Tuesday, October 22, 2013

THE OUTLOOK FOR TOBACCO IN 2014

Ripe to the last leaf: This flue-cured tobacco was harvested early on October 18 near Oxford, N.C.. and delivered to the North Carolina State Fair for use in the annual stringing contest. It was very ripe. Farmers at the event said harvest might last till October 30.

Agricultural economists Will Snell of the University of Kentucky and Blake Brown of North Carolina State University recently issued their report on tobacco and its outlook for 2014. The following segment is derived directly from that report but edited some for concision. 

FLUE-CURED

Lower yields, high quality. Yields were much lower than expected due to a very wet growing season. USDA forecast average yields 2,024 pounds per acre, down from 2,296 pounds per acre in 2012. But the quality of the crop is excellent (see photo), and record high prices are evidence of the short supply/high quality character of this flue-cured crop. The average price per pound may exceed $2.15.  

Flue-cured production is estimated by USDA at 439 million pounds which would be down from the 473 million pounds produced in 2012 and down from early season expectations for nearly 500 million pounds of production for 2013. However, production and industry experts concur that actual crop size for 2013 is less than 439 million pounds.
 
The wet season caused some acreage to be abandoned, but most of the reduction in crop size was due to lower yields due to excessive rain. A weather-devastated 2011 crop, lack-luster Brazilian production and increased demand from China resulted in short global supplies of flavor style flue-cured. Harvested acreage for 2013 is forecast by USDA to be 216,000 acres, up from 206,000 acres in 2012. It was hoped that increased U.S. acreage for 2013 would alleviate the tight supply conditions. 

Given a smaller U.S. flue-cured crop than expected, buyers will attempt to increase 2014 production in the southern hemisphere. Brazil's crop is planted, and the hopes there are for a 1.4-billion-pound crop for 2014. Universal Leaf Tobacco Company estimates the 2013 crop from Brazil at 1.34 billion pounds. Zimbabwe produced about 364 million pounds of good quality flue-cured in 2013. It sold for a reported average price of $1.67 per pound, up slightly from 2012. 

What does this mean for contract prices? Should the very tight global supply situation be alleviated by larger, good-quality flue-cured crops in Brazil and Zimbabwe in 2014, then 2014 U.S. prices likely will fall back below $2 per pound. With very tight supplies and lower tobacco inventories held by many manufacturers, contract prices offered in early 2014 will be very sensitive to estimates of the crop size and quality of the southern hemisphere flavor-style producers. Given the continued declining demand for tobacco products in the U.S. and European Union, tobacco prices will also be very dependent on continued robust demand from China. 

BURLEY

World supplies tight. The U.S. and global markets for burley are following trends similar to those displayed by the U.S. flue-cured market-tight supplies entering 2013, challenging growing conditions this year and expectations [which were disappointed] of a strong marketing season. 
 
Tobacco buyers were hopeful that Americans would supply more burley in 2013 following a 25-percent-plus decline in world burley production. 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 likely up this year, but excessive summer rains in some areas destroyed acreage and will in all likelihood cause yields to be below average. 

So how much was produced? USDA's most recent crop report forecast U.S. burley production in 2013 at 201.7 million pounds. That would be only two percent below last year's official crop size. However, many production specialists and industry officials believe this estimate to be optimistic, with a crop more likely in the 180- to 190-million pound range. Harvested U.S. burley acres are projected to be up 4,000 acres in Kentucky, but will be only 1,200 acres higher beltwide. Average burley yields across the belt are estimated by USDA at 1,966 pounds per acre versus last year's 2,021 pounds per acre. 

Bottom line for burley? Global supplies of quality/full-flavor burley remain very tight as U.S. producers prepare for the upcoming 2013-2014 marketing season. Information not yet available on production in southern hemisphere producers like Malawi, Brazil and Argentina, but they will impact prices here. 

DARK

Increasing sales of domestic snuff and foreign competition that is only limited have continued to benefit U.S. dark tobacco growers. U.S. snuff consumption has increased annually since the mid 1980s on the heels of new product introductions, successful marketing programs, restrictions on cigarette smoking and perceived lower health risks compared to combustible tobacco products. Domestic snuff sales were up 3.3 percent in 2012, with a four percent growth rate during the first half of 2013, slightly below growth of the past decade. 

A noticeably larger 2013 crop may cause the industry to reevaluate additional acreage expansion in 2014, despite continued product sales growth. Nevertheless, the outlook for the U.S. dark tobacco growing sector remains very favorable given projected sales growth for smokeless tobacco products in the United States.
 
Watch for more excerpts from this report in future issues.

In other tobacco news:

Preview of the burley market? Farmers Warehouse of Danville, Ky., is shooting to open on the 23d, and I expect the others to open about that time.  How will they perform? We may have some indication from the Piedmont of North Carolina. I just heard from Dennis White, who operates the Old Belt warehouse in Rural Hall, N.C. (near Winston-Salem). He said 30,000 pounds of burley were brought to his warehouse for sale on October 8. "It all sold very well with cutters bringing $2.08, leaf $2.12 and tips $2.14," he said. "The buyers were Vaughan and Baileys. I will have a lot more on October 22. There have been a lot of calls." 

How much nitrogen was too much? It was hard to say this year. I had a a chance to talk to N.C. agriculture commissioner Steve Troxler Monday at the press conference announcing the state fair opening (which takes place Friday). Troxler grows flue-cured and said that in September, he had a decision to make about whether to apply supplemental nitrogen. It wasn't difficult. "I knew I would be harvesting well into October, and I knew I needed to apply additional nitrogen to hold the leaf on the stalk that long," he said. Looking ahead to next year, Troxler said, "There is enough demand worldwide for our tobacco that we could increase our acreage next year. But we need the barn space to cure it."

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