U.S. Tobacco Situation & Outlook

CCAAAAPPAgricultural Policy Analysis Center - University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996-4519

www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298

U.S. TobaccoU.S. TobaccoSituationSituation& Outlook& Outlook

Southern AgriculturalOutlook Conference

Atlanta, GA

September 27, 2006

Kelly Tiller

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U.S. Cigarette Production, U.S. Cigarette Production, Consumption & ExportsConsumption & Exports

Source: USDA, Economic Research Service

(-24%)

(-51%)

502

372

119

755

487

244

563

425

134

0

100

200

300

400

500

600

700

800

Production Consumption Exports

Bill

ion

Pie

ces

1996 2001 2006

(-34%)

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U.S. Moist Snuff ConsumptionU.S. Moist Snuff Consumption


41%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Mill

ion

Pou

nds

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Per Capita ConsumptionPer Capita Consumption

0

500

1,000

1,500

2,000

2,500

3,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Num

ber

of C

igar

ette

s

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Pou

nds

of S

nuff

Cigarettes Snuff

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Tobacco Industry TrendsTobacco Industry Trends

• Cigarette consumption continuing annual decline, about 1-2%

• Moist snuff consumption continuing annual increase, about 5%

• Cigarette companies moving into smokeless categories– RAI purchased Conwood in 2006 for $3.5 billion– PM introducing new smokeless products– New spitless products on the market

• Potential for future FDA regulation still looming

• Major manufacturers regaining some market share as NPMs are edged out of the market

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Tobacco Industry TrendsTobacco Industry Trends

• States continuing to increase cigarette excise taxes– Average state excise tax is $0.96/pack (by January

2007)– 21 states above $1.00/pack, 7 states above

$2.00/pack

• Significant increases in smoking restrictions

• Some major litigation resolved in 2006 (Engle, DOJ), other new suits pending (Schwab)

• Altria appears prepared to spin off Kraft Foods and Philip Morris USA (and PMI?)

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World Flue-Cured ProductionWorld Flue-Cured Production

Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2003 2004 2005 2006(E) 2007(P)

Mill

ion

gree

n kg

s

Brazil India USA Other Exporters ROW

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World Burley ProductionWorld Burley Production

Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

0100200300400500

600700800900

1,000

2003 2004 2005 2006(E) 2007(P)

Mill

ion

gree

n kg

s

USA Malawi Brazil Other Exporters ROW

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World Market TrendsWorld Market Trends

• World cigarette market becoming more concentrated– 3 companies account for 2/3 of market

• Aggressive marketing (where permitted) fueling growth

• Generally less uncertainty and risk from litigation internationally

• Increasing taxes and smoking restrictions in some developed countries

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Distribution of Leaf in U.S. CigarettesDistribution of Leaf in U.S. Cigarettes

0

10

20

30

40

50

60

70

80

90

100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Per

cent

Dis

trib

utio

n

Flue-cured Burley Maryland Imported


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Production AssessmentProduction Assessment

• Acreage and production increasing, but not back to pre-buyout levels

• Overall, 2006 production up nearly 100 million pounds, up nearly 15% over 2005

• Number of farmers down dramatically, especially for some traditional burley regions

• Remaining growers expanding acreage

• Production expanding into nontraditional growing areas

• Domestic stocks declining as co-op stocks are depleted

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US Tobacco ProductionUS Tobacco Production

Source: USDA, NASS, Crop Production Reports

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Mill

ion

Pou

nds

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US Tobacco AcreageUS Tobacco Acreage


0

100

200

300

400

500

600

700

800

900

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Tho

usan

d A

cres

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Change in Total Tobacco AcreageChange in Total Tobacco Acreage

• Still not back to pre-buyout acreage

• Burley generally down more than flue

• Pennsylvania up significantly

• Missouri above 2004 level

2004 to 2006

1.7%

-72.5%

-21.7%

-27.8%

-3.2%

10.3%

-1.3%

-44.6%

97.5%

-18.5%

-33.9%

-32.0%

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Change in Total Tobacco AcreageChange in Total Tobacco Acreage

