The Tobacco Buyout: Early Observations and Concerns Among KY Tobacco Growers Will Snell

1. The Tobacco Buyout: Early Observations and Concerns Among KY Tobacco Growers Will Snell University of Kentucky

2. Topics • Review of Winter Tobacco Meetings • Production Response • Early Post-Buyout Demand Response • Concerns for 2006 and Beyond Agricultural Economics

3. Tobacco Outlook Evolving from 2004-05 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? Agricultural Economics

4. 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 … 75% of former program participants will exit Agricultural Economics

5. With No Production Restrictions Will We Grow More Tobacco in 2005?

6. Kentucky Tobacco Production 2004 vs 2005(71 reporting counties, 78% of 2004 quota) -12% -17% -29% -53% -67% Source: Nov. 2004 KY County Agent Survey Agricultural Economics

7. Production Levels 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 Agricultural Economics

8. Average Post-Buyout Price ???(#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

9. ’05 Market Price

10. Location of Production 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 Agricultural Economics

11. Average Burley Yields (1980-2004) Agricultural Economics

12. Average Burley Yield (1980-2004) B o o n e C a m p b e l l K e n t o n G a l l a t i n P e n d l e t o n B r a c k e n C a r r o l l G r a n t T r i m b l e M a s o n G r e e n u p O w e n R o b e r t s o n L e w i s H a r r i s o n H e n r y O l d h a m F l e m i n g B o y d C a r t e r N i c h o l a s S c o t t F r a n k l i n S h e l b y B o u r b o n R o w a n J e f f e r s o n B a t h E l l i o t t M o n t g o m e r y L a w r e n c e W o o d f o r d S p e n c e r A n d e r s o n F a y e t t e C l a r k M e a d e B u l l i t t M e n i f e e M o r g a n J e s s a m i n e H a n c o c k M e r c e r J o h n s o n N e l s o n P o w e l l M a r t i n B r e c k i n r i d g e H e n d e r s o n i W s h n g t o n W o l f e M a g o f f i n a H a r d i n M a d i s o n D a v i e s s E s t i l l a U n i o n G r r a r d B o y l e L e e M a r i o n M c l e a n L a r u e B r e a t h i t t F l o y d W e b s t e r O h i o P i k e G r a y s o n L i n c o l n O w s l e y J a c k s o n C r i t t e n d e n K n o t t T a y l o r R o c k c a s t l e H o p k i n s H a r t C a s e y P e r r y G r e e n M u h l e n b e r g B u t l e r E d m o n s o n L i v i n g s t o n C a l d w e l l C l a y P u l a s k i L a u r e l L e s l i e L e t c h e r A d a i r M c c r a c k e n B a l l a r d L y o n W a r r e n M e t c a l f e R u s s e l l B a r r e n M a r s h a l l C h r i s t i a n K n o x C a r l i s l e L o g a n H a r l a n T o d d T r i g g W a y n e C u m b e r l a n d A l l e n B e l l S i m p s o n W h i t l e y C l i n t o n M c c r e a r y M o n r o e G r a v e s H i c k m a n C a l l o w a y F u l t o n KY Average (1980-2004) 2,096 lbs/Acre 2,101 - 2,200 lbs More than 2,200 lbs 2,000 to 2,100 lbs Less than 2000 lbs

