the tobacco buyout: early observations and concerns among ky tobacco growers will snell

The Tobacco Buyout: Early Observations and The Tobacco Buyout: Early Observations and Concerns Among KY Tobacco GrowersConcerns Among KY Tobacco Growers

Will SnellUniversity of Kentucky

Review of Winter Tobacco Meetings

Production Response

Early Post-Buyout Demand Response

Concerns for 2006 and Beyond

Agricultural Economics

TopicsTopics


Tobacco Outlook Evolving from Tobacco Outlook Evolving from 2004-05 Winter Tobacco Meetings2004-05 Winter Tobacco Meetings

???Number of Tobacco Farms/Growers?Location of Production?Price/Profit?Supply and Demand?Contract Requirements?Alternative Markets to Contracting?Role of the Cooperatives?Buyout Checks, 2004 Phase II, Grower Lawsuit Payments?

Post Buyout – Number of Farms/Growers

In recent years over 2/3 of KY’s tobacco farms with quotas have leased out their base

+ retirees

+ those who can’t compete in a post-buyout environment

+ those who can’t rent land/barns …


75% of former program participants will exit

With No Production Restrictions Will We Grow More Tobacco in 2005?

Kentucky Tobacco Production 2004 vs 2005Kentucky Tobacco Production 2004 vs 2005(71 reporting counties, 78% of 2004 quota)(71 reporting counties, 78% of 2004 quota)

0

20

40

60

80

100

120

140

160

1.65 1.60 1.50 1.40 1.35

$/LB

LBS


-12%-17%

-29%

-53%

-67%

Source: Nov. 2004 KY County Agent Survey

Production Levels


Production Will Be Affected By Labor

Barn Space

Access to Capital

Access to Markets

Available Crop Land

General Interest in Growing the Crop

Trust in the Companies Without a Safety Net

Profitability of Alternative Enterprises/Off Farm Income

And of course … PRICE vs COST OF PRODUCTION

Average Post-Buyout Price ???Average Post-Buyout Price ???(#2 Quality)(#2 Quality)

• Cost of Production- $3150/acre

• 2100 lb Yield (State Avg.) -- $1.50/lb COP

• 2500 lb Yield $1.25/lb COP


Grade % of Crop

Contract Price

X2 10% 1.60

C2 25% 1.45

B2 50% 1.52

T2 15% 1.65

AVERAGE 100% 1.53

Cost of Production at Various Yield Levels

0.000.250.500.751.001.251.501.752.00

1700 1900 2100 2300 2500 2700Lb/Acre

$/Lb

Operator Labor

Land, Facilities & Machinery

Hired Labor

Variable Costs

’05 Market Price

Location of Production


Location Will Be Driven By:

Infrastructure (Both Growers and Buyers)

Companies Desires to Minimize Disease and Weather Risk

Ability to Produce Desired Output and Quality Levels

Cost of Production

Yields

Average Burley Yields (1980-2004)Average Burley Yields (1980-2004)