• Flue-cured states generally up

• Florida way down

• Mix in burley– Kentucky up some– Tennessee down 13%

• Several states no longer reported

-2.0%

-56.0%

12.5%

4.1%

0.8%

18.5%

22.2%

-8.8%

58.0%

10.0%

-12.9%

17.7%

2005 to 2006

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Flue-Cured OutlookFlue-Cured Outlook

• 2006 flue-cured production expected to be 455 to 489 million pounds– Up 18-28% over 2005

• Acreage higher in 2006, still not up to 2004 levels– Up significantly (20%) in North Carolina, mostly in the Eastern

part of the state– Moving out of Florida– Smaller expansions in Virginia, Georgia, South Carolina

• Exports may strengthen as prices adjust to post-buyout levels– 2006 exports up, first increase in over a decade

• Lower production in Brazil in 2007 may increase incentives to expand U.S. production

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U.S. Flue-Cured ProductionU.S. Flue-Cured Production


0

200

400

600

800

1,000

1,200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Mill

ion

Pou

nds

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U.S. Flue-Cured AcreageU.S. Flue-Cured Acreage

0

50

100

150

200

250

300

350

400

450

500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Tho

usan

d A

cres


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Change in Flue-Cured AcreageChange in Flue-Cured Acreage

2005 to 2006

-72.5%

-21.7%

-0.9%

-18.5%

-26.1%

2004 to 2006

-56.0%

12.5%

22.0%

10.0%

21.4%

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Flue-Cured PricesFlue-Cured Prices

• ??? – no official market reporting

• 2006 prices appear slightly higher than 2005– Average around $1.50 per pound– Prices still about 20-25% below pre-buyout levels

• Contract price range appears to have narrowed in 2006– Some lower priced companies increased prices

• Percentage of tobacco sold under contract increasing

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U.S. Flue-Cured ExportsU.S. Flue-Cured Exports

0

50

100

150

200

250

300

Mill

ion

poun

ds (

decl

ared

wei

ght)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


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Burley OutlookBurley Outlook

• 2006 burley production expected to be 225 to 249 million pounds– Up 10-22% over 2005

• Acreage– Moving out of Tennessee and traditional areas of North Carolina

and Virginia– Shifting from East/Central to Western Kentucky– New production in Piedmont and Eastern North Carolina,

Pennsylvania

• Exports may strengthen as prices adjust to post-buyout levels

• Potential to support 300 million pounds total use

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U.S. Burley ProductionU.S. Burley Production


0

100

200

300

400

500

600

700

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Mill

ion

Pou

nds

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U.S. Burley AcreageU.S. Burley Acreage

0

50

100

150

200

250

300

350

400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Tho

usan

d A

cres


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Change in Burley AcreageChange in Burley Acreage

2005 to 20062004 to 2006

-31.1%

10.3%

-14.9%

-44.6%

-41.7%

-52.5%4.3%

18.5%

33.3%

-8.8%

-17.6%

0.0%

150.0%

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Burley PricesBurley Prices

• ??? – no official market reporting

• Additional price incentives offered in 2006– Higher prices brought in more acreage

• 2006 prices higher than 2005– Averaged around $1.50-$1.55 per pound in

2005– Averaging around $1.60 per pound in 2006– Still 20-25% below pre-buyout levels

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U.S. Burley ExportsU.S. Burley Exports


0

20

40

60

80

100

120

140

Mill

ion

poun

ds (

decl

ared

wei

ght)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Other Tobacco TypesOther Tobacco Types

• Less dramatic price declines post-buyout for dark-fired tobacco

• Adjustment to post-buyout market has been less dramatic

• Strong demand for domestic use in smokeless tobacco products

• Little movement in production areas

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Change in Dark-Fired AcreageChange in Dark-Fired Acreage

2005 to 20062004 to 2006

-46.5%

0.0%

-2.1%

11.8%

-11.7%

1.8%

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Change in Dark Air-Cured AcreageChange in Dark Air-Cured Acreage

2005 to 20062004 to 2006

28.8%

-25.9%

27.0%

-11.1%

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2006 TN-VA-NC Burley Survey2006 TN-VA-NC Burley Survey

