Two years removed from the government buyout, U.S. tobacco acreage and production appear to be on the upswing, at least in some parts of the country, says Kelly Tiller, University of Tennessee Extension economist.

“Looking at overall tobacco production, now that we're two years from the buyout, overall U.S. acreage and production are increasing. They're not back yet to those pre-buyout levels, and they're not expected to be back at those levels in the foreseeable future, but it does appear that things have hit the bottom and have started back up somewhat,” said Tiller at the recent Southern Region Agricultural Outlook Conference in Atlanta.

Most of the tobacco produced in the United States is used in cigarette consumption — about 92 percent, she says. “It's important to look at the trends and the cigarette and the tobacco industry in general. It can give us an idea about what we can expect in the near future,” says Tiller.

Looking at what has happened in the past, she says, the production of cigarettes has declined by about 34 percent in the last 10 years. But a majority of that has been in a reduction in the export of cigarettes. “This is primarily because a lot of the cigarette manufacturers are finding it more efficient to produce cigarettes overseas than to produce them in the United States and ship them out.”

A significant decline in the exports of cigarettes is evident, but the United States also seen significant declines in consumption, says Tiller. Consumption is down by about 24 percent, to about 370 billion pieces of cigarettes, consumed in the United States in 2006, according to estimates.

The brightest spot for the U.S. tobacco industry is in moist snuff consumption, she says. While cigarette consumption has been declining and is expected to continue to decline, the consumption of moist snuff has increased by 41 percent over the past decade. Per-capita consumption is increasing as well as overall consumption. But a different type of tobacco is used for moist snuff — a dark tobacco rather than burley or flue cured.

Cigarette consumption is expected to continue to decline by 1 to 2 percent each year, she continues. “There are a number of reasons for this decline, and a lot of them are health related. Many of those who continue to smoke are reducing the amount they smoke because of health reasons. In addition, there are a lot of new restrictions on smoking and cigarette prices are higher. So a continued decline is expected,” says Tiller.

Snuff consumption, on the other hand, is expected to continue to increase, at a rate of about 5 percent annually, which is fairly significant, she says. “Because of these trends in consumption, a lot of the cigarette companies are starting to move into the smokeless category — snuff and chewing tobacco. Over the past year, Reynolds American paid $3.5 billion for a private smokeless tobacco company, which was significantly above the market value of the company. Phillip Morris — the leading cigarette manufacturer — is introducing new smokeless products. Both of these companies, as well as others, are currently test marketing some spitless products. This is a moist snuff product.”

Eventually, although probably not anytime in the near future, the FDA will have the authority to regulate tobacco products, she says. That gives further incentive for more movement into smokeless products. “Under FDA authority, they can market and advertise these products as a reduced or lower health risk. That's significant incentive to expand into these categories.”

Some of the major manufacturers — Phillip Morris and Reynolds — are beginning to regain some of the market share that has been lost over the last decade or so, especially since the master settlement agreement, says Tiller. “When those larger companies were making those very large payments to states, a lot of the smaller, fly-by-night companies were coming in and undercutting them with deep-discount cigarettes, and the bigger companies were losing a lot of market share.”

Looking at the worldwide situation for flue-cured tobacco, says Tiller, China produces a large amount of flue-cured, but most of it is consumed internally, and it's not in competition with U.S. flue-cured tobacco. For the United States, there is a projection for a slight increase in flue-cured acres over the next year, and that will help regain some of that worldwide market share, she says.

Overall production in 2006 of all types of tobacco is up by about 100 million pounds, which is about a 15-percent increase over last year, says Tiller. “Although we're starting to increase in production and acres, the number of farmers producing that tobacco is down dramatically. We don't know exactly what those numbers are, but estimates for burley are that we've lost about 70 percent of our farmers. Those who continue to produce, however, are beginning to expand their acreage now as this adjustment period continues.

Tobacco acreage also is starting to expand into non-traditional areas, he says. “About 95 percent of U.S. tobacco is produced in six Southeastern states. Now, it's beginning to expand beyond those six states. But it's still a fairly limited amount of expansion.”

U.S. domestic stocks are beginning to decline now as a lot of the tobacco that was held by the cooperatives when the buyout occurred has been moved into the market, she says. As a result, U.S. production is working now from a more stable market environment in terms of supply and demand, she adds.

U.S. production was hovering around 1.5 billion pounds during the 1990s, but it has dropped dramatically, says Tiller. The buyout occurred in 2004 and production continued to drop, but production and acreage made a slight upswing in 2006.

The outlook for flue-cured production is expected to be between 455 and 489 million pounds for this year, which is estimated to be an increase of about 20 percent over 2005. There has been an acreage increase of about 22 percent in North Carolina with smaller expansions occurring in Virginia, Georgia and South Carolina.

Early predictions for 2006 are for an increase in U.S. flue-cured exports, says Tiller. “Some of the issues addressed in the buyout such as price competitiveness may be showing up in the export market. Another reason for the increase in exports is that production in Brazil is expected to be significantly lower in 2007. Since they're the largest exporter of flue-cured tobacco, that may be additional incentive for flue-cured production.”

We don't know much about tobacco prices since official price reporting was eliminated with the buyout, she says. “It appears from looking at contracts that the 2006 prices for flue-cured tobacco are up some from the 2005 levels. In 2005, the first year after the buyout, prices fell by about 20 to 25 percent.

Prices averaged about $1.45 to $1.47 per pound in 2005. It appears they are averaging about $1.50 per pound this year. There are still some auction markets available, but there is very little tobacco moving across the auction markets. About 95 percent of U.S. tobacco is now contracted.”

Burley production in the United States is expected to be in the range of 225 to 250 million pounds, she says.

“Expectations are that exports will strengthen as prices adjust to new lower post-buyout levels. Potentially, all of the factors are there to support industry equilibrium of about 350 million pounds of total use. That is somewhat less than the 250 million pounds now being produced, and it's not clear where those increased pounds will come from.”