1. Welcome to TMA’s 94 th Annual Meeting & Conference May 18, 2009 Williamsburg, Virginia

2. Farrell Delman President Tobacco Merchants Association TMA’s 94 th Annual Meeting & Conference May 18, 2009 Williamsburg, Virginia

3. SCHIP FCTC FDA RECESSION

4. Conference Overview Some Key Trends The WHO’s Framework Convention SCHIP FDA

5. Conference Overview Some Key Trends The WHO’s Framework Convention SCHIP FDA

6. World Cigarette Production & Consumption (Billions of Pieces) Source: USDA-FAS, TMA Estimates

7. World (excluding China) Cigarette Prod. vs. Cons. (Billions of Pieces) Source: USDA-FAS, TMA Estimates

8. TAXES … SMOKING BANS … NO ADVERTISING

9. POINT-OF-SALE AD BANS … KIDS IN CARS … OUTDOOR SMOKING

10. Sales Trends: Shorter Cigarettes Marlboro 72’s (Philip Morris USA and PMI)

11. Sales Trends: Smokeless Products Around the World United States Sweden India

12. The E-Cigarette Ruyun Freedom e-Cigarette-USA Equazcion

13. The China National Tobacco Corp. (CNTC) is the largest cigarette producer in the world and China is nearing 40% of the world’s consumption China ’ s Cigarette Market (Billions of Pieces) Source: CNTC

14. China vs. World Cigarette Consumption Forecasts (Billions of Pieces) Source: TMA Estimates

15. A Chinese Wall Against Cigarette Imports (% of Total) 19982008 Source: TMA.org, CNTC 1988 2,195.74 bn (99.84%) 3.50 bn (0.16%) 1,655.3 bn (99.79%) 15.99 bn (1.02%) 3.42 bn (0.21%) 1,557.08 bn (98.98%) Since Joining the WTO in 1997, China’s Market is as Closed as Ever

16. Sales Trends: Cigars (Billions of Pieces) Source: TMA International Issues Monitor

17. Sales Trends: Roll-Your-Own (Billions of Pieces) Source: TMA International Issues Monitor

18. Sales Trends: Slim/Super Slim Cigarettes Virginia Slims (PM USA & PM Int’l) Vogue (JT) ESSE (KT & G) Sobranie (JT/Gallaher) Led by Esse, Slims had 37.6% of the Korean market in 2007 and are projected to hit 59.2% by 2012; Korean slim exports grew from 6 mn pieces in 2001 to 10 bn in 2007

19. Next Stops for Public Health? Fast Food Obesity Alcohol Big Pharma

20. Conference Overview Some Key Trends The WHO’s Framework Convention SCHIP FDA

21. U.S. Ratification of the FCTC U.S. Ratification of the FCTC As of today, 168 nations or parties have signed the FCTC, while 164 have ratified it. The United States signed the FCTC on May 10, 2004, but has not yet ratified it.

22. May 1999:The 52 nd World Health Assembly backs a resolution which calls for the development of a Framework Convention on Tobacco Control. October 1999: 1 st session of FCTC Technical Working Group October 2000:Public hearings on FCTC held 1 st session of Intergovernmental Negotiating Body held March 2003:WHO members draft FCTC text May 2003:192 nations adopt FCTC text at WHO’s 56 th Assembly October 2004:1 st TobReg Meeting April 2005:1 st TobLabNet Meeting Feb. 2006:1 st Conference of the Parties [COP] Feb. 2008:1 st session of INB to negotiate protocol on illicit trade March 2009:4 th TobLabNet meeting held in Rio, Brazil June 2009:3 rd session of INB to be held in Geneva 4Q10:4 th session of the COP to be held in Uruguay FCTC - Timeline FCTC - Timeline

23. FCTC: Articles 9 and 10 FCTC: Articles 9 and 10 Article 9: Tobacco Product Content COP 3 recommended to submit a report at COP 4 which: Identifies best practices in reporting to regulators regarding content, emissions and product characteristics Validate, within 5 years, the analytical chemical methods for testing and measuring cigarette content and emissions Article 10: Tobacco Product Disclosure COP 3 recommended to submit a report at COP 4 which: Collects and analyzes information on legal cases related to tobacco product disclosures

