TOBACCO September 22, 1995 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- TOBACCO Situation and Outlook is published four times a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. TBS-232. Please note that this release contains only the text of TOBACCO--tables and graphics are not included. Subcriptions to the printed version of this report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #TBS, $19/year. ERS-NASS accepts MasterCard and Visa. ----------------------------------------------------------------------------- Tobacco Situation and Outlook. Commercial Agriculture Division, Economic Research Service, U.S. Department of Agriculture, September 1995, TBS-232. Contents Tobacco Products U.S. Exports and Imports U.S. Tobacco Leaf Situation and Outlook Flue-Cured Burley Southern Maryland Fire-Cured Dark Air-Cured Cigar Tobacco Special Articles Costs of Producing and Selling Flue Cured Tobacco: 1993, 1994, and Preliminary 1995 U.S. Tobacco Import Update Statistical Summary List of Tables Principal Contributor Verner N. Grise Voice (202) 219-0890 FAX (202) 219-0042 Special Articles Dargan Glaze Verner Grise and Nydia Suarez Database Coordinator Graphics and Table Design Fannye Lockley-Jolly Design & Layout Anne Pearl Word Processing Betty Barrett Lorie Thomas Erma McCray Approved by the World Agricultural Outlook Board. Summary released September 14, 1995. The summary of the next Tobacco Situation and Outlook is scheduled for release December 18, 1995. Summaries and full Situation and Outlook reports may be accessed electronically through the USDA CID System. For details, call (202) 720-9045.The Tobacco Situation and Outlook is published in April, June, September, and December. See back cover for subscription information. Summary U.S. tobacco production in crop year 1995/96 is forecast down about 15 percent because of lower yields. Yet, because of large flue-cured and burley farm carryover and higher flue-cured quotas, marketings in 1995/96 may increase about 3 percent. The U.S.-grown tobacco supply for 1995/96 is forecast to fall because carryin stocks (July 1 for flue-cured and cigar wrapper types, and October 1 for all other types), are likely to decline about 5 percent from a year earlier to 2.33 billion pounds. In contrast, stocks of imported leaf rose 2 percent to 1.05 billion pounds. Flue-cured tobacco output is down this year. However, with larger quotas and a record amount of 1994 crop leaf carried over on farms, marketings will increase in 1995. Prices are averaging somewhat higher because of poor quality crops in some competitor countries, legislation that required increased use of U.S.-grown leaf, larger cigarette production, increased bulk smoking exports, less uncertainty about Federal excise tax levels, and more higher value upper stalk marketings. U.S.-grown leaf use rose about 12 percent during 1994/95 from 1993/94's 1.44 billion pounds. U.S.-grown leaf use may decline in 1995/96, even though cigarette production is expected to increase. The proportion of foreign-grown leaf used in cigarettes may increase. President Clinton proclaimed a tariff rate quota (TRQ) effective September 13, for certain imported tobaccos, primarily flue-cured and burley. The annual quota replaced domestic content provisions that had been in effect since January 1, 1994. The TRQ of 150,000 metric tons, about 330 million pounds, is less constraining than the domestic content provisions. The proclamation also eliminated duties on Oriental and cigar wrapper, binder, and filler tobacco. U.S. leaf tobacco exports in 1995/96 (July/June), are projected to remain near last season's 433 million pounds. Although U.S. prices are somewhat higher than some major competitors', tighter world supplies will favor U.S. exports. In 1995, U.S. cigarette production may increase from the high level of a year earlier. Higher cigarette exports will more than offset slightly lower domestic cigarette consumption. U.S. consumption may fall a little due to smoking prohibitions and restrictions, health concerns, and declining acceptability of smoking. Lower retail cigarette prices during the last 2 years have slowed the rate of decline from the 1983 to 1993 period. The per capita smoking rate (persons 18 and older) will decline from last year's 2,514 cigarettes. Cigarette exports will likely increase and set a new record for the second consecutive year. As of early September, the 1995 flue-cured crop was estimated at 746 million pounds, down 14 percent from last year. However, about 140 million pounds of 1994-crop carryover leaf will be sold in 1995. Beginning stocks on July 1 were down 8 percent. The total supply of U.S.-grown flue-cured tobacco is 2.07 billion pounds, about 2 percent below last year. Total use this season may decline from 1994/95's 915 million pounds, with a decline in both domestic use and exports. Flue-cured sales began July 18. By September 14, growers had sold about 68 percent of anticipated marketings, with less than 1 percent going under loan. Sales through September 14 averaged $1.78 per pound, about 14 cents above the previous year. With larger marketings, cash receipts will rise from a year earlier. This year's burley crop is expected to be 17 percent below the 1994 crop due to lower yields. Because 1994 marketings were short of use, ending stocks of U.S.-grown burley tobacco on September 30 are projected 3 percent lower than last year. The 1995/96 supply will be down about 3 percent. A smaller crop is forecast for dark fire-cured, dark air-cured, and cigar tobaccos but a larger crop is forecast for Maryland tobacco. The national marketing quota for the 1996 flue-cured crop must be announced by December 15, 1995. Individual farm quotas and allotments will reflect undermarketings and overmarketings for the current crop. For burley, the marketing quota will be announced by February 1, 1996, and allotments for other types by March 1, 1996. Price supports for 1996 flue-cured and burley tobaccos will be based on a 5-year moving average of market prices and changes in costs of production. For other types, changes in support will continue to be based on the average of the parity index during the 3 previous years compared with 1959. Tobacco Products Domestic Cigarette Use Down Slightly; Exports Up U.S. cigarette consumption in 1995 will likely decline slightly, following stable consumption in 1994 (table 1). The decline will likely be smaller than those from 1985 to 1993. The decline results from higher average cigarette retail prices, a growing number of prohibitions and restrictions on where people can smoke, continuing publicity about relationships between smoking and health, and declining social acceptance of cigarette smoking. The decline is being tempered by relatively small price increases following big price reductions in 1993. Americans smoked an estimated 484 billion cigarettes in 1994/95 (July-June), slightly fewer than a year earlier. The share of discount-brand cigarettes fell to 30 percent of the market during 1994/95, compared with 33 percent a year earlier. Low-tar, low- nicotine cigarettes accounted