We received this article from Dr. Will Snell, Ag Economic specialist at University of Kentucky College of Ag, and I thought it was an informative article to share with you.
Final data from the 2012 crop year indicates that the value of Kentucky’s tobacco crop exceeded $400 million for the first time since the tobacco buyout in 2004. Most of the gains were due to higher burley prices, which finally approached pre-buyout prices of $2 per pound. Dark tobacco production still exceeded $100 million, accounting for around one-quarter of Kentucky’s total tobacco value.
USDA’s March 2013 Planting Intentions report projected a 5 percent increase in both Kentucky burley and total tobacco acres for the upcoming year. Beltwide burley planting intentions were up 2 percent, accounting for a 12 percent reduction in anticipated Tennessee burley acreage, which some industry officials believe is too low. Labor, infrastructure, and recent changes in the crop insurance program (RMA not allowing coverage on crop acres planted three years in a row in the same field) has likely constrained acreage expectations to some degree. Assuming the 2013 planting intentions are met, average belt-wide yields would generate a 2013 U.S. burley crop in the neighborhood of 210-215 million pounds; compared to last year’s USDA estimate of a 205 million pound crop, which some buyers claim was too high, and 172 million pounds produced in 2011.
In the midst of continued declining U.S. cigarette consumption, along with global demand challenges, can the market absorb another increase in U.S. burley production? World burley production is forecast to rebound by more than 25 percent in 2013, following a similar decline in 2012. However, most of the increase is in Africa, which produces a lower quality, filler style burley. High quality burley supplies (U.S., Brazil, and Argentina) are still very tight entering the 2013 season. Fairly stable South American production, coupled with relatively high Brazilian export prices, are prompting tobacco companies to ask U.S. burley growers to increase production in 2013. Furthermore, some contracting companies may be increasing contract volume offers above actual needs to accommodate for marketings that they anticipate may not materialize based on previous contracting history.
In reality, the current supply/demand balance of higher quality burley should enable a five percent to 10 percent larger U.S. burley crop to occur, without depressing prices and overall demand. Current contract price schedules (see below) indicate that top quality burley leaf should fetch near or above $2.00/lb for the 2013 crop.
If the projected size of the 2013 U.S. burley crop does not occur, look for the purchasing sector to once again consider boosting price schedules later this year. While the market appears favorable for 2013, it is important to realize that increasing market opportunities for U.S. burley growers is being driven more by tight supplies and not from overall demand expansion.