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Burley Tobacco Situation and Outlook

Burley Tobacco Situation and Outlook. Kelly Tiller. 2006 TN-NC-VA Tobacco Expo Kingsport, TN January 27, 2006. Agricultural Policy Analysis Center - The University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996 www.agpolicy.org - phone: (865) 974-7407 - fax: ( 865) 974-7298.

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Burley Tobacco Situation and Outlook

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  1. Burley Tobacco Situationand Outlook Kelly Tiller 2006 TN-NC-VA Tobacco Expo Kingsport, TN January 27, 2006 Agricultural Policy Analysis Center - The University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996 www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298

  2. Topics to Cover • Buyout follow-up • Burley tobacco productionpost-buyout • Domestic market trends • World market trends • Burley market outlook

  3. Annual Payment Distribution GrowerPayments Quota Owner Payments

  4. Total Payment Distribution GrowerPayments Quota Owner Payments

  5. Buyout Payments by State

  6. Payment Status • Year 1: • $931 million paid on more than 550,000 contracts by September 30, 2005 • 16% of the buyout contracts and dollars entered into a lump sum arrangement • Tax Year 2005 • Lump sum option: IRS-1099 for full amount • 1/10 option: IRS-1099 for full amount • Report on Form IRS-6252, Installment Sale Income • Do not report on Schedule D • Seems like: you can choose to pay all tax in TY2005 or you can spread it out over 10 years • Consult a tax professional

  7. Installment Sale Income

  8. Payment Status, cont’d • Year 2: • Payments should have been received by now • Some lump sum offers still available for payments 3 through 10 • Began accepting successor in interest applications for remaining 8 payments on January 23 • Fewer offers available, rates still competitive • Years 3 through 10 • Annual payments issued around mid-January 2007 through 2014

  9. Phase II Status • Over, done, finished, no more, the end … • Final Phase II payments (the ‘2004’ payment) have been distributed • Corrected TN tax information: • Check stubs should read “The IRS considers this payment as 2006 income.”  • Payees will receive a letter from the national trustee, J.P. Morgan Chase, clarifying the tax year information  • The trustee will issue 1099s for this payment for the 2006 tax year in January 2007 • J.P. Morgan Chase tobacco info line: 1-800-732-9955 • TN Tobacco Trust information line: 1-877-332-0711

  10. Post-Buyout Outlook • Who will produce? • Where? • How much? • At what price? • Demand response? • 2006 and beyond? Expand Get Out Wait & See

  11. Burley Production • Who will produce and whowill get out? • Considerations include: • Retirement, labor, barn space,access to capital, marketopportunities, relationship withcompanies, profit potential ofalternatives • Biggest consideration: • Profitability • Price versus cost of production

  12. Cost of Production & Yields ’05 Market Price Operator Labor Land, Buildings, Machinery, Hired Labor Variable Costs

  13. 2005 Production • March planting intentions: down 30% • Some acreage expansion in non-traditional areas • Pennsylvania, Maryland, Illinois, Mississippi, some flue-cured regions of central/eastern North Carolina • June acreage report: down 30% • Increases in yields expected to offset some of the acreage loss

  14. Average U.S. Burley Yields 2005 Yields: US – 1,952 lbs/acVA – 1,800 KY – 1,950 lbs/acNC – 1,650 TN – 2,000 lbs/ac Source: USDA / NASS

  15. U.S. Burley Production U.S. (-33%) KY (-34%) TN (-26%)

  16. TN Tobacco Cash Receipts - 68%

  17. U.S. Burley Purchases

  18. U.S. Cigarette Consumption

  19. U.S. Cigarette Exports

  20. Tobacco Used for Cigarettes

  21. Foreign Tobacco Content of US Cigarettes

  22. Imports in U.S. Cigarettes

  23. U.S. Export vs. Import Price

  24. World Burley Production & Use

  25. World Burley Production & Use

  26. U.S. Share of World Tobacco Production

  27. 2005: World Burley Producers

  28. 2004: World Burley Exporters

  29. Burley Export Trends

  30. World Tobacco Use(Developed vs. Developing)

  31. Industry Trends • U.S. industry trends • Domestic cigarette consumption continues to decline, 2-3% per year • U.S. cigarette exports continue to decline • Smokeless consumption continues to increase • More and stronger smoking bans • Relative health risks (compared to cigarettes) • Research continues on alternative products • Global market trends • Increasingly price competitive • Growing markets in developing countries • U.S. residual market supplier??

  32. How Many U.S. Burley Growers Required to Grow 300-400 Million Pounds? According to the USDA/FSA, there were49,343 burley growers in 2004

  33. Number of Growers to Produce300 Million Pounds

  34. Production Location? • Critical factor: • Cost of production • Driven primarily by yield potential • Other factors: • Off farm opportunities • Other farm opportunities • Quality • Infrastructure • Labor (supply/cost)

  35. Burley Avg. Yields (1980-2004)

  36. 2006 Burley Production • Hinges largely on 2006 contract prices • A disappointing 2005 crop will push out another crowd of growers • Growers ‘testing’ the post-buyout market • Will there be a sufficient margin to allow growers to weather 2 bad years? • Interest in expanding dark tobacco acreage where opportunities exist

  37. www.agpolicy.org/tobacco.html

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