The Tobacco Buyout: Early Observations and The Tobacco Buyout: Early Observations and Concerns Among KY Tobacco GrowersConcerns Among KY Tobacco Growers
Will SnellUniversity of Kentucky
Review of Winter Tobacco Meetings
Production Response
Early Post-Buyout Demand Response
Concerns for 2006 and Beyond
Agricultural Economics
TopicsTopics
Agricultural Economics
Tobacco Outlook Evolving from Tobacco Outlook Evolving from 2004-05 Winter Tobacco Meetings2004-05 Winter Tobacco Meetings
???Number of Tobacco Farms/Growers?Location of Production?Price/Profit?Supply and Demand?Contract Requirements?Alternative Markets to Contracting?Role of the Cooperatives?Buyout Checks, 2004 Phase II, Grower Lawsuit Payments?
Post Buyout – Number of Farms/Growers
In recent years over 2/3 of KY’s tobacco farms with quotas have leased out their base
+ retirees
+ those who can’t compete in a post-buyout environment
+ those who can’t rent land/barns …
Agricultural Economics
75% of former program participants will exit
With No Production Restrictions Will We Grow More Tobacco in 2005?
Kentucky Tobacco Production 2004 vs 2005Kentucky Tobacco Production 2004 vs 2005(71 reporting counties, 78% of 2004 quota)(71 reporting counties, 78% of 2004 quota)
0
20
40
60
80
100
120
140
160
1.65 1.60 1.50 1.40 1.35
$/LB
LBS
Agricultural Economics
-12%-17%
-29%
-53%
-67%
Source: Nov. 2004 KY County Agent Survey
Production Levels
Agricultural Economics
Production Will Be Affected By Labor
Barn Space
Access to Capital
Access to Markets
Available Crop Land
General Interest in Growing the Crop
Trust in the Companies Without a Safety Net
Profitability of Alternative Enterprises/Off Farm Income
And of course … PRICE vs COST OF PRODUCTION
Average Post-Buyout Price ???Average Post-Buyout Price ???(#2 Quality)(#2 Quality)
• Cost of Production- $3150/acre
• 2100 lb Yield (State Avg.) -- $1.50/lb COP
• 2500 lb Yield $1.25/lb COP
Agricultural Economics
Grade % of Crop
Contract Price
X2 10% 1.60
C2 25% 1.45
B2 50% 1.52
T2 15% 1.65
AVERAGE 100% 1.53
Cost of Production at Various Yield Levels
0.000.250.500.751.001.251.501.752.00
1700 1900 2100 2300 2500 2700Lb/Acre
$/Lb
Operator Labor
Land, Facilities & Machinery
Hired Labor
Variable Costs
’05 Market Price
Location of Production
Agricultural Economics
Location Will Be Driven By:
Infrastructure (Both Growers and Buyers)
Companies Desires to Minimize Disease and Weather Risk
Ability to Produce Desired Output and Quality Levels
Cost of Production
Yields
Average Burley Yields (1980-2004)Average Burley Yields (1980-2004)
15481846
189919011905209420962127
0
500
1000
1500
2000
2500
MO KY IN VA TN OH NC WV
Pou
nds
Per
Acr
e
Agricultural Economics
Adair
Allen
Anderson
BallardBarren
Bath
Bell
Boone
Bourbon
Boyd
Boyle
Bracken
Breathitt
Breckinridge
Bullitt
ButlerCaldwell
Calloway
Campbell
Carlisle
Carroll
Carter
Casey
Christian
Clark
Clay
Clinton
Crittenden
Cumberland
Daviess
Edmonson
Elliott
Estill
Fayette
Fleming
Floyd
Franklin
Fulton
Gallatin
Garrard
Grant
Graves
Grayson
Green
Greenup
Hancock
Hardin
Harrison
Hart
Henderson
Henry
Hickman
HopkinsJackson
Jefferson
Jessamine Johnson
Kenton
Knott
Knox
Larue
Laurel
Lawrence
Lee
Leslie Letcher
Lewis
Lincoln
Livingston
Logan
LyonMccracken
Mccreary
Mclean
MadisonMagoffin
Marion
Marshall
Martin
Mason
MeadeMenifee
Mercer
Metcalfe
Monroe
Montgomery
