1. CAAP Agricultural Policy Analysis Center - The University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996 www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298 Burley Tobacco Situation and Outlook 2006 TN-NC-VA Tobacco Expo Kingsport, TN January 27, 2006 Kelly Tiller

2. CAAP Topics to Cover Buyout follow-up Burley tobacco production post-buyout Domestic market trends World market trends Burley market outlook

3. CAAP Annual Payment Distribution Grower Payments Quota Owner Payments

4. CAAP Total Payment Distribution Grower Payments Quota Owner Payments

5. CAAP Buyout Payments by State (million $) Owner Payments Grower Payments Total Payments North Carolina $2,689$1,147$3,836 Kentucky$1,718$699$2,417 Tennessee$503$226$729 South Carolina $494$214$708 Virginia$415$177$592 Georgia$426$182$607

6. CAAP Payment Status Year 1: –$931 million paid on more than 550,000 contracts by September 30, 2005 –16% of the buyout contracts and dollars entered into a lump sum arrangement Tax Year 2005 –Lump sum option: IRS-1099 for full amount –1/10 option: IRS-1099 for full amount Report on Form IRS-6252, Installment Sale Income Do not report on Schedule D Seems like: you can choose to pay all tax in TY2005 or you can spread it out over 10 years Consult a tax professional

7. CAAP Installment Sale Income

8. CAAP Payment Status, cont’d Year 2: –Payments should have been received by now –Some lump sum offers still available for payments 3 through 10 Began accepting successor in interest applications for remaining 8 payments on January 23 Fewer offers available, rates still competitive Years 3 through 10 –Annual payments issued around mid-January 2007 through 2014

9. CAAP Phase II Status Over, done, finished, no more, the end … Final Phase II payments (the ‘2004’ payment) have been distributed Corrected TN tax information: –Check stubs should read “The IRS considers this payment as 2006 income.” –Payees will receive a letter from the national trustee, J.P. Morgan Chase, clarifying the tax year information –The trustee will issue 1099s for this payment for the 2006 tax year in January 2007 J.P. Morgan Chase tobacco info line: 1-800-732-9955 TN Tobacco Trust information line: 1-877-332-0711

10. CAAP Post-Buyout Outlook Who will produce? Where? How much? At what price? Demand response? 2006 and beyond? Expand Wait & See Get Out

11. CAAP Burley Production Who will produce and who will get out? –Considerations include: Retirement, labor, barn space, access to capital, market opportunities, relationship with companies, profit potential of alternatives –Biggest consideration: Profitability Price versus cost of production

12. CAAP Cost of Production & Yields Variable Costs Hired Labor Land, Buildings, Machinery, Operator Labor ’05 Market Price

13. CAAP 2005 Production March planting intentions: down 30% Some acreage expansion in non-traditional areas –Pennsylvania, Maryland, Illinois, Mississippi, some flue-cured regions of central/eastern North Carolina June acreage report: down 30% Increases in yields expected to offset some of the acreage loss

14. CAAP Average U.S. Burley Yields 2005 Yields: US – 1,952 lbs/ac VA – 1,800KY – 1,950 lbs/ac NC – 1,650TN – 2,000 lbs/ac Source: USDA / NASS

15. CAAP U.S. Burley Production U.S. (-33%) KY (-34%) TN (-26%)

16. CAAP TN Tobacco Cash Receipts - 68%

17. CAAP U.S. Burley Purchases

18. CAAP U.S. Cigarette Consumption

19. CAAP U.S. Cigarette Exports

20. CAAP Tobacco Used for Cigarettes

21. CAAP Foreign Tobacco Content of US Cigarettes

22. CAAP Imports in U.S. Cigarettes

23. CAAP U.S. Export vs. Import Price

24. CAAP World Burley Production & Use

25. CAAP

26. CAAP U.S. Share of World Tobacco Production

27. CAAP 2005: World Burley Producers

28. CAAP 2004: World Burley Exporters

29. CAAP Burley Export Trends

30. CAAP World Tobacco Use (Developed vs. Developing)

31. CAAP Industry Trends U.S. industry trends –Domestic cigarette consumption continues to decline, 2-3% per year –U.S. cigarette exports continue to decline –Smokeless consumption continues to increase More and stronger smoking bans Relative health risks (compared to cigarettes) –Research continues on alternative products Global market trends –Increasingly price competitive –Growing markets in developing countries –U.S. residual market supplier??

32. CAAP How Many U.S. Burley Growers Required to Grow 300-400 Million Pounds? According to the USDA/FSA, there were 49,343 burley growers in 2004

33. CAAP Number of Growers to Produce 300 Million Pounds 2,300 Lb Yield 2,500 Lb Yield 10 Acre Average 13,04312,000 20 Acre Average 6,5216,000

34. CAAP Production Location? Critical factor: –Cost of production –Driven primarily by yield potential Other factors: –Off farm opportunities –Other farm opportunities –Quality –Infrastructure –Labor (supply/cost)

35. CAAP Burley Avg. Yields (1980-2004)

36. CAAP 2006 Burley Production Hinges largely on 2006 contract prices A disappointing 2005 crop will push out another crowd of growers –Growers ‘testing’ the post-buyout market Will there be a sufficient margin to allow growers to weather 2 bad years? Interest in expanding dark tobacco acreage where opportunities exist

37. CAAPwww.agpolicy.org/tobacco.html