Features

The outlook for U.S. tobacco farmers in 2009 should be favorable, depending on weather and the world trade setting. Domestic demand is likely to decline further as anti-smoking activities push down cigarette sales. Also, U.S. cigarette exports in 2009 may be less than a fourth of what they were at their peak in 1996 (243.9 billion pieces valued at about $5 billion). Leaf tobacco exports may remain strong, in the range of 200,000 tons, valued at about $1.2 billion. Many blending experts in Europe and Asia like to use some U.S. flue-cured or burley tobacco in their cigarette brands. That should help U.S. leaf compete with the enormous tobacco exports from Brazil.

U.S. tobacco production increased 1.7 percent in 2008 to 400.6 million pounds. Larger commercial farmers have expanded tobacco cultivation in some areas, while many smaller farmers have planted less or quit growing tobacco. The area planted with tobacco in the United States may increase by about a tenth in 2009 after remaining flat in 2008.

Generating more than $4,000 per acre, cash receipts from tobacco are among the highest for field crops. In a time of economic downturn, lenders look favorably upon such cash flow. While the costs for growing tobacco have increased in recent years, the larger farmers already had the equipment and land available as fixed costs. Lower interest rates from some lenders will help them finance the items needed to grow tobacco.

North Carolina accounted for nearly half the U.S. tobacco harvest in 2008, compared with about 40 percent before the buyout based on 2004 allotment records. The fact that tobacco farmers get payments through the buyout if they did not take a lump sum payment helps improve their standing with banks.

Debates over the price paid to farmers for tobacco tend to bolster demand for information on all factors with an influence on the price. The average price paid to tobacco farmers was $1.98 per pound during 2004, the last year when allotments were in force. The average price received by farmers did not decline so much as had been predicted by some economists when market forces determined the amount paid under contracts beginning in 2005. The average farm price was nearly $1.66 per pound in 2007 and further gains occurred in 2008. While the price received in 2009 may be something about a tenth below the 2004 peak, it will still allow substantial profits for some commercial growers. Competition for land from corn and soybeans is likely to be less intense in 2009 than it was during the spring of 2008.

Meanwhile, U.S. cigarette output continues to decline. Higher cigarette taxes and anti-tobacco activities are likely to push cigarettes sale down further in 2009. Output of cigarettes has declined more steeply than domestic sales. That is because cigarette exports in 2009 may be only about a fourth of the 243.9 billion pieces recorded at the peak in 1996. It appears that major cigarette manufacturers have moved more of their operations overseas where they perceive the business climate to be less hostile.

While cigarette consumption has declined in some European countries due to higher taxes and stricter regulations, it is still strong in the Middle East, Asia and Africa. This means that cigarette manufacturers in the EU, Russia and Switzerland are exporting a rising share of their cigarette output. Japan is the leading world cigarette importer outside the European Union. Cigarette imports into Iran, Iraq and some other Middle East countries showed an upward trend recently. Since Iran obtains a large share of its cigarette imports from Switzerland and South Korea, it is indirectly an important market for U.S. leaf tobacco. Switzerland was a top destination for U.S. leaf tobacco in 2008.

EU internal competition
In the period 2003-2007, Germany experienced a cigarette export boom to some of the new EU countries. The country’s cigarette exports increased to a value of about $3 billion in 2007, after which exports slowed due to competition from Poland. But new sales to Japan helped to keep German cigarette exports strong. Germany was the top market for U.S. leaf tobacco in 2007, but growing imports from Brazil pushed U.S. shipments to Germany down by about one-third in 2008.

Dutch cigarette exports made good gains in the 1990s but have been relatively static recently, in the range of 112 billion pieces valued at about $2.5 billion annually. A shift by EU importers to less costly cigarettes from Poland and other EU exporters has made it more difficult for Dutch factories to expand exports of their more expensive cigarettes.

The intense competition for markets within the EU has encouraged European cigarette exporters to look for new customers in the Middle East and Africa.

Russia and eastern Europe
Cigarette manufacturers in various countries prefer to use U.S. tobacco. There is a perception that using some U.S. tobacco in the blend of export brands will help boost sales. Yet if the price for U.S. tobacco goes beyond $7,000 per ton, some manufacturers may start using more tobacco from other countries.

Russia bought $80 million worth of U.S. tobacco in 2008. U.S. tobacco exports to Ukraine peaked at $96 million in 2007 but declined in 2008. Russia’s annual cigarette output of about 412 billion pieces ranks second to China, and exports have accelerated recently.