for a little higher proportion than a year earlier, but slightly below the record high of 1981. Per capita consumption during 1995 (persons 18 and older) is forecast at about 123.5 packs of 20 (2,470 cigarettes), down 2 percent from last year (table 2) and the lowest since 1941. During the first 6 months of 1995, U.S. cigarette exports rose 21 percent (table 3). Shipments to Asia rose and shipments to Europe were up even more. Purchases have risen sharply in Belgium-Luxembourg (a point of entry and distribution to other European countries) and have grown in Japan, the two largest importers. Purchases have fallen in both Turkey and the former Soviet Union. During the last 6 months of 1995, exports may exceed those of a year earlier. Retail prices of tobacco products were about 2 percent higher in July than a year earlier (table 4). Manufacturers lowered prices of premium-brand cigarettes more than 25 percent in August 1993 to slow or reverse the rapid gains of discount brand cigarettes in recent years. Manufacturers raised prices a little in November 1993, then kept them unchanged until they were increased 3 percent in May 1995. Five States enacted or imposed tax hikes in 1995 that averaged 14 cents a pack. The weighted average State tax on cigarettes was 31.4 cents per pack of 20 in April 1995. Rates currently range from 2.5 cents in Virginia to 81.5 cents in Washington. Many cities and other local governments also tax cigarettes, and 43 States now impose sales taxes on cigarettes. The Federal excise tax has remained at 24 cents per pack since January 1, 1993. Youth Tobacco Use Addressed On August 10, President Clinton authorized the Food and Drug Administration (FDA) to regulate cigarettes and smokeless tobacco products as drugs because of their nicotine content. The initiative is an attempt to curb use of tobacco products by youth. The Administration rejected voluntary control proposals by some cigarette manufacturers and lawmakers but indicated specific measures to eliminate smoking by minors could be legislated. The FDA has published proposed regulations govern- ing tobacco product sales to youth and advertising (Federal Register, August 11). Among the proposals are: Tobacco brand-name sponsorship of sporting events and brand-name advertising on items like hats and T-shirts would be prohibited, Prohibition of street vending machine sales of cigarettes and requirement of proof of age for cigarette purchases, A requirement that the tobacco industry run a comprehensive education campaign against underage smoking, Limits advertisements in publications that have significant youth readership to black and white text only, Outdoor advertising for cigarettes would be prohibited within 1,000 feet of schools and playgrounds. Permited outdoor advertising would be black and white, text only. Comments on the proposed rules are accepted through November 8. Although there is general agreement among various groups, such as tobacco company officials, pro-tobacco legislators, health agency heads, and antitobacco legislators, that youth should be discouraged from smoking and using smokeless tobacco products, there is strong disagreement about methods. Tobacco company officials and pro-tobacco legislators strongly oppose FDA regulation of tobacco use; a move generally applauded by health agency heads and antitobacco legislators. The five major U.S. cigarette manufacturers have filed a lawsuit contesting FDA's legal right to regulate tobacco and the Freedom to Advertise Coalition has challenged the constitutionality of rules limiting advertising. Cigar Consumption May Increase Consumption of large cigars (including cigarillos) may increase from last year's 2.29 billion, the second consecutive year consumption has risen. The increases reverse the trend of the last 3 decades. The average number of cigars smoked by males 18 and over in 1995 probably will be about 4 percent above a year earlier. For 1995, output of little cigars (weighing 3 pounds or less per 1,000) may increase about 8 percent from last year's 1.41 billion. Production fluctuated between 1.2 and 1.3 billion during most of the last decade. Smoking Tobacco Consumption Down U.S. consumption of smoking tobacco used in pipes and roll-your- own cigarettes will probably decline from last year's 14.7 million pounds, continuing the downtrend of the last decade. In 1994/95 (July/June), domestic use, including imports, totaled 14.1 million pounds, about 7 percent below a year earlier. Chewing tobacco production in 1995 is expected to increase from the 62.5 million pounds produced in 1994 (table 8). If realized, the increase would reverse the trend of the last decade. Snuff consumption will likely increase in 1995 for the eighth consecutive year. The hike in snuff use from 1988 to 1995 probably results from the growing number of restrictions on smoking, and effective industry promotion. U.S. Exports and Imports U.S. exports of unmanufactured tobacco during 1994/95 (July/June) fell to 432 million pounds (574 million pounds, farm sales weight). The reduction occurred primarily because sufficient supplies of lower-priced tobacco were available from other countries. Flue-cured and burley shipments during July-June were down 1 percent. The value of unmanufactured exports for 1994/95 totaled $1.3 billion, the same as 1993/94. Leaf exports in 1995/96 may be close to those of 1994/95 because of tighter world supplies. Still, high U.S. prices and declining cigarette consumption in major importing countries limit export prospects. However, the shift to American blend cigarettes in a number of countries limit the decline in U.S. exports. World Cigarette Trade World cigarette trade rose sharply (20 percent) in 1994, after falling the previous year. Shipments from the United States, Germany, Hong Kong, the Netherlands, the United Kingdom and Singapore were up. Together, these six countries account for about two-thirds of all world exports. The former Soviet Union, the United Kingdom, France, Japan, Italy, Hong Kong, Singapore, and Saudi Arabia are important cigarette importing countries. The United Kingdom has recently become both a major exporter and importer of cigarettes. World cigarette production rose 4 percent in 1994 because of increases in the United States, Germany, and China. The increase in China, which accounts for about a third of world production, continues a trend started in 1978. Through most of the 1980's, China's production rose about 9 percent a year. The annual rate of increase slowed to 3 percent in 1988-90 before falling in 1991. The decline in 1991, and relatively small increases (compared with 1980-88) the last 3 years, resulted from: (1) the leveling of demand as the market became satisfied and (2) a policy decision by the China National Tobacco Corporation (CNTC) 4 years ago to place production quotas on cigarette manufacturers to reduce excess stocks. Filter-tip cigarette production now represents 75 percent of China's cigarettes, up from 40 percent as recently as 1989. Excluding China, world cigarette production in 1994 rose 4 percent from a year earlier. In