TOBACCO December 20, 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-233. 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 ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #TBS, $19/year. ERS-NASS accepts MasterCard and Visa. ----------------------------------------------------------------------------- Contents Page 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 Statistical Summary Special Article Costs of Producing and Selling Burley Tobacco: 1993, 1994, and Preliminary 1995 List of Tables Principal Contributor Verner N. Grise Voice (202) 219-0890 FAX (202) 219-0042 Special Article Dargan Glaze Database Coordinator Graphics and Table Design Fannye Lockley-Jolly Design & Layout Wynnice Napper Word Processing Lorie Thomas Betty Barrett Approved by the World Agricultural Outlook Board. Summary released Monday, December 18, 1995. The summary of the next Tobacco Situation and Outlook is scheduled for release April 3, 1996. Summaries and full Situation and Outlook reports may be accessed electronically through the USDA CID System. For details,call (202)219-0515. The Tobacco Situation and Outlook is published in April, June, September, and December. See back cover for subscription information. Summary The U.S. tobacco crop is smaller this year than last, and total supplies are also smaller because beginning stocks are down. Flue-cured prices increased because of tighter world supplies, higher price supports, more higher value upper stalk marketings, and improved quality marketings. Burley prices were up slightly despite some decline in quality from a year earlier. The 1995 flue-cured crop averaged $1.794 a pound at auction, 9.6 cents above last year. As measured by official grades, overall quality was slightly higher. With higher prices and larger marketings (about 130 million pounds of 1994 farm carryover tobacco was sold in 1995), cash receipts rose about 12 percent this season. Burley auctions began on November 20, and during the first 4 weeks of sales, prices averaged about 0.2 cent a pound higher than a year earlier. Burley supports were increased by 1.1 cents a pound this season. Total U.S. tobacco production this year is forecast at 1.32 billion pounds, 16 percent below 1994 and the lowest since 1987. Although acreage was up 0.5 percent, yields were down 17 percent. With smaller production and lower carryin, domestic supplies were reduced about 7 percent this year. Production will likely increase in 1996. U.S. tobacco use during 1995/96 may exceed marketings, reducing next summer's ending stocks about 4 percent from the 2.32 billion pounds of U.S.-grown tobacco carried into this year. Still, both domestic use and exports may decline this year. U.S. cigarette consumption in calendar year 1995 is up slightly from last year. Output will likely increase because of larger exports. Cigar, snuff, and chewing consumption all may rise, but smoking tobacco use continues to fall. During January-September 1995, U.S. exports of unmanufactured tobacco rose slightly from a year earlier, but for all of 1995, exports will likely fall short of 1994's 196,794 metric tons (434 million pounds, or 571 million pounds, farm sales weight). U.S. leaf exports may fall a little short of the 1995 level in 1996 because of increased world supplies, short U.S. supplies of some qualities of flue-cured leaf, and smaller burley marketings. During January-September, unmanufactured tobacco imports (duty paid) fell 17 percent from a year earlier. The decline reflects lower cigarette leaf and stems. General imports (arrivals) fell 20 percent. U.S. stocks of imported cigarette leaf and smoking tobacco rose 3 percent. Imports are expected to increase during the remainder of 1995. Effective September 13, an annual tariff rate quota (TRQ) applies for certain imported tobaccos, primarily flue-cured and burley. The TRQ of 150,000 metric tons, about 332 million pounds, is less constraining than the domestic content provisions that had been in effect since January 1, 1994. The supply of U.S.-grown flue-cured tobacco for 1995/96 (July-June), about 2.04 billion pounds, is down 3 percent because of smaller carryover. With marketings above indicated use, ending stocks are expected to rise 1 percent from last year's 1.19 billion pounds. The national (basic) flue-cured quota for 1996 was set at 873.6 million pounds, 6.5 percent below 1995. The effective quota (reflecting adjustments for net under-quota marketings) is estimated at 944 million pounds, 2 percent higher than in 1995. Price supports will average $1.601, 0.4 cent higher. Basic quotas are down because cigarette manufacturers reduced purchase intentions. However, because of a 70- million-pound shortfall in 1995 marketings, the effective quota is up. The supply of U.S.-grown burley tobacco for 1995/96 (October-September) is estimated at 1.48 billion pounds, 7 percent below a year earlier. As of December 1, the 1995 crop was estimated at 499 million pounds. However, considering carryover on farms, marketings in 1995/96 are expected to total 515 to 525 million pounds. About 65 million pounds of 1994-crop tobacco remained unsold from last season because of insufficient quota. Sizeable farm carryover will likely remain at the end of the 1995/96 marketing season as well. By law, the marketing quota for burley must be announced by February 1, and acreage allotments for several other kinds by March 1. Supplies of fire-cured and Maryland tobacco are higher, but supplies of dark air-cured and cigar tobacco are lower. Tobacco Products Cigarette Consumption Up Slightly; Exports Up With U.S. cigarette consumption up slightly and increased exports, 1995 