New modern factories operated by multinationals in Russia have provided quality products at reasonable prices. Russia is by far the world’s leading leaf tobacco importer, purchasing some 305,000 tons annually. About 40 countries ship tobacco to Russia, although Brazil is the major supplier by far. Domestic leaf production accounts for less than 1 percent of the Russian tobacco supply and the import duty is only 5 percent.

Strong Brazil
Global leaf tobacco exports averaged about 2.4 million tons annually during 2006-2008, with a value of over $7 billion. Brazil's leaf tobacco exports rose to 694,000 tons valued at $2.2 billion in 2007. That was double the value of U.S. tobacco exports in 2007 ($1 billion). Brazil has been busy filling much of the gap left by the steep decline of tobacco exports from Zimbabwe, and U.S. exports have apparently benefited as well.

Competition among leaf tobacco exporting countries has fluctuated at various times. Recently, Brazil has had remarkable success, especially with flue-cured. More countries in Africa are coming from a low base to export burley tobacco. Zimbabwe is not expected to rebound soon because of hyperinflation and political turbulence.

Brazil will likely remain the leading leaf supplier of Germany, Netherlands, Belgium, Spain, Russia, Ukraine, Poland, China, Japan, Egypt and other countries.

U.S. tobacco companies have found a setting similar to the Carolinas in southern Brazil. The business and political climate has been favorable for U.S. leaf tobacco traders operating in Brazil. They have used their contacts and sales know-how to bolster Brazilian tobacco exports. Brazil has become the top supplier of Japan’s leaf tobacco exports, while arrivals from the United States have nearly ended. China has increased tobacco imports from both suppliers, although imports from Brazil are about double the volumes coming from the United States.

World leaf production
After declining during the past decade, world tobacco production might rebound slightly in 2009. FAO and FAS/USDA reports indicate world tobacco production was about 8 million metric tons (dry weight) during 1997. That was when tobacco production in China was about 3.4 million tons. By 2004, tobacco production in China was down to 2.4 million tons, and it drifted lower afterward. A slight rebound to something above 2.2 million tons may occur for China's tobacco production in 2009, if the weather is favorable.

U.S. tobacco production declined from 811,000 tons in 1997 to 400,000 tons in 2004, and then averaged about 11 percent less during 2006-2008. A rebound for U.S. tobacco production to near the 2004 level may occur in 2009, with strong gains for larger commercial growers of flue-cured. High prices should also spur further gains for production of dark fire-cured tobacco.

Sub-Saharan Africa
Multinationals, development agencies and banks have provided technical and financial assistance to spur tobacco production in sub-Saharan Africa. Mozambique has had a tremendous success expanding production of burley tobacco. Tanzania and Uganda have expanded output of flue-cured tobacco, mostly for export. Some former Zimbabwean farmers have participated in projects to boost flue-cured tobacco production in Zambia.

Other producers of tobacco exporters have experienced declines in recent years.

Following the breakup of the Soviet Union in 1991, tobacco exports from Central Asia and Moldavia declined. Also, Bulgaria lost a large share of the leaf tobacco and cigarette market once available through state trading firms in Moscow.

Tobacco production also declined in some Middle Eastern countries in recent years. Iraq harvested about 18,000 tons of tobacco during some years of the 1980s, but the 2008 crop was less than 4,000 tons. Tobacco production in Lebanon and Syria too was higher in the past. Iran may become a larger importer of leaf tobacco in the future, since domestic output has remained steady in the range of 25,000 tons annually during recent years.

U.S. imports
U.S. imports of leaf tobacco may decline further in 2009. A greater focus on harm reduction may provide incentive to use more domestic flue-cured tobacco in blending. A large share of the tobacco used in U.S. cigarette manufacture in recent years was imported, especially from Brazil and Argentina. Not that much may be known about the cultural practices for growing tobacco in some countries. Tobacco imported into the United States is tested for pesticides and residues left from the farm cultivation and curing systems. The Agricultural Marketing Service of the USDA provides the tests in the areas where the tobacco enters the country.

U.S. tobacco imports declined in 2008 as the average price increased about a tenth to more than $3,700 per ton. Currency fluctuations can have an impact on prices of goods imported into the United States. U.S. tobacco imports reached a peak of 288,056 tons in 2003 and drifted downward through 2008. U.S. imports of tobacco from Brazil declined from 106,100 tons in 2003 to 80,652 tons in 2006 and then rebounded to 94,247 tons in 2007 before declining again in 2008. The average price for U.S. tobacco imports from Brazil moved up about a fourth to $3,842 per ton in the first nine months of 2008.

2000-08 United States tobacco production (all classes)

United States Department of Agriculture
National Agricultural Statistic Service