It’s clear that we are nearing the day when the U.S. Cuban Trade Embargo will finally be lifted. The Obama administration took major steps to normalize relations with the small island nation, located just 80 miles off the coast of Florida. In my opinion, Cuba is in for the fight of their life and it may not end well for them. Here are three key problems as I see it.
1.) Cuba currently produces 90 million cigars per year, while the U.S. alone reportedly consumes over 300 million cigars per year. Even if Cuba gave the U.S. 50% of their entire production they wouldn’t scratch the surface of the pent up demand. It goes without saying that Cuba is famous for its cigars and the demand for the forbidden fruit is through the roof. If the flood gates open, current production would never be able to keep up, and simple supply demand economics suggest that prices will not just rise but spike.
2.) The Cuban government is woefully under-equipped to increase tobacco production in a meaningful way. The government controls the export of cigars entirely—these are the number one export and money maker for the socialist country— but they severely lack the infrastructure, capital, and modern equipment to be able to meet the demand. Antiquated farming equipment and techniques make increased production difficult at the most basic level. If an embargo is lifted, the Cuban government needs to be able to adequately respond to a surge in demand, and this is extremely unlikely.
3.) The U.S. does not recognize Cuban companies as legitimate businesses. This allows the non-cuban cigar manufacturers that operate under the same names as the classic Cuban cigars to be considered authentic by U.S. Copyright law. The Dominican produced Cohibas and Montecristos, for example, will be given legal preference over the original Cubans controlled by Habanos SA in a dispute over branding, leaving the classic Cuban cigar brands Cohiba, Montecristo and Partagas considered counterfeits. This could easily lead to a court battle after the embargo is lifted.
So what does this all mean to the people of Cuba?
You might think that this is the shining moment that all Cubans have been waiting for. Finally their amazing product will be open to the largest cigar market in the world and will bring an influx of foreign money to the isolated nation. But just when the economy could get relief, the rug will be pulled out from under them. How you ask? The price of Cuban cigars will surge to record levels, with some projections at 5-10 times the current MSRP. This will force SA Habanos to attempt an increase in tobacco production. But due to limited resources, production quality will likely suffer and cause what was a cigar boom, to bust! No one wants to pay a few hundred dollars for a sub par product, and poor quality won’t just be a problem for the American consumer. If there is a dramatic shift in Cuban cigar quality, international buyers will lose faith in the product, and overall sales will decline. Export of cigars is the backbone of the socialist country and without robust sales, the country’s economy will collapse. Cuba is already a very poor country and in no position to weather an economic storm. Our advice is to hoard as many cigars as you can produced prior to 2015.