Economic outlook - First Quarter 2010
Industry experts weigh in on last season and look ahead to 2010
TFQ Editorial Staff
The 2009 growing season presented yet more challenges for tobacco farmers, with news about SCHIP and tax increases on cigarettes, FDA oversight, falling consumption, stagnant high input costs and a wet season that was particularly difficult on burley growers. Leading industry economists Dr. Blake Brown, from North Carolina State University, who is knowledgeable about flue-cured tobacco, and Dr. Will Snell, from the University of Kentucky, who is knowledgeable about burley tobacco, both weighed in on last season and offer insights on what may be in store for 2010.
“For 2009, the encouraging part is that production continues to come up,” says Brown. “The U.S. Department of Agriculture estimate is about 518 million pounds [up 4 percent from 2008] of flue-cured tobacco. I’ve heard all kinds of estimates—I heard someone say 600 million pounds—but I don’t think it’ll be quite that high. The prices will probably similar to 2008 except for [Philip Morris], which is puzzling all of us. What went on there I don’t know exactly, but wherever I go that’s the one I hear talked about.”
“The value of the 2009 Kentucky tobacco crop—depending on how the quality of cured leaf materializes—may be near last year’s $382.6 million level, which represented the highest-valued crop during the post-buyout era,” says Snell. “Nationally, the USDA projects burley production at 214.9 million pounds [up 7 percent], with dark fire-cured pegged at 53.6 million pounds [down 14 percent] and dark air-cured at 17.5 million pounds [down 31 percent]. For dark tobaccos, the dramatic drop-off in production was more supply, not demand driven. Worldwide burley production is projected to be up more than 10 percent from 2008 and more than 30 percent from 2007, with most of the increase in lower-quality African markets.
“On the demand side, both domestic use and exports of U.S. burley declined in the midst of higher tobacco taxes, smoking restrictions, shifting of U.S. cigarette production overseas, depressed U.S. and world economic conditions and ample world tobacco supplies. Thus, after several years in [the] early post-buyout era when total U.S. burley disappearance was in the 250 to 300 million pound range, U.S. burley use will likely decline below 200 million pounds for the 2009-2010 marketing year.”
With domestic consumption being hit particularly hard, the export market continues to be of increasing importance for American tobacco growers.
“Exports have been coming back up a little bit,” says Brown. “We’ve been exporting about 50 percent of our flue-cured lately, and we do have a very favorable exchange rate situation, making flue-cured prices here in the U.S. competitive on the global basis—even with the Brazil prices.
“I don’t know exactly what’s going to happen, but it seems like we’ll be in a favorable situation. If you look at the fundamentals of the export market, at least at the moment, it doesn’t look like there’s much reason to believe that exports will go down. Exports, as they always have been, are very dependent on exchange rates, so at least for the moment we’re in a pretty good situation with that.”
“For burley, domestic needs will continue to decline in response to anticipated lower consumption, making export demand critical,” says Snell. “The cheap U.S. dollar may enable some of the excess 2009 crop to find a home in foreign markets in 2010. If the U.S. dollar remains relatively low compared to the Brazilian currency and the world economy begins to rebound, international cigarette manufacturers seeking flavor may re-evaluate U.S. burley in their purchasing and blending decisions for 2010 and beyond.”
Moving forward, tobacco growers will have to continue adjusting to an ever-changing industry.
“In response to ample supplies and product demand forecasts, burley and dark tobacco buyers are not likely to ask Kentucky tobacco growers to plant additional acres in 2010,” says Snell. “Some growers, especially low-quality burley growers, may see contracts reduced or eliminated. Many non-contracting producers may decide to exit following disappointing results from the 2009 market.
“An improving U.S. economy, additional smoking restrictions and perceptions of lower health risks relative to cigarettes could result in smokeless product sales rebounding in 2010, which, coupled with recent acreage adjustments, should help improve the overall supply/demand balance for dark tobaccos. With anticipated contract volume reductions, coupled with minimal contract price adjustments, look for the value of Kentucky tobacco production to fall below $350 million in 2010.”