TMA Annual Meeting and Conference Global Leaf Trends Changing Dynamics / Future Trends Presentation By: Jim Starkey Wi

1. TMA Annual Meeting and ConferenceGlobal Leaf Trends Changing Dynamics / Future Trends Presentation By:Jim StarkeyWilliamsburg, VirginiaMay18, 2009

2. Some Significant Changes • Market Implications • Current Supply and Demand Situation • Future Trends / Potential Beneficiaries • Final Observations

3. 2008 Estimated World Leaf Production

4. Significant Changes • Sources of leaf have shifted dramatically

5. Flue-Cured Tobacco Production 1960 2008

6. Burley Tobacco Production 1960 2008

7. A Dynamic Industry • Sources of leaf have shifted dramatically • Consolidation has reduced the number of industry players • Leaf dealers • Manufacturers

8. Leaf Industry Consolidation Past Universal Leaf Socotab (49%) Thorpe & Ricks GK Casalee Dibrell Intabex A.G. Monk Austin Transcontinental Adams Meridional Present Universal Leaf Alliance One DIMON Monk Austin Standard Commercial

9. Manufacturer Consolidation JT RJI/Gallaher Imperial Altadis / Commonwealth BAT ETI / RJ(42%) / Tekel / Scantoco PM USA John Middleton / UST PMI Lakson / Sampoerna / Rothmans, Canada RJ Conwood

10. The Current SituationA Dynamic Industry • Cigarette manufacturers expand portfolio • New products/smoking devices • New categories • Cigars • Smokeless • Snus • Other

11. Market Implications • New origins entail greater production risk • Less irrigation • Shift from large commercial farms to small scale • Shift from auction to contracting • Result is greater downside production risk

12. Market Implications • Increased production risk • Buyer/user consolidation • Smaller numbers • No unplanned inventory • Shorter durations • Higher market volatility

13. Market Implications • Increased production risk • Market volatility • Higher production costs • Fertilizers • Pesticides and herbicides • Fuel • Labor • Plus alternative crops • Tobacco growers have alternatives • Crop prices have risen dramatically

14. Market Implications • Cost of buyer-mandated programs • Improve leaf quality • Eliminate foreign matter • GAP • Social responsibility

15. Market Implications Increased: Production Risk Market Volatility Production Costs Attractive Alternatives Buyer Mandates Higher Leaf Prices

16. The Current SituationSlow Growth in Leaf Markets Cigarette Production Trend

17. The Current SituationSlow Growth in Leaf Markets • Growth mainly in: • Asia • Eastern Europe • Middle East • Declines in developed countries • Characterized by: • Increasing taxation • Increasing regulation • Production shifts Population growth Rising income levels

18. The Current SituationSlow Growth in Leaf Markets • Less clear how much leaf utilization has increased, if at all outside PRC • New manufacturing technology uses less leaf/stick • Impact of industry consolidation • Supply chain efficiency • Waste reduction/increased utilization • American blend growth has stalled – affects burley demand

19. The Current Situation FC Leaf Production 2003-2008 (Million Green Kgs) 3,969 3,792 3,702 3,656 3,513 3,315 PRC Other Exporters

20. The Current SituationFlue-Cured Leaf Production • Two very different stories • PRC • Dramatic growth • 500 mKgs or 28% • Only slightly greater than cigarette production growth (24%)

21. The Current SituationFlue-Cured Leaf Production • Exporters down 2% World Flue-Cured Exporters’ Leaf Production (x-PRC)

22. The Current SituationFlue-Cured Leaf Production • 2008 declines in Brazil, Zimbabwe, other Africa and Canada • More than offset increases in US, EU and India

23. Primarily Flavor Primarily Filler 806 704 685 688 664 563 + 39% + 0% The Current SituationBurley Leaf Production • Production recovered in 2008 from weather-reduced 2007 crops

24. The Current SituationBurley Leaf Production • However • Filler primary beneficiary • Flavor styles flat • Burley supplies, particularly flavor remain tight

25. The Current Situation Burley Production - Flavor

26. The Current Situation Burley Production - Filler *EU exporters include Poland for all years

27. The Current Situation Unsold Stocks • Last piece of market puzzle • Flue-cured unsold stocks • At lowest level since 1991 • Reflects lower 2008 production x-PRC

28. U.S. Pool Others 187 151 128 98 85 72 The Current SituationUnsold Stocks World Uncommitted Flue-Cured Stocks as of June 30

29. The Current SituationUnsold Stocks • Flue-cured markets balanced heading into 2009

30. U.S. Pool Others 86 85 72 49 29 9 The Current Situation Unsold Stocks • Burley unsold stocks • Essentially gone World Uncommitted Burley Stocks as of June 30