• Mail-based survey of 6,000 burley growers in traditional areas of Tennessee, Virginia, and North Carolina

• First available market and production information post-buyout

• Surveys completed May 2006

• 813 completed responses, preliminary results available

• Follow-up Extension agent survey Dec. 2006

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Respondents Growing in ‘06Respondents Growing in ‘06

0

100

200

300

400

500

600

700

800

Total TN VA NC

Nu

mb

er

of

Re

spo

nd

en

ts

47%47%

52% 40%

No

Yes

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Average Planted AcresAverage Planted Acres

0123456789

10

Ave

rag

e P

lan

ted

Acr

es

2004 2005 2006

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’’06 Average Acreage06 Average Acreage

No53%

Yes47%

0123456789

10P

lan

ted

Acr

es

All TN VA NC

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Last Year Actively GrowingLast Year Actively Growing

0

50

100

150

200

250

# R

esp

on

den

ts E

xiti

ng

2002 2003 2004 2005

3%

11%

62%

23%

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2006 Prices, Tennessee2006 Prices, Tennessee

0

20

40

60

80

100

120

140

20

06

Pric

e D

istr

ibu

tion

(fr

eq

)

< $

1.3

5

$1

.35

-9

$1

.40

-4

$1

.45

-9

$1

.50

-4

$1

.55

-9

$1

.60

-4

$1

.65

-9

$1

.70

-4

> $

1.7

4

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2006 Prices, Virginia2006 Prices, Virginia

0

5

10

15

20

25

30

35

40

20

06

Pric

e D

istr

ibu

tion

(fr

eq

)

< $

1.3

5

$1

.35

-9

$1

.40

-4

$1

.45

-9

$1

.50

-4

$1

.55

-9

$1

.60

-4

$1

.65

-9

$1

.70

-4

> $

1.7

4

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2006 Prices, North Carolina2006 Prices, North Carolina

02468

1012141618

20

06

Pric

e D

istr

ibu

tion

(fr

eq

)

< $

1.3

5

$1

.35

-9

$1

.40

-4

$1

.45

-9

$1

.50

-4

$1

.55

-9

$1

.60

-4

$1

.65

-9

$1

.70

-4

> $

1.7

4

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Likelihood of Producing in ‘07Likelihood of Producing in ‘07

0

50

100

150

200

250

# R

esp

on

den

ts

DefinitelyYes

ProbablyYes

Not Sure ProbablyNot

DefinitelyNot

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Expected Acreage Changes in ‘07Expected Acreage Changes in ‘07

0

50

100

150

200

250

# R

esp

on

den

ts

Up>50%

Up25%-50%

Up25%

Same Down25%

Down25%-50%

Down>50%

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0

50

100

150

200

250

300

# R

esp

on

den

ts

DefinitelyYes

ProbablyYes


DefinitelyNot

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Other Farm EnterprisesOther Farm Enterprises

0

10

20

30

40

50

60

70

80

Per

cen

tag

e

Beef

HayDai

ry

Broile

rsG

rain

Fr & V

eg

Dark F

ire

Dark A

irFlue

CCAAAAPP

Why NOT Producing in ’07?Why NOT Producing in ’07?

• Not profitable enough (88%)

• Shortage of labor (63%)

• Age, near retirement (52%)

• Too risky without a price guarantee (37%)

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Biggest Challenges Next 2-5 YearsBiggest Challenges Next 2-5 Years

• Contract prices too low (54%)

• High costs of hiring labor (53%)

• High costs of nitrogen fertilizer (47%)

• Shortage of affordable and/or legal labor (27%)

• High costs of other production in puts (24%)

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Summary & ConcernsSummary & Concerns

• Tobacco markets beginning to stabilize and rebound following the buyout

• Exports have potential to expand, especially in flue-cured

• Increasing imports leveling off post-buyout

• Concerns about labor availability

• Working toward more mechanization in burley harvest

• High fuel prices particularly a problem for flue-cured

• Free market provides more incentives to reduce costs

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U.S. Tobacco Situation & Outlook

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