via
contracts
at
the
farm
level
(
Standard,
2004).

The
shift
to
contracting
tobacco
is
a
change
in
the
economic
structure
of
this
industry.
However,
from
a
process
perspective,
the
tobacco
still
moves
in
the
traditional
manner
from
farmer,
to
stemming
and
re­
drying,
to
cigarette
manufacturer.
The
shift
to
contracting
eliminates
the
separate
economic
transactions
that
used
to
occur
between
farmers,
stemming
and
re­
drying
companies,
and
cigarette
manufacturers.

Because
Philip
Morris
and
Reynolds
American
use
a
significant
share
of
domestic
tobacco
production,
their
actions
have
affected
the
entire
supply
chain.
The
decline
in
value
of
shipments
reported
by
the
Census
reflects
the
decrease
in
stemming
and
re­
drying
companies'
sales.
By
purchasing
tobacco
directly,
cigarette
companies
have
co­
opted
the
revenues
companies
such
as
Universal
Corporation
made
purchasing
raw
tobacco
at
auction
and
selling
it
to
cigarette
companies.
Stemming
and
re­
drying
companies
have
remained
profitable.
Although
revenues
are
down,
costs
for
stemming
and
re­
drying
firms
have
also
declined
because
they
no
longer
need
to
maintain
a
large
staff
of
buyers
to
purchase
tobacco.
The
contractual
arrangement
allows
stemming
and
re­
drying
firms
to
focus
on
their
core
business
of
adding
value
to
tobacco
by
stemming
and
re­
drying.

Further,
tobacco
farmers
are
finding
significantly
less
demand
at
auction
for
their
products
because
larger
purchasers
like
Philip
Morris
are
no
longer
participating.
The
fear
of
not
finding
a
buyer
at
auction
has
driven
many
farmers
into
contract
relationships
with
cigarette
manufacturers.
Others
have
sought
alternatives
to
the
contract
relationship
and
the
auction
system.
The
Flue­
Cured
Tobacco
Cooperative
Stabilization
Corp.
 
a
farmer­
owned
cooperative
founded
in
1946
as
a
buyer
of
last
resort
for
tobacco
 
has
begun
moving
out
of
its
traditional
role
as
solely
a
purchaser
and
reseller
of
tobacco.
In
2004
the
Cooperative
purchased
a
plant
located
near
Roxboro,
North
Carolina,
from
the
Vector
Group
(
formerly
Liggett).
The
plant
can
both
stem
and
re­
dry
green
tobacco
and
produce
10
billion
cigarettes
per
year
(
Thompson,
2004).
This
brings
the
cooperative
into
direct
competition
with
both
stemming
and
redrying
companies
and
cigarette
manufacturers.
2
In
addition
to
the
changes
brought
on
by
the
shift
to
contract
buying,
the
industry
is
becoming
more
concentrated.
On
November
8,
2004
DIMON
International
and
Standard
Commercial
Corporation
announced
plans
to
merge.
DIMON
and
Standard
hold
the
2nd
and
3rd
largest
market
share
in
the
stemming
and
re­
drying
segment.
Regulators
and
shareholders
approved
the
merger
in
April
2005.
It
became
final
in
May
(
DIMON,
2005).
The
new
firm
 
named
Alliance
One
International,
Inc.
 
is
the
2nd
largest
player
in
the
industry
after
Universal
Corporation.
On
November
9,
2004
 
the
day
the
merger
was
announced
 
the
combined
company
was
estimated
to
have
a
projected
market
value
of
$
538
million,
while
Universal
would
have
a
market
value
of
almost
$
1.2
billion.
The
companies
cited
the
need
to
cut
costs
and
increase
their
global
reach
as
the
top
reasons
for
the
merger
(
Hagel,
2004).
12
13
Companies
are
also
consolidating
their
operations,
closing
less
efficient
smaller
facilities
and
shifting
production
to
larger,
more
efficient
plants.
In
2004,
DIMON
announced
it
would
close
its
Danville,
Virginia,
location
and
shift
production
to
their
Farmville,
North
Carolina,
facility
(
Hagel,
2004).
In
2002,
Universal
Corporation
closed
a
plant
in
Henderson,
North
Carolina,
shifting
production
to
expanded
facilities
in
Virginia
and
North
Carolina
(
Universal,
2002).
The
merger
between
DIMON
and
Standard
Commercial
Corporation
will
result
in
more
consolidation.
The
company
plans
to
centralize
operation
into
their
Wilson
and
Farmville
North
Carolina
locations
(
Hale,
2005).
This
shift
to
fewer,
larger
operations
could
create
increased
pollution
from
the
remaining
large
factories.

Large
Facilities.
Table
8
contains
a
listing
of
stemming
and
re­
drying
facilities
larger
than
500,000
square
feet.
These
facilities
are
concentrated
in
the
southeastern
United
States
near
tobacco
growing
areas.
In
terms
of
employment,
County
Business
Patterns
lists
the
largest
stemming
and
re­
dryng
facility
as
located
in
North
Carolina
and
employing
between
500
and
999
people.
EPA
believes
that
this
is
the
Universal
Corporation
facility
in
Rocky
Mount.
This
facility
was
built
recently
and
primarily
serves
Philip
Morris
contract
orders.
Standard
Commercial
Corporation's
Wilson
North
Carolina
facility,
while
large,
also
houses
company
headquarters,
so
stemming
and
redrying
facilities
are
likely
smaller
than
it
might
initially
appear.

Table
8
Large
Stemming
and
Re­
drying
Facilities
(
Larger
than
500,000
square
feet)

Company
City,
State
Square
Feet*

Universal
Corporation
Rocky
Mount,
NC
1,244,000
Danville,
VA
895,0000
Lancaster,
PA
636,000
Alliance
One
International
Danville,
VA**
1,867,000
Farmville,
NC
895,000
Wilson,
NC
2,304,714
*
Includes
storage
areas.
**
Alliance
One
International
has
told
EPA
that
this
facility
is
closed.
Since
it
is
still
listed
as
active
in
the
company
SEC
filings,
EPA
has
included
it
on
the
list
(
USEPA,
2005a).

