CCAAAAPPAgricultural Policy Analysis Center - University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996-4519

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

Tobacco in Tobacco in Tennessee:Tennessee:Market, TrendsMarket, Trends

& Outlook& Outlook

Tennessee Extension Market Outlook In-Service Workshop

Kelly Tiller

Eastern RegionKnoxville

November 1, 2006

Central RegionMurfreesboro

November 8, 2006

CCAAAAPP

U.S. Cigarette Production, U.S. Cigarette Production, Consumption & ExportsConsumption & Exports

Source: USDA, Economic Research Service

(-24%)

(-51%)

502

372

119

755

487

244

563

425

134

0

100

200

300

400

500

600

700

800

Production Consumption Exports

Bill

ion

Pie

ces

1996 2001 2006

(-34%)

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U.S. Moist Snuff ConsumptionU.S. Moist Snuff Consumption

Source: USDA, Economic Research Service

41%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Mill

ion

Pou

nds

CCAAAAPP

Per Capita ConsumptionPer Capita Consumption

0

500

1,000

1,500

2,000

2,500

3,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Num

ber

of C

igar

ette

s

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Pou

nds

of S

nuff

Cigarettes Snuff

CCAAAAPP

Tobacco Industry TrendsTobacco 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

CCAAAAPP

Tobacco Industry TrendsTobacco 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?)

CCAAAAPP

World Flue-Cured ProductionWorld Flue-Cured Production

Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2003 2004 2005 2006(E) 2007(P)

Mill

ion

gree

n kg

s

Brazil India USA Other Exporters ROW

CCAAAAPP

World Burley ProductionWorld Burley Production

Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

0100200300400500

600700800900

1,000

2003 2004 2005 2006(E) 2007(P)

Mill

ion

gree

n kg

s

USA Malawi Brazil Other Exporters ROW

CCAAAAPP

World Market TrendsWorld 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

CCAAAAPP

Distribution of Leaf in U.S. CigarettesDistribution of Leaf in U.S. Cigarettes

0

10

20

30

40

50

60

70

80

90

100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Per

cent

Dis

trib

utio

n

Flue-cured Burley Maryland Imported

Source: USDA, Economic Research Service

CCAAAAPP

Production AssessmentProduction 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

CCAAAAPP

US Tobacco ProductionUS Tobacco Production

Source: USDA, NASS, Crop Production Reports

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Mill

ion

Pou

nds

CCAAAAPP

US Tobacco AcreageUS Tobacco Acreage

Source: USDA, NASS, Crop Production Reports

0

100

200

300

400

500

600

700

800

900

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Tho

usan

d A

cres

CCAAAAPP

Change in Total Tobacco AcreageChange in Total Tobacco Acreage

• Still not back to pre-buyout acreage

• Burley generally down more than flue

• Pennsylvania up significantly

• Missouri above 2004 level

2004 to 2006

1.7%

-72.5%

-21.7%

-27.8%

-3.2%

10.3%

-1.3%

-44.6%

97.5%

-18.5%

-33.9%

-32.0%

CCAAAAPP

Change in Total Tobacco AcreageChange in Total Tobacco Acreage

• Flue-cured states generally up

• Florida way down

• Mix in burley– Kentucky up some– Tennessee down 13%

• Several states no longer reported

-2.0%

-56.0%

12.5%

4.1%

0.8%

18.5%

22.2%

-8.8%

58.0%

10.0%

-12.9%

17.7%

2005 to 2006

CCAAAAPP

Change in Flue-Cured AcreageChange in Flue-Cured Acreage

2005 to 2006

-72.5%

-21.7%

-0.9%

-18.5%

-26.1%

2004 to 2006

-56.0%

12.5%

22.0%

10.0%

21.4%

CCAAAAPP

Burley OutlookBurley 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

CCAAAAPP

U.S. Burley ProductionU.S. Burley Production

Source: USDA, NASS, Crop Production Reports

0

100

200

300

400

500

600

700

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Mill

ion

Pou

nds

CCAAAAPP

U.S. Burley AcreageU.S. Burley Acreage

0

50

100

150

200

250

300

350

400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Tho

usan

d A

cres

Source: USDA, NASS, Crop Production Reports

CCAAAAPP

Change in Burley AcreageChange in Burley Acreage

2005 to 20062004 to 2006

-31.1%

10.3%

-14.9%

-44.6%

-41.7%

-52.5%4.3%

18.5%

33.3%

-8.8%

-17.6%

0.0%

150.0%

CCAAAAPP

Burley PricesBurley 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

CCAAAAPP

U.S. Burley ExportsU.S. Burley Exports

Source: USDA, Economic Research Service

0

20

40

60

80

100

120

140

Mill

ion

poun

ds (

decl

ared

wei

ght)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

CCAAAAPP

Other Tobacco TypesOther 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

CCAAAAPP

Change in Dark-Fired AcreageChange in Dark-Fired Acreage

2005 to 20062004 to 2006

-46.5%

0.0%

-2.1%

11.8%

-11.7%

1.8%

CCAAAAPP

Change in Dark Air-Cured AcreageChange in Dark Air-Cured Acreage

2005 to 20062004 to 2006

28.8%

-25.9%

27.0%

-11.1%

CCAAAAPP

2006 TN-VA-NC Burley Survey2006 TN-VA-NC Burley Survey

• Mail-based survey of 6,000 burley growers in traditional areas of TN, VA, NC– Sample drawn from burley active grower

buyout contract recipients

• First available market and production information post-buyout

• Surveys completed May 2006

• 813 completed responses, preliminary results available

• Follow-up Extension agent survey Dec.