cigarette production may increase and set a new record (table 1). Cigarette exports will likely increase 8 to 12 percent, and domestic consumption may increase about 0.5 percent from last year. During January-September 1995, U.S. consumption totaled about 367 billion cigarettes, up slightly from a year earlier. Cigarette smoking is up a little in 1995, despite a growing number of prohibitions and restrictions on where people can smoke, continuing antismoking activity, such as publicity about relationships between smoking and health, and declining social acceptance of cigarette smoking. Consumption has remained relatively stable the last 2 years because retail prices have averaged lower than in 1993. Sales of low-tar, low-nicotine cigarettes rose sharply from 1970 to 1981, then declined from 60 percent of the market in 1981 to 52 percent in 1985. However, in 1994, low-tar, low-nicotine sales rose to 59 percent and are expected to hold steady this year. Retail prices of tobacco products were about 3 percent higher in October than a year earlier. Retail prices for 1995 will average about 2.5 percent higher than in 1994 but 1 percent lower than in 1993. Manufacturers have changed cigarette prices only once since November 1993. Manufacturers had lowered premium-brand cigarette prices more than 25 percent in August 1993 because of declining market share of premium brands to discount brands. Except for a 3-percent price increase for premium brands in May 1995, cigarette prices have not been changed. Five States enacted or imposed tax hikes in 1995 that averaged 14 cents a pack. The weighted average State tax on cigarettes was 32.1 cents per pack of 20 in July. 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. The Federal excise tax has remained at 24 cents per pack since January 1, 1993. Use of Other Products Mixed Production of chewing tobacco rose during the first three quarters of 1995 from a year earlier, and output for the year may increase about 1 percent from last year's 62.5 million pounds. Also, during the first 9 months, snuff production was about 2 percent above the same period in 1995, and consumption is up. Consumption of large cigars (including cigarillos) totaled 1.68 billion during January-August, 10 percent above a year earlier. The yearly total is likely to be up somewhat (table 2). Sales of higher-priced cigars have rebounded because of positive publicity and changing demographics. This pattern may continue. Third-quarter domestic use of smoking tobacco--including imports--was down from a year earlier. For all of 1995, smoking tobacco consumption is expected to fall 3 percent. 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 cigarettes by youth. The FDA has published proposed regulations governing tobacco product sales to youth and advertising (Federal Register, August 11). Among the proposals are: o Prohibition of tobacco brand-name sponsorship of sporting events and brand-name advertising on items like hats and T-shirts, o Prohibition of street vending machine sales of cigarettes and requirement of proof of age for cigarette purchases, o A requirement that the tobacco industry run a comprehensive education campaign against under-age smoking, o Limitation of advertisements in publications that have significant youth readership to black and white text only, and o Prohibition of outdoor advertising for cigarettes within 1,000 feet of schools and playgrounds. Permitted outdoor advertising would be black and white, text only. The comment period on the proposed rules has been extended to January 2, 1996. U.S. Exports and Imports Exports May Decline Slightly This Year Exports of unmanufactured tobacco (by weight) for calendar 1995 were slightly above a year earlier through September 1995, including a 4-percent increase during July-September (table 6). However, the calendar year exports will probably be down slightly because of sufficient world supplies of leaf at lower prices than in the United States. The decline would likely be even greater except that world supplies have tightened. Total 1995 exports will probably be 415 to 435 million pounds, compared with last year's 434 million pounds (196,794 metric tons, equivalent to 571 million pounds, farm sales weight). In reporting to the Census Bureau's Foreign Trade Division in recent years, exporters have shifted certain partially processed exports from "unmanufactured tobacco" to the categories "smoking tobacco in bulk" and "smoking tobacco, not elsewhere classified." The last two categories accounted for about 29 percent of exports (by weight). Shipments of "smoking tobacco in bulk" rose 19 percent during January-September, and exports of "smoking tobacco, not elsewhere classified" were up 18 percent. These exports include what is often referred to as "cut rag" tobacco. For January-September 1995, exports of flue-cured, the principal export class, were up 11 percent. Exports of burley--the second most important export class--were down 6 percent. Exports of cigar leaf and "other leaf" were up. Exports of Kentucky-Tennessee fire-cured, Virginia fire-cured, black fat, Maryland, and stems were down. Among major markets, shipments to Asia were down, but shipments to Europe were up. Shipments to Africa were up sharply. There were no exports under USDA-financed programs this past year. With more ample world supplies and short 1995 flue-cured and burley crops, 1996 calendar year leaf exports from the United States will likely decline, if normal shipping patterns are followed. In addition, lower leaf prices of competitors and declining cigarette consumption in major importing countries continue to dampen export prospects. Imports Down Through September of this year, total U.S. imports for consumption (duty paid) were 17 percent below a year earlier. 