15481846

189919011905209420962127

0

500

1000

1500

2000

2500

MO KY IN VA TN OH NC WV

Pou

nds

Per

Acr

e


Adair

Allen

Anderson

BallardBarren

Bath

Bell

Boone

Bourbon

Boyd

Boyle

Bracken

Breathitt

Breckinridge

Bullitt

ButlerCaldwell

Calloway

Campbell

Carlisle

Carroll

Carter

Casey

Christian

Clark

Clay

Clinton

Crittenden

Cumberland

Daviess

Edmonson

Elliott

Estill

Fayette

Fleming

Floyd

Franklin

Fulton

Gallatin

Garrard

Grant

Graves

Grayson

Green

Greenup

Hancock

Hardin

Harrison

Hart

Henderson

Henry

Hickman

HopkinsJackson

Jefferson

Jessamine Johnson

Kenton

Knott

Knox

Larue

Laurel

Lawrence

Lee

Leslie Letcher

Lewis

Lincoln

Livingston

Logan

LyonMccracken

Mccreary

Mclean

MadisonMagoffin

Marion

Marshall

Martin

Mason

MeadeMenifee

Mercer

Metcalfe

Monroe

Montgomery

Morgan

Muhlenberg

Nelson

Nicholas

Ohio

OldhamOwen

Owsley

Pendleton

Perry

Pike

Powell

Pulaski

Robertson

Rockcastle

Rowan

Russell

ScottShelby

Simpson

Spencer

Taylor

ToddTrigg

Trimble

Union

Warren

Washington

Wayne

Webster

Whitley

Wolfe

Woodford

Harlan

More than 2,200 lbs 2,101 - 2,200 lbs

2,000 to 2,100 lbs Less than 2000 lbs

Average Burley Yield(1980-2004)

KY Average (1980-2004)2,096 lbs/Acre

Adair

Allen

Anderson

Ballard

Barren

Bath

Bell

Boone

Bourbon

Boyd

Boyle

Bracken

Breathitt

Breckinridge

Bullitt

ButlerCaldwell

Calloway

Campbell

Carlisle

Carroll

Carter

Casey

Christian

Clark

Clay

Clinton

Crittenden

Cumberland

Daviess

Edmonson

Elliott

Estill

Fayette

Fleming

Floyd

Franklin

Fulton

Gallatin

Garrard

Grant

Graves

Grayson

Green

Greenup

Hancock

Hardin

Harrison

Hart

Henderson

Henry

Hickman

Hopkins

Jackson

Jefferson

Jessamine Johnson

Kenton

Knott

Knox

Larue

Laurel

Lawrence

Lee

Leslie Letcher

Lewis

Lincoln

Livingston

Logan

LyonMccracken

Mccreary

Mclean

MadisonMagoffin

Marion

Marshall

Martin

Mason

MeadeMenifee

Mercer

Metcalfe

Monroe

Montgomery

Morgan

Muhlenberg

Nelson

Nicholas

Ohio

Oldham

Owen

Owsley

Pendleton

Perry

Pike

Powell

Pulaski

Robertson

Rockcastle

Rowan

Russell

ScottShelby

Simpson

Spencer

Taylor

ToddTrigg

Trimble

Union

Warren

Washington

Wayne

Webster

Whitley

Wolfe

Woodford

Harlan

Purchase2%

Mid Western7%

Northern KY12%

Central KY25%

Bluegrass41%

Eastern KY13%

Burley Production by KY Crop Reporting Districts(1980-2003)


2005 Burley Acres2005 Burley Acres

March 1st Planting Intentions – 30%

June Acreage Report -30%

… But Increase in Yields Were Expected to PartiallyOffset Some of the Decline in Acreage

Average Burley Yields Average Burley Yields

0

500

1000

1500

2000

2500

3000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Pou

nds

Per

Acr

e

U.S.KY


Source: NASS/USDA

2005 Yield:US: 1826 lbs/acreKY: 1800 lbs/acre

U.S. Burley Production (1997-2005)U.S. Burley Production (1997-2005)

0

100

200

300

400

500

600

700

1997 1998 1999 2000 2001 2002 2003 2004 2005

Mill

ion

Lbs


Source: NASS/USDA

-34%

KY Burley Production (1997-2005)KY Burley Production (1997-2005)

050

100150200250300350400450500

1997 1998 1999 2000 2001 2002 2003 2004 2005

Mill

ion

Lbs


Source: NASS/USDA

-35%

TN Burley Production (1997-2005)TN Burley Production (1997-2005)

0

20

40

60

80

100

120

1997 1998 1999 2000 2001 2002 2003 2004 2005

Mill

ion

Lbs


Source: NASS/USDA

-30%

Burley Production in Other States (2004 vs 2005)Burley Production in Other States (2004 vs 2005)

