Flue-Cured Tobacco Flue-Cured Tobacco July 18, 2009July 18, 2009

Blake BrownBlake BrownHugh C. Kiger ProfessorHugh C. Kiger Professor

Agricultural & Resource EconomicsAgricultural & Resource EconomicsCollege of Agriculture & Life SciencesCollege of Agriculture & Life Sciences

OutlineOutline

I.I. U.S. & NC ProductionU.S. & NC Production

II.II. Input CostsInput Costs

III.III. Tobacco TradeTobacco Trade

IV.IV. Industry Situation & IssuesIndustry Situation & Issues

V.V. Curing CapacityCuring Capacity

U.S. & NC ProductionU.S. & NC Production

Flue-cured tobacco basic quota Flue-cured tobacco basic quota (87-04)/production (05-08)(87-04)/production (05-08)

Flue-cured tobacco acreageFlue-cured tobacco acreage2005-20092005-2009

Flue-cured tobacco acreage by stateFlue-cured tobacco acreage by state

2005-20092005-2009

PricesPrices

PricesPrices

2008:2008:• $1.80 per pound$1.80 per pound• Up about $0.30 from 2007Up about $0.30 from 2007• Up about 20%Up about 20%

20092009• Similar to or slightly below 2008?Similar to or slightly below 2008?

Input CostsInput Costs

Propane Gas: August 2009 ContractPropane Gas: August 2009 ContractDaily Prices/gallon NYMEXDaily Prices/gallon NYMEX

Monthly Index of Prices Paid: FertilizerMonthly Index of Prices Paid: Fertilizer(% of 1990-1992 prices)(% of 1990-1992 prices)

Source: USDA-NASS

Tobacco TradeTobacco Trade

Flue-Cured Domestic Use and Flue-Cured Domestic Use and ExportsExports

Source: Exchange-Rates.org

Trade TrendsTrade Trends

Dollar is once again declining in Dollar is once again declining in value: good for exportsvalue: good for exports

Tobacco ManufacturingTobacco Manufacturing

Manufacturing TrendsManufacturing Trends Higher Federal excise taxesHigher Federal excise taxes Continued increases in state excise Continued increases in state excise

taxestaxes FDA RegulationFDA Regulation

• Higher cigarette pricesHigher cigarette prices• Lower cigarette productionLower cigarette production• Lower demand for tobaccoLower demand for tobacco

Manufacturing TrendsManufacturing Trends Changes in U.S. cigarette production Changes in U.S. cigarette production

technology will reduce the amount of technology will reduce the amount of tobacco used per cigarette by U.S. tobacco used per cigarette by U.S. manufacturers leading to significant manufacturers leading to significant declines in demand for US tobaccodeclines in demand for US tobacco

Diverse paths for cigarette market in Diverse paths for cigarette market in developing world versus market in developing world versus market in USUS

Implications for GrowersImplications for Growers

Lower domestic useLower domestic use Fewer growers Fewer growers But domestic manufacturers will But domestic manufacturers will

have more specialized needshave more specialized needs Domestic manufacturers will be very Domestic manufacturers will be very

selective in choosing growersselective in choosing growers The chosen will be profitableThe chosen will be profitable

Implications for GrowersImplications for Growers

Exports dependent on Brazil and Exports dependent on Brazil and exchange ratesexchange rates

Export buyers follow more traditional Export buyers follow more traditional buying patternsbuying patterns

Curing InfrastructureCuring Infrastructure

Aging Curing BarnsAging Curing Barns

Almost 10 years since most Almost 10 years since most retrofitting retrofitting

Shrinking industry has enabled farms Shrinking industry has enabled farms to “cull” barnsto “cull” barns

Farmers now face decisions about Farmers now face decisions about barn replacementbarn replacement

Investment in new barns?Investment in new barns?

Do your profit levels justify the Do your profit levels justify the investment?investment?• $35,000 barn (installed)$35,000 barn (installed)• 10 year 10 year useful useful life, 8% interest ratelife, 8% interest rate• $490/acre annual return to barn needed$490/acre annual return to barn needed

How certain is your contract over the How certain is your contract over the next 10 years?next 10 years?

Investment in new barns?Investment in new barns?

If other fixed costs = $200/acreIf other fixed costs = $200/acre Implies $700/acre needed as a return Implies $700/acre needed as a return

to fixed coststo fixed costs This does NOT include any return to This does NOT include any return to

land (rent) or managementland (rent) or management

Flue-Cured Tobacco Flue-Cured Tobacco

Returns Over Operating CostsReturns Over Operating Costs ($ per acre)($ per acre)

$1.70$1.70 $1.75$1.75 $1.80$1.80

20002000$607 $707 $807

22002200$895 $1,005 $1,115

24002400$1,183 $1,303 $1,423

26002600$1,471 $1,601 $1,731