24. FCTC: Article 11 FCTC: Article 11 Tobacco Product Packaging and Labeling The COP 3 recommends: Well-designed health warnings and messages Large picture warnings located on principal display areas The use of color rather than just black & white along with relevant qualitative statements to be displayed on each pack (or package) about the emissions of the tobacco Nations should also consider adopting measures to restrict or prohibit the use of logos, colors, brand images or promotional information on packaging other than brand names and product names displayed in a standard color and font style (plain packaging).

25. FCTC: Article 15 - Illicit Trade FCTC: Article 15 - Illicit Trade INB -3 Protocol Now Being Developed Defines “Illicit” as Smuggling Illicit Manufacturing Counterfeiting Create Practical T&T System (s) Cases / Pallets vs. Cartons vs. Packs “Sales only allowed in X Country/Province” To Determine Point of Diversion Monitoring & Reporting System (s) to Track the Product Movement through Distribution Authorized Enforcement Access to commercial shipment data bases

26. Mandates Cooperation & Data Sharing Among National & International Agencies (AP) Monitor & Collect Data on Cross-border trade (not national data alone) As well as all product “moving under suspension of taxes or duties within its jurisdiction” Provide COP Reports Requires destroying counterfeit & contraband product and machinery used to produce it and the confiscation of ill-gotten gains Encourages Nations to Enact Penalties and Remedies, including licensing, to prevent illicit trade “including counterfeit and contraband” (AP) FCTC: Article 15 - Illicit Trade FCTC: Article 15 - Illicit Trade

27. U.S. Ratification of the FCTC U.S. Ratification of the FCTC FCTC Checklist:  (Article 5)General Obligations  (Article 6)Price and Tax Measures  (Article 8)Protection from ETS  (Article 9)Contents of Tobacco Products [FDA]  (Article 10)Tobacco Product Disclosure [FDA]  (Article 11)Packaging & Labeling of Tobacco Products [FDA] (Article 12)Education, Communication, Training & Public Awareness (Article 13)Tobacco Advertising, Promotion & Sponsorship [FDA]  (Article 15)Illicit Trade in Tobacco Products [FDA]  (Article 19)Liability

28. Conference Overview Some Key Trends The WHO’s Framework Convention SCHIP FDA

29. US Federal Excise Taxes on Tobacco Products First Implemented 1862:Large Cigars 1865:Cigarettes 1897:Little Cigars (Under 3 pounds per 1,000) 1917:Pipe, Snuff and Chewing Tobacco 1965:Pipe, Snuff and Chewing tax eliminated 1989:Pipe, Snuff and Chewing Tobacco 2000:Roll-Your-Own Tobacco

30. The US Federal Cigarette Excise Tax Timeline (US$ per 1,000 pieces) 1865:$1.20 - to pay costs from the Civil War c.1880:$1.75 c.1890:$0.50 1920:$3.00 - to pay costs from World War I 1941:$3.25 - to pay costs from World War II 1943:$3.50 - to pay costs from World War II 1952:$4.00 - to pay costs from the Korean War 1983:$8.00 - “Tax Equity & Fiscal Resp. Act of 1982” 1991:$10.00 - “Omnibus Budget Recon. Act of 1990” 1993:$12.00 - “Omnibus Budget Recon. Act of 1990” 2000:$17.00 - for uninsured children’s health care 2002:$19.50 - for uninsured children’s health care 2009:$50.33 – State Children’s Health Insurance (SCHIP)

31. “SCHIP” Excise Tax Rate Hikes Product Old Rate Current Rate % Increase Cigarettes 39¢/pack $1.0066/pack158.1% Little Cigars 3.76¢/pack $1.0066/pack2,577.1% Large Cigars 20.719%52.75%154.6% Large Cigar Tax Cap 4.875¢/piece 40.26¢/piece 725.8% Chewing Tob. 19.5¢/lb. 50.33¢/lb. 158.1% Snuff 58.5¢/lb. $1.51/lb.158.1% Pipe Tobacco 109.69¢/lb. 283.11¢/lb. 158.1% RYO Tobacco 109.69¢/lb. $24.78/lb.2,159.1%

