Tuesday, January 10, 2012

THE ECONOMIC OUTLOOK FOR 2012

Good news, bad news from Brazil: It is becoming clear that the Brazilian flue-cured crop now coming to market was grown on about 20% less acreage than the previous one, says Blake Brown, N.C. Extension economist. Production is thought to be in the area of 1.2 billion pounds, he said, compared   to   the   very   large  1.5-billion-pound crop of a year ago. The bad news is that there is still plenty left of Brazilian leaf left from previous crops at various points in the distribution chain. No information on the Brazilian burley crop yet, but the previous crop was estimated at the very high level of 2.57 million pounds.

Fast start for flue contracting. "Companies are being much more proactive about lining up contracts than in the past [in the U.S.]," says Brown. "My impression is that a significant amount of this year's crop has been signed for already. Prices seem to be at least as high as last year."  If it hadn't been for the storm, there would have been a big problem of excessive supply of flue-cured. "The supply is still very high right now," says Brown. But as he told Tobacco Farmer Newsletter last fall, "There is plenty of mediocre tobacco out there, but no excess of high quality premium tobacco. There might even be a shortage." He understands that so far, the tobacco from the 2011 U.S. crop has moved extremely well. "And if we can grow a good crop this season, there is definitely room for it on the world market."

Burley growers are upbeat after a much better season than the one before. "The aggregate world burley supply is good, but better quality burley is in tight supply," says Will Snell, Kentucky Extension economist. "It seems likely there will be contract offers to growers to increase production. They may not be across the board but instead just to the better growers." But will there be takers? "There are options now, thanks in part to increased demand for biofuel. Grains and livestock may seem like better opportunities to some growers." But marketing was continuing as the year began, and the good prices of December generally held up, with $1.75 to $1.80 still roughly the range per pound and $1.80 per pound for the best. But it may not hold to the end. "We will likely have some lower quality burley to hit the market later in the season which might bring down some prices," says Snell.


Economical yields are still a concern for burley. "It is very puzzling," says Snell. "We are still below 2,000 pounds an acre, even in Kentucky. You're barely covering variable costs at that level. It is not enough to cover all expenses. You must eventually have a return to labor and management." Under the current price structure, 2,200 pounds an acre would be the minimum a grower would need to compete with $6 corn. "Without additional price incentives, burley yields really need to be in excess of 2,400 pounds per acre to compete with prices for other ag alternatives, to cover increasing labor expenses, and to allow for adequate investment incentives for burley tobacco infrastructure," says Snell.


Dark tobacco prices have held up as snuff consumption keeps increasing. "We might see a little more poundage this year," says Snell. "Most farmers will grow dark rather than burley if they can." Last year, snuff production was up 6.5% and increased another 4.4% during the first seven months of 2011, says Brown. Smoking restrictions, successful marketing of traditional snuff products and the introduction of new products, along with perceived lower health risks, have collectively benefited the smokeless sector in recent years. Following two straight years of supply adjustment, it appears that the industry once again is close to an acceptable supply/demand balance, says Brown. Look for dark tobacco prices to remain near recent levels ($2.25 per pound for dark air-cured and $2.50 per pound for dark fire-cured) for the 2011-2012 marketing year, he says.

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Visit our booth at the Southern Farm Show, Feb. 1 - 3. Booth # 3714.


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