Shifts in consumer preferences towards a blended cigarette worldwide are creating opportunities for burley tobacco producers globally, despite overall declines in world tobacco consumption. This trend, coupled with more competitive pricing evolving from the tobacco buyout, does create renewed opportunities for U.S. and Kentucky burley growers, following a massive slide in production opportunities under the abolished federal program. However, to meet potential demand increases, the domestic burley sector must provide an adequate supply of leaf to both domestic and foreign buyers. It was very evident immediately following the buyout that many burley farmers in traditional areas would likely exit the industry due to a variety of reasons including operator age, anticipated post-buyout profit margins, a lack of trust in the tobacco companies, labor availability, and the condition of existing curing facilities. Of the remaining growers, most were reluctant, despite no production constraints, to expand acreage in the first year following the buyout given the uncertainty of a changing marketing environment for tobacco post-buyout (i.e., no safety net or secondary “guaranteed” market) and also limited barn space and cropland being available to rent from exiting landowners. Thus, it was not too surprising that March 2005 planting intentions for U.S. burley were down 30% compared to 2004 acreage. Somewhat concerned over the long-term supply availability in the U.S. market from traditional areas, some tobacco companies sought burley production outside of traditional burley growing areas in states like Pennsylvania, Maryland, Illinois, Mississippi, and even in the flue-cured regions of central and eastern North Carolina.
Despite some expansion in non-traditional areas, USDA crop reports indicated that burley farmers actually did plant around 30 percent less acres in 2005 compared to 2004 levels. Even with this drop in acreage, most industry observers believed that U.S. burley production for 2005 would fall by a smaller percentage as higher yields anticipated from the "better" growers remaining in the industry would likely offset some of the acreage losses. However, the 2005 U.S. burley crop was produced in many areas under some extremely difficult growing conditions with diseases and a lack of rainfall contributing to very disappointing yields. Production in non-traditional areas is generally being described as "pretty decent", but uncertainty still exists on the quality outcome of the leaf in these areas given the curing conditions and curing facilities.
According to the October 1st crop report, U.S. burley production is forecast at 192.3 million pounds for 2005, 34 percent below last year's level. (Kentucky’s burley forecast is 35% below the 2004 output). The average national burley yield projected for the 2005 crop actually fell to 1,826 pounds per acre – well below the anticipated 2,300 pound plus yield expected from post-buyout growers. (Kentucky's forecast burley yield is even lower at 1,800 pounds per acre.) These observed yields coupled with some quality concerns will likely result in a significant number of burley growers losing money on the 2005 crop. Consequently, the U.S. burley sector could observe another noticeable exit of growers in 2006, which raises even more concerns about the potential supply and the number of remaining producers for the 2006 crop and beyond. Despite production shortfalls from the 2005 crop, the industry does have access to around 170 million pounds of pre-buyout loan stocks to draw upon to meet their needs during this adjustment period. Around ½ of these pool stocks have already been purchased by the trade to supplement the smaller 2005 U.S. burley crop and tightening world burley supplies. Worldwide burley production is forecast to be off 10 percent in 2005, with several high quality grades of burley reportedly being in tight supply.
What about post-buyout burley demand? U.S. burley disappearance has historically been in the 500 to 600 million pound range. However, in recent years disappearance has fallen below 350 million pounds, caused primarily by losses in the domestic market. U.S. burley exports did decline from their record highs in the 1990s, but following a period of stability, U.S. burley exports have been surprising strong in recent years. Trade data reveal that U.S. burley exports gained 40% in 2004, and increased over 25% during the first six months of 2005 compared to the same period last year. Suddenly Russia has evolved as the number one export customer for U.S. burley. However, the availability of pre-buyout import stocks, declining domestic cigarette consumption, and shifts in cigarette exports to overseas manufacturing facilities are causing some significant declines in domestic use of U.S. burley. USDA reports that domestic manufacturers used less than 100 million pounds of U.S. burley in the 2004 marketing season, with imports accounting for more than 62% of the domestic market. Collectively, U.S. burley disappearance may approach or could even fall below 300 million pounds in 2005, but should rebound in the coming years (if supplies are available) as both domestic and export markets adjust gradually to more competitively priced U.S. burley. Thus, opportunities should exist for the remaining U.S. and Kentucky burley growers to expand in the coming years. The question remains whether the price incentives offered by manufacturers will encourage additional production and will the sector see production to continue to shift to non-traditional areas.
What about dark tobacco? The situation for dark is very different compared to burley. While grower prices for dark tobaccos are also anticipated to be lower following the buyout, the smokeless tobacco companies did provide large enough price incentives to entice an increase in 2005 dark fire-cured tobacco acreage, while 2005 dark air-cured acreage fell only slightly. Dark tobacco demand continues to improve in response to the sustained expansion in domestic smokeless tobacco consumption which is in its 18th straight year of growth. In addition to strong product demand, Kentucky dark tobacco growers continue to benefit from limited overseas competition of quality dark tobaccos, and the ongoing close relationship with domestic smokeless tobacco manufacturers.
Accounting for both burley and dark tobacco production, cash receipts for the Kentucky tobacco crop may be near $250 million in 2005 – compared to more than $400 million the past three years. Interestingly the first year of buyout payments sent more than $240 million to Kentucky farmers in 2005. In addition to buyout payments, Kentucky tobacco farmers also received the final installation of the grower lawsuit and after a major legal and political debate, their last Phase II check. Dollars received as a result of the buyout will likely be substantially higher in 2006 as a large number of former quota owners and growers are expected to take the lump sum option. Consolidation in the number of growers will likely continue in 2006, with production continuing to shift to the areas that can consistently produce the quality attributes demanded by the companies at the lowest cost. While the future for those remaining in the sector remains very uncertain, production and cash receipts for the Kentucky tobacco sector does have the potential to expand in future years (in response to demand opportunities) if growers are encouraged to remain in production.