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 to manufacture cigarettes. Arrivals are expected to increase during October-December from a year earlier. Beginning September 13 an annual tariff rate quota (TRQ) replaced the more stringent domestic content provisions (see below). Imports for consumption of Oriental leaf, the major import class, rose 45 percent. However, decreases occurred for most of the other cigarette leaf categories. Unstemmed burley leaf imports were down 74 percent; other stemmed leaf (mainly burley) was down 78 percent, stemmed flue-cured was down 8 percent; unstemmed flue-cured was about unchanged, but cigarette scrap was up 61 percent. Both cigar leaf and scrap imports were up. January-September arrivals of tobacco (general imports), were down 20 percent (by weight). The major categories of cigarette tobacco, except Oriental, were down. Stems were down 61 percent. Cigar leaf arrivals were down but cigar scrap was up. U.S. stocks of foreign-grown cigarette and smoking tobacco rose over the last 12 months. On October 1, 1995, foreign stocks in the United States totaled 947 million pounds (farm sales weight), 3 percent above a year earlier. About 69 percent of the stocks were flue-cured and burley, somewhat higher than a year earlier. Tariff Rate Quota Proclaimed 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 1/ 26.5 Brazil 176.8 Chile 6.1 Guatemala 1/ 18.7 EU-15 2/ 22.0 Malawi 26.5 Philippines 6.6 Thailand 15.4 Zimbabwe 26.5 Other 6.6 Total 331.7 ------------------------ 1/ Argentina's quota will decline to 24.3 million pounds on September 13, 1998 and to 23.7 million pounds on September 13, 1999. Guatemala's quota will increase annually beginning September 13, 1996 to 19.6 million, 20.4 million, 21.2 million, and 22 million pounds by September 13, 1999. 2/ Includes Austria, Belgium-Luxembourg, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. Imports from Canada, Mexico, and Israel are not included under quantitative restrictions because of existing free trade agreements. Tobacco imports above the quota level are subject to a 350-percent duty. Duty can be refunded if the same tobacco imported is used to manufacture cigarettes that are exported. Tobacco imported within the quota is also eligible for duty drawback against exports. Within quota duties are at rates bound in the GATT Uruguay Round Agreement. Provisions of Section 320(c) of the Agricultural Adjustment Act of 1938 require that a domestic marketing assessment (DMA) be paid by certain manufacturers if their domestic tobacco use for U.S.-made cigarettes in a calendar year was less than 75 percent of the total tobacco used. DMA will only apply for tobacco used in calendar year 1994. Section 422 of the Uruguay Round Agreements Act provided that this previously enacted DMA would be limited to calendar year 1994 if a tariff rate quota was proclaimed by President Clinton in connection with negotiations under Article 28 of the GATT. With the proclamation of a TRQ, adjustments in budget deficit assessments became effective. Tobacco imports with the same or similar characteristics as domestic price-supported types are subject to the same budget deficit assessments as the like kind domestic crop. For tobacco types that are not under price supports in the United States comparable imports are excluded from budget deficit assessments. These include Oriental and cigar tobacco (cigar tobacco is excluded even though some types are under price support). U.S. Tobacco Leaf Situation and Outlook 3/ ---------------------- 3/ All quantities in this section are stated in farm sales equivalent, unless otherwise noted. U.S. production for 1995 is likely down 16 percent from a year earlier. Effective quotas were up 16 percent for flue-cured but were down 5 percent for burley. Total acreage was up 0.5 percent from a year earlier. However, the average yield for all tobacco fell by 17 percent. Flue-cured yields fell 20 percent, and burley yields fell 12 percent (table 9). As measured by official grades, the overall quality of the flue-cured crop was slightly better than the good-quality crop of a year ago. Burley quality is probably down. Both flue-cured and burley supplies are smaller because of reduced carryover and lower burley marketings. For other kinds, supplies of Maryland and fire-cured are up, but supplies of dark air-cured and cigar leaf are down. Prices for all tobacco will likely average higher than a year earlier. The short 1995 crop and the large quantity of farm carryover flue-cured and burley with higher price supports, boosted prices. The volume of flue-cured tobacco placed under loan fell sharply this season. Because manufacturers have agreed to purchase all 1990-93 flue-cured and burley loan stocks, holdings for these kinds have declined sharply from a year earlier. Higher prices and larger marketings mean that 1995 cash receipts rose from a year earlier. But, net returns per acre for 1995 production probably declined, despite lower no-net-cost assessments, because of substantially lower yields. Marketing Quota and Allotments in 1996 The 1996 national basic quota for flue-cured tobacco is 6.5 percent below a year earlier. But, when undermarketings from 1995 marketings are added, the effective quota (sum of individual quotas) is up 2 percent. Marketing quotas for flue-cured and burley in 1996 are set by totaling (1) intended purchases by domestic cigarette manufacturers from the 1996 crop; (2) average exports for 1993/94, 1994/95, and 