U.S. Flue-Cured Tobacco Situation & Outlook February 6, 2015 Dr. Blake Brown Hugh C. Kiger Professor Agriculture & Resource Economics College of Agriculture & Life Sciences
How much are contracted pounds down for 2015?? 15% 20% 25%
% Cut in Pounds Acreage & Production for 15, 20, & 25% Reduction in 2015 Contracted Pounds Contracted Pounds Production at 10% Overage -15% -20% -25% 408 million 384 million 360 million 449 million 422 million 396 million Acreage 204 thousand 192 thousand 180 thousand Assumptions: 480 million pounds contracted in 2014 2,200 lb/acre average yield
So what s causing such a large reduction?... Global supplies? Imports? Anticipation of large reductions in cigarette consumption? Exports exchange rates, etc? Greater deterioration of EU Market? A slowing of exports to Asia?
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015P Global Supply: U.S., Brazil and Zimbabwe Flue-Cured Tobacco Production 2500 2000 1500 1000 500 0 Zimbabwe US Brazil Source Brazil & U.S.: Universal Corporation. World Leaf Production as of Feb 3, 2015. Source Zimbabwe: Zimbabwe Tobacco Association Weekly FCV Report 14.07.2014
Millions Imports: Domestic Use of U.S. Flue-Cured Tobacco & Imported Tobacco 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 170 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Imported Flue-Cured Domestic Use of U.S. Flue-Cured Imported Other Leaf 118
Declining Cigarette Consumption
Tobacco products will undergo a technological revolution over the next 5-10 years Non-combustibles could dominate traditional combustibles in the U.S. and EU Will e-cigs or heat-not-burn products dominate? E-cigs: very different tobacco required heat-not-burn: high quality tobacco needed & maybe substantial quantity needed US & EU combustible sales may be heavily impacted
350000000 300000000 250000000 U.S. Unmanufactured Exports of Flue-Cured Tobacco (lbs farm weight) 200000000 150000000 100000000 World EU27 PRC 50000000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: USDA-FAS
Exports to EU follow the same path as Domestic use in the US But China s cigarette demand remains strong As China s domestic economy continues to strengthen, more consumers will trade up to premium brands, IBISWorld Industry Report
Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Real Commodity Exchange Rate for US Tobacco 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Source: USDA-ERS
2/1/2010 4/1/2010 6/1/2010 8/1/2010 10/1/20 12/1/20 2/1/2011 4/1/2011 6/1/2011 8/1/2011 10/1/20 12/1/20 2/1/2012 4/1/2012 6/1/2012 8/1/2012 10/1/20 12/1/20 2/1/2013 4/1/2013 6/1/2013 8/1/2013 10/1/20 12/1/20 2/1/2014 4/1/2014 6/1/2014 8/1/2014 10/1/20 12/1/20 Brazilian Real/EURO & US$/EURO: 2010-2015 Competitor s exchange rates matter. 0.9 0.8 0.7 0.6 0.5 0.4 BRL/EUR USD/EUR 0.3 0.2 0.1 0 Source: ONADA
Millions Domestic Use and Exports of U.S. Flue-Cured Tobacco 700 600 500 400 300 200 100 0 380 118 262 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Domestic Exports
What can we conclude? Large 2014 crops in U.S. & Zimbabwe, but crops in Brazil, Zimbabwe & U.S. are smaller for 2015 should reduce inventories
What can we conclude? Large 2014 crops in U.S. & Zimbabwe, but crops are smaller for 2015 should reduce inventories Imports of flue-cured to U.S. have increased, but is this temporary?
What can we conclude? Large 2014 crops in U.S. & Zimbabwe, but crops are smaller for 2015 should reduce inventories Imports of flue-cured to U.S. have increased, but is this temporary? Combustible cigarettes could experience even greater declines in US and EU E-cigs or heat-not-burn.much uncertainty
What can we conclude? Large 2014 crops in U.S. & Zimbabwe, but crops are smaller for 2015 should reduce inventories Imports of flue-cured to U.S. have increased, but is this temporary? Combustible cigarettes could experience even greater declines in US and EU much uncertainty Exchange rates for US exports are not favorable
What can we conclude? Large 2014 crops in U.S. & Zimbabwe, but crops are smaller for 2015 should reduce inventories Imports of flue-cured to U.S. have increased, but is this temporary? Combustible cigarettes could experience even greater declines in US and EU much uncertainty Exchange rates for US exports are not favorable Will exports to China increase fast enough to offset declines in exports to EU?
What can we conclude? Large 2014 crops in U.S. & Zimbabwe, but crops are smaller for 2015 should reduce inventories Imports of flue-cured to U.S. have increased, but is this temporary? Combustible cigarettes could experience even greater declines in US and EU much uncertainty Exchange rates for US exports are not favorable Will exports to China increase fast enough to offset declines in exports to EU? Reduction in 2015 contracted pounds is probably due to some combination of all of the above
2014 World Flue-Cured Production 9.9 billion pounds Other 13% U.S. 6% Brazil 16% Zimbabwe 6% PRC 59% Quality is the strategic advantage of U.S. flue-cured producers