China the increase was 1 percent. In contrast, during most of the last decade, world production outside of China was relatively stagnant because of price and tax increases, and heightened health concerns. Higher cigarette prices, increased health concerns, and antismoking legislation have dampened cigarette consumption in several countries during the last decade. However, consumption rose or stabilized in Germany, Taiwan, Thailand, Turkey, and some other countries in 1994, while consumers shifted preferences to milder American styles. Consumption was down in Japan, South Korea, Belgium-Luxembourg, Spain, Switzerland, Canada, Mexico, and Brazil, at least partly because of increased prices. Consumption is expected to fall during the remainder of the 1990's in many developed countries. Export Prospects The value of U.S. tobacco leaf and product exports in 1994/95 (July-June) rose to a record $7 billion, 21 percent above a year earlier. Higher values and larger volumes of cigarettes accounted for the increase. The value of shipments in 1995/96 may increase because of higher volume and product value. In 1995, Zimbabwe, a key competitor, produced a larger crop. Quality of this year's crop was not as good, but prices were higher because of tighter world supplies. Most of Zimbabwe's crop is exported. Leading markets for Zimbabwe's tobacco include Western Europe, the Middle East, and the Far East. Production is down in Brazil, another major U.S. competitor. Tobacco Imports Down U.S. unmanufactured tobacco imports for consumption totaled 436 million pounds during 1994/95 (July-June), 38 percent below a year earlier.1/ Imports of stems fell even more--64 percent. Cigar leaf imports were up a little and scrap imports were down (tables 10 and 11). General imports (arrivals) fell 15 percent during 1994/95 because of reductions in stemmed and unstemmed flue-cured and burley leaf and stems. Part of the decline reflects the impact of the Omnibus Budget Reconciliation Act of 1993 (OBRA) provision that penalized the use of more than 25 percent foreign-grown leaf and stems for manufacture of cigarettes and the availability in the United States of large stocks of foreign-grown leaf. By July 1, U.S. stocks of imported tobacco totaled 1.05 billion pounds (farm sales weight), 2 percent above a year earlier. U.S. cigar and cigarette manufacturers use imported tobacco in their blends. For the year ending June 30, cigarettes and other products and semiprocessed tobacco using cigarette leaf and stems contained about 34 percent imported tobacco, compared with 40 percent a year earlier. Import content of cigars and loose leaf chewing totaled about 73 percent, slightly above a year earlier. U.S. cigarette leaf imports (arrivals) during January-June averaged $1.46 a pound, excluding ocean freight and duty. Even when duties apply, drawback provisions lower net import duties because importers can obtain refunds when they export similar kinds of tobacco in either manufactured or leaf form. Beginning in 1994, cigarettes manufactured in the United States were generally limited to 25 percent foreign content of leaf and stems used without penalties applying. However, implementing legislation for the GATT Uruguay Round ended the domestic content provisions when the President proclaimed a tariff rate quota (TRQ) on certain tobaccos effective September 13 following completion of negotiations with supplier countries. The TRQ for imported flue-cured and burley tobacco is a GATT/WTO-consistent alternative to the domestic content provisions of the OBRA. The proclamation also eliminated duties on Oriental and cigar wrap- per, binder, and filler tobacco. (Federal Register, September 13). Also, see article on pages _-_ in this issue. The volume of leaf imports exceeded leaf exports for the fourth consecutive year. The United States is a major exporter of tobacco products. The value of leaf and product exports exceeded that of leaf and product imports by about $6.3 billion in 1994/95, up nearly a third from a year earlier. U.S. Tobacco Leaf Outlook and Situation 1/ During the past marketing year (1994/95), about 67 percent of U.S.-grown tobacco leaf was used for domestic manufacture and 33 percent was exported. Disappearance of U.S. leaf rose to 1.61 billion pounds. For 1995, effective marketing quotas are higher for flue-cured but lower for burley. Despite a slightly larger acreage, lower yields resulted in a September forecast of 1.35 billion pounds production in 1995. This is about 15 percent below last year and if realized, would be the smallest crop since 1987. Disappear- ance is expected to be above production, so domestically grown stocks will decline. Efforts To Eliminate Unauthorized Pesticides Continue Pesticide use on U.S. tobacco has been restricted for many years. Furthermore, the Food Security Act of 1985 extended adherence standards. The act requires USDA to inspect both domestic and imported flue-cured and burley tobacco to determine if pesticide residues exceed established limits. Before selling their tobacco, growers must certify to the Consolidated Farm Service Agency (CFSA) that any pesticides used in production have been approved by the Environmental Protection Agency (EPA) for use on tobacco and were applied in accordance with labeled directions. Growers lose price support if they falsify the certification, fail to certify, or refuse to provide samples for testing. Growers who are found filing a false report will be required to refund any price support advances that have been received on the current crop. In addition, violators are subject to a $10,000 fine, 5 years imprisonment, or both. To ensure the integrity of U.S.-grown tobacco, efforts to eliminate unauthorized pesticides include 1) tests of samples taken from auction warehouse floors, 2) stepped-up efforts in recent years to educate growers about nonapproved pesticides, and 3) intensified monitoring of pesticide use and penalties for misuse. Program on Nested Tobacco Continues A program dealing with "nested" flue-cured tobacco was implemented in the 1989 marketing season and continues today. Nested tobacco is defined as any pile of leaf that contains "inferior or damaged" tobacco intentionally concealed "within sound or superior tobacco." To curtail nesting, tobacco lots are randomly inspected by USDA graders as a part of a program to maintain and improve the quality of U.S. flue-cured leaf. Violators making a false certification about nesting can be sentenced up to 1 year imprisonment, a $1,000 fine, or both under existing law. Growers who nest may also be denied price support for their tobacco. Farmers are required to certify that they have not nested their tobacco to be eligible for price support. Any pile of tobacco found to be nested cannot be sold on the day the nest is discovered. The nested pile must be taken from the auction sales floor and nested material removed. The tobacco must be reviewed and reinspected before it can be offered for sale at a later date. Producers who are determined by CFSA to have marketed nested tobacco must refund price support advances received on