The Ever-Changing and Uncertain
Tobacco Situation and Outlook
Will Snell
Agricultural Economist
University of Kentucky
Tobacco Issues
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Lawsuits/Settlements
Declining Export Markets
Import Substitution
World Burley Surplus/Competitiveness
Movement of Cigarette Production Offshore
Volume and Quality of Pool Stocks
Marketing Inefficiencies
Lease Prices
Contracting
Grading
Designation
Continued Political Uncertainty
Mil Lbs
U.S. Burley Basic and Effective Quota
1000
900
800
700
600
500
400
300
200
100
0
1980
1983
1986
1989
Basic
2000 Quotas: Basic -- 247 mil lbs
1992
1995
1998
Effective
Effective -- 367 Mil lbs
Mil Lbs
Burley Production:
U.S vs. Rest of the World
2500
2000
1500
1000
500
0
1995
1996
1997
ROW
1998
1999
2000
U.S.
In recent years 100% of the adjustment in world burley
production has occurred in the U.S. market.
Kentucky Tobacco Cash Receipts
Million Dollars
1000
900
800
700
600
500
400
300
200
100
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Kentucky Tobacco Cash Receipts/Mailbox $
1200
Million Dollars
1000
800
600
400
200
0
1995
Receipts
1996
1999 Phase II
1997
1999 T-LAP
1998
1999
2000 T-LAP
2000
2000 Phase II
Can Demand/Quotas Recover?
U.S. Cigarette Consumption
650
600
Billions
550
500
450
400
350
300
1985
1987
1989
1991
1993
1995
1997
1999
U.S. Cigarette Consumption Is Down Around 10% Since The Tobacco
Settlement …. But Is Expected To Fall By Only 2% To 3% In 2000
While the Tobacco Settlement Is
Adversely Affecting the Domestic
Demand for U.S Burley, the Major
Reason for the Decline in U.S.
Burley Demand is Due to:
• Losses in the Export Market
• Substitution of Imported Burley
Domestic vs Imported Burley Use
600
Mil Lbs
500
400
300
Domestic
200
100
0
1970
Imports
1975
1980
1985
1990
1995
U.S. Cigarette Exports
300
Billions
250
200
150
100
50
0
1985
1987
1989
1991
1993
1995
1997
1999
U.S. Cigarette Exports Fell 39% From 1996 To 1999 And
Continue To Slide In 2000
U.S. Cigarette Production
800
700
Billions
600
500
400
300
200
100
0
1985
1987
1989
1991
1993
1995
1997
1999
U.S. Cigarette Production Has Declined Constantly Since
the 1996 Record Level of 755 Billion Pieces
Based on Recent Import
Patterns, U.S. Cigarette
Production Levels in the 500 to
550 Billion Piece Range Would
Require Around 200 to 225
Million Pounds of U.S. Burley
U.S. Burley Exports
Million Pounds
250
200
150
100
50
0
1986
1988
1990
1992
1994
1996
1998
Can U.S. Burley Export Demand Rebound Above 150 Million Lbs?
U.S. Burley Demand
700
Million Lbs
600
500
400
300
200
100
0
1980
1985
1990
1995
Current Demand For U.S. Burley May Be More in the
Neighborhood of 350-400 Million Pounds
What About China?
• Represents 1/3 of World Cigarette Consumption
• Growth in American-Blended Cigarettes
• Opportunities Will Exist To Move Some U.S.
Burley/Cigarettes Into China
• Market Will Develop Slowly and Will Not Be the
Immediate Answer to Industry’s Short-Term
Problems
What Does This Imply About
2001 Quota Levels?
U.S. Burley Pool Stocks
600
Million Lbs
500
400
300
200
100
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Manufacturer Purchase Intentions
Million Lbs
600
500
400
300
200
100
0
1988
1990
1992
1994
1996
1998
2000
“Potential” Quota Scenarios
For 2001
2001 Purchase Intentions No Change
2000 Pool Sales
0
2000 Pool Intake
0
Basic Quota
210 (-15%)
Effective Quota
230 (-37%)
Does the Industry Have Enough Inventory to Allow the
Effective Quota to Fall to Less Than 250 Million Lbs?
“Potential” Quota
Scenarios For 2001
2001 Purchase Intentions
No Change No Change
No Change
2000 Pool Sales
0
50
75
2000 Pool Intake
0
0
0
Basic Quota
210 (-15%)
235 (-5%)
247 (0%)
Effective Quota
230 (-37%)
255 (-30%) 267 (-27%)
Price Adjustment Issues
• Given Quota Transfer Restrictions, Will Lower Prices
Constrain Available Supplies to Meet Potential Increases in
Demand?
• How Will World Burley Prices Adjust to Potential Reductions
in the U.S. Burley Price?
• Will Lower U.S. Burley Prices Result in a Percentage Greater
Increase in U.S. Burley Demand?
• What Are the Structural/Adjustment Costs For Farmers/Rural
Communities That Cannot Compete At Lower Prices?
Issues To Address
• Industry (Both Buyers and Sellers) Evaluation of the
Distribution of Price Supports According to the Value of
These Grades in the World Market
• A Grading System That Is Perceived to be Objective By
Both the Buyers and the Sellers
• Mechanism to Adequately Compensate Quota Owners to
Transfer Quota Into the Hands of Active Growers
• Unity/Leadership …. Survivorship