1. U.S. Flue-Cured Tobacco Situation & Outlook TGANC 2017
Dr. Blake Brown
Hugh C. Kiger Professor
Agriculture & Resource Economics
College of Agriculture & Life Sciences

2. Global Supply: U.S., Brazil and Zimbabwe Flue-Cured Tobacco Production
Source Brazil & U.S.: Universal Corporation. “World Leaf Production as of November 8, 2016.”
Source Zimbabwe: Zimbabwe Tobacco Association “Weekly FCV Report ”

3. US Flue-Cured Exports and Domestic Disappearance

4. 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

5. “Philip Morris could stop making conventional cigarettes” BBC News November 30, 2016
iQOS did well in test markets…PM plans to introduce into additional markets

6. 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

9. How does a declining industry have strong profit growth?
Acquisition of profitable smokeless companies
Aggressive consolidation
Acquisition of other manufacturers
Combining production facilities
Reducing employment through consolidation of production

10. How does a declining industry have strong profit growth?
Unprecedented pricing power

11. How does a declining industry have strong profit growth?
Unprecedented pricing power
an addictive product

12. How does a declining industry have strong profit growth?
Unprecedented pricing power
an addictive product
by being one of the most heavily regulated industries in the world

13. So what can you take back to the farm…?
Consolidation
That’s what you’ve been doing for years
Is there more you can do…?

14. Cost for 200 acres % of Total PLANTS $ 48,000 FERLIZER & LIME $ 77,756
$ ,000
6.7%
FERLIZER & LIME
$ ,756
10.8%
CHEMICALS
$ ,292
16.7%
CURING FUEL
$ ,000
9.0%
ELECTRICITY
$ ,280
3.5%
OTHER
$ ,804
5.9%
CROP INSURANCE
$ ,000
3.3%
TRACTOR, MACHINERY FUEL, LUBE, REPAIRS
$ ,074
3.9%
LABOR
$ ,238
34.2%
INTEREST
$ ,454
1.7%
LAND RENT
$ ,000
4.2%
TOTAL VARIABLE COSTS
$ ,898

15. Labor Use in Tobacco Labor estimates for hand harvest
Pre-harvest: 46 hours
Harvest: 60 hours
Post Harvest: 9 hours hours total

16. Adverse Effect Wage Rates for North Carolina
2011
2012
2013
2014
2015
2016
2017
$9.30
$9.70
$9.68
$9.87
$10.32
$10.72
$11.27

17. So what can you take back to the farm…?
Consolidation
Spreading overhead costs over more production
Regulatory Compliance as a competitive advantage?

18. Some Take-Aways
Exchange rates favored increased Brazilian production; 2017 Brazilian flue-cured production is up at over 1.4 billion pounds

19. Some Take-Aways
Exchange rates favored increased Brazilian production; 2017 Brazilian flue-cured production is up at over 1.4 billion pounds
Contracted pounds and production decline slightly in 2017

20. Some Take-Aways
Exchange rates favored increased Brazilian production; Brazilian flue-cured production is up at over 1.4 billion pounds
Contracted pounds and production decline in 2017
Despite continued reductions in cigarette consumption and increases in taxation and regulation, industry profits remain strong

21. Some Take-Aways Watch the “heat-not-burn” category
Exchange rates favored increased Brazilian production; Brazilian flue-cured production is up at over 1.4 billion pounds
Contracted pounds and production decline in 2017
Despite continued reductions in cigarette consumption and increases in taxation and regulation, industry profits remain strong
Watch the “heat-not-burn” category

22. Some Take-Aways
Exchange rates favored increased Brazilian production; Brazilian flue-cured production is up at over 1.4 billion pounds
Contracted pounds and production decline in 2017
Despite continued reductions in cigarette consumption and increases in taxation and regulation, industry profits remain strong
Watch the “heat-not-burn” category
Opportunities for flavor style producers are in countries where smokers are expected to “trade up” to premium brand cigarettes

23. Some Take-Aways What is your competitive advantage? Quality Cost
Exchange rates favored increased Brazilian production; Brazilian flue-cured production is up at over 1.4 billion pounds
Contracted pounds and production decline slightly in 2017
Despite continued reductions in cigarette consumption and increases in taxation and regulation, industry profits remain strong
Watch the “heat-not-burn” category
Opportunities for flavor style producers are in countries where smokers are expected to “trade up” to premium brand cigarettes
What is your competitive advantage?
Quality
Cost
Compliance

24. Executive Farm Management Program for NC Sweet Potato and Tobacco Farmers
Key Topics
Strategic Planning
Human Resource Management
Financial Management
Leading Change
Risk Management
Family Business Issues
Assessing Markets
Assessing and building key partnerships
Strengthening your value proposition