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CCAAAAPPAgricultural 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 Burley Tobacco SituationSituation
and Outlookand Outlook
2006 TN-NC-VA Tobacco Expo
Kingsport, TN
January 27, 2006
Kelly Tiller
CCAAAAPP
Topics to CoverTopics to Cover
• Buyout follow-up
• Burley tobacco productionpost-buyout
• Domestic market trends
• World market trends
• Burley market outlook
CCAAAAPP
Annual Payment DistributionAnnual Payment Distribution
0
50
100
150
200
250
300
350
400
(mill
ion
$)
NC KY TN SC GA VA
GrowerPayments
Quota Owner Payments
CCAAAAPP
Total Payment DistributionTotal Payment Distribution
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
(mill
ion
$)
NC KY TN SC GA VA
GrowerPayments
Quota Owner Payments
CCAAAAPP
Buyout Payments by StateBuyout 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
CCAAAAPP
Payment StatusPayment 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
CCAAAAPP
Installment Sale IncomeInstallment Sale Income
CCAAAAPP
Payment Status, cont’dPayment 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
CCAAAAPP
Phase II StatusPhase 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
CCAAAAPP
Post-Buyout OutlookPost-Buyout Outlook
• Who will produce?
• Where?
• How much?
• At what price?
• Demand response?
• 2006 and beyond?
Expand
Wait & See
Get Out
CCAAAAPP
Burley ProductionBurley Production
• Who will produce and whowill get out?– Considerations include:
• Retirement, labor, barn space,access to capital, marketopportunities, relationship withcompanies, profit potential ofalternatives
– Biggest consideration:• Profitability• Price versus cost of production
CCAAAAPP
Cost of Production & YieldsCost of Production & Yields
Variable Costs
Hired Labor
Land, Buildings, Machinery,
Operator Labor
’05 Market Price
CCAAAAPP
2005 Production2005 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
CCAAAAPP
Average U.S. Burley YieldsAverage U.S. Burley Yields
0
500
1000
1500
2000
2500
3000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Poun
ds P
er A
cre
2005 Yields:
US – 1,952 lbs/acVA – 1,800 KY – 1,950 lbs/acNC – 1,650 TN – 2,000 lbs/ac
Source: USDA / NASS
CCAAAAPP
U.S. Burley ProductionU.S. Burley Production
0
100
200
300
400
500
600
700
1997 1998 1999 2000 2001 2002 2003 2004 2005
Millio
n Lb
s
U.S. (-33%)
KY (-34%)TN (-26%)
CCAAAAPP
TN Tobacco Cash ReceiptsTN Tobacco Cash Receipts
0
50
100
150
200
250
(mill
ion
$)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
- 68%
CCAAAAPP
U.S. Burley PurchasesU.S. Burley Purchases
0
50
100
150
200
250
300
350
2001 2002 2003 2004 2005
Mil
lbs
Company Purchases 2005 Production Sale of Pool Stocks
CCAAAAPP
U.S. Cigarette ConsumptionU.S. Cigarette Consumption
350
400
450
500
550
1990 1992 1994 1996 1998 2000 2002 2004
(bill
ion
pie
ces)
CCAAAAPP
U.S. Cigarette ExportsU.S. Cigarette Exports
80
120
160
200
240
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
(bill
ion
pie
ces)
CCAAAAPP
Tobacco Used for CigarettesTobacco Used for Cigarettes
CCAAAAPP
Foreign Tobacco Content of US CigarettesForeign Tobacco Content of US Cigarettes
0
10
20
30
40
50
60
70
(per
cent
)
CCAAAAPP
Imports in U.S. CigarettesImports in U.S. Cigarettes
CCAAAAPP
U.S. Export vs. Import PriceU.S. Export vs. Import Price
0
1
2
3
4
5
6
7
8
9
1997 1998 1999 2000 2001 2002 2003 2004 2005
Dol
lars
per
kilo
gram
U.S. Export U.S. Import
CCAAAAPP
World Burley Production & UseWorld Burley Production & Use
500
550
600
650
700
750
800
850
900
1990
1992
1994
1996
1998
2000
2002
2004
2006
1,00
0 to
ns
Prod. Use
CCAAAAPP
World Burley Production & UseWorld Burley Production & Use
0
200
400
600
800
1,000
1,200
1,400
1990
1992
1994
1996
1998
2000
2002
2004
1,0
00
to
ns
Prod. Use Stocks
CCAAAAPP
U.S. Share of World Tobacco ProductionU.S. Share of World Tobacco Production
0%
5%
10%
15%
20%
25%
30%
35%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
CCAAAAPP
2005: World Burley Producers2005: World Burley Producers
China3%
Malawi15%
Brazil18%
EU10%
Argentina8%
Mozambique6%
Thailand5%
Zambia3%
Others21%
U.S.11%
CCAAAAPP
2004: World Burley Exporters2004: World Burley ExportersBrazil23% EU
12%
U.S.9%
Argentina7%
Malawi29%
Others12% China
2%Mexico
1%
Thailand5%
CCAAAAPP
Burley Export TrendsBurley Export Trends
0
20,000
40,000
60,000
80,000
100,000
120,000
140,00019
79
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
(ton
s)
Malawi Brazil Italy USA
CCAAAAPP
World Tobacco UseWorld Tobacco Use(Developed vs. Developing)(Developed vs. Developing)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1970-72 1980-82 1990-92 1997-99 2005 2010
(mill
ion
poun
ds)
Developed Developing
CCAAAAPP
Industry TrendsIndustry 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??
CCAAAAPP
How Many U.S. Burley Growers Required How Many U.S. Burley Growers Required to Grow 300-400 Million Pounds?to Grow 300-400 Million Pounds?
According to the USDA/FSA, there were49,343 burley growers in 2004
CCAAAAPP
Number of Growers to ProduceNumber of Growers to Produce300 Million Pounds300 Million Pounds
2,300 Lb Yield
2,500 Lb Yield
10 AcreAverage
13,043 12,000
20 AcreAverage
6,521 6,000
CCAAAAPP
Production Location?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)
CCAAAAPP
Burley Avg. Yields (1980-2004)Burley Avg. Yields (1980-2004)
CCAAAAPP
2006 Burley Production2006 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
CCAAAAPP
www.agpolicy.org/tobacco.htmlwww.agpolicy.org/tobacco.html