Dark Tobacco Trends, Issues and

Outlook

Will Snell, University of KY

U.S. Tobacco BuyoutOctober 2004

… would lead to challenges and opportunities which would vary by type and geographic location

0

10000

20000

30000

40000

50000

60000

70000

1992 1997 2002 2007

Agricultural Economics

Number of Farms Growing Tobacco in KYNumber of Farms Growing Tobacco in KY

Source: USDA AG Census

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

Purchase11% (+5%)

Mid Western19% (+5%)

Northern KY10% (-1%)

Central KY25% (+3%)

Bluegrass30% (-6%)

Eastern KY6% (-6%)

Distribution of Total (Burley + Dark)Tobacco Production (Pre vs Post- Buyout)

Top 7 Value of Tobacco Producing Counties:Pre (1980-2004) vs Post Buyout (2007)

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

Agricultural Economics

Post-Buyout Pre-Buyout

Includes both burley and dark tobaccos

Note Barren County was also in the top 7 pre-buyout

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Flue-Cured Burley Dark

Source: NASS/USDA

Agricultural Economics

Percentage Change in Acres Percentage Change in Acres Since the Tobacco BuyoutSince the Tobacco Buyout

0

5000

10000

15000

20000

25000

30000

2000 2002 2004 2006 2008

Dark AirDark Fire

Source: NASS/USDA

Agricultural Economics

US Dark Tobacco AcresUS Dark Tobacco Acres

+21%

+38%

Agricultural Economics

Issues Affecting Expansion of U.S. Dark Tobacco Production

• Growing Smokeless Tobacco Consumption (smoking restrictions, effective marketing, health issues)

• Profitability of Dark Tobacco Production• Grower Confidence and Trust with Buyers• Entry of New Dark Tobacco Companies

(Cigarette Mfgs) and New Tobacco Products

Increasing Dark Acres at the Expense of Burley Acres

Source: Universal Leaf

Agricultural Economics

Share of World Dark Fire-Cured Production – 2008Share of World Dark Fire-Cured Production – 2008

U.S44%

Africa21%

Indonesia14%

Italy6%

Others15%

0

20

40

60

80

100

1990 1995 2000 2005

Mill

ion

Lb

s

Agricultural Economics

U.S. Snuff Tobacco Consumption

Source: USDA/ERS and TMA

+4% to +7% Annual Growth

Value of Kentucky Dark Tobacco Value of Kentucky Dark Tobacco ProductionProduction

0

25

50

75

100

125

150

2000 2001 2002 2003 2004 2005 2006 2007 2008

Agricultural Economics

Source: Ky Ag Stats/NASS, 2008 Estimate by UK

Million Dollars

Value of Kentucky Tobacco ProductionValue of Kentucky Tobacco Production

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006 2007 2008

Dark

Burley

Agricultural Economics

Source: Ky Ag Stats/NASS, 2008 Estimate by UK

Million DollarsDark will likely account for more than 30% of Kentucky’s total tobacco value in 2008 vs its

historic level of 5 to 7%

Value of Tennessee Tobacco ProductionValue of Tennessee Tobacco Production

0

25

50

75

100

125

150

175

200

2000 2001 2002 2003 2004 2005 2006 2007 2008

Dark

Burley

Agricultural Economics

Source: Ky Ag Stats/NASS, 2008 Estimate by UK

Million DollarsDark now accounts for well over ½ of

Tennessee’s total tobacco value

0102030405060708090

100

2002 2004 2006 2008

Million Lbs

Dark AirProduction

Dark FireProduction

Total DarkUse

Agricultural Economics

U.S. Dark Tobacco Production vs. UseU.S. Dark Tobacco Production vs. Use

Source: ERS/NASS/USDA, 2008 Estimates Based on September Crop Report

Is This ExpansionToo Much?

0

10

20

30

40

50

60

70

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Million Lbs

Agricultural Economics

Dark Fire-Cured: Production vs. UseDark Fire-Cured: Production vs. Use

Production

Use

Source: FSA/ERS/USDA

0

5

10

15

20

25

30

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Million Lbs

Agricultural Economics

Dark Air-Cured: Production vs. UseDark Air-Cured: Production vs. Use

Production

Use

Source: FSA/ERS/USDA

0

50100

150200

250300

350400

450

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Million

Lb

s

DomesticUseExports

Production

Agricultural Economics

Source: NASS/ERS/USDA2006-2008 Disappearance Estimates by UK/UT

U.S. Burley Disappearance (Exports + Domestic Use) vs. Production

Potential Needs for 2008-09? 200 Mil lbs ???

U.S. Tobacco BuyoutOctober 2004

• FDA ???

• Tobacco Taxes ???

• Smoking Restrictions ???

Tobacco Policy2009

Issues Affecting Dark Tobacco OutlookIssues Affecting Dark Tobacco Outlook

• Supply Side:

– Contract Levels/Prices– Input Prices

» Fertilizer» Labor» Credit

– Profitability of Other Crops/Enterprises

• Demand Side– Recession– Smoking Restrictions– Consumer Acceptance of

New Products– Tax Increases/FDA

What does the future hold?

• Acres will decline from 2008 levels, but remain relatively high• Management expertise will keep acres located in this area … but others will try•Will company/grower relations remain strong?• Health debate holds the potential for continued expansion•Will an export market materialize for dark tobacco/products?

Average Tobacco YieldsAverage Tobacco Yields

0

500

1000

1500

2000

2500

3000

3500

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Po

un

ds

Pe

r A

cre

Burley Dark Fire Dark Air

Agricultural Economics

Source: NASS/USDA