1995/96 marketing years; and (3) an adjustment to maintain loan stocks at the specified reserve-stock level of 15 percent of basic quota, or a minimum of 100 million pounds of flue-cured or 50 million pounds of burley. The five domestic cigarette manufacturers (each with more than 1 percent of U.S. production and sales) are required to submit a statement of flue-cured and burley purchase intentions to the Secretary of Agriculture 15 days before the national quota announcement deadline. Intended purchases of flue-cured in 1996 total 475.5 million pounds, down 17 percent from last year's high level. Burley purchase intentions are due by January 15, 1996. For the 1996 flue-cured marketing quota, the three-component formula total is 900.6 million pounds, 6.5 percent below a year earlier. USDA used its discretion to reduce the quota formula total by 3 percent. The 1996 quota was set at 873.6 million pounds, compared with 934.6 million pounds in 1995. The national acreage allotment was set at 418,391 acres, also 6.5 percent below 1995. By February 1, USDA will announce the 1996 burley poundage quota and by March 1, it will announce the 1996 acreage allotments for other kinds of tobacco under the production control program. Shortly after that announcement, growers of Ohio filler-Wisconsin binder and Puerto Rican cigar filler kinds will vote in two 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 crop. Growers of Maryland, Pennsylvania filler, and Connecticut and Massachusetts binder turned down marketing quotas in their last referenda (1995), so Government price support is not available for their 1996 crops. Pennsylvania filler has never had marketing quotas. For Maryland, quotas last applied to the 1965 crop, and for Connecticut and Massachusetts binder, quotas last applied in 1983. Price Supports in 1996 USDA has set the 1996 flue-cured support at $1.601, 0.4 cent above 1995. The 1996 price support for flue-cured and burley (to be announced later) is the preceding year's support adjusted by changes in the 5-year moving average of prices, excluding the highest and lowest (two-thirds weight) and changes in a cost-of-production index (one-third weight). Costs include variable expenditures, but exclude costs of land, quota, risk, overhead, management, marketing contributions, and other items not directly related to tobacco production. The Secretary of Agriculture has discretionary authority to adjust the price support between 65 and 100 percent of the calculated increase or decrease. The 5-year moving average of prices and changes in a cost-of-production index increased the price support for flue-cured. The 1996 flue-cured support was raised by 67 percent of the formula increase. Price supports for other types of tobacco have not been set for 1996. For types other than flue-cured and burley, maximum increases in supports will continue to be based on changes in the average parity index during the 3 previous years compared with 1959. But loan associations can request reduced support if market conditions warrant. For the 1996 flue-cured price support calculation (omitting high and low years), the 1991-95 prices averaged 171.6 cents a pound, 1.5 cents higher than the 1990-94 average. Using trend yields to minimize the effects of weather, the cost of production in 1995 is estimated to have declined 1.2 cents per pound. The weighted average of the price increase and cost decrease was 0.6 cent. Data in table A-1, showing estimated burley production costs for 1995, are expected to be used by the Farm Service Agency (formerly Agricultural Stabilization and Conservation Service) in determining cost components for the 1996 burley support price. The combined effect of price and cost changes likely will result in a burley support price in 1996 near that of a year earlier. The marketing assessment under the Omnibus Budget Reconciliation Act of 1990 will total 1.601 cents per pound (divided equally between growers and buyers for the 1996 crop of flue-cured tobacco). Importers of flue-cured tobacco will be assessed the full 1.601 cents per pound for imported tobacco. The marketing assessments for other kinds and no-net-cost assessments for all kinds will be announced later. Global Leaf Production Up Slightly Global leaf production in 1995 is forecast at 14.2 billion pounds (6.44 million metric tons), up 1 percent from last year's 14.1 billion pounds (6.4 million metric tons). Output is up in China, Zimbabwe, Malawi, and Turkey. Flue-cured production probably rose slightly, but burley production fell about 11 percent. Oriental, dark air- and sun-cured, dark air-cured cigar, and dark fire-cured were up, but light air-cured production was down. Agriculture Appropriations Approved On July 20, 1995, 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 September 18, the U.S. Senate passed a non-binding "sense-of-the-Senate" resolution urging that a separate deficit reduction fee already being paid by the tobacco industry be used to cover administrative costs of the price support program. The 1996 appropriations measure was signed by the President on October 24. Bill To Change Tobacco Program Introduced in U.S. House of Representatives A bill (H.R. 2653) entitled "Tobacco Amendments Act of 1995" was introduced in the U.S. House of Representatives on November 16. It would allow the Secretary of Agriculture to use funds collected from the Tobacco Marketing Assessment (TMA) to fund administrative costs of the tobacco price support-production control program. Among a number of other things, the bill would require that imported cigar tobacco be subject to the same no-net-cost assessments as like-kinds