Tobacco growers faced a tough marketing reality as they transplanted their 2010 crop. Contracts from buyers were down substantially from 2009, and it wasn’t clear how much leaf could be sold without a contract.
The choices were:
• Play it safe and plant less.
• Plant some tobacco without a contract and take a chance a market to sell uncontracted tobacco will materialize.
In May, observers believed growers were generally taking the optimistic approach, planting acreages close to or equal to last year.
“We are looking at cuts in contracts of about a fifth, but farmers here seem to be planting about the same amount as last year,” says Hassel Brown, East Bend, N.C., which is near Winston-Salem. “We are going to have to be resourceful in selling this crop.”
One leaf dealer, Rick Smith of Independent Leaf in Wilson, N.C., estimated in May that there will be about 50 million pounds of flue-cured tobacco grown off contract.
“We would expect about 400 million pounds of flue-cured based on what the companies contracted,” says Smith. “But it is probably going to be closer to 450 million pounds.”
If there is a bumper crop this fall, there is going to be a problem, says Smith. But he thinks a big crop would still get sold.
“There are a lot of pounds floating around without a contract,” he says. “But I don’t expect farmers will have to store it. It will enter the trade at some price.”
Roger Quarles, president of the Burley Tobacco Grower's Cooperative Association and a Georgetown, Ky., burley grower, thinks burley contracts are down at least 15 percent. “It may be more,” he says. “That indicates a lot of off-contract tobacco.”
By Quarles’ calculation, we might be looking at 30 to 40 million pounds of wildcat burley, roughly twice as much as last year.
“But I don’t think that is reason for panic,” he says. “We had off-contract tobacco in 2009, and it appears all of it got sold.”
Will Snell, Kentucky Extension agricultural economist, believes burley production might be down more than appeared on the surface.
“My best guess, and it is simply a guess, is that we are down 20 to 25 percent in burley contract pounds,” he says. “The March burley planting intentions report indicated a 4 percent cut beltwide. I would expect actual plantings to drop more, probably in the neighborhood of 10 percent. If a good crop materializes, that would result in a buyers’ market, especially for non-contract pounds.”
That contracting for the 2010 crop is down should not surprise us, says Blake Brown, North Carolina State University Extension economist.
“It reflects what is going on in the retail market in the developed markets. We are seeing more tax increases on tobacco products and more adoption of the World Health Organization protocols on tobacco.”
The atmosphere for tobacco in all the developed markets is relatively hostile right now, and developed countries are where U.S. tobacco generally goes.
Just a few months ago, the outlook for U.S. exports this year seemed more promising.
“We thought we were okay in exports,” Brown says. “The exchange rate was considered favorable, and the price of our tobacco was low relative to Brazil, our chief competitor.”
Those factors remain in effect, and there is some reason for optimism. “The domestic tobacco companies have been using more tobacco than they have bought for several years, which means they have been pulling their inventories down,” says Brown. “If a high-quality crop could be produced, as it was last year, the companies might choose to buy more than planned.”
A few auction warehouses remain from the old days, and they could take some of the excess tobacco off the market.
Five auction warehouses for burley operated in Kentucky in 2009, and there may be one or two more this year, says Quarles.
“The auction system here worked very well in 2009,” says Quarles. “Farmers had good luck selling their tobacco at auction, and that has encouraged them to think they can plant without contracts. But remember — there is no guarantee the system will work this well again.”
One auction for flue-cured is expected to operate in 2009, in Wilson, N.C.
In addition, there is one new leaf-marketing vehicle. At the beginning of the year, Quarles’ cooperative formed a new corporation called U.S. Growers Tobacco Company (USGTC) which accepts, processes and stores the tobacco of participating farmers until prices become favorable.
The farmer receives no payment on delivery but receives all the eventual payment, minus 10 cents per green pound for the services, and normal storage and processing charges.
“Farmers retain ownership of the tobacco until it is sold,” says Quarles.
USGTC began accepting tobacco after the regular sales season ended in February, and Quarles says the corporation has already sold much of its take from the 2009 crop.
“We have sold our higher-graded tobacco,” he said in May. “We still have some of the lower quality grades. Buyers are looking at it.”
USGTC accept all types, and a little more than half of what it took in was flue-cured.
Quarles believes the corporation, which served a bit like the old stabilization pools, had a positive effect on the price.
“We are sure that simply because USGTC was there, the overall market average was raised a little.”
However this crop gets sold, Quarles isn’t panicking. “All farm commodities go through market fluctuation,” he says. “Tobacco is just another commodity.”