1. Flue-Cured Tobacco July 18, 2009 Blake Brown Hugh C. Kiger Professor Agricultural & Resource Economics College of Agriculture & Life Sciences

2. Outline I. U.S. & NC Production II. Input Costs III. Tobacco Trade IV. Industry Situation & Issues V. Curing Capacity

3. U.S. & NC Production

4. Flue-cured tobacco basic quota (87-04)/production (05-08)

5. Flue-cured tobacco acreage 2005-2009

6. Flue-cured tobacco acreage by state 2005-2009

7. Prices

8. Prices 2008: 2008: $1.80 per pound$1.80 per pound Up about $0.30 from 2007Up about $0.30 from 2007 Up about 20%Up about 20% 2009 2009 Similar to or slightly below 2008?Similar to or slightly below 2008?

9. Input Costs

10. Propane Gas: August 2009 Contract Daily Prices/gallon NYMEX

11. Monthly Index of Prices Paid: Fertilizer (% of 1990-1992 prices) Source: USDA-NASS

12. Tobacco Trade

13. Flue-Cured Domestic Use and Exports

14. Source: Exchange-Rates.org

15. Trade Trends Dollar is once again declining in value: good for exports Dollar is once again declining in value: good for exports

16. Tobacco Manufacturing

17. Manufacturing Trends Higher Federal excise taxes Higher Federal excise taxes Continued increases in state excise taxes Continued increases in state excise taxes FDA Regulation FDA Regulation Higher cigarette pricesHigher cigarette prices Lower cigarette productionLower cigarette production Lower demand for tobaccoLower demand for tobacco

18. Manufacturing Trends Changes in U.S. cigarette production technology will reduce the amount of tobacco used per cigarette by U.S. manufacturers leading to significant declines in demand for US tobacco Changes in U.S. cigarette production technology will reduce the amount of tobacco used per cigarette by U.S. manufacturers leading to significant declines in demand for US tobacco Diverse paths for cigarette market in developing world versus market in US Diverse paths for cigarette market in developing world versus market in US

19. Implications for Growers Lower domestic use Lower domestic use Fewer growers Fewer growers But domestic manufacturers will have more specialized needs But domestic manufacturers will have more specialized needs Domestic manufacturers will be very selective in choosing growers Domestic manufacturers will be very selective in choosing growers The chosen will be profitable The chosen will be profitable

20. Implications for Growers Exports dependent on Brazil and exchange rates Exports dependent on Brazil and exchange rates Export buyers follow more traditional buying patterns Export buyers follow more traditional buying patterns

21. Curing Infrastructure

22. Aging Curing Barns Almost 10 years since most retrofitting Almost 10 years since most retrofitting Shrinking industry has enabled farms to “cull” barns Shrinking industry has enabled farms to “cull” barns Farmers now face decisions about barn replacement Farmers now face decisions about barn replacement

23. Investment in new barns? Do your profit levels justify the investment? Do your profit levels justify the investment? $35,000 barn (installed)$35,000 barn (installed) 10 year useful life, 8% interest rate10 year useful life, 8% interest rate $490/acre annual return to barn needed$490/acre annual return to barn needed How certain is your contract over the next 10 years? How certain is your contract over the next 10 years?

24. Investment in new barns? If other fixed costs = $200/acre If other fixed costs = $200/acre Implies $700/acre needed as a return to fixed costs Implies $700/acre needed as a return to fixed costs This does NOT include any return to land (rent) or management This does NOT include any return to land (rent) or management

25. Flue-Cured Tobacco Returns Over Operating Costs ($ per acre) $1.70$1.75$1.80 2000 $607$707$807 2200 $895$1,005$1,115 2400 $1,183$1,303$1,423 2600 $1,471$1,601$1,731