32. State Tobacco Product Excise Taxes - All 50 States and D.C. Cigarettes - All 50 States and D.C. - 47 States and D.C. (excl. FL, NH, PA) Large Cigars- 47 States and D.C. (excl. FL, NH, PA) - 49 States and D.C. (excl. PA) Little Cigars- 49 States and D.C. (excl. PA) - 49 States and D.C. (excl. PA) Smoking Tob.- 49 States and D.C. (excl. PA) - 49 States and D.C. (excl. PA) Chewing Tob. - 49 States and D.C. (excl. PA) - 49 States and D.C. (excl. PA) Snuff- 49 States and D.C. (excl. PA) NOTE: Florida Senate Bill 1840 would impose an OTP tax rate of $1 per ounce on cigars.

33. Local Tobacco Product Excise Taxes - 8 States (AK, AL, HI, IL, MO, NY, OH, VA) Cigarette - 8 States (AK, AL, HI, IL, MO, NY, OH, VA) Major cities include among others: Major cities include among others: Anchorage, AKChicago, IL Honolulu, HINew York City, NY Cleveland, OH Anchorage, AKChicago, IL Honolulu, HINew York City, NY Cleveland, OH Alabama (269 cities, 53 counties); Missouri - 129 Alabama (269 cities, 53 counties); Missouri - 129 - 4 States (AK, AL, HI, MD) Cigar- 4 States (AK, AL, HI, MD) - 4 States (AK, AL, HI, MD) OTP- 4 States (AK, AL, HI, MD) Source: TMA’s Tobacco Tax Guide (May 2009)TMA’s Tobacco Tax Guide

34. State Cigarette Excise Tax Increases (1999 – 2009) # of Bills # of States # of Approvals 199957213 (MD, NH, NY) 20002471 (LA) 200151265 (ME (2), RI, WA, WI) 20021163421 (AZ, CT, DC, HI, IN, IL, KS, LA, MA, MD, MI, NE, NJ, NY, OH, OR, PA, RI, TN, UT, VT) 20031753715 (AR, CT, DE, DC, GA, ID, MT, NJ, NM, NV, PA, RI, SD, WV, WY) 2004139338 (AL, AK, CO, MI, MT, NJ, RI, VA) 2005114309 (KY, ME, MN(2), NC, NH, NM, OH, RI, WA) 200657256 (AZ, HI, NJ, SD, TX, VT) 2007105248 (CT, DE, IN, IA, MD, NH, TN, WI) 200857204 (DC, MA, NH, NY) 200989324 (AR, KY, MS, RI…HI)

35. The Shrinking U.S. Cigarette Market FET Doubled (1983) Peak: 1981 – 641 bn. pieces Marlboro Friday (April 1993) MSA (November 1998) Bottom: 2008 – 345.1 bn. pieces Source: USDA-Economic Research Service TMA’s Tobacco USA TMA’s Tobacco USA

36. Source: TTB Cigarette Domestic Taxable Removals (First Quarter 2009) (Bn. of Pcs.)

37. U.S. Cigarette Sales by Quarter (Billions of Pieces) Source: Maxwell Consumer Report -10.45% vs. 1Q08

38. Taxable Removals by Product (February 2009 vs. March 2009) (Mn. of Lbs.) (Mn. of Pcs.) Source: TTB

39. 2008 Est. price:2008 consumption: $4.58 345.1 billion pieces 2009 Est. price:2009e consumption:Elasticity: $5.50327.8 billion pieces-0.250 $5.50324.3 billion pieces-0.300 $5.50320.8 billion pieces-0.350 $5.50317.4 billion pieces-0.400 U.S. Cigarette Price Elasticity e = Δ Quantity/ Δ Price

