The Future of Burley Supply Burley Stabilization Corporation Daniel Green Burley Stabilization Corporation Daniel Green

Overview Historical Trends Review U.S. Market Review Short-term Supply Issues Long-term Supply Issues

25 Year Production Review World Production Trends Filler vs. Flavor Production in Flavor Exporters

Source: USDA/Universal Leaf Tobacco World Burley Production MTs

Source: USDA/Universal Leaf Tobacco World Burley Production MTs

Flavor vs. Filler Production Flavor Filler

MTs Burley Production

World Burley Production Share

 The significant decrease in higher-value flavor burley in recent years exemplifies a relatively rapid shift from traditional flavor producing regions.  Given the much smaller supply of flavor burley, manufacturers are certainly substituting filler for flavor. Better technology in cigarette production. Better quality filler tobacco. Consumer demand for cheaper cigarettes. Flavor vs. Filler Burley

U.S. Cigarette Taxes $/Pack Source:

U.S. Cigarette Retail Price Source:

U.S. Cigarette Production Source: USDA ERS, TMA Billion Pieces 16% since % last 10 years

Source: NASS/ERS/USDA Estimates by Univ. KY KGs US Burley Trade Balance

American Blend Outlook Approximately 39% of cigarettes consumed worldwide are American blend compared to 53% Virginia and 8% other. Consumption of American Blend cigarettes is concentrated in USA, Russia, Japan, Philippines, Ukraine, South Korea and Germany. All are declining markets with approximately 5% decrease in consumption per year the past two years. Growth markets for American Blend include Egypt, China, Iran, Thailand, Indonesia, Vietnam, Belarus and Taiwan. While a declining market, American Blend sales declines are not substantially different from Virginia Blend declines and still represent a 2.1 trillion stick market.

Short-Term vs. Long-Term Supply Short-term factors affecting supply will contribute to excess quantities and general reduction in quality. Long-term factors contribute to lower capacity to produce flavor burley to meet demand.

U.S. Burley Tobacco Hectares

U.S. Burley Tobacco Hectares Actual hectares planted in 2015 may be closer to 31,000

U.S. Burley Tobacco – Farm Prices Farm Price/KG

Burley Production Decision 2014 Contract Volume - 84 MT 2014 Production Volume - 95 MT 2015 Contract Volume - 59 MT 2014 Production Volume - 95 MT

Growers are planting tobacco without a marketing contract. Current incentives to produce are out of line with current burley demand. If substantial contract volume reductions and price reductions are in place for 2015, then why are growers overproducing? Burley Production Decision

Expected Price for Burley 1 acre of burley, 2,000 lb. yield history, 75% coverage Produced 2,000 pounds of burley grading B4GF B4GF receives discount factor of = 0.4, 0.4 x 2,000 = 800 pounds counting as production

Expected Price for Burley 2014 Guaranty = 0.75 x 2,000 = 1,500 pound guarantee Indemnity = 1, = x $2.05 = $1,435 Grower sells tobacco at 3rd quality for $1.90

Expected Price for Burley Total price received per pound: $1,435 indemnity + $3,800 sale price $2.63/LB ($5.78/KG)

Expected Price for Burley For 2015, Price election is $1.80/LB Under same example, expected indemnity for B4GF is $1,260. If grower expects $1.32/LB or greater for insured non-contract tobacco, non-contract tobacco will average the same as 2014 contract tobacco ($1.95/LB).

Source: US Ag Census, 2012 Average Age of U.S. Burley Growers

Likelihood of Producing in 10-Years Source: UT CTGR Survey Data Likelihood of Producing in 10 YRs

Likelihood of Producing in 10-Years Source: US Ag Census Number of Tobacco Farms in KY

Source: UT CTGR Survey Data Alternative Crops to Burley Growers

Other Market Outlook Issues Impact of the WHO – FCTC, FDA regulation and the EU Tobacco Products Directive Participation of Big Tobacco into the electronic alternatives market Continued growth in illicit trade – 1 in 10 cigarettes are illicit Approach of Public Health to electronic cigs/vapor products

Future of Tobacco Regulations Increased Attack on Combustibles Growth & Acceptance of E-options

Future of Alternatives Philip Morris iQOS & HeatSticksJTI Ploom & Ploom Pax

Moist Snuff Sales Source: Million Pounds

E-Cig/Vapor E-Cigs first on the market less than ten years ago. Worldwide sales of vapor products totaled $3.5 billion in 2013, with approximately half of the sales in the USA. E-Cig and Vapor product sales are approximately 2% of the value of cigarette sales in the USA. Projected to exceed $50 billion per year worldwide by 2030 by Euromonitor.