Burley Market Outlook
November 2001

Will Snell
Agricultural Economist, University of Kentucky
November 2001

The opening of the 2001-02 burley marketing season is upon us and promises to be quite different from historical standards. Last year only one company contracted directly with growers, accounting for 27% of total sales. But for 2001, most of the buyers decided to acquire the majority of their burley needs via direct marketing contracts with growers. Based on beltwide designation numbers, it appears that nearly 65% of the 2001 burley crop will be sold directly to cigarette manufacturers and leaf export dealers. The escalation of contracting volume has forced the closure of many warehouses, with much uncertainty for those remaining. In response to this changing marketing environment, warehouse officials have debated many options (e.g., applying a buyer’s premium, lowering/rebating warehouse fees using Phase I funds, implementing marketing improvements such as moisture testing, non-interference grading, and changing weigh-in dates) as an attempt to entice both growers and buyers to remain with the auction marketing system. While a dual marketing system will prevail for the 2001-02 season, the future of the auction system remains very unclear. What is expected though, that despite all the changes and uncertainty leading up to this year’s marketing season, the current supply and demand conditions will likely generate a favorable 2001-02 market for U.S. burley growers.

2001 U.S. Flue-Cured Market Review

The U.S. flue-cured market sometimes provides a good signal of what burley growers can anticipate from their marketing season. Similar to burley, the current world flue-cured situation is characterized by tightening supplies relative to demand. Consequently, prices for the 2001 U.S. flue-cured crop were fairly strong, averaging nearly $1.86/lb, approximately seven cents/lb above last year’s average. Eighty percent of the 2001 U.S. flue-cured crop was contracted with contract prices averaging around four cents/lb above auction prices. Over 13% of auction marketings were placed under loan, but accounting for both auction and non-auction sales, only 2.7% of the 2001 flue-cured crop went to the pool.

World Burley Supply/Demand Balance

For the first time in several years, the U.S. burley marketing season will open on the heels of an improving world supply and demand balance. A surplus of burley evolved on the world market during the mid to late 1990s in response to unrealized demand expectations leading into the 21st century. While sales of blended cigarettes (containing a mix of burley, flue-cured and oriental tobaccos) continued to grow during this period, depressed economies in parts of the world, coupled with aggressive anti-smoking campaigns and escalating tobacco product prices in other markets constrained the growth in world burley demand. Since 1997, world burley production has declined by 17 percent, with the U.S. accounting for more than 80 percent of this adjustment. Consequently, the world supply/demand balance for burley tobacco has improved considerably over the past year, with certain grades and styles of burley tobacco in short supply. Besides cuts in production, a major factor benefiting the world supply/demand balance has been the removal of the 1999 U.S. pool inventory from world burley stocks. Legislation passed late in 2000 declared these stocks a disaster and were taken under title by the USDA. Farm groups have lobbied for these stocks to be destroyed, but USDA intent on these stocks remains unclear. Currently, leaf dealers are anticipating that these stocks will not be moved back into the world market. If USDA ultimately decides to place stocks of this magnitude (exceeding 12 percent of world burley production) on the international market, the industry would quickly revert back into an excess supply situation, which would further reduce U.S. burley leaf exports and encourage more burley imports into the U.S.

U.S. Burley Market Outlook for 2001-02

According to the October USDA crop report, the 2001 U.S. burley crop is forecast to total 372 million pounds. However, some growers are reporting that yields may be somewhat lighter than originally anticipated. Nevertheless, current production estimates coupled with projected carryover burley from the 2000 crop will likely result in more than 400 million pounds being available for the 2001-02 market. However, quota limitations are expected to constrain marketings for the 2001-02 season to around 340 to 350 million pounds.

This year’s burley growing and curing conditions have generated a crop that overall may not be as desirable as the 2000 crop, but one that is likely to be characterized across the belt as above average. Color is reported to be good to excellent on the earlier housed tobacco with some concern regarding the brightness of the late tobacco. Demand for dark red tips will once again be strong, with some uncertainty over buyers’ needs for a potential surplus of mid-stalk tobacco. Currently, domestic and export demand conditions indicate that annual U.S. burley disappearance (use) for the near term may be in the 350 to 400 million pound range. Most of this will come from the 2001 market, but companies still have access to their own existing U.S. burley inventories (some of which includes pool stock purchases from last year) and the opportunity to purchase from an anticipated larger 2002 foreign burley crop. Despite these options, current demand conditions would warrant the buyers purchasing most of the 2001 crop. Thus, pool stocks are not expected to increase significantly above their current level totaling around125 million pounds.

What about prices? Contract prices were boosted for most grades in response intense buyer competition to attract growers away from considering other company contracts and away from the auction market. The top quality tip contract prices are generally in the $2.05 to $2.12/lb range, with the better quality leaf (B) contract grades generally in the $1.97 to $2.05/lb range, lugs or cutter (C) contract grades generally in the $1.94 to $1.98/lb range and flyings or trash (X) contract grades generally in the $1.97 to $2.02/lb range. For tobacco being sold on the auction market, the average price support for the 2001 crop increased 2.1 cents/lb to $1.826/lb. However, most of the increase was applied to price supports for the top quality grades (generally up some 2 to 4 cents/lb above last year’s loan rates) at the expense of mixed stripped price supports, which were lowered to less than $1.00/lb (a drop of around 30 cents/lb from last year’s levels). Overall, it appears that contract prices for the more typically marketed grades are some 5 to 7 cents/lb higher than price support levels. But, if supplies for some grades are tightening as reported, demand at the auction could erase some of this differential between auction and contract prices . Given these observations and the anticipated quality of the 2001 crop, the overall average market price is expected to exceed last year’s record high price of $1.95/lb. And growers will also benefit from a one-cent per pound no-net cost fee on the 2001 crop, down from three cents per pound assessed on last year’s crop.

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