1. CAAP Agricultural Policy Analysis Center - University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996-4519 www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298 U.S. Tobacco Situation & Outlook Southern Agricultural Outlook Conference Atlanta, GA September 27, 2006 Kelly Tiller

2. CAAP U.S. Cigarette Production, Consumption & Exports Source: USDA, Economic Research Service (-24%) (-51%) (-34%)

3. CAAP U.S. Moist Snuff Consumption Source: USDA, Economic Research Service  41%

4. CAAP Per Capita Consumption

5. CAAP Tobacco Industry Trends Cigarette consumption continuing annual decline, about 1-2% Moist snuff consumption continuing annual increase, about 5% Cigarette companies moving into smokeless categories –RAI purchased Conwood in 2006 for $3.5 billion –PM introducing new smokeless products –New spitless products on the market Potential for future FDA regulation still looming Major manufacturers regaining some market share as NPMs are edged out of the market

6. CAAP Tobacco Industry Trends States continuing to increase cigarette excise taxes –Average state excise tax is $0.96/pack (by January 2007) –21 states above $1.00/pack, 7 states above $2.00/pack Significant increases in smoking restrictions Some major litigation resolved in 2006 (Engle, DOJ), other new suits pending (Schwab) Altria appears prepared to spin off Kraft Foods and Philip Morris USA (and PMI?)

7. CAAP World Flue-Cured Production Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

8. CAAP World Burley Production Source: Universal Leaf Tobacco Company, Inc., Sept. 2006

9. CAAP World Market Trends World cigarette market becoming more concentrated –3 companies account for 2/3 of market Aggressive marketing (where permitted) fueling growth Generally less uncertainty and risk from litigation internationally Increasing taxes and smoking restrictions in some developed countries

10. CAAP Distribution of Leaf in U.S. Cigarettes Source: USDA, Economic Research Service

11. CAAP Production Assessment Acreage and production increasing, but not back to pre- buyout levels Overall, 2006 production up nearly 100 million pounds, up nearly 15% over 2005 Number of farmers down dramatically, especially for some traditional burley regions Remaining growers expanding acreage Production expanding into nontraditional growing areas Domestic stocks declining as co-op stocks are depleted

12. CAAP US Tobacco Production Source: USDA, NASS, Crop Production Reports

13. CAAP US Tobacco Acreage Source: USDA, NASS, Crop Production Reports

14. CAAP Change in Total Tobacco Acreage Still not back to pre- buyout acreage Burley generally down more than flue Pennsylvania up significantly Missouri above 2004 level 2004 to 2006 1.7% -72.5% -21.7% -27.8% -3.2% 10.3% -1.3% -44.6% 97.5% -18.5% -33.9% -32.0%

15. CAAP Change in Total Tobacco Acreage Flue-cured states generally up Florida way down Mix in burley –Kentucky up some –Tennessee down 13% Several states no longer reported -2.0% -56.0% 12.5% 4.1% 0.8% 18.5% 22.2% -8.8% 58.0% 10.0% -12.9% 17.7% 2005 to 2006

16. CAAP Flue-Cured Outlook 2006 flue-cured production expected to be 455 to 489 million pounds –Up 18-28% over 2005 Acreage higher in 2006, still not up to 2004 levels –Up significantly (20%) in North Carolina, mostly in the Eastern part of the state –Moving out of Florida –Smaller expansions in Virginia, Georgia, South Carolina Exports may strengthen as prices adjust to post-buyout levels –2006 exports up, first increase in over a decade Lower production in Brazil in 2007 may increase incentives to expand U.S. production

17. CAAP U.S. Flue-Cured Production Source: USDA, NASS, Crop Production Reports

18. CAAP U.S. Flue-Cured Acreage Source: USDA, NASS, Crop Production Reports

19. CAAP Change in Flue-Cured Acreage 2005 to 2006 -72.5% -21.7% -0.9% -18.5% -26.1% 2004 to 2006 -56.0% 12.5% 22.0% 10.0% 21.4%

