1. CAAP Agricultural Policy Analysis Center - University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996-4519 www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298 U.S. Tobacco Leaf Supply & Demand Tobacco Merchants Association Annual Meeting Williamsburg, VA May 8, 2007 Kelly Tiller University of Tennessee Agricultural Policy Analysis Center

2. CAAP U.S. Cigarette Production, Consumption & Exports Source: USDA, Economic Research Service (-24%) (-55%) (-36%)

3. CAAP U.S. Moist Snuff Consumption Source: USDA, Economic Research Service  46%

4. CAAP Per Capita Consumption Source: USDA, Economic Research Service, Sept. 2006

5. CAAP Change in Total Tobacco Acreage Still not back to pre- buyout acreage –North Carolina just over 2004 level Burley generally down more than flue Burley expansion into Pennsylvania Acreage out of Florida 2004 to 2007 12.3% -100% -17.4% -23.0% -1.6% 10.3% 1.6% -37.5% 135.0% -25.9% -37.0% -30.4% Source: USDA, National Ag. Statistics Service

6. CAAP Change in Total Tobacco Acreage Flue-cured states up –North Carolina up considerably, stable in 2007 –Florida way down Mix in burley –Kentucky up some –Tennessee down 13% –Expanding in Penn. 4.1% -56.0% 6.3% 4.1% -3.4% 11.1% 26.0% 2.9% 58.0% 21.1% -13.7% 14.6% 2005 to 2006 Source: USDA, National Ag. Statistics Service

7. CAAP US Tobacco Production Source: USDA, NASS, Crop Production Reports

8. CAAPFlue-Cured 2006 flue-cured production 446 million lbs –Up 17% over 2005 Acreage higher in 2006, still not up to 2004 levels –Up significantly (26%) in North Carolina, mostly in Eastern NC –Moving out of Florida –Smaller expansions in Virginia, Georgia, South Carolina 2007 acreage near level –Up in Georgia, Virginia, down in South Carolina 2006 prices slightly higher than 2005, average around $1.50/lb –Prices still about 20% below pre-buyout levels –Contract price range appears to have narrowed in 2006, some lower priced companies increased prices

9. CAAP Change in Flue-Cured Acreage 2005 to 2006 -100% -17.4% 2.4% -25.9% -21.7% 2004 to 2007 -56.0% 6.3% 26.0% 21.1% 21.4% Source: USDA, National Ag. Statistics Service

10. CAAPBurley 2006 burley production 217 million pounds –Up 7% over 2005 Acreage –Moving out of Tennessee and traditional areas of North Carolina and Virginia –Shifting from East/Central to Western Kentucky –New production in Piedmont and Eastern North Carolina, Pennsylvania Additional price incentives offered in 2006 –Higher prices brought in more acreage 2006 prices higher than 2005 –Averaged around $1.56 per pound in 2005 –Averaged around $1.64 per pound in 2006 –Still ~20% below pre-buyout levels

11. CAAP Change in Burley Acreage 2005 to 20062004 to 2007 -27.4% 10.3% -23.4% -37.5% -45.8% -61.0% 4.3% 11.1% 26.7% 2.9% -17.6% -17.9% 150.0% Source: USDA, National Ag. Statistics Service

12. CAAP Other Tobacco Types Less dramatic price declines post-buyout for dark-fired tobacco –Averaged about $2.39 for dark-fired, $2.20/lb for dark air-cured Adjustment to post-buyout market has been less dramatic Strong demand for domestic use in smokeless tobacco products Little movement in production areas

13. CAAP Change in Dark-Fired Acreage 2005 to 20062004 to 2007 -50.7% 35.8% -3.8% 2.9% -0.0% -3.6% Source: USDA, National Ag. Statistics Service

14. CAAP Change in Dark Air-Cured Acreage 2005 to 20062004 to 2007 17.8% 1.9% 8.1% 11.1% Source: USDA, National Ag. Statistics Service

15. CAAP 2006 Tobacco Production Surveys Mail-based survey of 6,000 burley growers –Traditional production regions in TN, VA, and NC –Survey conducted May 2006 –813 completed responses Follow-up web-based survey of county Extension agents –All types, in 7 major states –Conducted Dec. 2006