40. U.S. Cigarette Forecast (Billions of Pieces) Source: TMA Estimate

41. 2009 FET2009 Consumption2009 Fed. Tax. Rev. $0.39/pk 80.11 bn. pc. (Jan-Mar) $1,562.1 mn $1.0066/pk244.19 bn. pc. (Apr-Dec) $12,290.1 mn TOTAL324.30 bn. pc. $13,852.2 mn Cigarette Tax Revenue Forecast (Millions of US$) 2008 FET2008 Consumption2008 Fed. Tax. Rev. $0.39/pk 345.15 bn. pc $6,730.4 mn Source: TMA Estimate The Federal government is expected to collect an additional $7.12 billion in 2009.

42. Cigarette Tax Revenue Forecast (Millions of US$) 2008 SET2008 Consumption2008 State. Tax. Rev. $1.08/pk 345.15 bn. pc $18,638.1 mn 2009 SET2009 Consumption2009 State. Tax. Rev. $1.12/pk 324.30 bn. pc $18,160.8 mn State governments will collect $477.3 mn less in tax revenues even as some States raise their excise tax rates in 2009. Source: TMA Estimate

43. State MSA Revenue Forecast (Millions of US$) 2008 Consumption2008 MSA Payment (in 2009) 345.15 bn. pc $6,769.1 mn State governments will collect $138.3 mn less in MSA payments as the cigarette market continues to decline. Source: TMA Estimate 2009 Consumption2009 Est. MSA Payment (in 2010) 324.30 bn. pc $6,630.8 mn

44. Cigarette Tax Incidence - 2007 (tax share of retail price) Avg. Price Sales Tax State per packFET SETTax Inc. South $3.658$0.39$0.07$0.19617.9% Carolina US $4.678$0.39$1.0725$0.23936.4% (Average) Rhode $6.590$0.39$2.46$0.40549.4% Island NOTE: The price figures include sales taxes. Source: TMA, Orzechowski & Walker

45. Cigarette Tax Incidence - 2009 (% of tax share of retail price) Avg. Price Sales Tax State per packFET SETTax Inc. South $4.574$1.01$0.07$0.25929.3% Carolina +25% US $5.743$1.01$1.12$0.24741.4% (Average) Rhode $8.584$1.01$3.46$0.56258.6% Island +30.26% NOTE: The price figures contain sales taxes. Source: TMA estimates

46. Retail Price and Tax Incidence Figures f0r 2008 Retail PriceTax Incidence Norway$11.7271.20% UK$9.1676.49% Australia$8.4665.65% Singapore$7.9570.54% Canada$7.5070.73% France$7.2480.39% Germany$6.8276.45% Italy$5.8075.17% All Prices are in US Dollars per pack of 20. Retail PriceTax Incidence United States$4.6836.97% Spain$4.0977.35% Portugal $3.8650.25% Poland$3.1474.15% Japan$3.2163.06% China$2.2060.73% South Korea $1.8862.61% Indonesia$0.9049.09%

47. Estimated Price Structure of a Premium Pack of Cigarettes (2009) (% of total price) Assuming an average retail price of a pack of premium cigarettes in 2009 at $5.50 (not including sales tax). Source: TMA Estimate

48. Estimated Price Structure of a 4th Tier Pack of Cigarettes (2009) (Percentage of total price) Assuming a 4 th tier average national retail price in 2009 of $3.30. Source: TMA Estimate

49. “SCHIP” Excise Tax Rate Hikes Product Old Rate Current Rate % Increase Cigarettes 39¢/pack $1.0066/pack158.1% Little Cigars 3.76¢/pack $1.0066/pack2,577.1% Large Cigars 20.719%52.75%154.6% Large Cigar Tax Cap 4.875¢/piece 40.26¢/piece 725.8% Chewing Tob. 19.5¢/lb. 50.33¢/lb. 158.1% Snuff 58.5¢/lb. $1.51/lb.158.1% Pipe Tobacco 109.69¢/lb. 283.11¢/lb. 158.1% RYO Tobacco 109.69¢/lb. $24.78/lb.2,159.1%

