Will Snell

1
The Ever-Changing and Uncertain Tobacco Situation
and Outlook

• Will Snell
• Agricultural Economist
• University of Kentucky

2
Tobacco Issues

• Lawsuits/Settlements
• Declining Export Markets
• Import Substitution
• World Burley Surplus/Competitiveness
• Movement of Cigarette Production Offshore
• Volume and Quality of Pool Stocks
• Marketing Inefficiencies
• Lease Prices
• Contracting
• Grading
• Designation
• Continued Political Uncertainty

3
U.S. Burley Basic and Effective Quota
2000 Quotas Basic -- 247 mil lbs
Effective -- 367 Mil lbs
4
Burley ProductionU.S vs. Rest of the World
In recent years 100 of the adjustment in world
burley production has occurred in the U.S. market.
5
Kentucky Tobacco Cash Receipts
6
Kentucky Tobacco Cash Receipts/Mailbox
7
Can Demand/Quotas Recover?
8
U.S. Cigarette Consumption
U.S. Cigarette Consumption Is Down Around 10
Since The Tobacco Settlement . But Is Expected
To Fall By Only 2 To 3 In 2000
9
While the Tobacco Settlement Is Adversely
Affecting the Domestic Demand for U.S Burley, the
Major Reason for the Decline in U.S. Burley
Demand is Due to

• Losses in the Export Market
• Substitution of Imported Burley

10
Domestic vs Imported Burley Use
Domestic
Imports
11
U.S. Cigarette Exports
U.S. Cigarette Exports Fell 39 From 1996 To 1999
And Continue To Slide In 2000
12
U.S. Cigarette Production
U.S. Cigarette Production Has Declined Constantly
Since the 1996 Record Level of 755 Billion Pieces
13
Based on Recent Import Patterns, U.S. Cigarette
Production Levels in the 500 to 550 Billion Piece
Range Would Require Around 200 to 225 Million
Pounds of U.S. Burley
14
U.S. Burley Exports
Can U.S. Burley Export Demand Rebound Above 150
Million Lbs?
15
U.S. Burley Demand
Current Demand For U.S. Burley May Be More in
the Neighborhood of 350-400 Million Pounds
16
What About China?

• Represents 1/3 of World Cigarette Consumption
• Growth in American-Blended Cigarettes
• Opportunities Will Exist To Move Some U.S.
  Burley/Cigarettes Into China
• Market Will Develop Slowly and Will Not Be the
  Immediate Answer to Industrys Short-Term Problems

17
What Does This Imply About 2001 Quota Levels?
18
U.S. Burley Pool Stocks
19
Manufacturer Purchase Intentions
20
Potential Quota Scenarios For 2001
Does the Industry Have Enough Inventory to Allow
the Effective Quota to Fall to Less Than 250
Million Lbs?
21
Potential Quota Scenarios For 2001
22
Price Adjustment Issues

• Given Quota Transfer Restrictions, Will Lower
  Prices Constrain Available Supplies to Meet
  Potential Increases in Demand?
• How Will World Burley Prices Adjust to Potential
  Reductions in the U.S. Burley Price?
• Will Lower U.S. Burley Prices Result in a
  Percentage Greater Increase in U.S. Burley
  Demand?
• What Are the Structural/Adjustment Costs For
  Farmers/Rural Communities That Cannot Compete At
  Lower Prices?

23
Issues To Address

• Industry (Both Buyers and Sellers) Evaluation of
  the Distribution of Price Supports According to
  the Value of These Grades in the World Market
• A Grading System That Is Perceived to be
  Objective By Both the Buyers and the Sellers
• Mechanism to Adequately Compensate Quota Owners
  to Transfer Quota Into the Hands of Active
  Growers
• Unity/Leadership . Survivorship