the lot of nested tobacco. Purchasers of nested tobacco are encouraged to inform CFSA about farmers who nest tobacco. CFSA administers the tobacco program and determines price support eligibility for producers who nested tobacco. Marketing Quota and Price Support in 1996 By December 15, USDA will announce the flue-cured poundage quota and matching acreage allotment for 1996. Individual farm quotas and acreage allotments for the next year will reflect this year's overmarketings and undermarketings. Marketings this year are expected to fall short of the effective quota (table 15). By February 1, 1996, USDA will announce the 1996 burley poundage quota, and by March 1, it will announce the 1996 acreage allotments for other kinds of tobacco. Shortly after the announcements, growers of Ohio filler and Wisconsin binder and Puerto Rican cigar filler types will vote in separate referenda for or against marketing quotas on their next three crops. In previous referenda, growers of flue-cured, burley, fire-cured, dark air-cured, and Virginia sun-cured, approved marketing quotas applicable to the 1996 crops. The quota law provides that flue-cured and burley quotas equal the sum of buying intentions of domestic cigarette manufacturers, the average of unmanufactured tobacco exports, and adjustments of loan association inventories needed to reach the reserve stock level. The Secretary of Agriculture may adjust this three-part total up to 3 percent. Support levels for 1995 average $1.587 per pound for flue-cured and $1.725 for burley. Grade loan rates for flue-cured range from $1.05 to $1.92 and for burley they range from $1.00 to $1.88. Price supports for kinds other than flue-cured and burley average from 1.6 to 2.4 percent higher in 1995 than a year earlier. For 1996, the flue-cured and burley price support will be the level for 1995 adjusted by changes in the 5-year moving average of prices (two-thirds weight) and changes in a cost- of- production index (one-third weight). Costs include general variable expenditures, but exclude costs of land, quota, risk, overhead, management, marketing contributions, and other costs not directly related to tobacco production. The Secretary of Agriculture can set the price support between 65 and 100 percent of the calculated increase or decrease. For other kinds, changes in price support will continue to be based on the average of the parity index during the 3 previous years compared with 1959. However, loan associations can request lowered support levels if market conditions warrant. Data in table A-1, showing estimated flue-cured production costs for 1995, are expected to be used by CFSA in determining the cost component for the 1996 support level. The combined effect of price and cost changes will likely result in little change in the flue-cured support level in 1996. Growers of Maryland, Pennsylvania filler, and Connecticut binder tobacco turned down marketing quotas in their last referenda (1995), so government price support is not available for their 1995 crop. Pennsylvania filler has never had marketing quotas. For Maryland, quotas last applied to the 1965 crop. For Connecticut binder, quotas last applied to the 1983 crop. Shade- produced tobacco (type 61) is not covered by marketing quota legislation. U.S. House of Representatives Reject Amendment To Curtail Some Tobacco Activities An amendment to the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriation Bill (H.R. 1976) sought to curtail funding for Federal tobacco activities. The amendment to prohibit the use of funds to carry out extension service programs for tobacco and to discontinue providing funds for Federal crop insurance for tobacco was defeated on July 20. Flue-Cured With generally less favorable growing conditions across the flue- cured belt, flue-cured yields were below a year earlier. Quality varies throughout the belt. Quality of Georgia and Florida tobacco improved, but probably declined a little from the good quality crops of a year earlier in North Carolina, South Carolina, and Virginia. As of September 14, auction prices averaged 14 cents a pound higher than a year ago. Last year, prices rose 1.7 cents a pound because of higher price supports, lower production, and a good quality crop in the northern production region. Prices are somewhat above a year earlier. Reduced U.S. production, lower world supplies, good quality 1994-carryover tobacco, increased cigarette production with more U.S.-grown leaf, larger bulk smoking exports, and greater certainty about Federal excise taxes contributed to higher prices. Also, upper stalk leaf marketings represent a higher than usual proportion of sales because of large 1994-crop farm carryover. Too, there are fewer primings and lugs from the 1995 crop due to dry weather. These factors raise the average support for marketings this season. Season average prices may average 10 to 12 cents above last year's average of $1.698 a pound. The 1995 marketing season began 1 day earlier than a year ago. The Georgia-Florida and South Carolina and border North Carolina markets opened on July 19. Northern markets opened earlier than usual because of substantial 1994 farm-carryover tobacco. Weekly sales were near sales opportunities (USDA-sanctioned schedules) during the first few weeks of sales. By early September, harvesting was progressing ahead of the average pace. So far this year, price support loan receipts have been considerably below last season. Strong leaf demand because of increased use of U.S.-grown leaf in cigarette production, a good quality 1995 Georgia-Florida crop, and 1994 farm carryover tobacco have caused the reduction in loan takings. At auctions through September 14, flue-cured prices averaged $1.78 a pound, 14 cents above the average for the same number of sales days last season (table 14). By September 14, about 68 percent of total expected marketings had been sold, a larger share than the same number of sales days a year earlier. Loan Receipts Substantially Below Last Season The price support for the 1995 flue-cured crop and 1994 farm carryover tobacco, averages $1.597 a pound, 1.4 cents above last season. Even with somewhat larger sales, a larger share of the crop has been purchased by manufacturers and dealers so far this season. Loan receipts through September 14 totaled only 4.4 million pounds, less than 1 percent of projected producer marketings. By this date in 1994, a substantially larger percentage of producer marketings were under loan. To receive price support in 1995, flue-cured tobacco growers must: Certify about pesticide use and whether any lots are nested. Designate one or more warehouses within 100 miles of their county seat where they plan to sell their crop. Purchase catastrophic crop insurance at a rate of $50 a crop to receive price support in 1995. Contribute to a no-net-cost account and budget deficit marketing assessment totaling 0.8 cents a pound; purchasers must pay 1.8 cents a pound. Under quota legislation, growers receive price support on marketings up to 103 percent of their farm poundage quotas. However, marketings above the poundage quota are deducted from the following year's quota. For marketings above 103 percent, growers must pay a penalty of $1.27 a pound (75 percent of the average market price for the preceding year). Based on the September estimate, 1995 production will total about 746 million pounds. Growers carried over about 140 million pounds from the 1994 crop because of insufficient quota, so around 885 million pounds are available for sale. However, enough quota is probably available to sell only about 880 million pounds in 1995, because individual growers cannot sell more than 103 percent of the quota without being heavily penalized. Lease and transfer of flue-cured quotas has applied since 1988 for disaster conditions only. Disappearance Higher in 1994/95 Last season, disappearance of flue-cured tobacco totaled 915 million pounds, about 123 million above the prior year (table 16). Domestic use rose, but exports fell. The 31 percent increase in domestic use reflected larger cigarette and bulk smoking tobacco for export production and greater use of U.S.