of domestic cigar-quota tobacco, would reestablish flue-cured tobacco farm yield based on each farm, and reduce flue-cured tobacco planting requirements from 90 to 80 percent. Flue-Cured Auction Prices Up in 1995 Prices for the 1995 flue-cured crop rose 6 percent from 1994, compared with a 1-percent increase in 1993. With larger volume, the value of producer sales rose about 12 percent from a year earlier. Loan placements fell 88 percent to the lowest level on record. Consequently, purchases from this year's crop and 1994-crop farm carryover were 19 percent above those of a year earlier. Furthermore, sales of old-crop tobacco by the Flue-Cured Tobacco Stabilization Corporation have been brisk. Compared with the 1994 season, changes in prices of tobacco by grade and production areas varied. The season-average price, $1.794 for gross sales (including resales), is 9.6 cents above last year. Average prices were up 10.6 cents in the Georgia-Florida belt; 9.8 cents in the old and middle belt of North Carolina and Virginia; 8.7 cents in the eastern North Carolina belt, and 7.9 cents in the North Carolina-South Carolina border belt. Among the 56 markets having sales, season averages ranged from $1.73 to $1.83 a pound. With a larger effective quota, producer's marketings were 6 percent above last season. Auction and nonacution sales totaled 854 million pounds, 47 million above 1994. Still, despite sales of about 130 million pounds of farm carryover tobacco, sales were 70 million pounds short of the effective quota. Unfavorable weather and disease reduced 1995 flue-cured yields sharply. Despite poor growing conditions, overall quality of marketings in 1995 were slightly above the good quality sales of a year earlier. There was a larger proportion of good but less fair quality tobacco. The share of low quality was about unchanged. The share of nondescript tobacco fell slightly. Growers sold a larger share of ripe and mature tobacco throughout the belt. Auction Sales The Georgia-Florida and South Carolina and border North Carolina markets opened on July 18 and other markets opened the following day. Northern markets opened earlier than usual because of substantial 1994 farm-carryover tobacco. Because of the earlier opening, markets closed earlier than usual. The maximum producer sales opportunity averaged about 71 million pounds a week. Since 1974, growers have designated warehouses where their crop will be sold, and the USDA Flue-Cured Tobacco Advisory Committee has recommended opening and selling schedules. Selling times have been allocated according to growers' designations. Growers could change the designations at the start of each month. Resales averaged 7.9 percent of gross sales, a little lower than in 1994. Again this season, there were no provisions for the Flue-Cured Stabilization Cooperative or warehouses to handle carryover tobacco. Only a small amount of tobacco remains on farms for sale next year due to low yields in 1995. Export Volume May Fall With a short crop and a shortage of some qualities of leaf, 1995/96 flue-cured exports may fall. Furthermore, leaf exports continue to be held down because of a variety of factors. These include lower-priced leaf from competitor countries, a shift to exporting more tobacco as products, stagnant or declining cigarette consumption in major importing countries, and reduced leaf use per cigarette. Supplies Decline in 1995/96 Smaller carryin stocks more than offset larger marketings and reduced the domestic flue-cured supply to 2.04 billion pounds, 3 percent below last year (table 16). The flue-cured outturn was 8 percent below 1994 marketings. However, marketings in 1995 were about 6 percent higher than in 1994 because of a large volume of farm-carryover tobacco. Harvested acreage was up 7 percent, but yields declined a record 20 percent. This season's total disappearance may decline from last season. Domestic disappearance may decline because of increased use of imported tobacco, despite increased cigarette production, increased shipments of semi-processed tobacco, and the availability of discount-priced U.S. leaf. Exports may decline. Next year's carryover may increase slightly. The Flue-Cured Stabilization Cooperative sold 235.4 million pounds during January-November and loan receipts totaled only 11.7 million pounds. Loan receipts were only 12 percent of a year earlier and were a record low. By January 1996, unsold loan stocks will decline sharply from the 395.8 million pounds held a year earlier to less than 60 million pounds, because manufacturers agreed to purchase all pre-1994 loan stocks during a 7-year period. On December 15, USDA announced a national flue-cured marketing quota of 873.6 million pounds for 1996, 6.5 percent below a year earlier. The quota was in accordance with the three-part formula, plus the discretionary 3 percent downward adjustment. The national acreage allotment was set at 418,391 acres, also 6.5 percent below 1995. Acreage allotments and poundage quotas reflect 1995 undermarketings and overmarketings. The basic quota, plus estimated net undermarketings, make the 1996 effective quota about 944 million pounds, 2 percent above 1995. A crop close to quota, when added to prospective carryover, would provide a larger 1996/97 supply than this year. Foreign Flue-Cured Production and Sales This year's flue-cured production in Canada is estimated at 171 million pounds, up 11 percent from last year. Auctions opened on October 16 and by December 1, sales averaged Can$1.63 per pound, about 10 percent higher than a year earlier. The U.S. equivalent price was about $1.21 per pound. Brazil's flue-cured production