Morgan
Muhlenberg
Nelson
Nicholas
Ohio
OldhamOwen
Owsley
Pendleton
Perry
Pike
Powell
Pulaski
Robertson
Rockcastle
Rowan
Russell
ScottShelby
Simpson
Spencer
Taylor
ToddTrigg
Trimble
Union
Warren
Washington
Wayne
Webster
Whitley
Wolfe
Woodford
Harlan
More than 2,200 lbs 2,101 - 2,200 lbs
2,000 to 2,100 lbs Less than 2000 lbs
Average Burley Yield(1980-2004)
KY Average (1980-2004)2,096 lbs/Acre
Adair
Allen
Anderson
Ballard
Barren
Bath
Bell
Boone
Bourbon
Boyd
Boyle
Bracken
Breathitt
Breckinridge
Bullitt
ButlerCaldwell
Calloway
Campbell
Carlisle
Carroll
Carter
Casey
Christian
Clark
Clay
Clinton
Crittenden
Cumberland
Daviess
Edmonson
Elliott
Estill
Fayette
Fleming
Floyd
Franklin
Fulton
Gallatin
Garrard
Grant
Graves
Grayson
Green
Greenup
Hancock
Hardin
Harrison
Hart
Henderson
Henry
Hickman
Hopkins
Jackson
Jefferson
Jessamine Johnson
Kenton
Knott
Knox
Larue
Laurel
Lawrence
Lee
Leslie Letcher
Lewis
Lincoln
Livingston
Logan
LyonMccracken
Mccreary
Mclean
MadisonMagoffin
Marion
Marshall
Martin
Mason
MeadeMenifee
Mercer
Metcalfe
Monroe
Montgomery
Morgan
Muhlenberg
Nelson
Nicholas
Ohio
Oldham
Owen
Owsley
Pendleton
Perry
Pike
Powell
Pulaski
Robertson
Rockcastle
Rowan
Russell
ScottShelby
Simpson
Spencer
Taylor
ToddTrigg
Trimble
Union
Warren
Washington
Wayne
Webster
Whitley
Wolfe
Woodford
Harlan
Purchase2%
Mid Western7%
Northern KY12%
Central KY25%
Bluegrass41%
Eastern KY13%
Burley Production by KY Crop Reporting Districts(1980-2003)
Agricultural Economics
2005 Burley Acres2005 Burley Acres
March 1st Planting Intentions – 30%
June Acreage Report -30%
… But Increase in Yields Were Expected to PartiallyOffset Some of the Decline in Acreage
Average Burley Yields Average Burley Yields
0
500
1000
1500
2000
2500
3000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Pou
nds
Per
Acr
e
U.S.KY
Agricultural Economics
Source: NASS/USDA
2005 Yield:US: 1826 lbs/acreKY: 1800 lbs/acre
U.S. Burley Production (1997-2005)U.S. Burley Production (1997-2005)
0
100
200
300
400
500
600
700
1997 1998 1999 2000 2001 2002 2003 2004 2005
Mill
ion
Lbs
Agricultural Economics
Source: NASS/USDA
-34%
KY Burley Production (1997-2005)KY Burley Production (1997-2005)
050
100150200250300350400450500
1997 1998 1999 2000 2001 2002 2003 2004 2005
Mill
ion
Lbs
Agricultural Economics
Source: NASS/USDA
-35%
TN Burley Production (1997-2005)TN Burley Production (1997-2005)
0
20
40
60
80
100
120
1997 1998 1999 2000 2001 2002 2003 2004 2005
Mill
ion
Lbs
Agricultural Economics
Source: NASS/USDA
-30%
Burley Production in Other States (2004 vs 2005)Burley Production in Other States (2004 vs 2005)
0
2
4
6
8
10
12
IN VA NC OH MO WV PA
Mill
ion
Lbs
Agricultural Economics
Source: NASS/USDA
?--44%
-12% -47%
-7%
-50%
0
50
100
150
200
250
300
350
400
450
500
1997 1998 1999 2000 2001 2002 2003 2004 2005
Mil lbs
U.S. Burley Loan StocksU.S. Burley Loan Stocks
Agricultural Economics
Source: USDA/ERS/Burley Co-op
Pre-Buyout 170 mil lbs
CCC Sales: 57 mil lbs
Co-op Sales: 31 mil lbs
Current :82 mil bls
U.S. Burley PurchasesU.S. Burley Purchases
0
50
100
150
200
250
300
350
400
2001 2002 2003 2004 2005
Mil
lbs
COMPANY PURCHASES POOL INTAKE2005 PRODUCTION POOL PURCHASES
Agricultural Economics
Agricultural Economics
What about World Supply/Demand What about World Supply/Demand Response in the Post-Buyout Era?Response in the Post-Buyout Era?
