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Contract cuts predicted for tobacco growers
By ROCKY WOMACK
(March 17, 2015) With a new year for flue-cured tobacco growers, contract cuts by buyers are taking place, and some individual cuts are steep.
The question is: How big will the cuts be for all growers, including those in Virginia? Are they headed for a 15-, 20-, or 25-percent cut, and what’s causing this?
“If you’re looking at a 15-percent cut, that would put us at around 408 million pounds,” said Blake Brown, a tobacco economist with North Carolina State University. “If you have 10-percent overage, that would put us at around 450 million pounds. Certainly, that doesn’t seem totally unreasonable. We all knew some sort of cut was coming, that it had to after a very big crop that we had last year.
“Twenty percent would put us at around 384 million pounds contracted. That’s certainly a plausible scenario. That would put us at 10-percent overage on production at about 422 million pounds. If we looked at 25 percent, then we are moving down toward 400-million pounds in terms of our pounds that would be produced.”
So what’s causing the contract cuts? Is it global supply? Imports? Anticipation of large reductions in cigarette consumption? Or is it exports?
Global supplies were up last year, Brown says. Brazil was not up. Mainly, the increase in production came from the United States and Zimbabwe.
With the 2015 crops in Brazil and Zimbabwe right now, he says both countries have decreased production. Brazil is estimated to decline about 90 to 100 million pounds. Zimbabwe, which has suffered from dry weather growing conditions early in the season then wet weather toward the end, is likely looking at a decrease of around 50 million pounds.
Brown wonders since Brazil and Zimbabwe struggle with declines in production this year and if the United States produces a smaller crop in 2015, will that mean excess global supplies will decline too, which could increase production in 2016? Of course, he says the big question is whether U.S. growers will produce a smaller crop.
“I think one of the worst case scenarios that we can come up with is if we have lots of overage produced above our contracted pounds,” Brown says. “Those pounds will seek a home somehow, and they will have a detrimental impact not only on the prices for 2015 but also on the season for 2016.”
Imports decreased after the tobacco quota buyout in 2004 but have crept up recently, he says. They increased to about 170 million pounds of stem and unstemmed flue-cured imports in 2013-14.
Because of the decline in U.S. cigarette consumption, Brown says domestic use of U.S. tobacco is declining in general.
“This is something we’ve talked about for 30 years, and that continues, whether it’s cigarette taxes, whether it’s smoking regulations, whether it’s some new trend in smoking. It’s here in the U.S., and it’s in Europe. It continues to have a large, large impact on us.
“I do believe that cigarettes or tobacco products are at the edge of a revolution in technology,” Brown adds. “I don’t know if it will be e-cigarettes, which would lead us to a very, very different kind of tobacco production. Or I don’t know if it would be something like heat-not-burn products. Heat-not-burn products would be a much better scenario for tobacco farmers because they require high-quality tobacco, and they require probably more tobacco than would be required for nicotine extraction. I don’t know which of these scenarios will play out.
“I think it’s pretty clear that tobacco companies aren’t probably sure which scenario will play out either because they’re trying to cover their bases in all of these, which is very wise. They have all acquired or started e-cigarette companies within the last five or so years. They are all working on heat-not-burn products. And they’re all still working on the combustible cigarette market. This is something we’re going to have to watch because there’s a tremendous amount of uncertainty, and yet some combination of all will impact cigarette companies’ thinking about purchases today because we’re talking about things that will have to be thought through two to five years down the road or longer.”
After the tobacco buyout, exports increased and climbed to around 300 million pounds. However, one of America’s biggest purchasers—the European Union—has suffered from domestic smoking declines so exports have gone down some. Fortunately, Brown says China has stepped in and filled the void for now by purchasing more U.S. leaf. The question U.S. growers must ask is: Will China’s purchases continue to offset the decline from the European Union? Only time will tell.
“You’re very fortunate to have another area of the world that wants your product,” Brown says.
So what’s really causing the contract cuts in 2015? Brown believes it is all of the above—global supply, imports, reductions in cigarette consumption and exports. One thing is for sure. Growers have a rocky road ahead.
“We’re going through another one of those transitions,” says Steve Troxler, North Carolina Commissioner of Agriculture. “We’ve seen it before. In the early ’80s, many of us went through that. We had a 25-percent cut in allotment. We were paying a 25-cent assessment. There was a proposal out there for a 44-cent increase on excise taxes on tobacco. Things looked pretty bad to tell you the truth, but we held our heads up. We got through it. We made some changes, and we remain successful today.
“What we have got in our favor right now is the ability to adapt,” Troxler says. “We’re going to get through this.”