Tobacco outlook hinges on U.S. buyout

The 2005 outlook for U.S. flue-cured tobacco, and to a lesser extent world flue-cured tobacco, depends mainly on whether the U.S. tobacco program ends or continues, 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 recently released by Blake Brown of North Carolina State University and William Snell of the University of Kentucky.

Since the 2005 Brazil crop will have been contracted for and planted by the time any buyout legislation is passed, it's unlikely that leaf merchants or cigarette manufacturers will expand 2005 U.S. production substantially, say the economists. However, if the U.S. tobacco program ends, 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.

“If the U.S. tobacco program continues, then the 2005 flue-cured quota could decline by 25 to 30 percent from its record-low level of 2004. The assessment could increase substantially from its level of 10 cents per pound in 2004,” states the forecast.

Brown and Snell say the exodus of farmers from tobacco production could be substantial, as many who have tried to maintain production in hopes of a buyout give up and exit without financial assistance.

“Quota rental rates would escalate even further than their already high levels. Factors that could keep the quota from falling dramatically are: 1) a substantial increase in purchase intentions (highly unlikely); 2) purchase of inventories from Stabilization by manufacturers (less likely than in increase in purchase intentions but still unlikely given ample world supplies: or 3) a government bailout of the program through government purchases of Stabilization stocks, discounts of Stabilization stocks, or through a mandated floor on the quota (unlikely, but more likely than the first two factors).”

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. Unmanufactured 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.

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