Burley and Dark Tobacco Outlook: Thoughts and Observations for 2013

Economics

Will SnellAg Economist, University of KY

Burley Review of 2012

USDA: U.S. Burley Acres +14%, Production +19% (207 mil lbs ???)

Universal Leaf (190 mil lbs)

Overall Better Quality Crop

Leaf Exports Stable– Price competitive despite higher valued U.S. dollar– Exports limited due to supplies

Domestic Use Fairly Stable– Rate of Decline in US Cigarette Sales Near “Traditional Levels”– Increased Smoking Restrictions

Extremely Tight Supply/Demand Balance

Higher Prices ($1.97/lb)

Economics

U.S. Burley PricesU.S. Burley Prices

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: ERS/ NASS/USDA

EconomicsAvg. Prices Up 15-20+ Cents/Lb

98% 102% 104%

145%

337%

247%

122% 129%154%

199%222%

0%

50%

100%

150%

200%

250%

300%

350%

Source: Calculated from NASS/USDA data

Agricultural Economics

Tobacco Prices vs Prices of Other Enterprise and the Cost of Inputs

2012 as a % of 2004 levels

Kentucky Tobacco, Prices, Value for 2012

  Production (mil lbs)

Price ($/lb)

Value of Production

(mil $)

Burley 151.7 $1.97 $298.8

Dark Fire 31.5 $2.56 $80.6

Dark Air 12.6 $2.28 $28.7

Totals for KY 195.8 $2.09 $408.20

Economics

Source: NASS/USDA

Value of Kentucky Tobacco ProductionValue of Kentucky Tobacco Production

0

100

200

300

400

500

600

2000 2002 2004 2006 2008 2010 2012

Million Dollars

Dark

Burley

Source: Ky Ag Stats/NASSK

Economics

What about the 2013 U.S. Burley Outlook?

• Look for Contract Lb Offers to Increase

• How Will Tobacco Growers Respond?

• Labor challenges

• Crop Insurance Challenges

• Aging infrastructure Continued Regulation uncertainty

• GAP/Contract demands

• Favorable Outlook for Other Ag Enterprises

Economics

2013 Planting Intentions

Economics

  2012 Acres 2013 Planting

Intentions

Percent Change

KY 74,000 78,000 +5%

TN 16,000 14,000 -12%

PA 4,700 5,100 +9%

NC 2,100 2,100 -

OH 1,900 2,000 +5%

VA 2,700 1,900 -30%

US 101,400 103,100 +2%

Source: NASS/USDA

0

50

100

150

200

250

300

350

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

Mil

lio

n L

bs

DomesticUse

Exports

Production

Source: NASS/ERS/AMS, UK Production Estimate for 2013

U.S. Burley Production vs Disappearance (Use)

Economics

Can the Market Support a 210-220 Mil Lb US Burley Crop in 2013?

0200400600800

100012001400160018002000

2005 2007 2009 2011 2013

Million Lbs

Others

Africa

Brazil

US

World Burley ProductionWorld Burley Production

Source: Universal Leaf, September 2012

Economics

Agricultural Economics

U.S. Burley Export Value vs Brazilian Import Value

0

0.5

1

1.5

2

2.5

3

3.5

4

2003 2005 2007 2009 2011

$/lb

U.S. Brazil

Source: USDA/TMA

0

50

100

150

200

250

300

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

Mil

lio

n L

bs

Source: ERS/AMS/TMA

U.S. Burley Exports

Agricultural Economics

Agricultural Economics

2013 Burley Contract Price Schedules 2013 Burley Contract Price Schedules

Based on the following crop throw 10%Xs, 20% Cs, 40% Bs, 10% BRs and 20% Ts

Company/Buyer ---------------------------------GRADE------------------------------

  1 2 3 4 5

A $2.03 $1.96 $1.80 $1.25 $1.00

B $2.03 $2.00 $1.94 $1.20 $0.00

C $2.03 $1.99 $1.90 $1.53 $1.33

D $1.99 $1.88 $1.73 $1.33 $1.00

E $2.01 $1.94 $1.78 $1.51 $1.20

F $2.03 $1.98 $1.89 $1.38 $1.19

G $2.04 $1.99 $1.90 $1.54 $1.32

What About Dark Tobacco?

405060708090

100110

1990 1995 2000 2005 2010M

illio

n Lb

s

U.S. Snuff Production

0

5,000

10,000

15,000

20,000

25,000

30,000

2005 2007 2009 2011 2013

Dark AirDark Fire

Source: NASS/USDA

US Dark Tobacco AcresUS Dark Tobacco Acres

Economics

0102030405060708090

100

2002-2003

2004-2005

2006-2007

2008-2009

2010-2011

2012-2013

Million Lbs

Dark Air Use

Dark Fire Use

Production

U.S. Dark Tobacco Use vs Production

EconomicsSource: NASS/ERS/AMS, UK Disappearance Estimates for 2011-2012

$1.25$1.50$1.75$2.00$2.25$2.50$2.75

2004 2006 2008 2010 2012

Dark Air-Cured Dark Fire-Cured

Dark Tobacco PricesDark Tobacco Prices

Agricultural Economics

Source: NASS/USDA

93,530

56,977

16,234

44,967

29,237

8,113

0

25,000

50,000

75,000

100,000

1997 2002 2007 2012

U.S. Kentucky

Number of Farms Growing Tobacco in the U.S and Kentucky

Source: USDA Ag Census

Agricultural Economics

  2010 2012

KY 5,488 3,365

OH 428 216

IN 227 112

MO 71 27

WV 26 7

FSA “Reported” Farms for Burley Only

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mil

lio

n L

bs

Source: ERS, UK Estimates for 2013 and 2014

Kentucky Buyout Dollars (2005-2014)

Economics

Emerging Issues/Questions for 2013 and Beyond

Regulation will come at a cost, but can it be a benefit to differentiate US tobacco

Will immigration reform happen? If so what will be the “cost”?

Will we be able to adopt more mechanization/lower labor requirements?

Can we increase yields w/o sacrificing quality or industry requirements?

Will crop insurance survive and it what form?

How long can the industry go w/o significant infrastructure reinvestment?

Will consumer-accepted alternative (reduced risk) tobacco products contain less or minimal tobacco?

China – Will it become a significant market for U.S. burley?

Can tobacco growers/leadership work with health community on “reasonable” tobacco regulation and control efforts?

Will adequate funds be available to support regional collaboration on tobacco grower research and extension activities and personnel?

Will profit incentives/overcoming challenges result in an adequate # of growers