fell about 8 percent in 1995, a decline for the second consecutive year. Output in China is likely about 4 percent higher, but output in India may be down. The 1995 flue-cured crop in Zimbabwe was 18 percent larger than the year before (table 19). Markets closed on October 6. Prices averaged US$0.96 a pound, 18 cents above a year earlier. The higher average price reflects a drawdown in world supplies. Burley Burley Auction Prices Up Slightly Burley auction sales through December 14 totaled 342 million pounds (gross) and averaged $1.846 a pound. Including nonauction sales, growers sold about 62 percent of the crop before Christmas, somewhat less than usual because of a lack of mositure to bring tobacco into case for stripping and marketing. Sales are scheduled to resume January 8. Burley prices during the first 4 weeks of sales averaged about 0.2 cent a pound above a year earlier. Quality is down a little this year. Sales consisted of more fair and low quality leaf than a year earlier. More of the leaf was classified as tannish red and red. Price supports average $1.725, up 1.1 cents from last year. Loan rates by grade range from $0.97 to $1.88 per pound. Through December 14, loan receipts totaled 54,000 pounds, considerably less than a year earlier. Disappearance Rises in 1994/95 During the year ending September 30, 1995, burley disappearance totaled 623 million pounds, 13 percent above the previous year. Domestic use rose 16 percent and exports rose 5 percent. Germany and Japan remained the leading export markets. Total use may decline in 1995/96 because of greater use of imported burley. The decline will be cushioned by increased cigarette production, larger shipments of semi-processed tobacco, and greater use of discount-priced domestic leaf. Despite the increasing popularity of blended cigarettes that use burley, leaf exports may decline a little because of the short U.S. burley crop, sufficient amounts of lower cost supplies from other countries, and increased shipments of semiprocessed tobacco. Supplies Down This season's burley supply, 1.48 billion pounds (estimated marketings plus carryover), is 7 percent below a year earlier (table 17). The 1995 crop, estimated at 499 million pounds as of December 1, is 12 percent below last year's marketings. In addition, about 65 million pounds of 1994 crop are available for sale this season. Despite the availability of around 565 million pounds of burley, quota constraints will hold marketings in 1995/96 to between 515 and 525 million pounds. This season's effective farm poundage quota was 5 percent below last year. Growers reduced acreage 7 percent and yields were 12 percent lower than a year earlier. With 1994 marketings falling short of use, carryover on October 1 fell 3 percent from a year earlier due to reduced loan stocks. Manufacturer and dealer holdings rose slightly. Carryover next October 1 will likely decline. Because of manufacturer loan stock purchase agreements, loan holdings will likely fall below 200 million pounds. The 1995/96 supply is about 2.4 times the probable disappearance, below traditional benchmark levels. In addition, manufacturers and dealers held 305 million pounds of foreign-grown burley on October 1, about 3 percent more than a year earlier. Decision on 1996 Quota Due by February 1 The 1996/97 outlook for burley hinges partly on the quota decision USDA is required to announce by February 1. Legislation requires that the national marketing quota be set by totaling (1) intended purchases by domestic cigarette manufacturers (to be submitted by January 15, 1996), (2) the average exports for 1993/94, 1994/95,and 1995/96 marketing years, and (3) an adjustment to maintain loan stocks at the reserve stock level. At USDA's discretion, the three component total can be adjusted up or down no more than 3 percent. The law provides for a maximum reduction of 10 percent from the previous year's basic quota. The quota cannot be reduced more than 10 percent in 1996 because loan stocks do not exceed 150 percent of the reserve stock level. Because this year's marketings are expected to fall short of the effective quota, next year's effective quota will likely be above the basic quota. Southern Maryland Southern Maryland Disappearance Down During the year ending September 30, 1995, disappearance of Maryland tobacco was 17.7 million pounds, 0.1 million below a year earlier. Domestic use rose, but exports fell from a year earlier. Sales to Switzerland and Germany, usually the two major destinations, were down. Supplies of Maryland tobacco are up for the second consecutive year. Use in 1995/96 may be similar to the two previous seasons. Total carryover on January 1, 1996, is expected to be larger than the year earlier. The 1995 crop is estimated at 18.8 million pounds, about 1 million below the previous season. The 1981 farm act provided for penalties for growing and marketing Maryland tobacco in quota areas. However, quotas are not applicable to Pennsylvania seed-leaf tobacco, and--because seedleaf prices are lower--some seedleaf growers are changing to Maryland tobacco. In 1995, about 34 percent of total Maryland tobacco production was in Pennsylvania, a little below a year earlier. The supply for 1995/96 is about 11.5 million pounds, 3 million more than a year earlier. Auctions for the 1995 Maryland crop will begin in March 1996 in Maryland. Auctions for Maryland tobacco in Pennsylvania started December 4, with price bids averaging lower than the first week of sales a year earlier. Fire-Cured Fire-Cured Auction Price Up Auctions for Virginia fire-cured (type 21) opened December 5, with prices the first 2 weeks