50. Source: US-TTB U.S. Little Cigars (Billions of pieces)

51. 1 cigarette = 0.0325 ounces of RYO Source: USDA-AMS U.S. Roll-Your-Own Tobacco (Billions of pieces [converted])

52. Projected Declines in Consumption (Billions of Pieces) 2008 Cons. Proj. 2009 Cons. Difference Little Cigars 5.448 3.269 (-40%) -2.179 (bn. pc.) RYO Tobacco 6.762 4.057 (-40%) -2.705 (bn. pc.) Source: TMA Estimate Combined, the disproportionate excise tax increases for little cigars and RYO tobacco could boost cigarette consumption by an additional 4.884 billion pieces.

53. Source: USDA-ERS, US-TTB U.S. Large Cigars (Billions of pieces)

54. Source: USDA-AMS U.S. Moist Snuff (Millions of pounds)

55. U.S. Dark Fire-Cured and Dark Air-Cured Production (Metric Tons) Source: USDA-NASS

56. U.S. Tobacco Consumption by Leaf Equivalents – 2007 (Millions of Pounds) Source: US-TTB, USDA-AMS, TMA Cigarettes (360 bn pc) Cigars (1 cigar = 10g) Smoking Tobacco Chewing Tobacco Snuff

57. U.S. Tobacco Production by Leaf Equivalents – 1880 (Millions of Pounds) Source: US Department of Agriculture – ERS, TMA Cigarettes Cigars (1 cigar = 10g) Smoking Tobacco Chewing Tobacco Snuff

58. Conference Overview Some Key Trends The WHO’s Framework Convention SCHIP FDA

59. Tobacco Regulatory Bill Comparison Issue Waxman/ Kennedy BuyerBurr/Hagan Bill No. H.1256/S.982H.1261S.579 Agency “Center for Tobacco Products” within FDA “Tobacco Harm Regulation Center” within HHS “Tobacco Regulatory Agency” within HHS Ingredient Disclosure  ‘Tar’ Limits  Flavor Ban  Fire-Safe 

60. Issue Waxman/ Kennedy BuyerBurr/Hagan Advertising Ban  (restrictions)  (restrictions) Graphic Warnings Waxman: May Kennedy: Shall  Waxman: May Kennedy: Shall  Retail Licensing  Descriptors  Illicit trade  Tobacco Regulatory Bill Comparison

61. Manufacturers Tobacco Product Compliance Center (TPCC) State Tax Administrators Wholesalers/ Distributors Retailers Local Tax Administrators One important condition: Data integrity and audit trail documenting company usage Creating a Centralized License Data Base of Publicly Available Information to Facilitate Public-Private Communication One-Stop Updating with License Suspension Reports Provided

62. Issue Waxman/ Kennedy BuyerBurr/Hagan Sales Restrictions  Sampling  Smokeless in adult  Any TP in adult Seizure  Small Man. Exemption  User Fees From $85mn in FY09 to $712mn in FY19 and thereafter. Civil money penalties & license fees. $100mn/yr starting in FY10 with inflationary factor thereafter. Tobacco Regulatory Bill Comparison

63. Modified Risk Waxman/ Kennedy Sets a very high bar to making reduced risk claims. Requires pre-market approval whereby manufacturer files an application detailing elements including product description, formulation, and research. Multi-year research likely. Buyer Creates a “reasonably likely” test for reduced risk claims based on measurable and substantial reductions in morbidity and mortality among users; Smokeless tobacco product can not be sold as a MR product; Requires MR product to be labeled such that the consumer can easily comprehend the risk. Burr/ Hagan Creates a “totality of scientific knowledge” test based on a number of joint conditions for reduced risk claims based on available scientific evidence demonstrating that a given product "yields a reduced amount of 1 or more toxicants when compared to an appropriate reference tobacco product or products“. Tobacco Regulatory Bill Comparison