13. Burley Production by KY Crop Reporting Districts (1980-2003) Northern KY 12% Bluegrass 41% Central KY 25% B o o n e C a m p b e l l K e n t o n G a l l a t i n P e n d l e t o n B r a c k e n C a r r o l l G r a n t Mid Western 7% T r i m b l e M a s o n G r e e n u p O w e n R o b e r t s o n L e w i s H a r r i s o n H e n r y Eastern KY 13% O l d h a m F l e m i n g B o y d C a r t e r N i c h o l a s S c o t t F r a n k l i n S h e l b y B o u r b o n R o w a n J e f f e r s o n B a t h Purchase 2% E l l i o t t M o n t g o m e r y L a w r e n c e W o o d f o r d S p e n c e r A n d e r s o n F a y e t t e C l a r k M e a d e B u l l i t t M e n i f e e M o r g a n J e s s a m i n e H a n c o c k M e r c e r J o h n s o n N e l s o n P o w e l l M a r t i n B r e c k i n r i d g e H e n d e r s o n W a s h i n g t o n W o l f e M a g o f f i n D a v i e s s H a r d i n M a d i s o n E s t i l l U n i o n G a r r a r d B o y l e L e e M a r i o n M c l e a n L a r u e B r e a t h i t t F l o y d W e b s t e r O h i o P i k e G r a y s o n L i n c o l n O w s l e y J a c k s o n C r i t t e n d e n K n o t t T a y l o r R o c k c a s t l e H o p k i n s H a r t C a s e y P e r r y G r e e n M u h l e n b e r g B u t l e r E d m o n s o n L i v i n g s t o n C a l d w e l l C l a y P u l a s k i L a u r e l L e s l i e L e t c h e r A d a i r M c c r a c k e n B a l l a r d L y o n W a r r e n M e t c a l f e R u s s e l l B a r r e n M a r s h a l l C h r i s t i a n K n o x C a r l i s l e L o g a n H a r l a n T o d d T r i g g W a y n e C u m b e r l a n d A l l e n S i m p s o n W h i t l e y B e l l C l i n t o n M c c r e a r y M o n r o e G r a v e s H i c k m a n C a l l o w a y F u l t o n

14. 2005 Burley Acres March 1st Planting Intentions – 30% June Acreage Report -30% … But Increase in YieldsWere Expected to Partially Offset Some of the Decline in Acreage Agricultural Economics

15. Average Burley Yields 2005 Yield: US: 1826 lbs/acre KY: 1800 lbs/acre Source: NASS/USDA Agricultural Economics

16. U.S. Burley Production (1997-2005) -34% Source: NASS/USDA Agricultural Economics

17. KY Burley Production (1997-2005) -35% Source: NASS/USDA Agricultural Economics

18. TN Burley Production (1997-2005) -30% Source: NASS/USDA Agricultural Economics

19. Burley Production in Other States (2004 vs 2005) ? --44% -12% -47% -7% -50% Source: NASS/USDA Agricultural Economics

20. U.S. Burley Loan Stocks Pre-Buyout 170 mil lbs CCC Sales: 57 mil lbs Co-op Sales: 31 mil lbs Current : 82 mil bls Source: USDA/ERS/Burley Co-op Agricultural Economics

21. U.S. Burley Purchases Agricultural Economics

22. What about World Supply/Demand Response in the Post-Buyout Era? Agricultural Economics

23. U.S. Burley Marketings vs Production in Selected Other Burley Markets (1997-2005F) • 1997 -2004: • US (-52%) • Brazil (+43%) • Argentina (+51%) • Malawi (+13%) World Burley Production for 2005 Is Expected to be Down Around 10% for 2005 Source: Universal Leaf Agricultural Economics

24. Burley Production in Other African Markets Source: Universal Leaf Agricultural Economics

25. U.S. Burley Export Price vs Average U.S. Burley Import Prices Source: USDA/FAS Agricultural Economics

26. U.S. Burley Exports For the first 5 months of 2005, USBX up 29% Source: USDA/FAS Agricultural Economics

27. U.S. Cigarette Production, Consumption and Exports Source: USDA/ERS Agricultural Economics

28. U.S. Burley Imports For the first 5 months of 2005, USBM down 63% Source: USDA/FAS Agricultural Economics

29. U.S. Burley Disappearance (Use)

30. USDA’s Burley Disappearance (Use)10 Year Baseline Projections (2005-2014)

31. Concerns • 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

32. Kentucky Tobacco Cash Receipts Source: Ky Ag Stats/NASS Agricultural Economics

33. Average Burley Yield(1980-2004) Over 2000 lbs. 1700-1799 lbs Below 1699 lbs. 1800-2000 lbs