averaging 3.2 cents more than last season. Prices were up because of reduced production. Quality was probably down from a year earlier. During the first 2 weeks of sales, price gains were larger for lugs and nondescript than for leaf grades. This is the fourth year price support has been available for Virginia fire-cured tobacco sold in bales and thus far, about 80 percent has been sold in bales. This year's Virginia crop is about 0.9 million pounds smaller than last year. Auctions for Kentucky-Tennessee fire-cured are expected to open in mid-January. Direct purchases (country sales) for Kentucky-Tennessee (types 22-23) this year, as well as last, may represent a large part of total sales. The 1995 fire-cured crop is estimated at 39.9 million pounds, 8.4 million or 21 percent lower than a year ago. Kentucky-Tennessee production was down about 7.5 million pounds because of smaller acreage and lower yields. With a larger carryin, supplies of Kentucky-Tennessee fire-cured rose 3.3 million pounds from a year earlier. Based on recent use, supplies represent about 3.4 years use. On October 1, the beginning of the marketing year, Kentucky-Tennessee loan stocks were about 470,000 pounds below a year earlier. Disappearance varies from year to year, but it will probably fall short of 1995 production, so carryover next October 1 will be larger (table 23). Disappearance Higher Disappearance of fire-cured types in 1994/95 was 37.2 million pounds--about 0.8 million pounds above the previous season. Domestic disappearance of types 22-23 was up, but exports were down. Output of moist snuff was up, but plug chewing tobacco decreased 7 percent. In Malawi, the largest exporter of fire-cured tobacco outside the United States, 1995 production rose nearly 60 percent but was still about 19 percent below 1992's. Lower Malawian production during the last 3 years has enhanced U.S. fire-cured export prospects. Dark Air-Cured Dark Air-Cured Prices Up Auctions for One Sucker and Green River tobacco (Kentucky-Tennessee air-cured types 35-36) opened December 4. Auctions for Virginia sun-cured (type 37) opened December 8. Growers have received more for all three types than they did last season. Higher dark air-cured prices reflect a smaller crop. Quality is similar to a year earlier. This season, much of the One-Sucker is expected to be sold at auction. Loan receipts of dark air-cured (types 35-37) totaled 74,000 pounds for sales through December 15, compared with 230,000 pounds for a similar period last season. Carryover May Rise At an estimated 9 million pounds, the 1995 dark air-cured and sun-cured crop are about 2.8 million pounds smaller because of reduced acreage and yields. The 1995/96 supply of dark air-cured (35-36), at 36.3 million pounds, is about 0.1 million pounds below 1994/95. Total supplies of dark air-cured represent about 3.8 years use, based on recent disappearance. Carryover may not change much because disappearance is likely to be close to production. Although stocks are relatively large, the supply-demand balance has improved in recent years. Disappearance of dark air-cured tobacco during 1994/95 was 9.1 million pounds, 1.5 million lower than the previous marketing year. Moist snuff output was up, but other traditional outlets declined from a year earlier. Production of dark air-cured tobacco is considerably below 1980-85 levels. Snuff consumption rose, but other products that use this type of leaf (such as plug chewing tobacco) are decreasing, so domestic use could decline this season. Cigar Tobacco Supplies Decline Both production and carryover stocks are down, and supplies of U.S. and Puerto Rican (negligible) cigar tobacco are down about 11 percent from a year earlier (table 27). Reflecting a smaller crop, the two Wisconsin binder cooperatives tookno 1994-crop tobacco. Filler production fell, but both binder and wrapper production rose. Most U.S. cigar output is sold directly on farms or through cooperatives. As of early December, no sales of 1995-crop cigar binder or filler had been reported. Season-average prices will be published in the May 1996 USDA Crop Production report. Smaller production and carryover reduced supplies of U.S. and Puerto Rican filler about 5.7 million pounds. Carryin was about 15 percent lower; production fell 19 percent to 9.2 million pounds. Production of Ohio (types 42-44) and Puerto Rican (type 46) filler has virtually ceased. Recent production and disappearance trends indicate that stocks of filler types 41-46 may decline by the end of the 1995 marketing year. Supplies of Connecticut Valley wrapper tobacco for 1995/96 are about 300,000 pounds above last season. The cigar wrapper carryover next July 1 is expected to be similar to this year. For 1995/96, binder supplies are down because carryover declined. Cigar binder disappearance totaled 11.3 million pounds last season, down about 0.1 million from a year earlier. Cigar binder's principal outlet is looseleaf chewing tobacco. Binder disappearance has followed a cyclical pattern, and it may increase modestly this year because of higher loose leaf chewing production. During October 1994-September 1995, manufacturers imported more cigar tobacco than a year earlier--a total of 83 million pounds of imports for consumption. Stocks of foreign-grown leaf in the United States on October 1 totaled 76.5 million pounds, about 1.5 million below a year earlier. Special Article Costs of Producing and Selling Burley Tobacco: 1993, 1994, and Preliminary 1995 by Dargan Glaze 1/ ---------------------- Agricultural economist, Rural Economy Division, Economic Research Service, USDA. Abstract: The variable costs of