2009 Forecast - First Quarter 2009
We caught up with leading tobacco economists Dr. Blake Brown and Dr. William Snell to find out what they see on the horizon for 2009.
TFQ Editorial Staff
After two consecutive growing seasons where weather dominated the news, farmers in the Southeast hope Mother Nature will get back to “normal” to make for an improved crop. While they may not be able to predict the weather, we caught up with leading tobacco economists Dr. Blake Brown (an economist from North Carolina State University who is knowledgeable about flue-cured tobacco) and Dr. William Snell (a economist from the University of Kentucky who is knowledgeable about burley tobacco) to find out what they see on the horizon for 2009.
TFQ: What are you predictions for the crop size in 2009?
DR. BROWN: It’ll be surprising if the flue-cured crop goes up this year. I don’t know if it’ll go down significantly, but I’d be surprised if it was a larger crop in 2009; it may possibly be a little smaller than last year, but not much.
DR. SNELL: During most of the post-buyout era, U.S. burley production has hovered around 200 million pounds, with disappearance being in the neighborhood of 300 million pounds as the companies had access to pre-buyout cooperative stocks. After several years of a tight supply/demand balance for burley, increasing world burley supplies, coupled with a reversal in the value of the U.S. dollar and tight grower profit margins, will likely yield a reduction in U.S. burley acres in 2009.
I’m just not comfortable indicating an exact percentage, with still a lot of uncertainty on the exchange rate outlook and the overall impact of the global recession on leaf trends.
How much crop is slated for export?
BROWN: We’ve been exporting around 40 percent of the flue-cured crop, and I suspect the export percentage could go up just a little bit, although the actual amount of export probably will not. In other words, if we see any reduction in terms of crop size here it’ll probably be from the domestic end. The exporting could go down a little, but hopefully not much.
SNELL: During the post-buyout era, U.S. burley exports have consistently been more than 200 million pounds, compared to around 140 million pounds prior to the buyout. Approximately 75 to 80 percent of the U.S. burley crop is now being exported. Of course, the increasing world supplies—primarily from African nations—and the increasing value of the U.S. dollar will likely cause U.S. burley export volume to decline.
How does global supply and demand look for 2009 and how competitive are U.S. prices?
SNELL: As I said, most of the increase for burley has been in Africa—primarily Malawi—which is not a direct substitute for U.S. burley, but it does add to the total supply. Higher-quality markets such as Brazil and Argentina are expecting larger crops in 2009 but not a significant increase.
BROWN: The 2009 forecast in Brazil for flue-cured is about the same as last year as well. The rising value of the dollar will put some downward pressure on exports. The U.S. is only about 6 percent of the global flue-cured market.
We’ve lost a little competitiveness in terms of the huge spike of oil prices because some countries like Brazil use mostly wood to cure, but we’re still competitive.
SNELL: The U.S. burley industry has benefited from a cheap U.S. dollar, lower post-buyout U.S. burley grower prices and the reduced cost of pre-buyout U.S. burley pool stocks since 2004. But all these variables are changing, and consequently U.S. burley price competitiveness is once again being a noticeable issue. Exchange rate is key!
What do you anticipate contract terms to be?
BROWN: I’m a little afraid to speculate at this point, but we anticipate the production costs coming down a little bit, and of course most farmers are hoping the tobacco prices won’t fall with them.
SNELL: Slowly, over time, you will see companies making more requirements regarding production practices—such as fertilization rates, chemical applications, stripping management, etc.—to address leaf quality, health issues and potential oncoming regulatory issues. You’ll also likely see some price adjustments to changes in input costs.
Speaking of which, how will fuel costs dropping from their record levels impact farmers?
SNELL: Energy-based input prices are coming down, which could result in lower production costs for 2009 but also impact contract price incentives as well.
BROWN: If lower LP gas and diesel prices hold through the growing and harvest season of 2009, production costs could drop significantly. However the outlook for energy is volatile and unpredictable.
Has the slowing economy had an impact on farm labor?
SNELL: Labor availability did not appear to be a major problem with the 2008 crop as more farmers are moving to the H-2A program. The slowdown in the economy could actually result in an increase in the local labor supply.
BROWN: For example, with the construction industry slowed, farmers may find it a little easier to get labor. Not enough to affect wages, but probably a little easier to find non-H2A labor.
SNELL: Administrative changes in the U.S. immigration policy could also impact the labor supply for 2009.
Will it be harder to get loans this year?
BROWN: No, I think our farm lenders are in relatively good shape. Banks are going to be tighter all the way around, but I suspect farmers are in better shape than most folks because a lot of their lending is often built on equity.
What’s the biggest concern for the 2009 season?
BROWN: The biggest worry farmers are going to have concerns what contracts are going to look like, and hopefully we’ll know that before too long. Then, secondly, what are fuel and fertilizer costs going to look like? Hopefully there’s some relief in site on those.
SNELL: I’d say, in the big scheme of things, the biggest concern is keeping growers interested in this crop given its tight profit margins, labor and credit concerns. And for the farmer, the reversal in some of the trends that we’ve talked about, such as world supplies, value of the dollar, tax increases and global recession.