Cost
Pass
Through.
The
shift
to
contract
relationships
with
cigarette
companies
makes
it
unclear
which
company
might
incur
the
costs
of
any
proposed
rule.
However,
since
the
move
toward
contracting
stemming
and
redrying
was
driven
by
concerns
about
costs
and
leaf
quality
it
is
unlikely
the
current
contracts
contain
stipulations
relating
to
wastewater.
EPA
believes
that
stemming
and
redrying
companies,
considering
their
size
and
their
small
number
(
three
major
companies
with
two
planning
a
merger)
would
be
able
to
pass
on
costs
relating
to
any
proposed
rule.
Smaller
stemming
and
redrying
firms
might
have
more
difficulty,
however
it
is
not
clear
whether
the
size
of
their
wastewater
streams
would
make
them
within
the
scope
of
any
proposed
rule.
In
the
CAFOs
Rule,
EPA
found
that
contract
growers
 
even
small
growers
 
would
be
able
to
pass
costs
through
some
costs
to
producers
and
consumers
(
USEPA,
2001).
3
See
Section
5.3
for
a
listing
of
facilities
employing
more
than
1,000.

14
4.6.2
Cigarette
Manufacturing
Cigarette
manufacturers
dominate
the
other
tobacco
manufacturing
segments
in
terms
of
value
of
shipments
and
tobacco
consumption.
Cigarette
sales
totaled
more
than
$
34
billion
(
Census,
2004b),
and
accounted
for
more
than
95%
of
global
tobacco
consumption
(
Standard,
2004).

Number
of
Companies.
Census
(
2004b)
provides
a
count
of
13
companies
in
the
cigarette
manufacturing
sector.
From
1997
to
2002
there
was
an
overall
increase
of
four
companies
in
this
sector,
however,
the
concentration
is
actually
increasing.
Large
firms
are
consolidating
further
while
new
small
firms,
which
are
not
part
of
the
Master
Settlement
Agreement,
are
entering
the
market.
The
new
firms
account
for
small
percentages
of
the
market.
Reynolds
America
reflects
R.
J.
Reynolds'
purchase
of
the
Brown
and
Williamson
division
of
British
American
Tobacco
in
2004.
Prior
to
the
merger,
R.
J.
Reynolds
and
Brown
and
Williamson
held
the
2nd
and
3rd
largest
market
share
respectively.
Philip
Morris
USA,
a
subsidiary
of
the
Altria
Group,
controls
49
percent
of
the
U.
S.
market,
while
Reynolds
America
owns
32
percent
of
the
domestic
market.
That
is,
these
two
firms
dominate
the
industry,
controlling
over
80
percent
of
the
domestic
market
between
them.
After
these
two
giants,
the
next
largest
companies
in
terms
of
market
share
are
Lolliards
(
part
of
Loews)
with
9
percent
of
the
market,
Commonwealth
Tobacco
with
3
percent,
and
the
Liggett
Group
(
owned
by
the
Vector
Group)
with
2.4
percent
(
American
Antitrust
Institute,
2004).

Number
of
Facilities.
Census
(
2004d)
reports
23
cigarette
manufacturing
facilities
operating
in
the
United
States.
Seventeen
of
these
facilities
employed
less
than
250
people,
one
reported
employing
between
500­
999
people,
while
the
remaining
five
employed
over
1000
people.
3
The
large
cigarette
companies
that
dominate
the
industry
have
highly
concentrated
manufacturing
facilities
located
in
the
southeastern
United
States.
Philip
Morris,
for
instance,
manufactures
all
of
its
cigarettes
in
two
facilities.
One,
located
near
Charlotte,
North
Carolina
is
located
on
2,100
acres
of
land
with
over
2.4
million
square
feet
under
one
roof.
The
facility
employs
2,700
people
(
Philip
Morris,
2005).
The
second
facility
in
Richmond,
Virginia
can
produce
more
than
600
million
cigarettes
per
day
and
employs
3,500
people.
Reynolds
America
boasts
a
2.5
million
square
foot
facility
in
Tobaccoville,
North
Carolina
(
Reynolds
America,
2004).

Master
Settlement
Agreement
(
MSA).
In
1998,
the
four
largest
cigarette
companies
 
Philip
Morris,
R.
J.
Reynolds,
Lolliards,
and
Ligget
 
and
the
attorney
generals
from
46
states
entered
into
an
agreement
known
as
the
Master
Settlement
Agreement
(
MSA)
that
transformed
the
competitive
environment
for
tobacco
companies
in
the
United
States.
The
agreement
grew
out
of
lawsuits
attempting
to
recover
Medicaid
costs
attributable
to
tobacco
use.
Talks
between
the
parties
led
to
a
settlement
that
includes
restrictions
on
advertising
and
payments
to
states
in
return
for
immunity
from
Medicaid
lawsuits.
Payments
are
calculated
using
a
complex
formula
that
is
based
on
1997
market
share.
Initial
estimates
put
the
total
value
of
the
settlement
at
$
200
billion
over
the
next
25
years.
In
reality,
however,
the
total
costs
for
the
MSA
are
unknown.
First,
payments
will
not
stop
after
25
years,
it
was
simply
used
as
a
convenient
time
frame.
Second,
payments
are
calculated
yearly,
for
each
company,
based
on
deviations
from
total
cigarettes
sold
in
1997.
Companies
selling
significantly
more,
or
less
than
their
1997
totals
are
subject
to
15
higher,
or
lower
payments
(
Parloff,
2005).
Since
1998,
40
cigarette
companies
have
entered
into
the
MSA
in
order
to
receive
immunity
from
Medicaid
lawsuits
(
Stith,
2004).

However,
major
companies
worried
that
smaller
cigarette
manufacturers
that
were
not
part
of
the
settlement
would
undercut
their
prices
and
steal
market
share.
To
ease
these
concerns,
the
MSA
stipulated
that,
before
states
could
receive
payment,
they
must
pass
legislation
that
required
non
signatories
(
known
as
nonparticipating
manufacturers)
to
pay
amounts
equivalent
to
MSA
payments
into
escrow
accounts.
The
money
was
justified
as
payments
for
any
future
Medicare
suit
brought
against
the
companies
by
the
states.
Held
in
escrow,
these
payments
will
be
returned
in
25
years
if
no
suit
is
filed.
The
MSA
stipulated
that
States
which
did
not
enact
escrow
laws
would
forfeit
future
payments.
Payments
would
also
be
cut
if
a
judge
struck
down
escrow
payment
laws
(
Parloff,
2005).