producing and selling burley tobacco decreased slightly from $2,441 per acre in 1994 to $2,374 in 1995. Total costs per acre, excluding land and quota costs, are expected to decrease from $3,368 to $3,278 per acre in 1995. The variable costs of producing burley tobacco per 100 pounds was about $117 in 1995, which was an increase of $11.25 per 100 pounds from 1994. The total costs per 100 pounds, excluding a charge for land and quota, averaged $146 in 1994, and is expected to increase to $162 in 1995. Keywords: Burley tobacco, variable costs, total costs, costs of production. Cost Changes: 1993 to 1994 The variable costs of producing an acre of burley tobacco rose by more than 5 percent between 1993 and 1994, from $2,314 to $2,441 (table A-1). All expenses, except fuel and lubrication and curing and heating fuel costs, increased from 1993 to 1994. Although energy costs decreased, the decline was only about 2 percent. Selling costs (marketing fees, no-net-cost and marketing assessments, and inspection and grading fees) per acre increased from $237 in 1993 to $342 in 1994, which constituted about 83 percent of the difference between the 1993 and 1994 total variable costs per acre. An increase in burley tobacco placed under the loan program increased loan stocks, thereby increasing the risk of losses in operating the price support program. Variable production costs per 100 pounds averaged about $110 in 1993 and $106 in 1994. The largest change between individual cost items per 100 pounds was labor ($5.35), followed by no-net-cost and marketing assessments ($3.50). The cost of machinery and barns increased from 1993 to 1994, and machinery and barn ownership costs rose 3 percent from about $492 per acre in 1993 to $508 per acre in 1994. Of the ownership costs, taxes and insurance increased the most; almost 6 percent from $118 in 1993 to $125 in 1994. Capital replacement costs increased from $266 in 1993 to $273 in 1994. Both general farm overhead and land and quota costs rose by almost 10 percent, reflecting increases of $2.50 per 100 pounds for the average market price of burley tobacco and 192 pounds per acre in yield. Capital replacement costs, returns to nonland capital, and taxes and insurance costs per 100 pounds of burley tobacco decreased from 1993 to 1994. General farm overhead and land and quota charges increased by 74 cents from 1993 to 1994. Cost Changes: 1994 to 1995 Preliminary 1995 estimates indicate the variable costs of producing an acre of burley tobacco declined by $66 from $2,441 to $2,374 (table A-1). Total costs per acre, excluding land and quota costs, are expected to decrease from $3,368 to $3,278 per acre in 1995. With declining yields, total costs per 100 pounds are expected to increase by $15.62. Since per-acre selling costs (marketing fees, no-net-cost and marketing assessments, and inspection and grading fees) are influenced by yields, the decline of 277 pounds in yield resulted in a $109 per-acre decrease between 1994 to 1995. Variable costs actually would have increased by 2 percent from 1994 to 1995 if selling costs were excluded. Variable production costs per 100 pounds averaged about $106 in 1994 and $117 in 1995. Machinery and barn ownership costs continued to rise, resulting in higher ownership costs for 1995. Total machinery and barn ownership costs increased by over 5 percent from $508 to $534 per acre from 1994 to 1995. Capital replacement costs rose by $19 per acre in 1994 to 1995. Total ownership costs per hundred pounds of burley tobacco increased by $4.79 from 1994 to 1995. General farm overhead decreased from 1994 to 1995 by almost $50 per acre. Land and quota charges declined from $1,363 per acre in 1994 to $1,200 because yields were lower and market prices were a little higher. General farm overhead and land and quota charge per 100 pounds of burley tobacco remained relatively unchanged between 1994 and 1995. Procedures for Estimating Costs Some costs were initially calculated by the Economic Research Services' 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 Farm Costs and Returns Survey (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. Data Sources The production costs presented in this article were estimated from data collected in February and March of 1990 for the 1989 burley crop year from the FCRS. These data were obtained from 365 burley producers in Kentucky and Tennessee. Growers in these two states produce about 85 percent of the U.S. burley tobacco crop. The 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 burley tobacco. The per acre and per 100 pound cost estimates are weighted averages of the production surveyed. Another Farm Costs and Returns Survey will be conducted February and March of 1996 for the 1995 burley crop in Kentucky and Tennessee. These data will provide the information used to estimate future costs of production for burley tobacco. Data from the FCRS burley 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 burley cost of production budgets. The market prices for the burley tobacco crop averaged $1.816 per pound for 1993 and $1.841 per pound for 1994. Because the 1995 burley markets are still open, the season-average price is not yet available. Based on auction prices as of December, an average price of $1.845 per pound was estimated for the 1995 crop. The yields for 1993 and 1994 were based on actual U.S. yields from NASS, averaging 2,108 and 2,340 pounds per acre, respectively. Yields for 1995 were those indicated by NASS as of December, averaging 2,023 pounds per acre. Burley tobacco yield was 277 pounds lower in 1995 than 1994 as a result of disease and dry weather. END-END-END