In the past six months, the economics for growing burley tobacco have changed. Given the current economic situation, growers need to have a sound marketing plan to make a profit this year, said Will Snell, Extension agricultural economist in the University of Kentucky College of Agriculture.
"Farmers need to be mindful of the current supply and demand balance," he said. "Tobacco farmers have never had problems selling their crop in the past, but it could be more difficult this year."
In the years following the buyout, demand was greater than supply for burley tobacco. With the supply-demand balance tilting in their favor, several existing growers were able to increase their acreage, and many new farmers entered the market. Many farmers had contracts with cigarette companies or sold to burley cooperatives, but others took their chances with auction prices in the tobacco warehouse.
Recently, both national and international demand for tobacco has dropped. In the United States, higher federal and state taxes on tobacco products, smoking bans, an increasing number of smokeless tobacco users and the availability of foreign tobacco have driven the demand lower. The increasing value of the dollar, the global economic downturn and an increase in supply of lower quality tobacco have decreased the global demand for burley.
The recently released U.S. Department of Agriculture Prospective Plantings report showed no change in burley tobacco acreage this year in Kentucky and a 1 percent decline in acreage nationally.
"Although burley demand may be off 10 to 20 percent this year, U.S. burley acreage is virtually unchanged from the 2008 crop, which could result in some burley, especially low-quality leaf, not being purchased or sold at a discounted price," Snell said.
The current economic shift has come at an inopportune time for many prospective growers. Across the state, some people are contemplating re-entering the tobacco market this year for reasons that include job loss, reduction in hours in off-farm jobs, lower prices for other commodities and a diminishing buyout income.
Snell said it's important to remember that while the Prospective Plantings report is a good indicator of 2009 commodity plantings, acreage totals may vary higher or lower at planting time. Profits still are possible for growers who produce high-quality tobacco, but they need to have a sound marketing plan in place.
"While most farmers without a marketing plan have been able to find a profitable home for their tobacco during the recent excess demand period, I am not confident that alternative marketing outlets can absorb a significant boost in production in 2009 without some major price adjustments," he said. "Going into the season without a contract is concerning."
However, contracts should not be signed hastily. Snell said growers should be comfortable with the prices and terms of the contract.