The 2005 outlook for U.S. flue-cured tobacco comes slightly more into focus with the end of the tobacco program. However, many uncertainties remain, according to two agricultural economists.
“With most of the United States and Brazil crops under contract, changes in production after a buyout will be largely coordinated by international leaf and cigarette merchants,” according to a paper released by Blake Brown of North Carolina State University and William Snell of the University of Kentucky.
Since the 2005 Brazil crop was contracted for and planted by the time buyout legislation was passed, it's unlikely that leaf merchants or cigarette manufacturers will expand 2005 U.S. production substantially, say the economists. However, U.S. flue-cured production could increase towards a level of 800 million pounds over the next two to three years.
Many flue-cured farmers would exit production with the end of the program, they say. “The pace of consolidation of production units would increase, resulting in fewer farms, but in larger aggregate U.S. production. Price would decline to under $1.50 per pound within one to two years and could decrease toward $1.25 as production expanded.”
In addition, world production of flue-cured tobacco would not likely expand substantially, according to the forecast. “Increases in the United States likely would come as merchants shifted some production from Brazil to the United States and moved future decreases in Zimbabwe production to the United States.”
Brazil, they say, will remain the dominant producer and exporter of flavor-type flue-cured tobacco. However, merchants have expressed some nervousness about disease or weather risks associated with having so much of the world's flavor-type flue-cured production concentrated in the small geographic production region of southern Brazil.
The production/price environment for the 2005 U.S. burley tobacco crop becomes very uncertain with the passage of the buyout, say the economists.
“Prices will fall to reflect the absence of quota rents and price supports, but it remains unclear what types of prices incentives the companies will offer to encourage enough growers to remain in business.
“Labor, credit and management constraints may limit expansion in the short-run. However, over a two to three-year period, U.S. burley production could increase to over 400 million pounds without production controls. Prices likely will decline toward $1.50 per pound during this period.”
A large exodus of small producers is expected with the buyout, particularly in the Appalachian region, states the forecast. “Some exceptions to this scenario may be in areas of Appalachia where few alternative sources of income exist. As with flue-cured, the pace of consolidation of burley farms would increase. While the number of burley farms likely would decline dramatically, those burley farms remaining will be considerably larger so that aggregate U.S. burley production will increase.
If geographical restrictions are not included in the buyout, production will shift out of the higher cost or production regions such as eastern Kentucky, eastern Tennessee, western North Carolina and West Virginia, according to the economists.
“Some farms in central Kentucky and Tennessee may grow more, but most of the growth likely will be in the western half of Kentucky in response to the low-cost environment created by higher yields and cropland availability. Additional expansion could occur in southern Illinois, southern Indiana and perhaps parts of central North Carolina and Virginia.”
U.S. flue-cured production for 2004 was forecast at 512 million pounds, up slightly from 2003, according to Brown and Snell. The 2004 flue-cured basic quota was 471 million pounds, and the effective quota was about 500 million pounds.
“Consequently, many flue-cured producers expected to have extra tobacco to carry over into 2005. At writing (Sept. 21, 2004), the Flue-Cured Tobacco Cooperative Stabilization Corporation was taking about 16 percent of the crop. About 80 percent of the 2004 crop was sold via contracts. Stabilization had 81 million pounds of old crop tobacco in inventory.”
If Stabilization takes 15 percent of the 2004 effective quota, new crop inventory will be about 80 million pounds, giving a total inventory at the end of the season of about 161 million pounds, say the economists.
“Use of U.S. flue-cured by U.S. cigarette manufacturers has declined from more than 500 million pounds in the mid-1990s to an estimated 411 million pounds in 2004. Un-manufactured exports of U.S. flue-cured have declined from close to 400 million pounds to an estimated 190 million pounds during the same period.”
World flue-cured production for 2004 was projected at 8.29 billion pounds, up 4.3 percent from 2003 according to the August 2004 “World Leaf Production Summary” by Universal Corporation. The report estimated Brazil's 2004 flue-cured production at 1.545 billion pounds, compared to estimates of 505 million pounds for the United States and 132 million pounds of Zimbabwe.
“Zimbabwe's flue-cured production has continued to erode, down from 523 million pounds in 2000, with Brazil picking up much of Zimbabwe's lost production. While world flue-cured producers are not in an over-supply situation, supplies are ample.”
U.S. burley tobacco production for 2004 was forecast at 301 million pounds or 7 percent higher than the 2003 crop. This still represents only 91 percent of the national effective quota of 332 million pounds. Burley markets opened in November.
In the 2003 marketing year, the Burley Tobacco Cooperative and Burley Stabilization received 40 million pounds out of 272 million pounds marketed or about 15 percent of marketings. Based on contract prices and price support schedules, average U.S. burley prices for the 2004 crop should continue to hover around $1.95 to $2 per pound. It's expected that about 80 percent of the burley crop will be contracted, with the majority of auction marketings going under loan.
U.S. burley demand, say the economists, continues to be hampered by the increasing use of less expensive imported tobacco, declining domestic cigarette production and a growing deep-discount U.S. cigarette market that uses very little U.S. burley.
“One bright spot for the burley sector of late has been a surprising expansion of leaf exports. After slumping for several years, U.S. burley exports increased 6 percent in 2003 and an additional 12 percent for the first six months of 2004. Despite the recent modest increase in exports, total use of U.S. burley generally has fallen from its traditional level of 500 to 600 million pounds to approximately 300 to 350 million pounds.”
World production of burley tobacco in 2004 was estimated at 1.88 billion pounds, according to Universal Corporation's “World Leaf Production Summary.” This is an 11.4 percent increase over 2003. Burley production in Brazil has increased steadily from 209 million pounds in 2000 to an estimated 317 million pounds in 2004.
Argentina has increased burley production from 86 million pounds to 123 million pounds during the same period.
“The quality of burley produced in Argentina and Brazil reportedly also has increased to the point of Brazilian and Argentine tobaccos now being close competitors to U.S. burley. Malawi has remained a substantial producer of ‘filler’ burley tobacco, producing an estimated 286 million pounds in 2004.”