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U.S. Tobacco Situation & Outlook

U.S. Tobacco Situation & Outlook. Kelly Tiller. Southern Agricultural Outlook Conference Atlanta, GA September 27, 2006. Agricultural Policy Analysis Center - University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996-4519

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U.S. Tobacco Situation & Outlook

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  1. U.S. TobaccoSituation& Outlook Kelly Tiller Southern AgriculturalOutlook Conference Atlanta, GA September 27, 2006 Agricultural Policy Analysis Center - University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996-4519 www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298

  2. U.S. Cigarette Production, Consumption & Exports (-34%) (-24%) (-51%) Source: USDA, Economic Research Service

  3. U.S. Moist Snuff Consumption  41% Source: USDA, Economic Research Service

  4. Per Capita Consumption

  5. Tobacco 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

  6. Tobacco 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?)

  7. World Flue-Cured Production Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

  8. World Burley Production Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

  9. World 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

  10. Distribution of Leaf in U.S. Cigarettes Source: USDA, Economic Research Service

  11. Production 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

  12. US Tobacco Production Source: USDA, NASS, Crop Production Reports

  13. US Tobacco Acreage Source: USDA, NASS, Crop Production Reports

  14. -3.2% 97.5% 1.7% -44.6% -32.0% 10.3% -27.8% -1.3% -33.9% -18.5% -21.7% -72.5% Change in Total Tobacco Acreage 2004 to 2006 • Still not back to pre-buyout acreage • Burley generally down more than flue • Pennsylvania up significantly • Missouri above 2004 level

  15. 0.8% 58.0% -2.0% -8.8% 17.7% 18.5% 4.1% 22.2% -12.9% 10.0% 12.5% -56.0% Change in Total Tobacco Acreage 2005 to 2006 • Flue-cured states generally up • Florida way down • Mix in burley • Kentucky up some • Tennessee down 13% • Several states no longer reported

  16. Flue-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

  17. U.S. Flue-Cured Production Source: USDA, NASS, Crop Production Reports

  18. U.S. Flue-Cured Acreage Source: USDA, NASS, Crop Production Reports

  19. -26.1% 21.4% -0.9% 22.0% -18.5% 10.0% -21.7% 12.5% -72.5% -56.0% Change in Flue-Cured Acreage 2004 to 2006 2005 to 2006

  20. Flue-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

  21. U.S. Flue-Cured Exports Source: USDA, Economic Research Service

  22. Burley 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

  23. U.S. Burley Production Source: USDA, NASS, Crop Production Reports

  24. U.S. Burley Acreage Source: USDA, NASS, Crop Production Reports

  25. 150.0% -44.6% -8.8% -52.5% 0.0% 10.3% 18.5% -31.1% 4.3% -14.9% 33.3% -41.7% -17.6% Change in Burley Acreage 2004 to 2006 2005 to 2006

  26. Burley 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

  27. U.S. Burley Exports Source: USDA, Economic Research Service

  28. Other 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

  29. -46.5% 11.8% -11.7% 0.0% -2.1% 1.8% Change in Dark-Fired Acreage 2004 to 2006 2005 to 2006

  30. 28.8% 27.0% -25.9% -11.1% Change in Dark Air-Cured Acreage 2004 to 2006 2005 to 2006

  31. 2006 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

  32. Respondents Growing in ‘06 No Yes 47% 47% 52% 40%

  33. Average Planted Acres

  34. ’06 Average Acreage Yes 47% No 53%

  35. Last Year Actively Growing 62% 23% 11% 3%

  36. 2006 Prices, Tennessee

  37. 2006 Prices, Virginia

  38. 2006 Prices, North Carolina

  39. Likelihood of Producing in ‘07

  40. Expected Acreage Changes in ‘07

  41. Likelihood of Producing in ‘10

  42. Likelihood of Producing in ‘15

  43. Other Farm Enterprises

  44. Why NOT Producing in ’07? • Not profitable enough (88%) • Shortage of labor (63%) • Age, near retirement (52%) • Too risky without a price guarantee (37%)

  45. Biggest 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%)

  46. Summary & 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

  47. For More Information … www.agpolicy.org

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