0

2

4

6

8

10

12

IN VA NC OH MO WV PA

Mill

ion

Lbs


Source: NASS/USDA

?--44%

-12% -47%

-7%

-50%

0

50

100

150

200

250

300

350

400

450

500

1997 1998 1999 2000 2001 2002 2003 2004 2005

Mil lbs

U.S. Burley Loan StocksU.S. Burley Loan Stocks


Source: USDA/ERS/Burley Co-op

Pre-Buyout 170 mil lbs

CCC Sales: 57 mil lbs

Co-op Sales: 31 mil lbs

Current :82 mil bls

U.S. Burley PurchasesU.S. Burley Purchases

0

50

100

150

200

250

300

350

400

2001 2002 2003 2004 2005

Mil

lbs

COMPANY PURCHASES POOL INTAKE2005 PRODUCTION POOL PURCHASES



What about World Supply/Demand What about World Supply/Demand Response in the Post-Buyout Era?Response in the Post-Buyout Era?

0

100

200

300

400

500

600

700

800

1997 1998 1999 2000 2001 2002 2003 2004 2005

mil lbs

Brazil Argentina Malawi U.S.

• 1997 -2004:

– US (-52%)– Brazil (+43%)– Argentina (+51%)– Malawi (+13%)

U.S. Burley Marketings vs Production in U.S. Burley Marketings vs Production in Selected Other Burley Markets (1997-2005F)Selected Other Burley Markets (1997-2005F)


Source: Universal Leaf

World Burley Production for 2005 Is Expected to be Down Around10% for 2005

0

20

40

60

80

100

120

140

160

180

1994 1996 1998 2000 2002 2004

mil lbs

Mozambique Zambia Uganda

Burley Production in Other African MarketsBurley Production in Other African Markets


Source: Universal Leaf

0

1

2

3

4

5

6

7

8

9

1997 1998 1999 2000 2001 2002 2003 2004 2005

$/kg

U.S. Import

U.S. Burley Export Price vs U.S. Burley Export Price vs Average U.S. Burley Import PricesAverage U.S. Burley Import Prices


Source: USDA/FAS

0

10

20

30

40

50

60

70

1992 1994 1996 1998 2000 2002 2004

1000 MT

U.S. Burley ExportsU.S. Burley Exports


Source: USDA/FAS

For the first 5 months of 2005, USBX up 29%

U.S. Cigarette Production, U.S. Cigarette Production, Consumption and ExportsConsumption and Exports

0

100

200

300

400

500

600

700

800

1990 1993 1996 1999 2002 2005

Bill

ion

s

PRODUCTION

CONSUMPTION

EXPORTS


Source: USDA/ERS

0

10

20

30

40

50

60

70

80

90

100

110

120

1992 1994 1996 1998 2000 2002 2004

1000 MT

U.S. Burley ImportsU.S. Burley Imports


Source: USDA/FAS

For the first 5 months of 2005, USBM down 63%

U.S. Burley Disappearance (Use)U.S. Burley Disappearance (Use)

0

100

200

300

400

500

600

700

800

1970 1975 1980 1985 1990 1995 2000

Mil

Lb

s

DOMESTIC EXPORTS TOTAL

USDA’s Burley Disappearance (Use)USDA’s Burley Disappearance (Use)10 Year Baseline Projections (2005-2014)10 Year Baseline Projections (2005-2014)

0100200300400500600700800

Mil

Lb

s

DOMESTIC EXPORTS TOTAL

Short-term Supply Availability

Contract and Market Price Information

Making Long-term Investments

Market for Tobacco that Does Not Meet Quality Specifications

Price Risks Due to Uncontrollable Quality Outcomes (early frost, unfavorable curing conditions)

Unity and Vision within the Industry


ConcernsConcerns

Kentucky Tobacco Cash ReceiptsKentucky Tobacco Cash Receipts

0100200300400500600700800900

1000

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Million Dollars


Source: Ky Ag Stats/NASS

Below 1699 lbs.

1700-1799 lbs

1800-2000 lbs

Over 2000 lbs.

Average Burley Yield(1980-2004)

the tobacco buyout: early observations and concerns among ky tobacco growers will snell

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