Implications
for
Cost
Pass
Through.
Since
1998,
MSA
signatories
have
 
in
concert
 
raised
wholesale
prices
by
$
11.20
per
carton.
This
exceeds
expert
estimates
of
$
4.50
per
carton
cost
of
the
settlement
by
almost
$
7
per
carton
(
Parloff,
2005).
The
increased
price
offset
sales
losses
to
nonparticipating
manufacturers.
In
their
2004
study
of
the
impact
of
the
MSA,
two
professors
at
Middle
Tennessee
University,
Ford
and
Fowler,
found
that
cigarette
companies
had
increased
their
profits
and
share
prices
under
MSA.
Critics
of
the
MSA
argue
that
the
provisions
of
the
MSA
that
dictate
escrow
payments
violates
the
law
twice.
First,
the
MSA
violates
the
interstate
commerce
provisions
of
the
Constitution
by,
in
effect,
levying
a
national
cigarette
tax
without
the
approval
of
Congress.
Second
it
creates
an
output
cartel
for
cigarettes.
Critics
further
charge
that
the
structure
of
the
MSA
creates
incentives
for
state
governments
and
attorney
generals
to
enforce
the
cartel.
Since
MSA
payments
from
participating
manufacturers
decline
as
their
market
share
slips
from
1997
levels
(
when
participating
manufacturers
controlled
99
percent
of
the
market),
and
states
do
not
receive
non
participating
manufacturers'
escrow
payments
directly,
but
rather
hold
them
for
25
years.
States
have
a
strong
incentive
to
insure
that
major
manufacturers
maintain
their
dominant
market
position
(
Stith,
2004).
This
incentive
was
evidenced
by
the
spate
of
actions
by
attorney
generals
against
non­
participating
manufacturers
soon
after
the
beginning
of
the
recession
 
and
declining
tax
receipts
 
in
2001
(
Parloff
2005).

Given
the
evidence
from
the
MSA
it
is
likely
that
the
major
cigarette
companies
will
be
able
to
pass
regulatory
costs
through
to
consumers.

Cigarettes
and
the
Consumer's
Dollar.
Other
government
data
strongly
suggests
that
major
tobacco
companies
have
formed
an
output
cartel.
In
2004
the
United
States
Department
of
Agriculture's
Economic
Research
Service
(
ERS)
published
a
study
that
investigated
what
tobacco
products
consumers
were
purchasing
and
how
the
consumers
dollar
was
divided
among
the
component
costs
of
a
cigarette.
Though
the
report
does
not
mention
cartels
or
monopoly,
data
in
the
report
point
in
that
direction.

In
2003,
Americans
spent
1.11
percent
of
their
disposable
income
on
all
tobacco
products.
Of
this,
1.04
percent
went
to
cigarettes.
That
is,
more
than
93
percent
of
the
disposable
income
Americans
spend
on
tobacco
products
goes
toward
the
purchase
of
cigarettes.
Cigars
accounted
for
0.03
percent
of
disposable
income,
while
other
products
(
chewing
tobacco,
snuff,
and
smoking
tobacco)
totaled
0.04
percent
(
ERS,
2004).
16
Table
9
details
the
cost
components
of
a
cigarette
in
terms
of
the
consumers
dollar..
In
2003,
farmers
received
1
percent
of
money
spent
on
cigarettes,
wholesalers
and
retailers
got
14
percent,
and
manufacturers
received
58
percent.
Taxes
comprised
27
percent.
Compared
with
1998
 
the
year
the
MSA
was
signed
 
manufactures
have
increased
their
share
of
the
consumers
dollar
from
50
to
58
percent
(
ERS
2004).
Some
of
this
increase
is
due
to
the
MSA,
however,
cigarette
makers'
ability
their
to
expand
their
share
of
the
consumer's
dollar
and
increase
profits,
over
a
time
period
when
excise
taxes
and
leaf
prices
increased
significantly,
and
total
cigarette
output
fell
by
180
billion
cigarettes
(
27
percent)
suggests
that
cigarette
companies
might
have
formed
a
cartel
(
ERS,
2004)
(
Ford
and
Fowler,
2004).
Table
10
provides
data
on
U.
S.
cigarette
production
from
1997
 
the
year
before
the
MSA
was
signed
 
to
2003.

The
competitive
effects
of
the
MSA
imply
that
signatories
to
the
MSA
would
be
able
to
pass
on
all
costs
associated
with
any
environmental
regulations.

Table
9
Percent
of
Cigarette
Users
Dollar
Percent
of
Cigarette
User's
Dollar
Cost
Component
2003
1998
Farming
1
2
Wholesaler/
Retailer
14
18
Manufacturers*
58
50
Taxes
27
30
Total
100
100
*
This
includes
stemming
and
redrying
costs.
Source:
ERS,
2004.
17
Table
10
Cigarette
Production
in
the
United
States
Year
Total
Production
(
in
billions
of
cigarettes)

1997
719.6
1998
679.7
1999
606.6
2000
594.6
2001
562.4
2002
497.0
2003
499.4
Source:
ERS,
2004.

4.6.3
Other
Tobacco
Product
Manufacturing
This
category
includes
a
number
of
very
different
tobacco
products.
The
most
important
are
smokeless
tobacco,
cigars,
and
cigarette
and
pipe
tobacco.
Each
major
product
is
discussed
below
in
its
own
section.
Overall,
Census
(
2004c)
reports
70
companies
in
this
sector.

4.6.3.1
Smokeless
Tobacco
The
smokeless
tobacco
category
includes
dry
snuff,
moist
snuff,
plug/
twist,
and
loose
leaf
chewing
tobacco.
The
Federal
Trade
Commission
(
FTC)
estimates
that
consumers
spent
$
2.1
billion
on
smokeless
tobacco
products
in
2001.
Moist
snuff
accounted
for
over
83
percent
of
smokeless
tobacco
sales,
followed
by
loose
leaf
chewing
tobacco
with
more
than
13
percent
of
sales.
All
other
smokeless
tobacco
products
account
for
less
than
four
percent
of
sales
(
FTC,
2003).

