CCAAAAPPAgricultural Policy Analysis Center - The University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996

www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298

Burley Tobacco Burley Tobacco SituationSituation

and Outlookand Outlook

2006 TN-NC-VA Tobacco Expo

Kingsport, TN

January 27, 2006

Kelly Tiller

CCAAAAPP

Topics to CoverTopics to Cover

• Buyout follow-up

• Burley tobacco productionpost-buyout

• Domestic market trends

• World market trends

• Burley market outlook

CCAAAAPP

Annual Payment DistributionAnnual Payment Distribution

0

50

100

150

200

250

300

350

400

(mill

ion

$)

NC KY TN SC GA VA

GrowerPayments

Quota Owner Payments

CCAAAAPP

Total Payment DistributionTotal Payment Distribution

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

(mill

ion

$)

NC KY TN SC GA VA

GrowerPayments

Quota Owner Payments

CCAAAAPP

Buyout Payments by StateBuyout Payments by State

(million $) Owner Payments

Grower Payments

Total Payments

North Carolina

$2,689 $1,147 $3,836

Kentucky $1,718 $699 $2,417

Tennessee $503 $226 $729

South Carolina

$494 $214 $708

Virginia $415 $177 $592

Georgia $426 $182 $607

CCAAAAPP

Payment StatusPayment 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

CCAAAAPP

Installment Sale IncomeInstallment Sale Income

CCAAAAPP

Payment Status, cont’dPayment 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

CCAAAAPP

Phase II StatusPhase 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

CCAAAAPP

Post-Buyout OutlookPost-Buyout Outlook

• Who will produce?

• Where?

• How much?

• At what price?

• Demand response?

• 2006 and beyond?

Expand

Wait & See

Get Out

CCAAAAPP

Burley ProductionBurley 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

CCAAAAPP

Cost of Production & YieldsCost of Production & Yields

Variable Costs

Hired Labor

Land, Buildings, Machinery,

Operator Labor

’05 Market Price

CCAAAAPP

2005 Production2005 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

CCAAAAPP

Average U.S. Burley YieldsAverage U.S. Burley Yields

0

500

1000

1500

2000

2500

3000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Poun

ds P

er A

cre

2005 Yields:

US – 1,952 lbs/acVA – 1,800 KY – 1,950 lbs/acNC – 1,650 TN – 2,000 lbs/ac

Source: USDA / NASS

CCAAAAPP

U.S. Burley ProductionU.S. Burley Production

0

100

200

300

400

500

600

700

1997 1998 1999 2000 2001 2002 2003 2004 2005

Millio

n Lb

s

U.S. (-33%)

KY (-34%)TN (-26%)

CCAAAAPP

TN Tobacco Cash ReceiptsTN Tobacco Cash Receipts

0

50

100

150

200

250

(mill

ion

$)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

- 68%

CCAAAAPP

U.S. Burley PurchasesU.S. Burley Purchases

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005

Mil

lbs

Company Purchases 2005 Production Sale of Pool Stocks

CCAAAAPP

U.S. Cigarette ConsumptionU.S. Cigarette Consumption

350

400

450

500

550

1990 1992 1994 1996 1998 2000 2002 2004

(bill

ion

pie

ces)

CCAAAAPP

U.S. Cigarette ExportsU.S. Cigarette Exports

80

120

160

200

240

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

(bill

ion

pie

ces)

CCAAAAPP

Tobacco Used for CigarettesTobacco Used for Cigarettes

CCAAAAPP

Foreign Tobacco Content of US CigarettesForeign Tobacco Content of US Cigarettes

0

10

20

30

40

50

60

70

(per

cent

)

CCAAAAPP

Imports in U.S. CigarettesImports in U.S. Cigarettes

CCAAAAPP

U.S. Export vs. Import PriceU.S. Export vs. Import Price

0

1

2

3

4

5

6

7

8

9

1997 1998 1999 2000 2001 2002 2003 2004 2005

Dol

lars

per

kilo

gram

U.S. Export U.S. Import

CCAAAAPP

World Burley Production & UseWorld Burley Production & Use

500

550

600

650

700

750

800

850

900

1990

1992

1994

1996

1998

2000

2002

2004

2006

1,00

0 to

ns

Prod. Use

CCAAAAPP

World Burley Production & UseWorld Burley Production & Use

0

200

400

600

800

1,000

1,200

1,400

1990

1992

1994

1996

1998

2000

2002

2004

1,0

00

to

ns

Prod. Use Stocks

CCAAAAPP

U.S. Share of World Tobacco ProductionU.S. Share of World Tobacco Production

0%

5%

10%

15%

20%

25%

30%

35%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

CCAAAAPP

2005: World Burley Producers2005: World Burley Producers

China3%

Malawi15%

Brazil18%

EU10%

Argentina8%

Mozambique6%

Thailand5%

Zambia3%

Others21%

U.S.11%

CCAAAAPP

2004: World Burley Exporters2004: World Burley ExportersBrazil23% EU

12%

U.S.9%

Argentina7%

Malawi29%

Others12% China

2%Mexico

1%

Thailand5%

CCAAAAPP

Burley Export TrendsBurley Export Trends

0

20,000

40,000

60,000

80,000

100,000

120,000

140,00019

79

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

(ton

s)

Malawi Brazil Italy USA

CCAAAAPP

World Tobacco UseWorld Tobacco Use(Developed vs. Developing)(Developed vs. Developing)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1970-72 1980-82 1990-92 1997-99 2005 2010

(mill

ion

poun

ds)

Developed Developing

CCAAAAPP

Industry TrendsIndustry 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??

CCAAAAPP

How Many U.S. Burley Growers Required How Many U.S. Burley Growers Required to Grow 300-400 Million Pounds?to Grow 300-400 Million Pounds?

According to the USDA/FSA, there were49,343 burley growers in 2004

CCAAAAPP

Number of Growers to ProduceNumber of Growers to Produce300 Million Pounds300 Million Pounds

2,300 Lb Yield

2,500 Lb Yield

10 AcreAverage

13,043 12,000

20 AcreAverage

6,521 6,000

CCAAAAPP

Production Location?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)

CCAAAAPP

Burley Avg. Yields (1980-2004)Burley Avg. Yields (1980-2004)

CCAAAAPP

2006 Burley Production2006 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

CCAAAAPP

www.agpolicy.org/tobacco.htmlwww.agpolicy.org/tobacco.html