- grown leaf. Even with an increase in cigarette production, an increase in imported leaf use may cause domestic disappearance to decline in 1995/96. Flue-cured exports fell 4 percent last year despite smaller production in competitor countries such as Brazil and Zimbabwe. Exports are below those of 1989/90-1992/93 because of declining competitiveness. Also, there has been no export credit guarantee (GSM-102) program assistance available to facilitate U.S. tobacco exports. Among leading importers, Germany, the Netherlands, Italy, Denmark, and Turkey took more, while Japan, Thailand, and the United Kingdom took less. For 1995, U.S. leaf exports will likely decline because of a rebound in world production. Despite a relatively good quality crop, lower-priced leaf in countries such as Zimbabwe and Brazil dampen U.S. export prospects. Even though the demand for American blend cigarettes continues to grow, U.S. leaf exports continue to be affected by high U.S. prices, stagnant or declining cigarette consumption in major importing countries, and reduced leaf use per cigarette. Supplies Decline Even with larger estimated 1995 marketings, flue-cured supplies declined about 2 percent from last season. Flue-cured acreage for harvest rose 7 percent from a year ago, but the national yield is estimated 20 percent lower. Yields are down in all states but by a greater amount in North Carolina and Virginia. Over 15 percent of the estimated 1995 marketings were produced in 1994. The domestic flue-cured carryover held by manufacturers and dealers on July 1, 1995, totaled 916 million pounds, 8 percent below a year earlier. The supply--indicated marketings plus carryover--is about 2.5 times the prospective use. The ratio is slightly above the traditional benchmark level. Marketings this season will likely exceed use, so carryover next July 1 may increase. Domestic cigarette manufacturers are purchasing a larger quantity of tobacco from producer marketings this season because of larger cigarette and bulk smoking production and greater 1994/95 use of U.S.-grown tobacco that had drawn down stocks. Also, prospects for a significant increase in the Federal excise tax in the near future has declined and has raised future cigarette production prospects. Loan stocks have declined. By September 1, uncommitted stabilization stocks of flue-cured tobacco (excluding the current year's crop) were only 49.2 million pounds, down 250.3 million from a year earlier. In December 1994, cigarette manufacturers agreed to purchase, over a 7-year period, 298.2 million pounds of 1990-93 crop loan stocks. So far in 1995, about 114 million pounds of 1990-93 crop tobacco has been placed under purchase agreement and about 200 million had been removed from stabilization by early September. In addition, about 48.5 million pounds of 1994-crop tobacco has been sold in 1995. A small volume from this year's crop assures substantially smaller unsold loan stocks on January 1, 1996 than the 395.8 million pounds of last January 1. Use of foreign-grown flue-cured leaf and stems fell 12 percent in 1994/95, the second year that a decline has occurred. However, stocks of foreign-grown flue-cured were 12 percent higher on July 1. The build-up in stocks occurred because cigarette manufac- turers were shifting to greater use of cheaper imported leaf for manufacturing discount and generic cigarettes. From January 1, 1994 until September 12, 1995, U.S. cigarette manufacturers were required to use 75 percent of U.S.-grown tobacco in cigarettes to avoid additional assessments. However, implementing legislation for the GATT Uruguay Round contained provisions ending the domestic content provisions when the President proclaimed a tariff rate quota (TRQ) on certain tobaccos effective September 13. The tariff-rate quota for imported flue-cured and burley tobacco is a GATT/WTO-consistent alternative to the domestic content provisions of the Omnibus Budget Reconciliation Act of 1993 (OBRA). Flue-Cured Tobacco Official Grade Standards Revised The U.S. Department of Agriculture issued a final rule on July 13, 1995 that revises the grade standards for flue-cured tobacco to identify mixing of tobacco leaves from adjacent stalk positions. The revision was recommended by the Flue-Cured Cooperative Stabilization Corporation and an Advisory Committee appointed by Congress to study the government tobacco program. Tobacco groupings reflect the part of the plant from which the leaf is pulled. The revision establishes a special factor to describe lots containing 25 percent or more of an adjacent grouping. The special factor "M" will precede the grademark for any lot of tobacco containing 25 percent or more of an adjacent group, but which otherwise meets the specification of a grade. Special factors "U" (unsound), "W" (doubtful keeping order), "S" (strip), and "M" (mixed), may be applied to all grades. Burley Burley tobacco use is up in 1994/95. In the marketing year ending September 30, 1995, about 70 percent of the crop will be used for cigarettes while exports will take about 25 percent and other products will use the rest. Disappearance Up For the year ending September 30, 1995, domestic use of U.S. burley is expected to increase from the 399 million pounds used in 1993/94 (table 16). Exports are also likely to be up, and total disappearance is estimated to increase about 9 percent from last year's 552 million pounds. Carryover of domestic burley will likely decline about 3 percent because 1994 marketings were below use. For the first 9 months of 1994/95, burley exports totaled 138 million pounds (farm sales weight), about 6 percent above a year earlier. Germany, the Netherlands, Denmark, Italy, Thailand, Turkey, and the Philippines took more while Japan, Sweden, and Belgium took less. Exports are up because of smaller world supplies. World Production Falls After rising 6 consecutive years, world burley production may have fallen for the second year in a row. A potential 10-percent decline in 1995 follows a 17-percent decline a year earlier. U.S. production