As
with
other
segments
of
the
tobacco
manufacturing
industry,
the
smokeless
segment
is
highly
concentrated.
The
FTC
reports
that
in
2001
the
five
largest
companies
accounted
for
99
percent
of
pounds
sold
(
FTC,
2003).
These
companies
are
a
mix
of
public,
foreign,
and
privately
held
firms.
The
market
leader,
US
Smokeless
Tobacco
Company
(
USSTC)
controls
43
percent
of
the
market
and
is
a
subsidiary
of
publicly
held
UST
Inc.
Most
of
USSTC
sales
are
in
the
moist
suff
segment,
where
it
controlled
74
percent
of
pounds
sold
in
2001
(
FTC,
2003).
Conwood,
LLP,
a
private
firm,
held
the
second
largest
share
at
23
percent.
Swedish
Match
AB
 
a
foreign
company
that
sell
cigars,
matches,
and
other
tobacco
products
with
over
$
1.8
billion
in
sales
 
controls
20
percent
of
the
smokeless
tobacco
market.
Swisher
is
a
private
firm
that
controls
6.3
percent
of
the
smokeless
market
and
also
produces
cigars.
National
Tobacco
company
has
the
smallest
share
at
5.9
percent
and
is
a
subsidiary
of
North
Atlantic
Trading
company,
which
also
sells
cigarettes.
18
4.6.3.2
Cigars
There
are
three
categories
of
cigars:
premium
cigars,
large
cigars,
and
little
cigars.
Premium
cigars
are
hand­
made
from
the
best
tobacco
and
sell
for
$
1
to
more
than
$
25
dollars
each
(
Knight
et
al,
1998).
The
Congressional
Research
Service
estimates
that
99
percent
of
premium
cigars
are
imported
(
Knight
et
al,
1998).
Through
our
research,
EPA
believes
that
the
remainder
are
made
in
very
small
shops
located
in
cities
with
large
Hispanic
populations
such
as
Miami.
Outside
of
these
small
shops,
the
only
other
premium
cigars
manufactured
in
the
United
States
are
produced
in
Puerto
Rico.

Large
cigars
are
mass
produced
by
machines
from
lower
quality
tobacco
and
sell
for
under
a
dollar
each.
Small
cigars
are
machine
made
and
defined
as
cigars
that
weigh
less
than
three
pounds
per
thousand.
In
1997,
approximately
2.3
billion
large
cigars
were
manufactured
in
the
United
States
 
about
61
percent
of
cigars
 
while
small
cigars
made
up
about
39
percent
of
the
market.
(
Knight
et
al,
1998).
In
terms
of
production,
cigarettes
dwarf
cigars.
For
comparison,
it
would
take
the
Philip
Morris
cigarette
manufacturing
plant
in
Richmond
less
than
7
days
to
make
3.8
billion
cigarettes,
the
number
of
cigars
manufactured
in
the
United
States
in
all
of
1997.

Cigar
production
is
highly
concentrated.
In
1997
the
top
four
manufacturers
 
Swisher
International
Group,
Inc.,
General
Cigar
Holdings,
Inc.,
Consolidated
Cigar
Holdings,
Inc.
and
Havatampa,
Inc.
 
controlled
80
percent
of
the
market
(
Knight
et
al,
1998).
Since
then
the
market
has
become
further
concentrated;
Consolidated
Cigar
Holdings
and
Havatampa
are
now
owned
by
Altadis
while
Swedish
Match
AB
took
control
of
General
Cigar
Holdings.

Swisher's
(
a
private
firm)
strength
is
concentrated
in
the
small
cigar
category,
where
its
products
had
a
46
percent
market
share.
EPA
believes
Swisher's
500,000
square
foot
Jacksonville
facility
is
the
largest
cigar
factory
in
the
United
States.
Swisher's
1998
10K
form
 
the
last
published
before
the
firm
was
taken
private
 
states
that
the
firm
believes
its
Jacksonville
factory
"
is
the
most
automated
cigar
manufacturing
facility
in
the
United
States"
(
Swisher,
1999).

4.6.3.3
Loose
Tobacco
This
segment
encompasses
loose
tobacco
for
use
in
pipes
and
roll­
your­
own
cigarettes.
The
rollyour
own
(
RYO)
cigarette
segment
has
grown
since
the
1998
Master
Settlement
Agreement
and
State
taxes
have
raised
the
price
of
a
traditional
pack
of
cigarettes.
Consumers
looking
to
save
money
can
make
their
own
cigarettes
for
less
money.
Additionally
others
are
turning
to
RYO
companies
because
of
concerns
about
cigarette
additives.
Reynolds
America
recently
showed
interest
in
the
RYO
segment,
purchasing
Santa
Fee
National
Tobacco
(
Tobacco
Retailer,
2002).
Despite
the
recent
growth,
loose
tobacco
is
a
small
area.
EPA
identified
several
facilities
that
produce
loose
tobacco.
They
tend
to
be
small,
privately
held,
and
less
technologically
advanced
than
other
tobacco
manufacturing
segments.
19
4.6.3.4
Cost
Pass
Through
Given
the
different
types
products
that
comprise
this
segment,
the
ability
to
pass
through
costs
are
likely
vary.
As
a
highly
concentrated
segment,
smokeless
tobacco
could
probably
pass
on
regulatory
costs
to
the
consumer.
In
1998
UST,
Inc.
signed
an
agreement
with
the
states
known
as
the
Smokeless
Master
Settlement
Agreement.
As
with
the
MSA
the
agreement
required
UST
to
cease
certain
marketing
practices
perceived
to
be
targeted
at
children
and
make
payments
of
$
125
million
over
ten
years.
Analysts
predict
that
the
cost
of
the
settlement
are
about
$
0.02
per
can,
and
are
passed
to
the
consumer
through
price
increases
(
Credit
Suisse
First
Boston,
1999).
Unlike
the
cigarette
MSA,
no
payments
go
directly
to
the
states.
All
the
money
is
given
to
a
foundation
aimed
at
reducing
teen
tobacco
use.
UST
is
the
only
signatory
to
this
agreement
(
Credit
Suisse
First
Boston,
1999).

