Tobacco in Tennessee: Market, Trends & Outlook

1. Tobacco in Tennessee:Market, Trends& Outlook Kelly Tiller Tennessee Extension Market Outlook In-Service Workshop Eastern RegionKnoxvilleNovember 1, 2006 Central RegionMurfreesboroNovember 8, 2006 Agricultural Policy Analysis Center - University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996-4519 www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298

2. U.S. Cigarette Production, Consumption & Exports (-34%) (-24%) (-51%) Source: USDA, Economic Research Service

3. U.S. Moist Snuff Consumption 41% Source: USDA, Economic Research Service

4. Per Capita Consumption

5. Tobacco 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

6. Tobacco 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?)

7. World Flue-Cured Production Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

8. World Burley Production Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

9. World 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

10. Distribution of Leaf in U.S. Cigarettes Source: USDA, Economic Research Service

11. Production 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

12. US Tobacco Production Source: USDA, NASS, Crop Production Reports

13. US Tobacco Acreage Source: USDA, NASS, Crop Production Reports

14. -3.2% 97.5% 1.7% -44.6% -32.0% 10.3% -27.8% -1.3% -33.9% -18.5% -21.7% -72.5% Change in Total Tobacco Acreage 2004 to 2006 • Still not back to pre-buyout acreage • Burley generally down more than flue • Pennsylvania up significantly • Missouri above 2004 level

15. 0.8% 58.0% -2.0% -8.8% 17.7% 18.5% 4.1% 22.2% -12.9% 10.0% 12.5% -56.0% Change in Total Tobacco Acreage 2005 to 2006 • Flue-cured states generally up • Florida way down • Mix in burley • Kentucky up some • Tennessee down 13% • Several states no longer reported

16. -26.1% 21.4% -0.9% 22.0% -18.5% 10.0% -21.7% 12.5% -72.5% -56.0% Change in Flue-Cured Acreage 2004 to 2006 2005 to 2006

17. Burley 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

18. U.S. Burley Production Source: USDA, NASS, Crop Production Reports

19. U.S. Burley Acreage Source: USDA, NASS, Crop Production Reports

20. 150.0% -44.6% -8.8% -52.5% 0.0% 10.3% 18.5% -31.1% 4.3% -14.9% 33.3% -41.7% -17.6% Change in Burley Acreage 2004 to 2006 2005 to 2006

21. Burley 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

22. U.S. Burley Exports Source: USDA, Economic Research Service

23. Other 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

24. -46.5% 11.8% -11.7% 0.0% -2.1% 1.8% Change in Dark-Fired Acreage 2004 to 2006 2005 to 2006

25. 28.8% 27.0% -25.9% -11.1% Change in Dark Air-Cured Acreage 2004 to 2006 2005 to 2006

26. 2006 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.

27. Respondents Growing in ‘06 No Yes 46% 47% 52% 40%

28. Average Planted Acres

29. ’06 Average Acreage No 53% Yes 47%

30. Last Year Actively Growing 62% 23% 11% 3%

31. 2006 Prices, Tennessee

32. 2006 Prices, Virginia

33. 2006 Prices, North Carolina

34. Among respondents producing tobacco in 2006 … Likelihood of Producing in ‘07

35. Among respondents producing tobacco in 2006 … Expected Acreage Changes in ‘07

36. Why NOT Producing in ’07? • Not profitable enough (88%) • Shortage of labor (63%) • Age, near retirement (52%) • Too risky without a price guarantee (37%)

37. Among respondents producing tobacco in 2006 … Likelihood of Producing 2010 2007 2015

38. Among respondents producing tobacco in 2006 … Other Farm Enterprises

39. Top Sources of Information • County Extension agents • Farm magazines / newspapers • Neighbors / other farmers • Researchers / research publications

40. Among respondents producing tobacco in 2006 … Total Gross Farm Receipts from Tobacco Average = 57%

41. Among respondents producing tobacco in 2006 … Net Farm Income from Tobacco Average = 52%

42. Biggest 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%)

43. Investment Priorities • Curing barns • Upgrading equipment or new equipment • Market prep facilities and baling equipment • Acquiring more good land • Field curing structures

44. Future 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

45. Summary & 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

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