may be down about 17 percent and production outside the United States may have fallen about 9 percent. Declines likely occurred in Brazil, Mexico, Argentina, Guatemala, India, and South Korea. Production probably increased in Malawi, China, and Poland. Supplies To Decline The September forecast of the 1995 U.S. burley crop is 511 million pounds, 17 percent below last year. This year, acreage and yields are both lower. Maturation of the crop is about normal and harvest is progressing at about the average rate. Marketings in 1995/96 are forecast to total about 550 million pounds, about 3 percent below last year. This falls short of the total expected production and farm holdings because of quota constraints. The indicated carryover, plus projected marketings are likely to reduce the burley supply for 1994/95 about 3 percent from a year earlier. The prospective supply is about 2.6 times the probable disappearance. The 1995/96 marketings are estimated at 95 percent of the effective quota, the highest proportion of quotas in 10 years. Since 1985, marketings have fallen short of the effective quota, especially in Tennessee. Beginning in 1991, the quota law was changed to permit greater use of burley quota, including beltwide sales of burley quotas within counties, and lease and transfer of quotas across county lines in Tennessee (about 19 million pounds went across county lines in 1994, but a little less probably crossed county lines in 1995 because of the smaller quota). With its higher costs, manufacturers shifted away from using U.S. burley to using foreign-grown burley. However, during July 1994- June 1995, use of imported burley tobacco fell about 19 percent from a year earlier to 161 million pounds. However, stocks of foreign-grown burley rose 2 percent from July 1, 1994 to July 1, 1995. U.S. auction sales usually begin in late November. The 1994 crop sold for $1.841 per pound, 2.5 cents higher than the year before. Price supports for 1995 will average $1.725 a pound, 1.1 cents above 1994. The no-net-cost fee and the budget deficit assessment combined, have been set at 1 cent a pound for both growers and purchasers. The budget deficit assessment was implemented in 1991. Southern Maryland Southern Maryland tobacco (type 32), a light air-cured tobacco, goes almost entirely into cigarette production. From 20 to 25 percent of the crop is exported. Disappearance Down a Little Disappearance of Maryland tobacco during October 1994-June 1995 totaled 14.7 million pounds, 0.1 million below a year earlier. Domestic use is up, but exports are down. Prices of the 1994 crop rose because of a higher quality crop in Maryland. By January 1, carryover may rise from last year's 8.4 million pounds. Exports of Maryland tobacco were down 35 percent to 3 million pounds during the first 9 months of the marketing year. Sales to the largest traditional destination--Switzerland-- were up. However, sales to the second and third largest markets--Germany and Belgium-Luxembourg--were down. Production and Supplies Up The crop is estimated at 20.2 million pounds, 2 percent above 1994. Production is likely down in Pennsylvania but up in Maryland. With larger carryin, supplies will likely increase. The 1981 farm act prohibits growing and marketing Maryland tobacco in quota areas. However, quotas are not applicable to Pennsylvania seedleaf tobacco, so with seedleaf's usually lower prices, some growers have changed to Maryland production. About 33 percent of total Maryland production will be grown in Pennsylvania in 1995. Fire-Cured Fire-cured production is mainly used in making snuff, and plug and twist chewing tobacco. Half of the crop is usually exported. During the last 3 seasons, production and use have rebounded. Prices have been strong for the last 7 years because production and use have been kept in line. Disappearance Up Disappearance of fire-cured (types 22-23), during the first 9 months of the 1994/95 marketing year (beginning October 1, 1994), was 26.7 million pounds, about 0.5 million above a year earlier. Domestic use was up. Disappearance of type 21 was down. Output of snuff, the major domestic use of fire-cured, has been increasing. Estimated disappearance of types 22-23 for the year is 35 million pounds, 1.6 million above last season. Carryover will likely increase about 11 million pounds from last year (table 24). Exports of 11 million pounds of Kentucky-Tennessee types 22-23 during the first 9 months were slightly below a year earlier. Virginia type 21 exports were up. Production Lower; But Supplies Up The September estimate of 1995 fire-cured production was 41.4 million pounds, 6.9 million pounds below last year due to smaller acreage and yields. Even with smaller production, the 1995/96 supply is expected to increase from this year's 121.2 million pounds. Next season's supply is expected to be about 3.3 times this season's disappearance. Dark Air-Cured Dark air-cured (types 35-37) is used in plug and twist chewing tobacco, snuff, and to some extent, smoking tobacco. Production and use have declined by more than half over the last 2 decades. Exports usually account for 10 to 20 percent of total use. Use Steady Disappearance of dark air-cured (types 35-36) tobacco during October-June totaled 7 million pounds, 0.1 million above a year earlier. Exports were up, but domestic use was down. Domestic use is down because of reductions in the output of plug chewing and smoking tobacco. With a larger crop, 1994/95 leaf prices fell from the previous season. For the 1994/95 season, total disappearance of types 35-36 will likely increase slightly from last season's 10.6 million pounds. This would result in a carryover of about 25.6 million pounds, about 0.9 million pounds higher than a year earlier (table 25). Disappearance of sun-cured (type-37) is lower. Production and Supplies Down The September estimate of dark air-cured tobacco is 9.6 million pounds--19 percent below last year--because acreage and yields are down. With the smaller crop, 1995/96 supplies will decline 1.3 million pounds from this year's 36.6 million. Next season's supplies represent about 3.2 times this season's estimated use. Cigar Tobacco Cigar leaf (types 41-61) is classified according to its traditional use--filler, binder, and wrapper. Most cigar wrapper is exported, but loose leaf chewing takes most of the filler and binder. Exports of filler and binder are negligible. U.S. cigar leaf output fell 6 percent last year. Production was less than a half its early 1980 levels. This year, production will likely decline again. Imports of cigar leaf rose, while scrap fell. The Philippines and countries in Central and South America are the chief foreign suppliers. About 104 million pounds of leaf are used annually for cigars and loose leaf chewing tobacco. Imports account for about 73 percent of these uses. Filler Disappearance Up For the first 9 months of 1994/95 (October-June) disappearance of U.S. cigar filler tobacco (types 41-46) totaled 12.7 million pounds, about 0.3 million pounds more than a year earlier. The increase occurred because production of loose leaf chewing