Agriculture : News
DATE: April 05, 2010
HARDIN COUNTY COOPERATIVE EXTENSION SERVICE
201 Peterson Drive
Elizabethtown, Kentucky 42701-9370
BY: Doug Shepherd
County Extension Agent for Agriculture and Natural Resources
Trying to Make Sense Out of the Current Burley Tobacco Situation:
The following two articles are from information supplied by Will Snell, UK Tobacco Ag Economist. The first of this information was presented prior to the USDA Tobacco report listed below. The events this spring have been very confusing and disturbing to most burley tobacco farmers and agribusinesses selling inputs and services to tobacco farmers. After several years of contracts being readily available, the burley situation has changed dramatically.
In reality the beginning of this adjustment started last year, when for the first time since the tobacco buyout in 2004, U.S. burley supply going into the growing season was closely in line with anticipated demand. In response to an excess supply of burley tobacco in the world market, coupled with a lot of regulatory uncertainty, some companies actually pulled back contract volume in 2009.
However, most contracting growers planted additional acreage in attempts to meet their contract volume to hedge against yield risk. Furthermore, a significant level of acreage was planted in 2009 by non-contract tobacco producers. As a result of higher acreage amidst contract volume reductions, growers faced a depressed market for non-premium styles of tobacco. However, the train-wreck in many cases didn’t happen last year for decent quality tobacco in response to lower than anticipated yields constraining excess production.
But the situation for 2010 has deteriorated further. On the domestic front, tobacco companies purchasing tobacco over the past couple of years incorrectly forecasted a continuation of historical annual U.S. cigarette consumption declines of 2 -3% vs. the observed 5% decline in 2008 and 6% decline in 2009. Plus, the recession forced many tobacco consumers to seek lower priced alternatives, which likely contained less U.S. tobacco. Consequently, domestic tobacco manufacturers overbought U.S. burley the past couple of years, leading to some significant inventory adjustment for 2010. Plus, the uncertainty of FDA regulations has likely led domestic companies to be even more conservative in their purchasing plans for 2010. On the international front, the value of the dollar has kept U.S. tobacco extremely competitive in the world market. But a doubling of tobacco production in the African market over the past couple of years has flooded the international tobacco market, displacing some U.S. burley around the globe.
As a result of these factors, U.S. burley contract volume was reduced this year by all major tobacco companies – but not equally across growers. Contract volume changes ranged from a very few growers actually receiving modest increases to some being eliminated completely. In aggregate, contract volume may have been reduced by some 25-35%. But, planted acreage will likely fall by less than that amount as some growers with access to credit and infrastructure will plant tobacco without a designated home. Consequently, the industry is setting itself up for a three tier price market. Top quality tobacco under contract will receive a premium. A middle priced market for medium quality tobacco under contract or top quality tobacco without a contract. And a severely discounted market for all low quality tobaccos.
When or how the situation will improve is a difficult question to answer. Domestic burley use will likely continue to decline as cigarette manufacturers adjust to a declining (and price sensitive) consumer base and increased FDA regulations. But total world burley supplies may be reduced for 2010 and a continued weak U.S. dollar could lead to some stability for the remaining U.S. burley growers in the coming years. In the mean time, the industry will continue to see further concentration in the number of tobacco growers needed to produce the desired supply level. Key issues impacting this outcome will be the future value of the dollar, the responsive of U.S. (and foreign) burley growers to FDA regulations, the global economy, and the ability to move more U.S. burley into niche/developing markets.
USDA Tobacco Report:
On March 31st, USDA released their planting intentions report for all crops. Below
is the data for tobacco.
- Burley: Kentucky 70,000 acres down 5,000 acres or 7%. Tennessee’s acreage was up 7%. US Burley acreage is down 4%.
- Dark Air-cured: Kentucky 4,500 acres down 2%, US acreage unchanged.
- Dark Fired: Kentucky at 9,000 acres down 1%. US acreage down 3%.
No real surprises for dark tobaccos following recent contract announcements. Based on recent conversation at winter tobacco meetings Dr. Snell wasn't too surprised that burley acres were not down more despite a much larger cut in contract acres. He would expect some of these burley acres in the planting intention data to not materialize due to credit constraints and a realization that it will be a challenge to make a profit on non-contracted acres in the current supply/demand environment. If harvested acreage is close to planting intentions and we observe decent yields, it will certainly be a buyer's market for non-contracted burley this fall/winter.
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