US Flue-Cured: Outlook US Flue-Cured: Outlook and Situation and Situation

June 11, 2010June 11, 2010

Blake BrownBlake BrownHugh C. Kiger ProfessorHugh C. Kiger Professor

Agricultural & Resource EconomicsAgricultural & Resource EconomicsCollege of Agriculture & Life SciencesCollege of Agriculture & Life Sciences

OutlineOutline

Tobacco Production and UseTobacco Production and Use Prices and DemandPrices and Demand Farm InfrastructureFarm Infrastructure SummarySummary

Production and UseProduction and Use

US Flue-Cured Tobacco AcreageUS Flue-Cured Tobacco Acreage

Flue-Cured Production: Flue-Cured Production: (million pounds)(million pounds)

20052005 20062006 20072007 20082008 20092009 20102010PROJECTEDPROJECTED

USUS11 380380 447447 504504 499499 526526 475475

NCNC11 272272 324324 377377 385385 418418 377377

BrazilBrazil22

1,5291,529 1,3931,393 1,3771,377 1,3401,340 13401340 12231223

1 USDA-NASS2 Universal Corp. Crop Reports

Flue-Cured Domestic Use and Flue-Cured Domestic Use and ExportsExports

Stemmed U.S. Flue-Cured Exports by Stemmed U.S. Flue-Cured Exports by RegionRegion

(metric tons, non-farm weight)(metric tons, non-farm weight)

Stemmed Exports of U.S. Flue-cured to East Stemmed Exports of U.S. Flue-cured to East AsiaAsia

(metric tons, non-farm weight)(metric tons, non-farm weight)

Flue-Cured Contracts & PricesFlue-Cured Contracts & Prices

• Lower Contracted Volume…of primary Lower Contracted Volume…of primary contracts: $1.75 - $1.80 per poundcontracts: $1.75 - $1.80 per pound

• A secondary contract market has A secondary contract market has emerged: $1.45-$1.50 per pound?emerged: $1.45-$1.50 per pound?

Demand and the FarmDemand and the Farm Declining demand for tobacco:Declining demand for tobacco:

• FDA regulationFDA regulation• FCTC regulationsFCTC regulations• Increased taxesIncreased taxes• Smoking restrictionsSmoking restrictions• Shifts to smokeless Shifts to smokeless

U.S. AverageU.S. AverageRetail Cigarette PriceRetail Cigarette Price

(US$ per pack)(US$ per pack)

Source: TMA Estimate

+20.09%

Retail Price and Tax Retail Price and Tax Incidence Figures f0r 2009Incidence Figures f0r 2009

Retail PriceTax Incidence

Norway $13.07 71.20%UK $8.83 76.57%Singapore $7.92 70.54%Australia $7.81 60.76%France $7.54 80.39%Canada $7.17 70.73%Germany $6.70 75.82%Italy $5.73 75.16%

All Prices are in US Dollars per pack of 20.

Retail PriceTax Incidence

United States $5.5044.67%

Portugal $4.8378.29%

Spain $4.1777.59%

Japan $3.3663.06%

South Korea $2.1562.61%

Poland $1.9680.22%

China $1.2071.28%

Indonesia $0.5249.09%

Infrastructure on the FarmInfrastructure on the Farm

Flue-Cured Tobacco Growers: Curing Barn AgeFlue-Cured Tobacco Growers: Curing Barn Age(CTGR 2009 Survey: 254 responses)(CTGR 2009 Survey: 254 responses)

•4% of bulk barns less than 4 years old

•30% of bulk barns between 5 to 10 years old

•44% of bulk barns between 11 to 20 years old

•17% of bulk barns between 21 to 30 years old

•5% of bulk barns more than 30 years old

Source: Center for Tobacco Grower Research JHS

Investment in new barns?Investment in new barns?

Do your profit levels justify the Do your profit levels justify the investment?investment?• $35,000 barn (installed)$35,000 barn (installed)• 10 year 10 year useful useful life, 8% interest ratelife, 8% interest rate• $490/acre annual return to barn needed$490/acre annual return to barn needed

How certain is your contract over the How certain is your contract over the next 10 years?next 10 years?

SummarySummary Contracted volume downContracted volume down Lower domestic use and purchasesLower domestic use and purchases

• FDA near term impact uncertainFDA near term impact uncertain Export demand?Export demand?

• Exchange rates?Exchange rates?• Developed country demand downDeveloped country demand down

Curing Barn Investment DecisionsCuring Barn Investment Decisions

Issues for GrowersIssues for Growers Do I have a contract?Do I have a contract?

• How do I cash flow?How do I cash flow? How do I cope with volume How do I cope with volume

reduction?reduction?• How much over contract do I produce?How much over contract do I produce?

How secure is my contract?How secure is my contract?• Should I replace any barns?Should I replace any barns?