tobacco rose. For 1994/95, filler disappearance is likely to increase about 0.2 million pounds from a year earlier. During October 1994-June 1995, manufacturers used 54 million pounds of foreign cigar type tobacco, 6 percent less than a year earlier. U.S. stocks of foreign-grown cigar leaf on July 1 totaled 78.6 million pounds, 4.2 million more than a year earlier. Stocks had declined the previous year. Cigar Binder Disappearance Mixed Cigar binder disappearance (Wisconsin and Connecticut) is expected to decline in 1994/95. For Wisconsin tobacco, loose leaf chewing remains the major outlet. Output of loose leaf chewing over the first 9 months rose from a year earlier, and Wisconsin binder use increased. Disappearance of Wisconsin tobacco will likely rise slightly in 1994/95. Disappearance will probably exceed last year's production, so carryover stocks will likely decline from last year's 27.9 million pounds. Disappearance of Connecticut Valley binder may decline in 1994/95. The carryover of binder tobacco is expected to total about 26.2 million pounds, 3.4 million below a year earlier. With an increase in loose leaf chewing and cigar output, production of this type of tobacco may stabilize after big declines in recent years. Cigar Wrapper Disappearance Up In the year ending June 30, 1995, disappearance of shade-grown wrapper (type 61) rose to 1.5 million pounds, 0.4 million above a year earlier. Production in 1995 is projected at 1.8 million pounds, 6 percent above a year earlier. Much of the Connecticut Valley crop goes overseas for processing, either to foreign buyers or the U.S. subsidiaries in the Dominican Republic. Supplies Down Supplies of U.S.-grown cigar tobacco will fall from 1994/95. The prospective crop and the carryover are both smaller. Filler and binder supplies are down, but wrapper supplies are up. The Wisconsin (types 54 and 55) cooperatives have sold their entire inventory. Filler: As of September 1, the Pennsylvania filler crop was indicated at 9.5 million pounds, about 16 percent less than 1994. The new crop, plus carryover, will provide a supply that is about 7 million pounds lower than last season. Production of Ohio filler has ceased because of high no-net-cost assessments. Puerto Rican production has also ceased because quotas have been set at zero since 1989. Binder: Cigar binder acreage is slightly higher and production may be up. As of September 1, production was estimated at 7.8 million pounds, about 0.2 million above a year earlier. Despite higher production, supplies will decline. After a big decline 2 years ago, the acreage of Wisconsin tobacco is about the same this year because acreage allotments were unchanged. Carryover of Wisconsin tobacco may fall because use may exceed 1994 production. With smaller production and carryover, supplies are likely to decline in 1995/96. Wrapper: Acreage of Connecticut Valley wrapper is likely unchanged from 1994 but yields are higher. Production is projected to total about 1.8 million pounds, up 6 percent from a year earlier. With a larger carryover, supplies will increase from last season's 3.7 million pounds. Special Article Costs of Producing and Selling Flue-Cured Tobacco: 1993, 1994, and Preliminary 1995 by Dargan Glaze Abstract: The variable costs of producing and selling flue-cured tobacco decreased from $1,885 per acre in 1994 to $1,869 in 1995, with selling costs accounting for most of this decrease. Total costs per acre, excluding land and quota costs, are expected to decrease from $2,674 per acre in 1994 to $2,644 in 1995. The variable costs of producing flue-cured tobacco per 100 pounds was about $97 in 1995, which was an increase of $18.80 per 100 pounds from 1994. The total costs per 100 pounds, excluding a charge for land and quota, averaged $110 in 1994 and is expected to increase to $137 in 1995. Keywords Flue-cured tobacco, variable costs, total costs, costs of production. Cost Changes: 1993 to 1994 The variable costs of producing an acre of flue-cured tobacco increased 5 percent between 1993 and 1994, from $1,789 to $1,885 (table A-1). While most cost components increased in 1994, energy costs declined by $31 per acre. Variable production costs per 100 pounds averaged about $81 in 1993 and $78 in 1994. Total machinery and barn ownership costs increased almost 4 percent from $505 to $523 per acre from 1993 to 1994. Continued increases in prices caused machinery costs to increase, resulting in capital replacement costs per acre rising from $281 in 1993 to $290 in 1994. Land and quota charges increased from $893 per acre in 1993 to $979 due to higher yields and market prices. General farm overhead rose by $25 per acre. On a per hundred pound basis, total ownership costs decreased from 1993 to 1994 by $1.17. General farm overhead and land and quota charges increased slightly by 27 cents. Cost Changes: 1994 to 1995 Preliminary 1995 estimates indicate a decrease in the variable costs of producing an acre of flue-cured tobacco by almost 1 percent from $1,885 to $1,869 (table A-1). While most costs increased, selling costs (warehouse fees, no-net-cost, marketing assessments, inspection and grading fees) decreased due to lower yields and assessments. Decreases in selling costs more than offset increases in other costs. Without consideration of all selling costs, variable costs per acre actually would have increased by 3 percent. Fertilizer and lime costs increased from $196 last year to $222 in 1995 and chemical costs rose from $213 to $220. Selling costs decreased by $75 per acre from 1994 to 1995. A sell off of flue- cured tobacco placed under the loan program lowered loan stocks, thereby decreasing the risk of losses in operating the price support program. Variable production costs per 100 pounds averaged about $78 in 1994 and $97 in 1995. The largest change between individual cost items per 100 pounds was labor (increased by $7.57), followed by curing and heating fuel (increased by $3.66) and fertilizer and lime (increased by $3.35). Prices for machinery and barns increased from 1994 to 1995, causing machinery and barn ownership costs per acre to rise 5 percent ($523 to $550). Of the ownership costs, capital replacement costs increased the most (7 percent). Both general farm overhead and land and quota costs decreased by almost 15 and 18 percent, respectively, reflecting both an increase of $10.20 per 100 pounds for the average market price of flue-cured tobacco and a decrease of 487 pounds per acre in yield. Total ownership costs per 100 pounds of flue-cured tobacco rose from $21.60 in 1994 to $28.45 in 1995 with capital replacement costs increasing by $4.04. General farm overhead and land and quota charges increased slightly between 1994 to 1995 (66 and 94 cents, respectively). Data Sources The production costs presented in this article were estimated from data collected in February and March of 1992 for the 1991 flue-cured crop year from USDA's Farm Costs and Returns Survey (FCRS). These data were obtained from 243 flue-cured producers in Georgia, North Carolina, South Carolina, and Virginia. These growers produce about 97 