Loose
tobacco
companies
would
likely
have
a
mixed
ability
to
pass
on
costs.
Some
higher
priced
pipe
tobacco
producers,
for
example,
do
not
compete
on
price
and
would
likely
have
the
ability
to
increase
prices
to
offset
regulatory
costs.
In
contrast,
cigarette
tobacco
producers
compete
more
strongly
on
price.
Many
consumers
of
this
product
prefer
it
to
pre­
rolled
cigarettes
because
of
the
cost
savings.
These
companies
would
likely
have
the
least
ability
to
pass
on
costs.
However,
given
the
small
size
of
this
market
it
is
unclear
whether
any
facility
would
generate
enough
wastewater
to
concern
EPA.

Cigar
companies
would
likely
show
the
same
mixed
ability
to
pass
through
costs.
The
small
cigar
market
 
dominated
by
Swisher
 
seem
to
mimic
the
cigarette
industry
in
terms
of
industrial
scale
and
could
likely
pass
most
regulatory
costs
to
consumers.
Other
smaller
firms
would
likely
be
less
able
to
pass
on
costs
but,
like
many
other
smaller
firms
in
other
segments,
it
is
unclear
whether
their
waste
streams
would
justify
regulation.
As
EPA
moves
forward
in
its
investigation
of
this
industry,
EPA
will
be
better
able
to
develop
more
concrete
cost
pass
though
assumptions
based
on
the
in­
scope
population.

5.
EPA
FINDINGS
5.1
Facilities
In
addition
to
developing
an
industry
profile,
EPA
developed
a
facility
list
with
contact
information,
mailing
address,
NAICS
code,
revenues,
employment,
and
whether
it
belonged
to
a
large
or
small
company.
Given
the
data
inconsistencies
about
the
number
of
facilities
and
companies
in
this
industry
and
the
identification
of
which
companies
are
active
in
which
sectors
shown
in
Tables
2,
8,
and
9,
creating
a
facility
list
was
neither
straightforward
nor
simple.
The
sources
and
process
for
developing
the
list
are
discussed
in
a
separate
memo
(
ERG,
2005).
The
complete
list
,
includes
contact
information
such
as
addresses
and
phone
numbers,
where
available.

Table
11
compares
the
facility
counts
by
NAICS
code
for
the
different
sources.
The
EPA
count
for
stemming
and
re­
drying
facilities
matches
that
in
the
2002
industry
census
(
Census,
2004a).
The
EPA
count
for
cigarette
manufacturing
facilities
is
larger
than
either
Census
count
(
Census,
2004b
and
2004d),
but
smaller
than
that
reported
in
Harris
InfoSource,
2004.
The
EPA
count
of
65
facilities
in
the
other
tobacco
manufacturing
sector
is
smaller
than
either
Census
count
(
Census,
2004c
and
2004d),
but
larger
than
that
reported
in
Harris
InfoSource,
2004.
Overall,
EPA
found
118
facilities
while
the
other
counts
range
from
114
to
133
facilities.
The
EPA
counts,
then,
fall
within
the
range
shown
in
the
public
sources.
4EPA
compared
the
sites
for
a
company
that
list
themselves
under
a
tobacco
manufacturing
SIC
or
NAICS
code
in
industry
databases
such
as
Harris
InfoSource
or
Dun
and
Bradstreet
with
the
manufacturing
plants
identified
in
the
company's
10­
K
form.
EPA
found
that
many
locations
without
manufacturing
operations
still
classify
themselves
with
the
manufacturing
codes.
We
do
not
know
if
Census
runs
into
the
same
difficulty
when
collecting
data.

20
We
believe
that
the
EPA
count
includes
all
major
manufacturing
facilities.
It
is
possible
that
our
counts
missed
some
small
cigar
manufacturers.

Since
no
source
published
a
complete
list
identifying
the
facilities
in
their
counts,
it
is
impossible
for
EPA
to
conducts
a
site­
by­
site
comparison.
However,
the
higher
counts
found
in
County
Business
Patterns
could
be
the
result
of
including
non­
manufacturing
locations
such
as
storage,
distribution,
and
headquarters
in
the
count.
4
Table
11
Facility
Counts:
Comparison
of
EPA
and
Other
Sources
Facility
Counts
NAICS
Census:
2002
Census
EPA
Harris
InfoSource
Census:
2002
CPB
312220
Tobacco
Stemming
and
Redrying
16
17
41
20
312221
Cigarette
Manufacturing
15
36
42
23
312229
Other
Tobacco
Product
Manufacturing
83
65
45
90
Totals
114
118
128
133
Sources:
Census,
2004a­
2004d,
Harris
InfoSource,
2004,
and
EPA
estimates.

5.2
Company
Counts
Table
12
compares
the
company
counts
from
the
2002
Census
of
Manufactures
(
Census,
2004a­
2004c)
with
the
EPA
counts.
The
Census
data
reflect
2002
conditions
while
the
EPA
data
reflect
2004
conditions.
As
a
result
of
their
recent
merger,
EPA
counts
the
DIMON
and
Standard
Commercial
Corporation
as
one
company.
EPA
also
counts
both
Lancaster
Leaf
Tobacco
Company
and
Luckett
Tobacco,
Inc.
under
their
parent
corporation
Universal
Corporation.
This
might
explain
some
discrepancies
in
the
numbers.
21
The
difference
in
the
count
of
cigarette
manufacturers
might
be
a
result
of
the
recent
start­
up
of
new
manufacturing
companies.
Two
companies
belong
to
Tribal
Entities
 
Seneca
Cayuga
Tobacco
and
Omaha
Nation
Tobacco
Manufacturing.
Several
of
the
newer,
smaller
companies
emphasize
that
they
produce
a
"
natural"
product
without
additives.

The
EPA
count
of
companies
in
the
other
tobacco
manufacturing
sector
is
substantially
lower
than
the
Census
count
(
by
18
companies
or
25
percent
lower).
Some
of
this
is
due
to
recent
consolidations,
such
as
Altadis
now
owning
Consolidated
Cigar
Holdings
and
Havatampa
and
Swedish
Match
AB
owning
General
Cigar
Holdings.
Some
companies
failed
after
the
interest
in
cigars
peaked
in
the
late
1990s
(
Savona,
2003)
Some
small
cigar
companies
have
recently
moved
manufacturing
operations
from
the
United
States
to
other
countries
such
as
the
Dominican
Republic
(
).
For
some
locations,
it
is
difficult
to
ascertain
whether
they
only
import
tobacco
or
manufacture
products
from
imported
tobacco.
Without
a
company
list
from
Census,
EPA
cannot
do
a
company­
by­
company
comparison
to
identify
where
different
classifications
have
occurred.
However,
EPA
believes
every
company
on
its
list
is
engaged
in
tobacco
manufacturing
activities.
EPA
is
aware
of
the
name
of
several
other
small,
privately
owned
cigar
manufacturing
locations
from
industry
magazines
but
could
find
no
other
data
on
them
(
.
These
could
not
be
included
in
our
facility
list
for
lack
of
data.
Thus,
if
we
have
missed
a
few
companies,
it
is
likely
that
they
are
small,
privately
owned,
and
unlikely
to
play
a
substantial
role
in
any
investigation
of
pollutant
discharges
from
this
industry.

