A look at the burley market

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By Rick Greenwell

Burley, like most of our agricultural enterprises, is produced in a global marketplace.

Higher global grain prices in recent years have not only encouraged Kentucky and U.S. farmers to raise more grain but also corn and soybean producers around the globe.

As a result of increasing global supplies, grain prices have predictably declined from the record levels we experienced in 2012.

The global burley market has a similar story.

World burley production fell to a very low level in 2012, generating higher burley prices around the globe in 2012 and 2013 and, not surprisingly, generated increases in global burley supplies.

According to the Universal Leaf Tobacco Company, world burley production has expanded by almost one-third since 2012.

But most of this growth has occurred in Africa, where burley output has almost doubled since 2012.

Africa is primarily a filler (low quality) leaf market.

There was a short 2013 U.S. burley crop, and there was fairly constant South American burley production.

Due to this, expectations were that U.S. burley growers might continue to observe expansion opportunities in 2014.  

However, it appears that in the midst of overall growing world supplies, coupled with very sluggish domestic demand, some companies have reduced U.S. burley volume in 2014.

This may not be the case for all companies or all growers, as there is room to eliminate some “fictitious” contract volume that was never going to materialize in recent years.

Preliminary signals that 2014 burley production opportunities may be reduced for some growers is certainly disappointing and somewhat surprising, given how aggressive the buying interest has been in recent years in attempting to find more U.S. burley production.

Evidently, lower cost/lower quality burley is finding its way back into cigarette blends in increasing amounts in the midst of overall declining global and domestic burley consumption.  

Prior to the buyout, U.S. burley exports had swelled to more than 200 million pounds.

Despite a period of favorable exchange rates and overall competitive prices during most of the post-buyout period, U.S. burley exports have been cut in half.  

Ample supplies of lower quality/less expensive burley from competing nations, coupled with lower world burley needs, have more than offset competitive U.S. burley prices in global markets since 2004.  

On a positive note, U.S. burley exports have remained relatively stable over the past four years, ranging from 108 to 114 million pounds.  

However, burley imports into the United States have been increasing in recent years despite slumping domestic cigarette production.  

Since 2010, U.S. burley imports have averaged 120 million pounds, resulting in a negative U.S. trade surplus (on a volume basis).  

Growing foreign burley supplies, an increasing U.S. dollar relative to the Brazilian real, and constraints on U.S. burley production will likely challenge growth in U.S. burley exports in the near future.  

Domestically, cigarette consumption continues to decline (3 to 4 percent annually) at a rate above historical levels due to higher prices, bans, health issues and a rapidly emerging issue – the growth of electronic cigarettes, which likely contain limited, if any, nicotine extracted from U.S. leaf.  

What does this market environment mean for 2014?  

While a deteriorating supply demand balance for burley is a concern, demand for high-quality contracted U.S. burley should continue to do well in this environment with prices exceeding $2.00/lb.

Lower-quality contracted burley will be closely scrutinized and likely graded lower than it has in recent years, prompting lower prices.

Tobacco produced outside of a contract remains very vulnerable in this type of marketing environment, unless the current supply/demand balance unexpectedly improves in the coming months.