Burley and dark tobacco review for 2013 and 2014 outlook

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By Rick Greenwell

2013 Review
Following a 25 percent decline in world burley production in 2012, tobacco buyers were hopeful that the U.S. would supply more burley in 2013.  

World burley production likely rebounded in 2013, but most of the growth occurred in lower quality/filler-style markets.

U.S. burley contract volume and acres planted were up in 2013, but excessive rains in some areas destroyed acreage and likely caused yields to fall.  

According to the USDA, 2013 U.S. burley production is forecast at 201.7 million pounds (-2 percent).

However, most industry personnel believe this estimate is too optimistic, with a crop more likely in the 180 to 190 million pound range.  

U.S. burley disappearance (domestic use plus exports) in recent years has stabilized to around 210 to 220 million pounds.

Tight U.S. burley supplies have limited export opportunities in recent years, despite favorable exchange rates.

Domestic use continues to be hindered by declining domestic cigarette consumption (falling three to four percent), but competitive prices, plus perhaps some concern over Food and Drug Administration regulation, has possibly increased U.S. burley relative to imported burley.

Consequently, global supplies of quality/full flavor burley remained tight entering the 2013-2014 marketing season.

U.S. burley averaged around $2.05 per pound during the early part of the marketing season, representing the highest price in the post buyout era.

U.S. dark tobacco producers continue to benefit from growing domestic snuff sales (increasing three to four percent annually) and limited foreign competition.

After several years of acreage adjustment, U.S. dark tobacco acreage was up around 2,000 acres this year, and the USDA expects a 10 percent larger dark tobacco crop in 2013 compared to last year (although most industry officials project smaller increases).

Based on contract prices, look for 2013 dark fire-cured prices for quality leaf to be in the neighborhood of $2.60 to $2.68 per pound and near $2.25 to $2.30 per pound for dark air-cured.  

A larger overall (burley and dark) Kentucky tobacco crop, coupled with higher prices, will likely generate a Kentucky tobacco value exceeding $400 million for 2013 and may ultimately end up being the highest-valued tobacco crop since the buyout in 2004.

2014 Outlook

While the market appears favorable for 2013, it is important to realize that increasing short-term market opportunities and higher prices for U.S. burley growers are being driven by tight supplies and not from overall demand expansion.

Based on the anticipated supply/demand balance, U.S. burley contract volume could further increase for some growers in 2014 (subject to 2013 marketings).  

Added to this equation will be expectations of lower grain prices, which could boost burley acreage above industry needs.  

This market reaction, coupled with increasing global production, could eventually put some downward pressure on future burley prices.  

Even with continued smokeless product sales growth, a 10 percent larger 2013 dark tobacco crop (if it materializes) may cause the industry to re-evaluate additional acreage expansion in 2014.

Consequently, dark tobacco acreage may not change much in 2014, with prices remaining firm.

Despite the challenges facing the industry, 2014 should be another good year for the Kentucky tobacco sector, but the outlook remains very cloudy beyond the coming year.  

Long-term uncertainties include immigration reform, future crop insurance changes, U.S./global tobacco regulations, excluding tobacco from trade agreements and the impact of a small but growing market for harm reduction tobacco products.  

The potential implications of flavoring/additive bans currently being debated in Europe, and around the world, are of particular concern for burley long term.

Various non-tobacco ingredients are added in the manufacturing process to offset some of the taste characteristics evolving from incorporating burley in blended cigarettes.  

Presently, it is unclear whether full-flavor burley tobaccos (like U.S. burley) would have any advantage over lower quality/filler style burley tobaccos if a ban were adopted in a particular market.

Besides affecting the overall demand for burley, other regulatory actions to influence manufacturing processes could ultimately impact grower production practices, leading to lower burley yields and profits.

Also, a growing market for electronic cigarettes could have a significant, adverse impact on U.S. burley demand both domestically and globally.  

Alternatively, social responsibility concerns (e.g., child labor laws), environmental challenges and the ability to adjust to government-induced regulations/consumer concerns may provide U.S. burley growers with advantages over their competitors.

Thus, despite some short-term optimism, U.S. burley producers have a multitude of factors limiting expansion and reinvestment in future burley production.