Table
12
Company
Counts:
Comparison
of
EPA
and
Other
Sources
Number
of
Companies
NAICS
Industry
Census
EPA
312210
Stemming
&
Redrying
13
10
312221
Cigarettes
13
20
312229
Other
Tobacco
70
52
Total
96
82
Source:
Census,
2004a­
2004c
and
EPA
estimates.

5.2
Company
Financials
Of
the
82
companies
identified
by
EPA,
only
12
are
publicly
held
and
thus
have
financial
data
available
for
analysis.
However,
since
tobacco
production
is
highly
concentrated
and
the
largest
firms
tend
to
be
publically
held,
these
12
companies
control
most
of
the
tobacco
production
in
the
United
States.
For
example,
the
five
cigarette
companies
listed
account
for
over
99
percent
of
production
in
the
US
in
1997.
Table
13
lists
selected
financial
results
for
these
firms.
Except
where
noted,
financial
data
is
for
2004.
22
Of
the
12
firms
in
Table
13
two
companies
 
Swedish
Match,
and
Altadis
 
are
foreign.
Three
of
the
12
 
Altria,
Loews,
and
Swedish
Match
 
have
significant
businesses
outside
of
tobacco
manufacturing.
Financials
listed
in
Table
15
include
proceeds
from
these
business.

Star
Scientific
and
North
Atlantic
Trading
Company
 
as
the
only
companies
with
negative
cash
flow
 
illustrate
the
stark
differences
between
companies
in
the
same
market.
Reynolds
American
and
Star
Scientific
compete
at
different
ends
of
the
same
market.
Reynolds
American,
with
many
of
the
best
known
cigarette
brands,
produces
premium
products
that
do
not
compete
on
price.
In
contrast
Star
Scientific
owns
discount
brands
that
lack
strong
loyalty
and
must
compete
on
price
against
a
large
number
of
other
tiny
discount
manufacturers
and
importers.
Reynolds
American
in
turn
is
highly
profitable,
while
Star
Scientific
is
more
marginal.

North
Atlantic
Trading
bears
much
the
same
relationship
with
UST.
North
Atlantic
smokeless
brands
are
sold
at
a
discount,
while
UST
operates
at
the
premium
end
of
the
market
with
good
margins.
The
importance
of
strong
brands
leads
EPA
to
believe
that
most
of
the
smaller
private
firms
would
likely
be
far
more
marginal
than
the
largest
firms
in
the
industry.

5.3
Large
Tobacco
Manufacturing
Facilities
Table
14
contains
a
listing
of
tobacco
manufacturing
facilities
employing
more
than
1,000
people.
All
but
one
produce
cigarettes,
and
all
are
located
in
the
southeastern
United
States.
All
companies
except
Swisher
are
publicly
held.

EPA
believes
that
the
cigarette
facilities
listed
in
Table
14
produce
nearly
all
the
cigarettes
sold
by
Altria,
Reynolds
American,
and
Lolliards.
Therefore
it
is
likely
that
these
facilities
account
for
close
to
90
percent
of
domestic
cigarette
production.
23
Table
13
Selected
Financial
Results
for
Publically
Held
Tobacco
Companies
(
in
thousands
of
Dollars)

Company
Current
Assets
Total
Assets
Current
Liabilities
Long
Term
Liabilities
Total
Liabilities
Total
Revenues
Net
Income
Depreciation
Cash
Flow
Stemming
and
Redrying
Dimon*,***
$
839,768
$
1,353,152
$
403,224
$
424,897
$
1,353,152
$
1,268,752
$
28,057
$
35,261
$
63,318
Standard
Commercial
Corporation***
$
618,150
$
840,014
$
451,298
$
91,814
$
840,014
$
780,044
$­
13,638
$
18,025
$
4,387
Universal
Corporation*
$
1,374,997
$
2,243,074
$
824,281
$
614,994
$
2,243,074
$
2,636,776
$
110,594
$
45,519
$
156,113
Cigarette
Altria
$
25,901,000
$
101,648,00
0
$
23,574,000
$
16,462,000
$
101,648,000
$
89,610,000
$
9,416,000
$
1,607,000
$
11,023,000
Reynolds
American
$
4,624,000
$
14,428,000
$
4,055,000
$
1,595,000
$
14,428,000
$
6,437,000
$
688,000
$
153,000
$
841,000
Vector
Group
(
Ligget)
$
242,124
$
535,895
$
119,835
$
254,603
$
535,895
$
498,860
$
6,728
$
11,823
$
18,551
Loews
(
Lorillards)
$
19,027,100
$
73,749,500
$
2,523,600
$
5,980,200
$
73,749,500
$
1,401,600
$
1,231,300
$
350,800
$
1,582,100
Star
Scientific
$
17,610
$
69,517
$
11,961
$
34,164
$
69,517
$
66,657
$­
16,576
$
3,414
$­
13,163
Other
Tobacco
Product
Manufacturing
Altadis**
$
5,872,703
$
11,498,584
$
6,318,012
$
2,569,948
$
11,498,584
$
11,915,909
$
368,743
$
353,015
$
721,758
Swedish
Match**
$
1,109,000
$
2,099,000
$
525,000
$
639,000
$
2,099,000
$
1,812,000
$
217,000
$
92,000
$
309,000
UST
$
1,173,133
$
1,659,483
$
618,873
$
840,000
$
1,649,918
$
1,838,238
$
530,837
$
47,647
$
57,848
North
Atlantic
Trading
Company
$
54,005
$
228,699
$
32,421
$
200,000
$
288,699
$
115,320
$­
18,029
$
816
$­
1,213
*
In
2004
Dimon
and
Universal
shifted
its
financial
year
end
from
June
to
March
and
only
reported
results
for
8
months.
Therefore
this
table
includes
2003
financials,
the
last
full
year
available.