CCAAAAPP

Respondents Growing in ‘06Respondents Growing in ‘06

0

100

200

300

400

500

600

700

800

900

Total TN VA NC

Nu

mb

er

of

Re

spo

nd

en

ts

46%47%

52% 40%

No

Yes

CCAAAAPP

Average Planted AcresAverage Planted Acres

0123456789

10

Ave

rag

e P

lan

ted

Acr

es

2004 2005 2006

CCAAAAPP

’’06 Average Acreage06 Average AcreageNo

53%Yes47%

0123456789

10P

lan

ted

Acr

es

All TN VA NC

CCAAAAPP

Last Year Actively GrowingLast Year Actively Growing

0

50

100

150

200

250

# R

esp

on

den

ts E

xiti

ng

2002 2003 2004 2005

3%

11%

62%

23%

CCAAAAPP

2006 Prices, Tennessee2006 Prices, Tennessee

0

20

40

60

80

100

120

140

20

06

Pric

e D

istr

ibu

tion

(fr

eq

)

< $

1.3

5

$1

.35

-9

$1

.40

-4

$1

.45

-9

$1

.50

-4

$1

.55

-9

$1

.60

-4

$1

.65

-9

$1

.70

-4

> $

1.7

4

CCAAAAPP

2006 Prices, Virginia2006 Prices, Virginia

0

5

10

15

20

25

30

35

40

20

06

Pric

e D

istr

ibu

tion

(fr

eq

)

< $

1.3

5

$1

.35

-9

$1

.40

-4

$1

.45

-9

$1

.50

-4

$1

.55

-9

$1

.60

-4

$1

.65

-9

$1

.70

-4

> $

1.7

4

CCAAAAPP

2006 Prices, North Carolina2006 Prices, North Carolina

02468

1012141618

20

06

Pric

e D

istr

ibu

tion

(fr

eq

)

< $

1.3

5

$1

.35

-9

$1

.40

-4

$1

.45

-9

$1

.50

-4

$1

.55

-9

$1

.60

-4

$1

.65

-9

$1

.70

-4

> $

1.7

4

CCAAAAPP

Likelihood of Producing in ‘07Likelihood of Producing in ‘07

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

% o

f R

esp

on

den

ts

DefinitelyYes

ProbablyYes

Not Sure ProbablyNot

DefinitelyNot

Among respondents producing tobacco in 2006 …

CCAAAAPP

Expected Acreage Changes in ‘07Expected Acreage Changes in ‘07

020406080

100120140160180200

# R

esp

on

den

ts

Up>50%

Up25%-50%

Up25%

Same Down25%

Down25%-50%

Down>50%

Among respondents producing tobacco in 2006 …

CCAAAAPP

Why NOT Producing in ’07?Why NOT Producing in ’07?

• Not profitable enough (88%)

• Shortage of labor (63%)

• Age, near retirement (52%)

• Too risky without a price guarantee (37%)

CCAAAAPP

Likelihood of ProducingLikelihood of Producing

Probably Not

Definitely Not

Not Sure

Definitely Yes

Probably Yes

2007 2010

2015

Among respondents producing tobacco in 2006 …

CCAAAAPP

Other Farm EnterprisesOther Farm Enterprises

0

10

20

30

40

50

60

70

80

Per

cen

tag

e

HayBee

f

Gra

in

Fr & V

eg

Dark F

ire

Dark A

ir

Dairy

Among respondents producing tobacco in 2006 …

CCAAAAPP

Top Sources of InformationTop Sources of Information

1. County Extension agents

2. Farm magazines / newspapers

3. Neighbors / other farmers

4. Researchers / research publications

CCAAAAPP

Total Gross Farm Receipts from TobaccoTotal Gross Farm Receipts from Tobacco

0%

5%

10%

15%

20%

25%

30%

% o

f R

esp

on

den

ts

None < 10% 10-24%

25-49%

50-74%

75-99%

All

Among respondents producing tobacco in 2006 …

Average = 57%

CCAAAAPP

Net Farm Income from TobaccoNet Farm Income from Tobacco

0%

5%

10%

15%

20%

25%

30%

% o

f R

esp

on

den

ts

None < 10% 10-24%

25-49%

50-74%

75-99%

All

Among respondents producing tobacco in 2006 …

Average = 52%

CCAAAAPP

Biggest Challenges Next 2-5 YearsBiggest Challenges Next 2-5 Years

• Contract prices too low (66%)

• High costs of hiring labor (58%)

• High costs of nitrogen fertilizer (52%)

• Shortage of affordable and/or legal labor (35%)

• High costs of other production inputs (26%)

CCAAAAPP

Investment PrioritiesInvestment Priorities

1. Curing barns

2. Upgrading equipment or new equipment

3. Market prep facilities and baling equipment

4. Acquiring more good land

5. Field curing structures

CCAAAAPP

Future Industry Information NeedsFuture Industry Information Needs

• Standardized and timely reporting of acreage, yields, production– Geographically disaggregated– Traditional and non-traditional areas

• Market prices

• Domestic and export use, disappearance, stocks

• Producer information– Operation, costs, challenges/issues, profiles

• Publicly available and accessible

CCAAAAPP

Summary & ConcernsSummary & 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

CCAAAAPP

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