31. The Current Situation Unsold Stocks • Burley markets remain • Extremely tight for flavor • Still tight for filler

32. Future Trends/Potential Beneficiaries • Cigarette Production • China will be main growth engine • Growth outside China will be slow (0-0.3%) • Growth in Asia, Middle East, and Eastern Europe • Offset by continued declines in developed countries • Leaf markets will be at best flat

33. Future Trends/Potential Beneficiaries • Leaf production – short term • 2009 Flue-cured • Total production forecast to increase due to mainly PRC • Production by exporters x-PRC projected to rise

34. Future Trends/Potential Beneficiaries • 2009 Burley • Production increase forecast

35. Future Trends/Potential Beneficiaries • Will not materially change tight supply situation, particularly flavor • Significant downside risk

36. Future Trends/Potential BeneficiariesSlow Growth – What Could Change Trend? • Higher production and leaf use • Development and consumer acceptance of reduced risk products that look and act like traditional products • Increased consumption of OTP and snus could create increased demand for dark air-cured leaf at expense of flue-cured and burley

37. Future Trends/Potential BeneficiariesSlow Growth – What Could Change Trend? • Lower production and leaf use • Serious government effort to reduce PRC cigarette consumption • Development and consumer acceptance of reduced risk products using heating rather than burning technology • These products require less leaf

38. Future Trends/Potential Beneficiaries • Not much change from current situation • Flue-cured – Flavor • Brazil • Will continue to dominate • Not immune to weather risk • Strong real raises dollar costs and prices • U.S. • Termination of program improved leaf competitiveness • Quality remains best • Highest priced but dollar weakness reduces gap

39. Future Trends • Flue-Cured - Flavor • U.S. • Termination of program improved leaf competitiveness • Quality remains best • Highest priced but dollar weakness reduces gap • Probably will remain mainly domestic supplier • Zimbabwe • Future depends on political/economic change • Would be strong demand, particularly from Europe and as alternative to Brazil • Production will not recover quickly • Unlikely to reach past levels

40. Future Trends • Flue-Cured – Filler

41. Future Trends • Flue-Cured – Filler • PRC • Will grow to meet domestic demand • Exports face increasing competition from India • Reliable supplier concerns make PRC alternate choice • Questions: • Will PRC continue domestic focus or seek to expand exports • Can PRC produce significant quantities of an “acceptable” flavor style

42. Future TrendsWinners and Losers • Flue-Cured – Filler • Other Africa • Zambia, Malawi, Tanzania and Uganda have potential • Excellent conditions including land, labor and climate • Lack of infrastructure/high cost of expansion • Affects competitiveness in market • Absence of land tenure systems is a major problem in some African countries • India, Pakistan, Bangladesh • Very competitive in price/quality • Production increasing • Could benefit from European decline • However all have growing domestic markets

43. Future TrendsWinners and Losers • Flue-Cured – Filler • Europe • Full decoupling in 2011 could result in significant decline in production • Some member states have talked about national subsidies to maintain industry/employment • Canada • Is essentially a domestic crop now

44. Future TrendsWinners and Losers • Burley situation is very tight and demand remains strong • Uncommitted stocks likely continuing at very low levels • Burley flavor • Brazil • Only Brazil has potential for significant increases in short term • Costs/prices will go up • Strength of real • Prices of other crops – maize, soybeans

45. Future TrendsWinners and Losers • Burley flavor • U.S. • Little interest in producing more even at higher prices in traditional areas • Further U.S. increases will depend on developing non-traditional areas

46. Future TrendsWinners and Losers • Burley – Filler • Malawi • May be reaching practical limits • Weather risk, particularly drought may be increasing • Prices likely to increase • Mozambique • Could double production with existing infrastructure • Additional increases possible with additional infrastructure investment • Dollar prices will have to double to offset impact of strong currency on local costs and grower incomes

47. Some Final ObservationsManufacturers Will Determine Where Leaf is Produced • Price/quality • Risk diversification • Weather • Political/economic • Reliability of supply • Scale is important • Other factors • Social responsibility • Sustainable production practices • Environmental stewardship

48. Some Final ObservationsProduction Will Likely Remain in Traditional Origins • New origins are expensive to develop • Dealers can’t afford w/o manufacturer support • More than enough capacity in traditional areas

49. Some Final Observations • Production volatility will increase • Shift to non-irrigated production • Little irrigation in new origins • Long term (20-50 year) forecast is: • Drier weather patterns in Southern Hemisphere • Periods of much wetter and much drier weather • Shift from auction to direct contracting shifts risk from growers to dealers

50. Some Final ObservationsContinued • Leaf prices will rise • Offset dollar decline on local currency costs and incomes outside U.S. • Rising prices of alternative crops • Cover costs of programs promoted by manufacturers to: • Improve quality • GAP • Social responsibility