**
2003
Financials
24
***
Standard
Commercial
Corporation
and
DIMON
will
merged
in
May
2005.
Combined
financials
are
unavailable.
25
Table
14
Largest
Tobacco
Manufacturing
Facilities
by
Employment
Company
Segment
Employment
City,
State
Philip
Morris
Cigarettes
3,500
Richmond,
VA
Cigarettes
2,700
Concord,
NC
Reynolds
American
Cigarettes
2,100
Tobaccoville,
NC
Cigarettes
1,100
Macon,
GA*

Cigarettes
Unknown
Winston
Salem*

Lolliards
Cigarettes
2,300
Greensboro,
NC
Swisher
Cigars
1,100
Jacksonville,
FL
*
Reynolds
American
is
the
result
of
a
2003
merger
between
Brown
and
Williamson
and
R.
J.
Reynolds.
After
the
merger
the
company
announced
that
operations
in
the
former
Brown
and
Williamson
plant
in
Macon,
Georgia,
would
cease
in
2006.
Production
would
be
transferred
to
a
unused
R.
J.
Reynolds
facility
in
Winston­
Salem.
As
of
December
2004
the
Macon
Telegraph
reported
that
1,100
people
(
down
from
3,000)
were
still
working
in
the
Macon
facility.
The
size
of
the
Winston­
Salem
facility
is
unknown.
(
Morris,
2004)

6.
SMALL
BUSINESS
ANALYSIS
6.1
Definition
of
a
Small
Business
The
Regulatory
Flexibility
Act
(
RFA),
as
amended
by
the
Small
Business
Regulatory
Enforcement
and
Fairness
Act
of
1996,
requires
EPA
to
consider
the
economic
impacts
of
this
regulatory
action
on
small
entities.
Companies
operating
tobacco
manufacturing
facilities
can
be
grouped
into
large
or
small
businesses
based
on
the
Small
Business
Administrations
(
SBA)
general
size
standard
definitions
(
SBA,
2004).
Table
15
lists
the
NAICS
codes
and
size
standards
for
the
companies
owning
tobacco
manufacturing
facilities.

Table
15
NAICS
Codes
and
Small
Business
Size
Standards
NAICS
Codes
Size
Standard
312210
312221
312229
Number
of
Employees
500
1,000
500
Source:
SBA,
2004.
26
6.2
Number
of
Small
Businesses
The
identification
and
count
of
small
businesses
in
the
tobacco
manufacturing
industry
is
based
on
the
facility
list
developed
by
EPA.
Table
16
presents
the
counts
for
the
number
of
small
business
owned
facilities
by
NAICS
code.
In
the
stemming
and
re­
drying
category,
EPA
found
eight
small
companies
that
operate
eight
facilities
and
two
large
companies
that
operate
a
total
of
nine
facilities.

For
cigarette
manufacturers,
13
small
companies
operate
15
facilities,
while
five
large
companies
control
19
factories.

In
the
other
tobacco
category,
46
small
companies
operate
46
facilities
and
six
large
companies
own
19
facilities.
Additionally,
two
Native
American
Nations
 
the
Omaha
Tribe
of
Nebraska
and
the
Seneca­
Cayuga
Tribe
of
Oklahoma
 
operate
cigarette
manufacturing
facilities.
Overall,
EPA
found
tobacco
manufacturing
companies
that
own
118
facilities.
Of
these
82
companies,
14
are
large,
2
belong
to
Native
American
Nations,
and
the
remaining
66
are
small.

Table
16
Company
and
Facility
Counts
by
Small
Business
Classification
NAICS
Business
Size
Companies
Facilities
312210
Small
8
8
Stemming
and
Redrying
Large
2
9
312221
Small
13
15
Cigarette
Manufacturing
Large
5
19
Native
American
Tribe
2
2
312229
Small
46
46
Other
Tobacco
Manufacturing
Large
6
19
Total
82
118
Source:
EPA
list.

7.
STEMMING
AND
RE­
DRYING
COMPANIES:
RESOLVING
INCONSISTENCIES
AMONG
SOURCES
This
section
presents
information
on
how
EPA
resolved
inconsistencies
between
data
sources
listing
the
number
of
companies
operating
in
the
stemming
and
re­
drying
sector.
This
is
meant
to
be
an
example
of
the
confused
and
contradictory
data
in
public
sources
for
all
portions
on
the
tobacco
manufacturing
industry.
5Alliance
One
International
is
the
product
of
the
May
2005
merger
of
DIMON,
Inc.
and
Standard
Commercial
Corporation.

6Philip
Morris
USA
is
a
subsidiary
of
the
Altria
Group.
Through
conversations
with
industry
EPA
has
learned
that
internally,
and
within
the
industry
the
company
is
referred
to
as
Philip
Morris,
rather
than
Altria.
This
memo
will
follow
these
conventions
and
refer
to
the
company
as
Philip
Morris.

7This
company's
inclusion
in
the
list
seems
to
be
an
error,
Gale
(
2001)
possibly
mistook
Brown
and
Root
for
Brown
and
Williamson,
a
producer
of
cigarettes
that
is
now
part
of
Reynolds
America.

27
EPA
needed
to
go
through
similar
take
similar
actions
with
the
other
NAICS
codes
to
create
a
final
list
of
facilities
and
companies
in
the
tobacco
manufacturing
industry.

Table
17
summarizes
the
companies
listed
in
the
stemming
and
re­
drying
industry
by
three
information
sources.
Comparing
the
lists
shows
significant
disagreement.
Only
three
companies
appear
on
all
of
the
lists.
Additionally,
EPA
identified
other
companies
performing
stemming
and
re­
drying
on
tobacco
from
other
public
sources.
These
are
listed
in
tobacco_
sites.
wk4.

