U.S. Flue-Cured Tobacco Situation & Outlook Dr. Blake Brown Hugh C. Kiger Professor Agriculture & Resource Economics College of Agriculture & Life Sciences

Global Supply: U.S., Brazil and Zimbabwe Flue-Cured Tobacco Production Source Brazil & U.S.: Universal Corporation. “World Leaf Production as of Aug 4, 2016.” Source Zimbabwe: Zimbabwe Tobacco Association “Weekly FCV Report ”

“The combination of lower crop production and expected reduced plantings should result in a largely balanced global leaf market in fiscal 2017.” Davenport & Company, LLC. November 6, 2015

Brazil & US Burley & Flue-Cured Production and Average Farm Price ProductionPrice Brazil billion pounds$1.39/pound billion pounds$1.24/pound US million pounds$2.00/pound million pounds$1.88/pound Sources: Afubra, USDA-NASS

Flue-Cured Acres Harvested: * US206,000228,800232,000218,300214,000 NC164,000170,000181,000170,000165,000 USDA-NASS Crop Estimates *August 2016 Forecast. USDA-NASS

Flue-Cured Production: (million pounds) * US NC NC * *USDA-NASS August 2016 Estimate

US Flue-Cured Exports and Domestic Disappearance

U.S. Unmanufactured Exports of Flue-Cured Tobacco (stemmed) (lbs farm weight) Source: USDA-FAS

China: Tobacco Use 2% decline in sales volume in 2015, but increase in value of sales Increase in wholesale excise taxes of 5-11% in 2015 Minimum smoking age of 18 Advertising restrictions and bans Bans/restrictions on smoking in public places and restaurants and bars Few regulations on vaping/e-cigarettes State Tobacco Monopoly Administration “is encouraging innovation of other tobacco products…” Source: Euromonitor International

China’s Cigarette Market: Number of Smokers (million) Sales of Cigarettes (bn sticks) 2,406.22,461.62,490.52,549.52,489.5 Sales Value of Cigarettes (CNY bn) 1,042.11,155.71,269.41,359.01,422.3 Source: Euromonitor International

China’s Cigarette Market: Euromonitor International Forecast Sales of Cigarettes (bn sticks) 2,428.02,398.02,383.22,375.82,372.1 Sales Value of Cigarettes (CNY bn) 1,472.01,515.71,554.01,587.41,616.3 Source: Euromonitor International

China National Tobacco Corporation -financial performance Revenue $ billion Operating Profit $ billion Source: IBISWorld

US Tobacco Products Market Cigarette consumption continues steady decline Industry revenue declines at annual rate of 2.3% to $37.6 billion Strong profit growth over last 5 years; $12.1 billion in profit estimated to account for 32.7% of revenue in 2016 Industry revenue expected to decline at an annual rate of 2.4% to $33.3 billion in 2021 Source: IBISWorld

US Flue-Cured Domestic Disappearance and Imports for Consumption

Global Tobacco Manufacturing Annual growth of 3.6% in VALUE of sales to $643.8 billion in 2015 From Value of sales expected to increase at an annual rate of 1.8% to $703.8 billion Continued volume declines in mature markets with growth in emerging markets Number of smoking age adults increases Increases in disposable income cause some smokers to trade up to premium tobacco products Source: IBISWorld

Global Revenue from Tobacco Products by Region (2014) % of Global Tobacco Revenue North Asia35.0% Europe27.3% North America16.5% India & Central Asia5.7% Africa & Middle East5.6% South America5.5% South East Asia2.4% Oceania2.0% Source: IBISWorld

Share of Global Market by Manufacturer % of Global Tobacco Products Market China National Tobacco Corp32.8% Philip Morris International Inc.12.2% British American Tobacco PLC10.6% Japan Tobacco Inc.9.6% Imperial Tobacco Group PLC5.0% Altria Group Inc.3.9% Other25.9% Source: IBISWorld

Global overview of e-cigarette regulation 2016 LEGISLATION Banned from sale Banned from sale and use Medicinal-only ‘As tobacco’ ‘Consumer goods/mixed/no specific regulation From: “GLOBAL TOBACCO KEY FINDINGS PART 2: VAPOUR PRODUCTS” Euromonitor International, PASSPORT.

Some future vapour scenarios rated by likelihood THE FUTURE FDA regulation lays waste to US market and allows tobacco companies to dominate market Widespread taxation impairs growth of e-cigarettes globally Significant liberalisation of cannabis legislation creates new front for vapour technology Reduced-risk becomes a ‘premium’ positioning slowing cannibalisation Technological leap which replicates the combustible experience and drives significant adoption Consumption of vapour products exceeds 30% of total tobacco consumption by % 75% 50% 33% 10% 60% From: “GLOBAL TOBACCO KEY FINDINGS PART 2: VAPOUR PRODUCTS” Euromonitor International, PASSPORT.

Some Take-Aways Global surpluses are reduced, especially flavor style flue-cured, bringing leaf supply & demand into balance

Some Take-Aways Global surpluses are reduced, especially flavor style flue-cured, bringing leaf supply & demand into balance Exchange rates favors increased Brazilian production, with the US remaining near or below 2016 levels

Some Take-Aways Global surpluses are reduced, especially flavor style flue-cured, bringing leaf supply & demand into balance Exchange rates favors increased Brazilian production, with the US remaining near or below 2016 levels Despite continued reductions in cigarette consumption and increases in taxation and regulation, industry profits remain strong

Some Take-Aways Global surpluses are reduced, especially flavor style flue-cured, bringing leaf supply & demand into balance Exchange rates favors increased Brazilian production, with the US remaining near or below 2016 levels Despite continued reductions in cigarette consumption and increases in taxation and regulation, industry profits remain strong Opportunities for flavor style producers are in countries where smokers are expected to “trade up” to premium brand cigarettes

Quality is the strategic advantage of U.S. flue-cured producers