64. Uses of the Tobacco Plant (Nicotina Tabacum/Rustica) ProteinsNicotine Food Enzyme Generation MedicinesVaccines HIV, Malaria, Hepatitis B, Insulin, Auto-Immune Deficiencies Depression, Cancer, Parkinson’s, Alzheimer’s Cereal Traditional Non- Traditional Other Human Growth Hormone

65. Nicotine Delivery TraditionalNon-Traditional E-Cigarette Patches Smoking Tobacco Smokeless Tobacco Gum/ Lozenges Snuff Dry Moist Loose Leaf Cigars Plug Twist/Roll CigarettesFirm Moist Machine Made Hand Made (RYO) Chewing Tobacco LittleLarge Pipe Tobacco Nasal Spray Water Snus Orbs/Strips/ Sticks

66. U.S. Cigarette Nicotine Consumption (Metric Tons) Source: TMA Estimates

67. U.S. Cigarette Nicotine Consumption Forecasts (Metric Tons) Source: 2009 TMA Estimates

68. The U.S. ’ s Cigarette Nicotine Consumption Forecasts (Metric Tons)

69. India: Multi-Ethnic, Multi-Lingual, Multi-Tobacco

70. World Leaf Production By Type - 2008 (Figures are in Thousands of Metric Tons) The world produced 6,014,000 metric tons of leaf (farm sales weight) in 2008. Source: Universal Leaf Tobacco

71. THANK YOU! And now to the World Leaf Situation & Outlook with Jim Starkey (TMA Chairman and former SVP Universal Leaf Tobacco)

72. TMA Annual Meeting and Conference Global Leaf Trends Changing Dynamics / Future Trends Presentation By: Jim Starkey Williamsburg, Virginia May18, 2009

73. Some Significant Changes Market Implications Current Supply and Demand Situation Future Trends / Potential Beneficiaries Final Observations

74. 2008 Estimated World Leaf Production

75. Significant Changes Sources of leaf have shifted dramatically

76. Flue-Cured Tobacco Production 19602008

77. Burley Tobacco Production 19602008

78. A Dynamic Industry Sources of leaf have shifted dramatically Consolidation has reduced the number of industry players –Leaf dealers –Manufacturers

79. Leaf Industry Consolidation Past Universal Leaf Socotab (49%) Thorpe & Ricks GK Casalee Dibrell Intabex A.G. Monk Austin Transcontinental Adams Meridional Present Universal Leaf Alliance One Monk Austin DIMON Standard Commercial

80. Manufacturer Consolidation JTRJI/Gallaher ImperialAltadis / Commonwealth BATETI / RJ(42%) / Tekel / Scantoco PM USAJohn Middleton / UST PMILakson / Sampoerna / Rothmans, Canada RJConwood

81. The Current Situation A Dynamic Industry Cigarette manufacturers expand portfolio –New products/smoking devices –New categories Cigars Smokeless Snus Other

82. Market Implications New origins entail greater production risk –Less irrigation –Shift from large commercial farms to small scale –Shift from auction to contracting Result is greater downside production risk

83. Market Implications Increased production risk Buyer/user consolidation –Smaller numbers –No unplanned inventory –Shorter durations Higher market volatility

84. Market Implications Increased production risk Market volatility Higher production costs –Fertilizers –Pesticides and herbicides –Fuel –Labor Plus alternative crops –Tobacco growers have alternatives –Crop prices have risen dramatically

85. Market Implications Cost of buyer-mandated programs –Improve leaf quality –Eliminate foreign matter –GAP –Social responsibility

86. Market Implications Attractive Alternatives Buyer Mandates Higher Leaf Prices Increased: Production Risk Market Volatility Production Costs

87. The Current Situation Slow Growth in Leaf Markets Cigarette Production Trend

88. The Current Situation Slow Growth in Leaf Markets Growth mainly in: –Asia –Eastern Europe –Middle East Declines in developed countries –Characterized by: Increasing taxation Increasing regulation Production shifts Population growth Rising income levels