EPA
conducted
additional
research
to
clarify
the
number
of
companies
involved
in
stemming
and
redrying
EPA
combined
all
three
lists
and
then
adjusted
for
mergers
(
see
Table
18).
Of
the
all
the
companies
in
all
three
lists
EPA
identified
three
companies
that
operate
primarily
as
stemming
and
re­
drying
businesses
(
Universal
Corp,
Alliance
One
International5,
and
Parker
Industries).
Four
companies
listed
in
the
three
sources
operate
in
the
tobacco
production
industry,
but
do
not
appear
to
conduct
any
stemming
and
re­
drying
(
Reynolds
America,
Philip
Morris,
Altadis
USA
Inc,
and
UST
Inc.).

The
Philip
Morris's6
Park
500
plant
provides
a
useful
example
of
how
facilities
and
companies
became
mis­
classified.
Harris
InfoSource's
2004
Tobacco
Production
Industry
Report
lists
the
plant
in
the
stemming
and
re­
drying
category.
This
facility
processes
the
remainders
left
over
from
the
cigarette
production
at
other
facilities
into
a
product
known
as
reconstituted
tobacco.
This
paper­
like
tobacco
is
then
used
as
a
cheap
filler
in
cigarettes
(
Neergaard,
1996).

EPA
believes
the
classification
discrepencies
arose
during
the
shift
from
SIC
to
NAICS.
When
SIC
2141
was
split
 
see
Table
1
 
Reconstituted
tobacco
was
in
SIC
2141
with
stemming
and
re­
drying
operations.
However,
under
NAICS,
stemming
and
re­
drying
became
NAICS
312220
while
tobacco
reconstituting
moved
to
NAICS
312229
(
other
tobacco).
Harris
InfoSource
probably
simply
shifted
the
SIC
2141
characterization
to
NAICS
31220
when
the
plant
should
have
been
classified
as
NAICS
312229.
July
2005
site
visits
conducted
by
EPA
confirmed
that
this
facility
makes
reconstituted
tobacco
and
conducts
no
stemming
and
re­
drying
(
USEPA,
2005b)

Two
companies,
Brown
and
Root
International
and
Schweitzer­
Mauduit
International,
Inc.,
do
not
have
stemming
and
re­
drying
operations
or
other
tobacco
manufacturing
operations.
Schweitzer
manufactures
cigarette
papers
and
other
associated
items,
while
Brown
and
Root
(
a
subsidiary
of
Halliburton)
deals
in
construction
and
natural
resources.
EPA
found
no
evidence
that
the
company
ever
engaged
in
any
tobacco
manufacturing
activities.
7
28
Additionally,
several
of
the
listed
companies
are
owned
by
either
Universal
Corporation
or
Alliance
One
International.
The
combined
list
from
the
three
data
sources
 
that
originally
contained
over
20
companies
 
should
only
be
a
maximum
of
four
companies.
Based
on
additional
information
from
publicly
available
sources,
EPA
then
added
another
7
companies
not
included
in
Table
17
for
a
total
of
10
firms.

Table
17
Companies
Listed
in
the
Stemming
and
Re­
drying
Industry
D&
B,
2004
(
SIC
2141)
Gale,
2001
(
SIC
2141)
Harris
InfoSource,
2004
(
SIC
2141)

Brown
&
Williamson
Tobacco
Corp.
DIMON
Inc.
Lancaster
Leaf
Tobacco
Company
of
Pennsylvania,
Inc.
Lane
Limited
Philip
Morris
USA
Inc.
Schweitzer­
Mauduit
International
Inc.
Southwestern
Tobacco
Inc.
Standard
Commercial
Services,
Inc.
Tobacco
Processors,
Inc.
Universal
Corp.
Brown
&
Root
International,
Inc.
Brown
&
Williamson
Tobacco
Corp.
Dibrell
Brothers,
Inc.
DIMON
Inc.
Flue­
Cured
Tobacco
Cooperative
Stabilization
Corp.
K.
R.
Edwards
Leaf
Tobacco,
Inc.
Monk­
Austin
Inc.
Philip
Morris,
Inc.
Standard
Commercial
Corp.
Standard
Commercial
Tobacco,
Inc.
Universal
Corp.
Universal
Leaf
Tobacco
Company,
Inc.
UST,
Inc.
Altadis
USA,
Inc.
Park
500
Parker
Industries
Phillip
Morris
USA
Standard
Commercial
Services,
Inc.
Standard
Commercial
Tobacco,
Inc.
Taylor
Company
Inc.
JP
Universal
Corp.
8Note
that
these
are
companies,
not
facilities.
Many
names
here
represent
entities
that
once
owned
the
same
facility,
but
no
longer
exist
as
corporate
entities
following
acquisitions
or
mergers.

9This
facility
operates,
primarily,
as
a
cigarette
manufacturing
facility.
Thus,
it
is
included
in
EPA
counts
as
a
cigarette
facility.

29
Table
18
Reorganized
list
of
Companies
Listed
in
the
Stemming
and
Re­
drying
Industry8
Companies
whose
primary
business
is
stemming
and
re­
drying:

Alliance
One
International
°
Standard
Commercial
Services,
Inc.
°
Standard
Commercial
Tobacco,
Inc.
°
Dibrell
Brothers,
Inc.
°
Monk­
Austin,
Inc.
°
DIMON,
Inc
Universal
Corp
°
Lancaster
Leaf
Tobacco
Company
of
Pennsylvania,
Inc.
°
Southwestern
Tobacco
Inc.
°
Tobacco
Processors,
Inc.
°
K.
R.
Edwards
Leaf
Tobacco,
Inc.
°
Universal
Leaf
Tobacco
Company,
Inc.
°
Taylor
Company,
Inc,
JP
Parker
Industries
(
Small
Business)

Companies
that
own
a
facility
with
stemming
and
re­
drying
capabilities
(
the
primary
activity
is
cigarette
manufacturing)

Flue­
Cured
Tobacco
Cooperative
Stabilization
Corp.
9
Companies
that
do
not
own
stemming
and
re­
drying
facility:

Reynolds
America
°
Lane
Limited
(
Pipe
and
Cigarette
Tobacco)
°
Brown
&
Williamson
Tobacco
Corp.

Altria
Group
°
Philip
Morris
USA
Inc.
°
Park
500
Altadis
USA,
Inc
UST,
Inc.

Companies
that
do
not
process
tobacco:

Schweitzer­
Mauduit
International
Inc.
 
(
manufactures
tobacco
papers)

Companies
that
EPA
believes
does
not
process
tobacco
Brown
&
Root
International,
Inc.
30
8.
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