16. CAAP ’06 Production & Acreage No 54% Yes 46% 3% 11% 23% 62% Average planted acreage among growers producing in 2006 Last year growing, among growers not producing in 2006

17. CAAP Likelihood of Producing 2007 2010 2015 Among respondents producing tobacco in 2006 …

18. CAAP Why NOT Producing in ’07? Not profitable enough Shortage of affordable and/or legal labor Age, near retirement Too risky without a price guarantee Producer mail survey, May 2006 …

19. CAAP Biggest Challenges Next 2-5 Years Contract prices too low (66%) High costs of hiring labor (58%) High costs of nitrogen fertilizer (52%) Shortage of affordable and/or legal labor (35%) High costs of other production in puts (26%) Producer mail survey, May 2006 …

20. CAAP Investment Priorities 1.Curing barns 2.Upgrading equipment or new equipment 3.Market prep facilities and baling equipment 4.Acquiring more good land 5.Field curing structures Producer mail survey, May 2006 …

21. CAAP Likelihood of Producing in 2007 –Received sale price of $1.65/lb or more –Farm in excess of 250 acres –Tobacco gross receipts were less than 10% of total gross farm receipts –34 years of age or younger –Earned a graduate or professional degree –Total gross agricultural receipts were lower than $10,000 –Had higher amounts of net household income –Indicated that their primary farming operation was in North Carolina Factors/characteristics increasing the probability of producing in 2007* Factors/characteristics increasing the probability of exiting in 2007* * Factors statistically significant at the 10% level or greater, in an ordered logit model with a chi-square value of 50.6 (p=0.067)

22. CAAP County Extension Agent Survey 64 Counties 49 Counties 22 Counties 10 Counties 4 Counties 44-B, 8-DF, 4-DAC 18-B, 20-FC 10-B, 4-FC, 4-DF, 1-DAC 58-B, 4-DF, 9-DAC 4-FC

23. CAAP Extension Agent Survey Results Flue-Cured –10-24% will not return in 2007 –Expect acreage to increase 11-15% in 2007 Burley –10-24% of burley growers exited after 2005 –Another 10-24% will exit after 2006 –Expect acreage to increase 16-20% in 2007 Dark-Fired –50-74% of the active producers in 2000 are still growing –2007 acreage expected to remain near 2006 –2006 prices averaged $2.00-$2.04/lb Dark Air-Cured –50-74% of the active producers in 2000 are still growing –2007 acreage expected to increase 6-10% –2006 prices averaged $2.10-$2.19/lb

24. CAAP Selected State Results North Carolina –26-50% of flue-cured growers have exited since 2000 –Expect 2007 burley acreage to increase 11-15% –2006 burley yields ranged from 1,750-1,999 lbs/ac Kentucky –51-75% of burley growers have exited since 2000 –2007 burley acreage expected to increase 16-20% –More than two-thirds of dark producers in 2000 still growing –Dark acreage expected to increase some in 2007 Tennessee –76-90% of burley growers exited 2000-2006 –Another 10-24% will exit after 2006 –Acreage expected to increase 21- 29% in 2007 –About 25-40% of dark growers exited since 2000 Virginia –About a third of burley and flu- cured growers have exited –Virginia Sun-Cured nearly gone Georgia –Less than 25% of flue-cured producers remain South Carolina –Nearly 50% of flue-cured growers have exited

25. CAAP Biggest Challenges Next 2-5 Years 1.Shortage of affordable and/or legal labor (4 th ) 2.Increased costs of hiring labor (2 nd ) 3.Contract prices are too low (1 st ) 4.Increasing costs of nitrogen fertilizer (3 rd ) 5.Increasing costs of other production inputs (5 th ) County Extension agent survey, December 2006 …

26. CAAP Summary & Concerns Tobacco markets beginning to stabilize following the buyout Concerns about labor availability and affordability, particularly in burley Working toward more mechanization in burley harvest High fuel prices particularly a problem for flue-cured Ethanol boom affecting all of agriculture, tobacco somewhat insulated for now To date, 2007 Farm Bill proposals appear to have marginal impact on tobacco