Uncertainty clouds tobacco's future Even under the most optimistic market conditions, the demand for U.S. burley tobacco likely will remain below traditional levels, at least for the immediate future, says Will Snell, University of Kentucky Extension economist.
"An improved outlook will depend greatly on the movement of loan stocks, the opening of new markets, program changes to improve competitiveness and a calming of the political and legal environment facing the U.S. tobacco industry," says Snell.
The U.S. tobacco industry continues to face a multitude of legal and political challenges that generate much uncertainty about the future of the industry, he adds. "Tobacco farm income losses have been cushioned by an influx of tobacco settlement dollars and federal disaster assistance. But, the future status of these income supplements remains questionable," notes the economist.
The 2000 basic burley quota declined to a record-low of 247 million pounds, he continues. This is 45 percent below the 1999 basic quota and 65 percent below the record 1997 quota level. The national effective quota for 2000 totaled 367 million pounds, he says, compared to more traditional levels exceeding 600 million pounds.
Several factors involved The dramatic decline in U.S. burley quotas can be attributed to numerous factors, including the following:
- Declining U.S. cigarette consumption, primarily in response to the price increases associated with the national tobacco settlement and increasing excise taxes.
- The increased substitution of less expensive imported burley tobacco for U.S. burley in domestically produced cigarettes.
- Movement of U.S. cigarette production overseas and, to a lesser extent, weakness in Asian and Russian economies, resulting in U.S. cigarette exports falling by more than 40 percent from their record level in 1996.
- World burley supplies exceeding world burley demand, further hindering U.S. burley export price competitiveness in international markets.
- U.S. burley pool stocks escalating to more than 400 million pounds with a large volume of these stocks considered by the trade as undesirable quality and/or undesirable grades of tobacco.
- Political and legal uncertainty inducing manufacturers to continue pursuing conservative buying strategies.
The burley tobacco outlook for 2001 improved substantially, says Snell, with recent pool stock sales and the forgiveness by the federal government of the 1999 Commodity Credit Corporation loan.
Basic quotas for farmers could increase by 30 percent or more if company buying intentions remain stable and a large amount of tobacco from the 2000 crop doesn't go under loan, he says. However, due to over-production in 2000, the actual amount that producers will be able to sell in 2001 could remain the same as in 2000 at 350 to 370 million pounds.
Domestic demand for U.S. burley will continue to be affected adversely by abundant stock levels, imports and the retail product price increases associated with legal costs facing the tobacco industry, notes Snell.
Trend to continue Cigarette prices likely will continue to rise, he says, but at a slower pace than in recent years. "This will result in domestic consumption reverting back to its more traditional two to three percent annual decline. Higher cigarette prices likely will result in an increased use of cheaper imported tobacco, as companies attempt to hold down costs, and consumers switch to lower-price brands which typically contain less U.S. tobacco."
While economic conditions may begin to improve in international markets, the rebounding of U.S. tobacco exports of leaf and tobacco products may be slow to materialize, says Snell.
"In fact, leaf exports in the short-run likely will fall in response to abundant world supplies and limited available supplies from the 2000 burley market."
While the opening of the Chinese market represents some opportunities for U.S. tobacco growers, leaf dealers are unsure of both the long and short-term effects, says Snell.
"As the Chinese economy rebounds, and as the growing middle and upper-income classes continue to emerge, opportunities probably will exist to move some U.S. burley into this enormous market. But this market will evolve slowly over time and probably isn't the immediate answer to the industry's short-term problems."
Political issues Numerous political issues once again will confront producers in 2001, says Snell. And, always at the top of the list is the survival of the tobacco program.
"While the program always is vulnerable, it currently appears that support for the program in Washington, D.C., has been enhanced in response to an improved understanding of the effect of the program on tobacco consumption, taxpayer costs and family farms.
"The biggest threat to the program probably is from internal forces. How long will grower support continue amid declining quotas, increasing lease rates, higher no-net cost fees and contract growing? Also, will the tobacco companies continue to support the program publicly and through their actions?"
Burley tobacco growers and quota owners will be given the opportunity to vote on the fate of the program in a referendum scheduled for February 2001, says Snell.
"If the program survives, legislation passed in June 2000 will modify the program to limit the volume of carry-forward quota and disaster leasing and modify the reserve stock adjustment in the quota formula. However, additional changes in the structure of price supports and the movement of quota to active growers may be necessary to improve the competitiveness of U.S. burley and enhance the longevity of the price support program."
Philip Morris initiated a pilot project for 2000 whereby tobacco was purchased directly from Kentucky and Tennessee burley tobacco farmers within the guidelines of the current federal tobacco program.
According to company officials, this action was taken to better control the very specific grades and styles of tobacco that might not be available in a declining quota market, says Snell.
Few guidelines "While the contracts offered under this pilot program did offer a few production guidelines, the agreement basically was a marketing contract. Under the arrangement, contracting farmers agree to deliver the tobacco to a designated receiving station. Company officials grade the tobacco and prices are established based on a pre-announced price schedule."
No net-cost and burley promotion fees are deducted, but contracting farmers do not have to pay grading or warehouse fees. Farmers have the option of rejecting the offered price and selling their tobacco through the traditional auction market.
Philip Morris contracted more than 100 million pounds of burley tobacco directly from farmers in 2000, says Snell, and the program probably will expand in 2001. Other companies also may experiment with direct contracting, he adds.
"But, I do not expect that tobacco companies will want to directly contract all of the tobacco they need from the farm. Some of the companies like the selectivity of the auction floor. The question remains if this will be enough to keep the auction market a viable option."
Burley tobacco producers are facing some critical decisions on whether they should continue to participate in a depressed and uncertain industry, reallocate resources more towards alternative agricultural enterprises or even pursue off-farm employment, says Snell.
"Worldwide tobacco consumption patterns indicate a niche market for the quality of burley tobacco produced in the United States.
"Thus, while domestic demand for tobacco probably will continue to decline in the foreseeable future, U.S. tobacco - especially burley - likely will remain an important ingredient for tobacco companies as they try to meet an increasing global demand for the American blended cigarette."
Changes required The ability of U.S. burley demand to rebound from recent lows will depend greatly, says Snell, on program and marketing changes to enhance the competitiveness of U.S. burley as well as the opening of new markets.
In addition, the political relationship between tobacco companies and growers also will play big roles in determining the future direction of the industry.
"Nevertheless, current demand patterns suggest that a significant number of efficient burley tobacco growers will be able to survive in this turbulent political, legal and economic environment.
"Although a smaller tobacco sector is likely to be sustained, a major concern focuses on the possibility that tobacco dollars will be concentrated among fewer farmers and across fewer geographic regions. The degree of concentration over time also will hinge greatly on potential changes in the federal tobacco program and tobacco marketing."
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