Tobacco acres, production on upswing

Two years removed from the government buyout, U.S. tobacco acreage and production appear to be on the upswing, at least in some parts of the country, says Kelly Tiller, University of Tennessee Extension economist.

“Looking at overall tobacco production, now that we’re two years from the buyout, overall U.S. acreage and production are increasing. They’re not back yet to those pre-buyout levels, and they’re not expected to be back at those levels in the foreseeable future, but it does appear that things have hit the bottom and have started back up somewhat,” said Tiller at the recent Southern Region Agricultural Outlook Conference in Atlanta.

Most of the tobacco produced in the United States is used in cigarette consumption — about 92 percent, she says. “It’s important to look at the trends and the cigarette and the tobacco industry in general. It can give us an idea about what we can expect in the near future,” says Tiller.

Looking at what has happened in the past, she says, the production of cigarettes has declined by about 34 percent in the last 10 years. But a majority of that has been in a reduction in the export of cigarettes. “This is primarily because a lot of the cigarette manufacturers are finding it more efficient to produce cigarettes overseas than to produce them in the United States and ship them out.”

A significant decline in the exports of cigarettes is evident, but the United States also seen significant declines in consumption, says Tiller. Consumption is down by about 24 percent, to about 370 billion pieces of cigarettes, consumed in the United States in 2006, according to estimates.

The brightest spot for the U.S. tobacco industry is in moist snuff consumption, she says. While cigarette consumption has been declining and is expected to continue to decline, the consumption of moist snuff has increased by 41 percent over the past decade. Per-capita consumption is increasing as well as overall consumption. But a different type of tobacco is used for moist snuff — a dark tobacco rather than burley or flue cured.

Cigarette consumption is expected to continue to decline by 1 to 2 percent each year, she continues. “There are a number of reasons for this decline, and a lot of them are health related. Many of those who continue to smoke are reducing the amount they smoke because of health reasons. In addition, there are a lot of new restrictions on smoking and cigarette prices are higher. So a continued decline is expected,” says Tiller.

Snuff consumption, on the other hand, is expected to continue to increase, at a rate of about 5 percent annually, which is fairly significant, she says. “Because of these trends in consumption, a lot of the cigarette companies are starting to move into the smokeless category — snuff and chewing tobacco. Over the past year, Reynolds American paid $3.5 billion for a private smokeless tobacco company, which was significantly above the market value of the company. Phillip Morris — the leading cigarette manufacturer — is introducing new smokeless products. Both of these companies, as well as others, are currently test marketing some spitless products. This is a moist snuff product.”

Eventually, although probably not anytime in the near future, the FDA will have the authority to regulate tobacco products, she says. That gives further incentive for more movement into smokeless products. “Under FDA authority, they can market and advertise these products as a reduced or lower health risk. That’s significant incentive to expand into these categories.”

Some of the major manufacturers — Phillip Morris and Reynolds — are beginning to regain some of the market share that has been lost over the last decade or so, especially since the master settlement agreement, says Tiller. “When those larger companies were making those very large payments to states, a lot of the smaller, fly-by-night companies were coming in and undercutting them with deep-discount cigarettes, and the bigger companies were losing a lot of market share.”

One of the factors in dwindling consumption is higher retail prices, she says, and one of the causes for this is state excise taxes. “The current federal excise tax rate is 34 cents per pack, but the average state excise tax is 96 cents per pack, and that’s up tremendously over recent years. Twenty-one states have an excise tax rate above $1 per pack, and seven states have an excise rate above $2 per pack. There are several places in the United States where a pack of 20 cigarettes cost more than $8.”

These tax increases are combined with significant increases in smoking regulations, such as bans on smoking in restaurants and bars. This is occurring even in traditional tobacco-friendly places, says Tiller.

Also influencing the market are cases of major tobacco litigation that were resolved in 2006. And for the most part, the settlements were very favorable for the cigarette industry.

Looking at the worldwide situation for flue-cured tobacco, says Tiller, China produces a large amount of flue-cured, but most of it is consumed internally, and it’s not in competition with U.S. flue-cured tobacco. For the United States, there is a projection for a slight increase in flue-cured acres over the next year, and that will help regain some of that worldwide market share, she says.

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