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Burley’s future in Kentucky and Tennessee.
What a season Kentucky and Tennessee growers have faced in 2005. Will 2006 be equally challenging? Tobacco Farm Quarterly asked two well-known tobacco economists for their thoughts on the future of burley in the two states.
Will Snell, tobacco economist with the University of Kentucky, foresees a reduction in the number of pounds grown and fewer growers across the state with a relatively greater loss in the eastern part of Kentucky. He attributes this primarily to low-yield potential in this area.
Burley yields have declined after they peaked just before 1971. At that time, burley was under an acreage system, where growers had economic incentives to maximize yields. Once the poundage system started in 1971, Snell says growers tended to trade off some lower yields for additional cropland because more pounds equated to higher profits in their minds. Because some tried to expand production beyond their managerial capacity, yields declined. Growers also fought off more disease with fewer permitted chemicals.
He predicts that some growers in the Bluegrass and northern parts of Kentucky will expand their scale of production. However, he still envisions fewer growers in these regions and a loss in pounds because of landlords who are not willing to rent land and barns to former tenants, urbanization issues, off-farm income opportunities and grower retirements.
In a post-buyout scenario, Snell predicts belt yields will eventually improve to average—between 2,400 and 2,500 pounds per acre in a normal growing season.
He sees another change. “I would expect a larger percentage of pounds would shift more to the central and midwestern regions of Kentucky, as characterized by relatively larger, full-time farmers who may see future reductions in government payments from grain production,” Snell says.
Snell also expects burley and dark tobacco growers in West Kentucky may shift their production entirely toward dark tobacco because of higher profit incentives.
Following a two- to three-year adjustment period, he sees a loss of 50 to 75 percent of prebuyout growers, with increased scale of production. They may have the opportunity to grow more pounds, but will the infrastructure and profit incentives be there?
In years ahead, Snell predicts growers may increase their production in response to improved demand opportunities, but he wonders if they will be in a position to take advantage of those, given their projected cost structure coupled with the price incentives offered by the companies.
“In the intermediate run (three to five years), I could foresee disappearance [use] approach 400 million pounds,” Snell says. “Exports which have been unbelievably strong recently will grow slowly.”
In the first five months of 2005, he says U.S. burley exports rose by 29 percent from 2004.
A short supply in certain foreign countries and Commodity Credit Corp. stocks not entering the market yet have contributed to the increase in exports, says Kelly Tiller, economist with the Agricultural Policy Analysis Center at the University of Tennessee. Also, she says a higher-quality domestic leaf that is more price-competitive would suggest a higher level of demand after a short-run adjustment period.
The recent increase in demand has come from Russia, which has become the No. 1 importer of U.S. burley tobacco, surpassing both Japan and Germany, Snell says. “I have not been able to get much feedback from dealers if they expect this to be a temporary or permanently consistent market,” he says. “As multinationals expand into Russia and attempt to meet an increasing demand for a blended cigarette, it may remain an important and expanding market for competitively priced burley.”
Another wildcard in the trade picture is China, where any modest growth in blended-cigarette consumption could result in additional growth for U.S. burley growers. China blends U.S. burley into its cigarettes,
Snell believes that despite declining U.S. cigarette production, opportunities do exist to boost domestic consumption of U.S. burley if imports decline. In the first five months of 2005, U.S. burley imports declined by 63 percent from 2004 as manufacturers drew down on imported stocks. However, burley imports soared in July, Snell says.
Meanwhile, burley production continues to expand in Brazil, Malawi and Argentina, but Snell expects that pace to slow. “I would expect that production expansion may stabilize in the short term as we tend to see production cycles for burley tobacco of some five to seven years, where we go from expansion to contracting and back to expansion,” he says. “Another factor is the effect the buyout could have on making U.S. tobacco more attractive to buyers (assuming we produce it), which could slow down expansion in South America.”
Tiller says higher U.S. prices contributed partly to the increased production in these countries, but it wasn’t the only factor. “Multinational companies have made significant investments in expanding the productive capacity outside the United States,” she says. “Also, as their production practices and quality [have] improved, production has increased.”
One of the biggest concerns of growers after the quota buyout was the price paid at the warehouses and the contract buying stations. “Many growers in Tennessee skeptically planted a crop in 2005, preserving their option to continue to produce tobacco and buying themselves some time to observe how the markets and sector begin to adjust to the free market,” Tiller says. “Some are satisfied; some are not. At the current prices, margins are slim for most growers. Many of those ‘hesitant’ participants in 2005 will not return. However, some growers will choose to expand in 2005.”
Many who are dissatisfied with prices would probably prefer to see the buying companies raise them. Tiller points out that prices hinge on companies’ future needs.
“They have to balance their corporate bottom line with the costs of ensuring a steady supply of quality tobacco,” Tiller says. “Obviously, they want to minimize their supply risks, and one way to do that is to develop long-term relationships with high-quality growers from diverse regions by offering a competitive contract price. But ultimately, they want to maximize profits and returns for shareholders.”
The companies might ask, “If we pay the higher prices, are Tennessee growers up to the challenge of raising quality tobacco?” Current yields leave that answer in doubt. Tiller says in 2005, yields will average about 1,900 pounds per acre in Tennessee, which she points out is probably not a high-enough yield for many growers to remain competitive, given the current pricing levels. Under the prices offered in 2005, she says competitive growers will likely need to have yields averaging about 2,100 pounds per acre or better, which is high for many regions of the state.
In 2006, a better question to ask, Tiller says, is whether companies will take into account future weather and disease conditions as well as other risks and offer prices high enough to allow farmers to survive the unexpected down periods.
Tiller foresees a shift in production to eastern Tennessee with fewer growers raising the crop. She also predicts production will drop below the average levels of the 1990s.
The new-era grower in Tennessee or Kentucky must admit that raising tobacco in a free-market system requires both the ability to grow quality leaf and a savvy business intellect. He can no longer rely solely on the heritage of the crop or the fact that burley grown in these states is the best in the world. Look, for instance, at the increasing number of flue-cured growers raising burley at the companies’ request. Balking the system may shove Tennessee and Kentucky growers out.