percent of the U.S. flue-cured tobacco crop. The Economic Research Service (ERS) develops costs of production data in the form of an enterprise budget that summarizes all operator and landlord costs and returns associated with the production of an acre of flue-cured tobacco. The per acre and per 100 pounds cost estimates are weighted averages of the production surveyed. Data from the FCRS flue-cured producers, along with data from National Agricultural Statistics Service (NASS) reports, such as Agricultural Prices, Crop Production, and Farm Labor, were used to calculate and update the flue-cured cost of production budgets. The market prices for the flue-cured tobacco crop averaged $1.681 per pound for 1993 and $1.69 per pound for 1994. Because the 1995 flue-cured markets are still open, the season-average price is not yet available. A price of $1.80 per pound was estimated for the 1995 crop based on market prices to date. The yields for 1993 and 1994 were based on actual U.S. yields from NASS, averaging 2,217 and 2,420 pounds per acre, respectively. Yields for 1995 were those indicated by NASS as of September, averaging 1,933 pounds per acre. Procedures for Estimating Costs Some costs were initially calculated by ERS' Budget Generator Model. The model uses survey information, such as field operations, machinery and equipment, and power sources, to calculate taxes and insurance, capital replacement, and return to nonland capital. Costs obtained directly from the FCRS include labor (paid and unpaid), fertilizer and lime, plant bed materials, chemicals, custom operations, noncash labor benefits, fuel and lubrication, curing and heating fuel, repairs, and quota rental costs and arrangements. These items are updated in nonsurvey years with price indexes. Other variable cost items, such as no-net-cost, marketing, and inspection and grading fees, were obtained from other sources. Finally, the quantities and costs from the survey farms were weighted to reflect the acreage represented by individual farms and aggregated to the national level. U.S. Tobacco Import Update by Verner N. Grise and Nydia R. Suare zAbstract: For the second year in a row, U.S. imports (arrivals) of foreign leaf and stems fell. Leaf and stem arrivals fell 15 percent during 1994/95 (July-June). The declines follow big increases in the early 1990's that resulted in legislation that limits imported tobacco use in U.S.-made cigarettes to no more than 25 percent of total use without penalties applying. Part of the decline in arrivals is likely due to the legislation. On September 13, tariff rate quotas (TRQ) replaced the more strigent domestic content provisions. Keywords:Imports, arrivals, GATT, legislation. Introduction This is an update of articles published in the September 1992, 1993, and 1994 issues of the Tobacco Situation and Outlook report. Unmanufactured tobacco imports (arrivals), fell 15 percent between 1993/94 (July-June) and 1994/95, the second year they have deceased. The decline was largest for stems. Reductions also occurred in stemmed and unstemmed flue-cured and burley. Oriental cigarette leaf, cigarette scrap, and cigar leaf arrivals increased. In the early 1990's, U.S. imports rose sharply. The jump occurred because cigarette manufacturers replaced U.S.-grown tobacco with cheaper foreign grown leaf and stems. Many U.S. cigarette smokers switched from higher-priced premium brands to discount cigarettes from 1990 to 1993. In 1993, manufacturers reduced premium brand cigarette prices by about 25 percent and their sales have risen and discount cigarette sales have declined. Due to concerns by growers and tobacco-State lawmakers about burgeoning imports, the Omnibus Budget Reconciliation Act (OBRA) of 1993 (P.L. 103-66), required U.S. manufacturers to use at least 75 percent domestic leaf and stems in their cigarettes until recently. A provision in the OBRA-93 specified that beginning January 1, 1994, U.S. cigarette manufacturers use at least 75 percent of U.S.-grown tobacco in cigarettes to avoid certain additional assessments. A dispute settlement panel determined in August 1994 that the 75- percent domestic content provisions for U.S. cigarette manufacturers is inconsistent with U.S. commitments to the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO). Consequently, implementing legislation for the GATT Uruguay Round contained provisions ending the domestic content provisions once the President proclaimed a tariff rate quota (TRQ) on certain tobaccos. Negotiations with supplier countries established a tariff rate quota for imported flue-cured and burley tobacco as a GATT/WTO-consistent alternative to the domestic content provisions of the OBRA. President Clinton proclaimed a tariff rate quota (TRQ) effective September 13, for certain imported tobacco, primarily flue-cured and burley. The proclamation also eliminated duties on Oriental and cigar wrapper, binder, and filler tobacco. Volume of tobacco imports for consumption under nine harmonized tariff subheadings, primarily flue-cured and burley, during the period from September 13 in any year to September 12 of the following year are restricted to the quantities listed below: Quantity Million pounds (declared weight) Argentina 26.5 Brazil 176.8 Chile 6.1 EC-15 22.0 Guatemala 18.7 Malawi 26.5 Philippines 6.6 Thailand 15.4 Zimbabwe 26.5 Other 6.6 Total 331.7 Canada, Mexico, and Israel are not included under quantitative restrictions. Tobacco imports above quota levels are subject to a 350-percent ad valorem duty. However, most of the duty may be refunded if the same tobacco imported is used to manufacture cigarettes that are exported. Imports Fell in 1994/95 Flue-cured imports (farm sales-weight basis) fell 12 percent from 1993/94 to 1994/95 (tables B-1 and B-2). Imports were 23 percent of total flue-cured use, the lowest in 3 years. Foreign-grown flue-cured stocks rose 12 percent from July 1, 1994 to July 1, 1995 (table B-3). Burley imports fell 19 percent from 1993/94 to 1994/95. Import share declined to 27 percent, the lowest in 4 years. Foreign- grown burley stocks rose 2 percent from July 1, 1994 to July 1, 1995. Based on arrival data (adjusted for stocks changes), Oriental imports rose 8 percent in 1994/95. Stocks on hand fell 6 percent from July 1, 1994 to July 1, 1995. Cigar leaf imports rose 2.5 percent to 76.5 million pounds. For the fourth consecutive year, cigar leaf imports represented more than 70 percent of cigar leaf disappearance in the United States. Summary The quantity and share of imported flue-cured and burley disappearance (use) fell in 1994/95. The OBRA domestic content requirement limited the foreign content of U.S.- produced cigarettes by imposing penalties on manufacturers who exceeded 25 percent foreign content in their cigarettes. The OBRA domestic content requirement became effective January 1, 1994. However, implementing legislation for the GATT Uruguay Round contained provisions ending the domestic content provisions. The President proclaimed a TRQ on certain tobaccos effective September 13 following negotiations with supplier countries. END-END-END