89. The Current Situation Slow Growth in Leaf Markets Less clear how much leaf utilization has increased, if at all outside PRC –New manufacturing technology uses less leaf/stick – Impact of industry consolidation Supply chain efficiency Waste reduction/increased utilization –American blend growth has stalled – affects burley demand

90. The Current Situation FC Leaf Production 2003-2008 (Million Green Kgs) 3,315 3,513 3,792 3,702 3,656 3,969 PRC Other Exporters

91. The Current Situation Flue-Cured Leaf Production Two very different stories –PRC Dramatic growth 500 mKgs or 28% Only slightly greater than cigarette production growth (24%)

92. The Current Situation Flue-Cured Leaf Production Exporters down 2% World Flue-Cured Exporters’ Leaf Production (x-PRC)

93. The Current Situation Flue-Cured Leaf Production 2008 declines in Brazil, Zimbabwe, other Africa and Canada More than offset increases in US, EU and India

94. The Current Situation Burley Leaf Production Production recovered in 2008 from weather- reduced 2007 crops 685 806 704 664 563 Primarily Flavor Primarily Filler + 39% + 0% 688

95. The Current Situation Burley Leaf Production However –Filler primary beneficiary –Flavor styles flat –Burley supplies, particularly flavor remain tight

96. The Current Situation Burley Production - Flavor Selected Countries 2000 Million Green Kgs 2007 Million Green Kgs 2008 Million Green Kgs 2007-08 % 2000-08 % US143102 --29 Brazil95105100-5+5 Argentina393742+14+8

97. The Current Situation Burley Production - Filler *EU exporters include Poland for all years Selected Countries 2000 Million Green Kgs 2007 Million Green Kgs 2008 Million Green Kgs 2007-08 % 2000-08 % Malawi 14287170+95+20 Mozambique 62844+57+633 Zambia 3512+140+300 India 91523+53+185 Thailand 284336-16+29 EU Exporters* 875356-3-36 PRC 622538+52-39 Philippines 2789+13-67 Mexico 2310 --57 S. Korea 2299--59

98. The Current Situation Unsold Stocks Last piece of market puzzle –Flue-cured unsold stocks At lowest level since 1991 Reflects lower 2008 production x-PRC

99. The Current Situation Unsold Stocks 85 128 151 187 98 72 U.S. PoolOthers World Uncommitted Flue-Cured Stocks as of June 30

100. The Current Situation Unsold Stocks Flue-cured markets balanced heading into 2009

101. The Current Situation Unsold Stocks Burley unsold stocks –Essentially gone 49 86 85 72 29 U.S. PoolOthers 9 World Uncommitted Burley Stocks as of June 30

102. The Current Situation Unsold Stocks Burley markets remain –Extremely tight for flavor –Still tight for filler

103. Future Trends/Potential Beneficiaries Cigarette Production –China will be main growth engine –Growth outside China will be slow (0-0.3%) Growth in Asia, Middle East, and Eastern Europe Offset by continued declines in developed countries Leaf markets will be at best flat

104. Future Trends/Potential Beneficiaries Leaf production – short term –2009 Flue-cured Total production forecast to increase due to mainly PRC Production by exporters x-PRC projected to rise Estimated Flue-Cured Production in Million Green Kgs 20072008E2009PChange over 08 Brazil643608595-13 India26027028010 US220231227-4 All x-PRC1,7061,6691,75081 PRC1,9502,1502,20050 Others216217210-7 World Total3,8734,0284,160132

105. Future Trends/Potential Beneficiaries –2009 Burley Production increase forecast Estimated Burley Production in Million Green Kgs 20072008E2009PChange over 08 Malawi8717025080 US102 98-4 Brazil1051001099 Argentina3742497 Mozambique2844539 Exporters563688803115 Others575654-2 Total621743857114

106. Future Trends/Potential Beneficiaries Will not materially change tight supply situation, particularly flavor Significant downside risk

107. Future Trends/Potential Beneficiaries Slow Growth – What Could Change Trend? Higher production and leaf use –Development and consumer acceptance of reduced risk products that look and act like traditional products –Increased consumption of OTP and snus could create increased demand for dark air-cured leaf at expense of flue-cured and burley

