Long roster of woes for tobacco points to depressed outlook

The University of Kentucky agricultural economist says tobacco farm income “has plummeted” in recent years, “with no apparent opportunities for a quick rebound in the near future within the current tobacco program.”

Currently, growers are facing declining exports, increasing imports, lower cigarette production, excessive pool stocks, escalating lease prices, soaring cigarette taxes, expanding health concerns, smoking restrictions/regulations, a plethora of legal issues, a rapidly changing marketing system, and much uncertainty over the future of the current federal tobacco program.

“Collectively, these factors have resulted in a significant decline in demand, marketing quotas, and income.”

While tobacco “will still remain an important, though smaller, agricultural enterprise” for North Carolina, Kentucky, and within regions of other tobacco states, he told those attending USDA’s annual Agricultural Outlook Forum at Arlington, Va., that “in reality, under current demand conditions, there are simply not enough tobacco dollars available to economically sustain the relatively large number of quota owners and growers.”

Consequently, Snell says, farmers, agricultural leaders, and policymakers in tobacco states are seeking a buyout, which would enable non-producing quota owners an opportunity to leave the industry, while simultaneously modifying current tobacco policy to improve the competitiveness of U.S. leaf for those farmers deciding to continue production during a post-buyout period.

Support for a buyout and tobacco policy reform is “almost unanimous” among growers, he says.

Future tobacco dollars will likely be much more concentrated among farms and across geographic regions, he says.

“Anticipated changes in U.S. tobacco policy will likely result in improved, competitive prices for tobacco, but it remains unclear how much market share the U.S. can regain in today’s very competitive and diminishing world market.”

What’s clear, Snell says, is that “the political, economic, social, and legal challenges facing U.S. growers will shape a much, much different tobacco-growing industry in the future than what has been seen in the past 60-plus years of the federal tobacco program.”

The value of U.S. tobacco production averaged $2.8 billion during the 1990s, had fallen to around $1.6 billion in 2002, and is projected to drop even more in 2003.

Historically, U.S. tobacco received “a significant price premium” in world markets for its quality, he notes, but increasing international production, coupled with improved quality of foreign tobacco, has narrowed the premium that manufacturers are willing to pay for U.S. leaf. Also, the price differential between U.S. and foreign tobaccos has generally widened, causing further erosion in the U.S. share of world production and trade.

U. S. burley’s share of the world market has slipped below 20 percent, compared to over 60 percent in 1970, while flue-cured has fallen to less than 10 percent, compared to 30 percent in 1970.

Brazil, Zimbabwe, Malawi, and Argentina have all increased market share relative to the U.S.

While world market losses have been increasing, U.S. sales have “deteriorated significantly,” with cigarette production down over 20 percent from its peak in 1996, and consumption down 13 percent.

“The major factor driving down U.S. cigarette output has been a steep decline in exports — down around 50 percent since 1996,” Snell says. “In addition, U.S. cigarette imports, along with sales of deep-discount domestically-produced cigarettes, have been escalating; both likely contain little, if any U.S. tobacco.”

Cigarette taxes were boosted in more than 20 U.S. states in 2002, expected to further reduce consumption.

All these factors, he says, are encouraging U.S. cigarette manufacturers to increase the amount of imported leaf in order to protect profit margins.

As a result, U.S. burley demand has dropped from 600 million pounds annually to 325 million to 375 million, while flue-cured demand has declined from over 900 million pounds to 525 million to 575 million.

“In response to dwindling demand, tobacco marketing quotas for both flue-cured and burley growers have been slashed by more than 50 percent over the past six years.”

Even with a cushioning of grower income by money from the National Tobacco Growers Settlement Trust Fund and some emergency disaster funds made available by Congress, income generated from tobacco has been reduced considerably, Snell says.

The industry faces “a very depressed outlook” for the future, he says, and farm leaders, health officials, and policymakers in tobacco states are working together to try and develop political and economic strategies to strengthen tobacco-dependent economies.

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