The Future of Burley Supply
Burley Stabilization Corporation
Daniel Green
Overview
Historical Trends Review
U.S. Market Review
Short-term Supply Issues
Long-term Supply Issues
25 Year Production Review
World Production Trends
Filler vs. Flavor
Production in Flavor Exporters
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
World Burley Production
MTs
1200
1000
800
600
400
200
0
Source: USDA/Universal Leaf Tobacco
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
World Burley Production
MTs
1200
1000
800
600
400
200
0
Source: USDA/Universal Leaf Tobacco
80%
30%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Flavor vs. Filler Production
100%
90%
Flavor
70%
60%
50%
40%
Filler
20%
10%
0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Burley Production
MTs
350
300
250
200
150
100
50
0
Argentina
Brazil
USA
World Burley Production Share
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1989
USA
Brazil
1999
Argentina
2009
Malawi
2015
Others
Flavor vs. Filler Burley


The significant decrease in higher-value flavor
burley in recent years exemplifies a relatively rapid
shift from traditional flavor producing regions.
Given the much smaller supply of flavor burley,
manufacturers are certainly substituting filler for
flavor.
Better technology in cigarette production.
Better quality filler tobacco.
Consumer demand for cheaper cigarettes.
U.S. Cigarette Taxes
$/Pack
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$-
Federal Excise Tax
Avg. State Tax
Source:
U.S. Cigarette Retail Price
$7.00
$6.10
$6.03 $6.05
$6.00
$5.87
$6.00
$5.00
$4.58
$4.25
$4.14
$3.91
$4.00
$3.29
$3.00
$2.29
$2.00
$1.93
$1.85
$1.95
$1.00
$1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2011 2012 2013 2014
Source:
U.S. Cigarette Production
Billion Pieces
45% last 10 years
700
600
16% since 2009
500
400
300
200
100
0
Domestic Consumption
Exports
Source: USDA ERS, TMA
US Burley Trade Balance
KGs
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
2005
2006
2007
2008
2009
US Exports
2010
2011
2012
2013
Source: NASS/ERS/USDA
2014
US Imports
2006-2008 Estimates by Univ. KY
American Blend Outlook
Approximately 39% of cigarettes consumed worldwide are American
blend compared to 53% Virginia and 8% other.
Consumption of American Blend cigarettes is concentrated in USA,
Russia, Japan, Philippines, Ukraine, South Korea and Germany. All are
declining markets with approximately 5% decrease in consumption per
year the past two years.
Growth markets for American Blend include Egypt, China, Iran,
Thailand, Indonesia, Vietnam, Belarus and Taiwan.
While a declining market, American Blend sales declines are not
substantially different from Virginia Blend declines and still represent a
2.1 trillion stick market.
Short-Term vs. Long-Term Supply
Short-term factors affecting supply
will contribute to excess quantities and
general reduction in quality.
Long-term factors contribute to
lower capacity to produce flavor burley
to meet demand.
U.S. Burley Tobacco
Hectares
70,000
60,000
50,000
40,000
30,000
20,000
10,000
2001
2003
2005
2007
KY+TN
2009
Others
2011
2013
2015
U.S. Burley Tobacco
Hectares
Actual hectares planted in 2015 may be closer to 31,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
2001
2003
2005
2007
KY+TN
2009
Others
2011
2013
2015
U.S. Burley Tobacco – Farm Prices
Farm Price/KG
$5.00
$4.54
$4.35 $4.35 $4.36 $4.40
$4.34
$4.00
$3.45
$3.00
$2.00
$3.61 $3.53
$3.86
$3.68 $3.77
$3.41
$4.29
Burley Production Decision
2014 Contract Volume - 84 MT
2014 Production Volume - 95 MT
2015 Contract Volume - 59 MT
2014 Production Volume - 95 MT
Burley Production Decision
• Growers are planting tobacco without a
marketing contract.
• Current incentives to produce are out of
line with current burley demand.
• If substantial contract volume reductions
and price reductions are in place for 2015,
then why are growers overproducing?
Expected Price for Burley
1 acre of burley, 2,000 lb. yield history,
75% coverage
Produced 2,000 pounds of burley grading
B4GF
B4GF receives discount factor of 0.60
1-0.6 = 0.4, 0.4 x 2,000 = 800 pounds
counting as production
Expected Price for Burley
2014 Guaranty = 0.75 x 2,000 = 1,500
pound guarantee
Indemnity = 1,500 - 800 = 700
700 x $2.05 = $1,435
Grower sells tobacco at 3rd quality for
$1.90
Expected Price for Burley
Total price received per pound:
$1,435 indemnity + $3,800 sale price
$2.63/LB ($5.78/KG)
Expected Price for Burley - 2015
For 2015, Price election is $1.80/LB
Under same example, expected indemnity
for B4GF is $1,260.
If grower expects $1.32/LB or greater for
insured non-contract tobacco, non-contract
tobacco will average the same as 2014
contract tobacco ($1.95/LB).
Average Age of U.S. Burley Growers
65+
28%
Under 25
1%
25-34
7%
35-44
12%
55-64
29%
45-54
23%
Source: US Ag Census, 2012
LikelihoodofofProducing
Producing in 10-Years
Likelihood
in 10 YRs
% Prob or Def will produce
% prob or def will not produce
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
KY-Burley
KY-Dark
NC-Flue
NC-Burley
TN-Burley
TN-Dark
Source: UT CTGR Survey Data
Likelihood
of Producing
in 10-Years
Number
of Tobacco
Farms
in KY
60,000
50,000
40,000
30,000
59,373
44,967
20,000
29,237
10,000
8,113
1992
1997
2002
2007
4,530
2012
Source: US Ag Census
Alternative Crops to Burley Growers
6.20%
11.00%
15.50%
Grain crops
Cow/calf
14.20%
17.20%
35.90%
Beef Cattle
Hay
Fruits/Veg.
Other
Source: UT CTGR Survey Data
Other Market Outlook Issues
Impact of the WHO – FCTC, FDA regulation and the
EU Tobacco Products Directive
Participation of Big Tobacco into the electronic
alternatives market
Continued growth in illicit trade – 1 in 10 cigarettes
are illicit
Approach of Public Health to electronic cigs/vapor
products
Future of Tobacco Regulations
Increased Attack on Combustibles
Growth & Acceptance of E-options
Future of Alternatives
Philip Morris iQOS & HeatSticks
JTI Ploom & Ploom Pax
Moist Snuff Sales
Million Pounds
Source:
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
120
110
100
90
80
70
60
50
40
30
20
10
0
E-Cig/Vapor
E-Cigs first on the market less than ten years ago.
Worldwide sales of vapor products totaled $3.5 billion in
2013, with approximately half of the sales in the USA.
E-Cig and Vapor product sales are approximately 2% of the
value of cigarette sales in the USA.
Projected to exceed $50 billion per year worldwide by 2030
by Euromonitor.