0
100
200
300
400
500
600
700
800
1997 1998 1999 2000 2001 2002 2003 2004 2005
mil lbs
Brazil Argentina Malawi U.S.
• 1997 -2004:
– US (-52%)– Brazil (+43%)– Argentina (+51%)– Malawi (+13%)
U.S. Burley Marketings vs Production in U.S. Burley Marketings vs Production in Selected Other Burley Markets (1997-2005F)Selected Other Burley Markets (1997-2005F)
Agricultural Economics
Source: Universal Leaf
World Burley Production for 2005 Is Expected to be Down Around10% for 2005
0
20
40
60
80
100
120
140
160
180
1994 1996 1998 2000 2002 2004
mil lbs
Mozambique Zambia Uganda
Burley Production in Other African MarketsBurley Production in Other African Markets
Agricultural Economics
Source: Universal Leaf
0
1
2
3
4
5
6
7
8
9
1997 1998 1999 2000 2001 2002 2003 2004 2005
$/kg
U.S. Import
U.S. Burley Export Price vs U.S. Burley Export Price vs Average U.S. Burley Import PricesAverage U.S. Burley Import Prices
Agricultural Economics
Source: USDA/FAS
0
10
20
30
40
50
60
70
1992 1994 1996 1998 2000 2002 2004
1000 MT
U.S. Burley ExportsU.S. Burley Exports
Agricultural Economics
Source: USDA/FAS
For the first 5 months of 2005, USBX up 29%
U.S. Cigarette Production, U.S. Cigarette Production, Consumption and ExportsConsumption and Exports
0
100
200
300
400
500
600
700
800
1990 1993 1996 1999 2002 2005
Bill
ion
s
PRODUCTION
CONSUMPTION
EXPORTS
Agricultural Economics
Source: USDA/ERS
0
10
20
30
40
50
60
70
80
90
100
110
120
1992 1994 1996 1998 2000 2002 2004
1000 MT
U.S. Burley ImportsU.S. Burley Imports
Agricultural Economics
Source: USDA/FAS
For the first 5 months of 2005, USBM down 63%
U.S. Burley Disappearance (Use)U.S. Burley Disappearance (Use)
0
100
200
300
400
500
600
700
800
1970 1975 1980 1985 1990 1995 2000
Mil
Lb
s
DOMESTIC EXPORTS TOTAL
USDA’s Burley Disappearance (Use)USDA’s Burley Disappearance (Use)10 Year Baseline Projections (2005-2014)10 Year Baseline Projections (2005-2014)
0100200300400500600700800
Mil
Lb
s
DOMESTIC EXPORTS TOTAL
Short-term Supply Availability
Contract and Market Price Information
Making Long-term Investments
Market for Tobacco that Does Not Meet Quality Specifications
Price Risks Due to Uncontrollable Quality Outcomes (early frost, unfavorable curing conditions)
Unity and Vision within the Industry
Agricultural Economics
ConcernsConcerns
Kentucky Tobacco Cash ReceiptsKentucky Tobacco Cash Receipts
0100200300400500600700800900
1000
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Million Dollars
Agricultural Economics
Source: Ky Ag Stats/NASS
Below 1699 lbs.
1700-1799 lbs
1800-2000 lbs
Over 2000 lbs.
Average Burley Yield(1980-2004)
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