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Changing times

| May 1, 2014

Faced with soft demand from traditional customers, U.S. tobacco farmers work to optimize their operations while eyeing opportunities presented by e-cigarettes.

By Chris Bickers

Tim Yarbrough, vice president of the Tobacco Growers Association of North Carolina, USA, recently expressed concern that an imbalance between tobacco demand and tobacco supply could lead to a drastically lower price for U.S. tobacco than in either of the two previous seasons. Speaking at the annual meeting of the export promotion organization Tobacco Associates (TA), Yarbrough, who grows flue-cured tobacco in Prospect Hill, North Carolina, said he is worried.

“I hope we are not looking at an oversupply situation,” he said. “Soft demand and too much tobacco would be a ‘perfect storm’ leading to a much lower price.”

Just as this story was completed, the U.S. Department of Agriculture announced its planting projection for 2014 for flue-cured of 232,300 acres, up 2 percent from 2013, and for burley, 100,100 acres, up 1 percent from 2013.

There certainly are a number of challenges facing U.S. growers, said George Scott, vice president for leaf for Universal Leaf North America.

“Domestic consumption in the U.S. declined 4.3 percent from 2011 to 2012, while European consumption is forecast to decline 7 to 8 percent,” said Scott, who spoke at the meeting held in Wilson, North Carolina.

“At the same time, e-cigarettes continue to increase market share,” he said. On the supply side, the Zimbabwe crop is expected to increase, while the exchange rate between Brazil and U.S. is projected to decrease by 15 percent.

Scott suggested three initiatives are necessary in order to keep U.S. production at current levels—finding a balance of grower sustainability while becoming competitive in the world market again, returning to a stable price market and continuing to provide a high-quality, compliant product.

Exports of U.S. leaf are up, but not because of purchases from traditional U.S. customers, said Blake Brown, a North Carolina Extension economist and another speaker at the TA meeting.

“The European Union [traditionally the leading destination for U.S. exports] is trending down,” he said. “But the demand in China is robust, and that is keeping exports strong.”

Short global supplies of flavor-style, good-quality flue-cured should work in favor of the U.S.

Confronted by these and other challenges, U.S. tobacco farmers are gearing up for either more production or more efficient production. Bob Pope, general manager of Long Tobacco Barn Co. in Tarboro, North Carolina, said that many farmers expressed interest in new curing barns at farm shows over the winter.

“We sold quite a few there, and we have continued to sell barns since then,” he said. “We will continue building 2014 barns through September.”

Used barns are selling at a fast clip too, Pope observed. “Barn haulers tell me they are very busy moving used barns that are bringing record high prices, which suggests tobacco farmers remain enthusiastic about their future prospects.”

Jumping into the liquid-nicotine market

In the meantime, American growers have begun exploring opportunities to provide the nicotine liquids used in e-cigarettes.

“So far, it is believed that the nicotine for these devices comes from China, India and maybe Eastern Europe,” said Rod Kuegel, a burley and dark tobacco grower from Owensboro, Kentucky.

He said meetings and negotiations were scheduled to see if this market could be developed, and he is sure that an experimental batch of liquid nicotine will be produced somewhere in the burley belt this year for further research.

“We [Americans] have the best controls on pesticide residues that exist in tobacco,” he said. “If electronic cigarettes are supposed to be healthier, how can they use nicotine from tobacco that doesn’t measure up to ours? This product should be produced in the U.S.”

The production practices for liquid nicotine have not been developed, but whatever the method, it is not likely to be too difficult for Americans to master.

And processing the raw product to liquid could be done on the farm. “All the equipment needed to process the tobacco could fit into a semi-trailer and be carried from farm to farm,” said Kuegel, who is president of the Council for Burley Tobacco.

E-liquid nicotine for e-cigarettes is being derived from tobacco, at least for now, said Brown. It is usually dissolved in a solution of propylene glycol, vegetable glycerin or polyethylene glycol.

Change may be dramatic, but it is difficult to forecast, said Brown, who noted one projection that e-cigarettes will overtake traditional cigarettes in volume sold by 2023.

But the technology and characteristics of the e-cigarette market may change dramatically, he said. Many companies are in the startup phase now, but consolidation will occur.

All of the major cigarette manufacturers in the U.S. and Europe have either purchased an e-cigarette company or are developing their own e-product.

“We will just have to see how the technology advances, but it’s one factor that could really impact the cigarette market in the future as more and more smokers switch to those kinds of products,” said Brown.

More plantings

Meanwhile, growers interviewed confirmed the slight increase in production anticipated by Department of Agriculture. Jeff Aiken of Telford, Tennessee, said acreage has been gradually increasing.

“There hasn’t been a mass re-emergence of growers,” he said. “It has primarily been a matter of growers who stayed in it planting more.”

The price was somewhere in the $2.05–$2.07 per pound range for the 2013 crop, which was enough to appeal to producers.

Burley growers went for years with no price increase at all, said Aiken, who is vice president of the Tennessee Farm Bureau Federation. “The price now is not where it should be, but it is an improvement over where it has been.”

In Kentucky, it looks like there might be a little expansion in burley acreage, said Kuegel. ”Supply is still a little short, so we hear, but domestic consumption is still declining, and that is a concern.”

In North Carolina, a small increase in flue-cured acreage seems likely, said Yarbrough. If that happens, and if farmers produce an average yield, we might see an average price about 10 cents less this season compared to 2013, he said.

“That would be livable if we can keep variable costs under control,” he added.

In Kentucky and Tennessee, additional contracts for dark tobacco growers were available this spring, although the volume was modest.

“Our yield in 2013 was low, and some companies reported falling 10 percent to 15 percent below their goal,” says Andy Bailey, Extension dark tobacco specialist. “Burley contracts appear to be similar to last year, and farmers are enthusiastic after the good price for the last crop.”

In addition, plantings of all tobacco types may be favored by the drop in the price of grain. “Farmers may divert some acres into tobacco instead,” he says.

 

 

 

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