20. CAAP Flue-Cured Prices ??? – no official market reporting 2006 prices appear slightly higher than 2005 –Average around $1.50 per pound –Prices still about 20-25% below pre-buyout levels Contract price range appears to have narrowed in 2006 –Some lower priced companies increased prices Percentage of tobacco sold under contract increasing

21. CAAP U.S. Flue-Cured Exports Source: USDA, Economic Research Service

22. CAAP Burley Outlook 2006 burley production expected to be 225 to 249 million pounds –Up 10-22% over 2005 Acreage –Moving out of Tennessee and traditional areas of North Carolina and Virginia –Shifting from East/Central to Western Kentucky –New production in Piedmont and Eastern North Carolina, Pennsylvania Exports may strengthen as prices adjust to post-buyout levels Potential to support 300 million pounds total use

23. CAAP U.S. Burley Production Source: USDA, NASS, Crop Production Reports

24. CAAP U.S. Burley Acreage Source: USDA, NASS, Crop Production Reports

25. CAAP Change in Burley Acreage 2005 to 20062004 to 2006 -31.1% 10.3% -14.9% -44.6% -41.7% -52.5% 4.3% 18.5% 33.3% -8.8% -17.6% 0.0% 150.0%

26. CAAP Burley Prices ??? – no official market reporting Additional price incentives offered in 2006 –Higher prices brought in more acreage 2006 prices higher than 2005 –Averaged around $1.50-$1.55 per pound in 2005 –Averaging around $1.60 per pound in 2006 –Still 20-25% below pre-buyout levels

27. CAAP U.S. Burley Exports Source: USDA, Economic Research Service

28. CAAP Other Tobacco Types Less dramatic price declines post-buyout for dark-fired tobacco Adjustment to post-buyout market has been less dramatic Strong demand for domestic use in smokeless tobacco products Little movement in production areas

29. CAAP Change in Dark-Fired Acreage 2005 to 20062004 to 2006 -46.5% 0.0% -2.1% 11.8% -11.7% 1.8%

30. CAAP Change in Dark Air-Cured Acreage 2005 to 20062004 to 2006 28.8% -25.9% 27.0% -11.1%

31. CAAP 2006 TN-VA-NC Burley Survey Mail-based survey of 6,000 burley growers in traditional areas of Tennessee, Virginia, and North Carolina First available market and production information post-buyout Surveys completed May 2006 813 completed responses, preliminary results available Follow-up Extension agent survey Dec. 2006

32. CAAP Respondents Growing in ‘06 47% 52%40% No Yes

33. CAAP Average Planted Acres

34. CAAP ’06 Average Acreage No 53% Yes 47%

35. CAAP Last Year Actively Growing 3% 11% 62% 23%

36. CAAP 2006 Prices, Tennessee

37. CAAP 2006 Prices, Virginia

38. CAAP 2006 Prices, North Carolina

39. CAAP Likelihood of Producing in ‘07

40. CAAP Expected Acreage Changes in ‘07

41. CAAP Likelihood of Producing in ‘10

42. CAAP Likelihood of Producing in ‘15

43. CAAP Other Farm Enterprises

44. CAAP Why NOT Producing in ’07? Not profitable enough (88%) Shortage of labor (63%) Age, near retirement (52%) Too risky without a price guarantee (37%)

45. CAAP Biggest Challenges Next 2-5 Years Contract prices too low (54%) High costs of hiring labor (53%) High costs of nitrogen fertilizer (47%) Shortage of affordable and/or legal labor (27%) High costs of other production in puts (24%)

46. CAAP Summary & Concerns Tobacco markets beginning to stabilize and rebound following the buyout Exports have potential to expand, especially in flue- cured Increasing imports leveling off post-buyout Concerns about labor availability Working toward more mechanization in burley harvest High fuel prices particularly a problem for flue-cured Free market provides more incentives to reduce costs

47. CAAP For More Information … www.agpolicy.org