108. Future Trends/Potential Beneficiaries Slow Growth – What Could Change Trend? Lower production and leaf use –Serious government effort to reduce PRC cigarette consumption –Development and consumer acceptance of reduced risk products using heating rather than burning technology –These products require less leaf

109. Future Trends/Potential Beneficiaries Not much change from current situation Flue-cured – Flavor –Brazil Will continue to dominate Not immune to weather risk Strong real raises dollar costs and prices –U.S. Termination of program improved leaf competitiveness Quality remains best Highest priced but dollar weakness reduces gap

110. Future Trends Flue-Cured - Flavor –U.S. Termination of program improved leaf competitiveness Quality remains best Highest priced but dollar weakness reduces gap Probably will remain mainly domestic supplier –Zimbabwe Future depends on political/economic change Would be strong demand, particularly from Europe and as alternative to Brazil Production will not recover quickly Unlikely to reach past levels

111. Future Trends Flue-Cured – Filler

112. Future Trends Flue-Cured – Filler –PRC Will grow to meet domestic demand Exports face increasing competition from India Reliable supplier concerns make PRC alternate choice Questions: –Will PRC continue domestic focus or seek to expand exports –Can PRC produce significant quantities of an “acceptable” flavor style

113. Future Trends Winners and Losers Flue-Cured – Filler –Other Africa Zambia, Malawi, Tanzania and Uganda have potential Excellent conditions including land, labor and climate Lack of infrastructure/high cost of expansion Affects competitiveness in market Absence of land tenure systems is a major problem in some African countries –India, Pakistan, Bangladesh Very competitive in price/quality Production increasing Could benefit from European decline However all have growing domestic markets

114. Future Trends Winners and Losers Flue-Cured – Filler –Europe Full decoupling in 2011 could result in significant decline in production Some member states have talked about national subsidies to maintain industry/employment –Canada Is essentially a domestic crop now

115. Future Trends Winners and Losers Burley situation is very tight and demand remains strong Uncommitted stocks likely continuing at very low levels Burley flavor –Brazil Only Brazil has potential for significant increases in short term Costs/prices will go up –Strength of real –Prices of other crops – maize, soybeans

116. Future Trends Winners and Losers Burley flavor –U.S. Little interest in producing more even at higher prices in traditional areas Further U.S. increases will depend on developing non- traditional areas

117. Future Trends Winners and Losers Burley – Filler –Malawi May be reaching practical limits Weather risk, particularly drought may be increasing Prices likely to increase –Mozambique Could double production with existing infrastructure Additional increases possible with additional infrastructure investment Dollar prices will have to double to offset impact of strong currency on local costs and grower incomes

118. Some Final Observations Manufacturers Will Determine Where Leaf is Produced Price/quality Risk diversification –Weather –Political/economic –Reliability of supply Scale is important Other factors –Social responsibility –Sustainable production practices –Environmental stewardship

119. Some Final Observations Production Will Likely Remain in Traditional Origins New origins are expensive to develop Dealers can’t afford w/o manufacturer support More than enough capacity in traditional areas

120. Some Final Observations Production volatility will increase –Shift to non-irrigated production –Little irrigation in new origins –Long term (20-50 year) forecast is: Drier weather patterns in Southern Hemisphere Periods of much wetter and much drier weather Shift from auction to direct contracting shifts risk from growers to dealers

121. Some Final Observations Continued Leaf prices will rise –Offset dollar decline on local currency costs and incomes outside U.S. –Rising prices of alternative crops –Cover costs of programs promoted by manufacturers to: Improve quality GAP Social responsibility

122. Some Final Observations Continued Reduced risk products could revolutionize and revitalize industry –Impact level of cigarette and other product manufacture –Leaf requirements –Future origins

123. TMA Annual Meeting and Conference Global Leaf Trends Changing Dynamics / Future Trends Presentation By: Jim Starkey Williamsburg, Virginia May18, 2009