U S FlueCured Tobacco Situation Outlook Dr Blake

U. S. Flue-Cured Tobacco Situation & Outlook Dr. Blake Brown Hugh C. Kiger Professor Agriculture & Resource Economics College of Agriculture & Life Sciences

Global Supply: U. S. , Brazil and Zimbabwe Flue-Cured Tobacco Production 2500 2000 1500 1000 500 Zimbabwe 0 08 20 09 20 10 20 11 20 12 20 13 20 14 20 1 20 5 16 20 E 17 P 20 07 20 06 20 05 20 20 04 US Brazil Source Brazil & U. S. : Universal Corporation. “World Leaf Production as of November 8, 2016. ” Source Zimbabwe: Zimbabwe Tobacco Association “Weekly FCV Report 26. 07. 2016”

0 EU/US$ EU/REAIS 2016 -10 2016 -09 2016 -08 2016 -07 2016 -06 2016 -05 2016 -04 2016 -03 2016 -02 2016 -01 2015 -12 2015 -11 2015 -10 2015 -09 2015 -08 2015 -07 2015 -06 2015 -05 2015 -04 2015 -03 2015 -02 2015 -01 2014 -12 2014 -11 2014 -10 2014 -09 2014 -08 2014 -07 2014 -06 2014 -05 2014 -04 2014 -03 2014 -02 2014 -01 Exchange Rates: EURO/US$ & EURO/Brazilian Real 1 0. 9 0. 8 0. 7 0. 6 0. 5 0. 4 0. 3 0. 2 0. 1

Flue-Cured Acres Harvested: 2012 2013 2014 2015 2016* US 206, 000 228, 800 232, 000 218, 300 214, 000 NC 164, 000 170, 000 181, 000 170, 000 165, 000 *October 2016 Forecast. USDA-NASS

Flue-Cured Production: (million pounds) US NC 2012 2013 2014 473 454 557 468 460 377 360 434 365 346 *USDA-NASS October 2016 Estimate 2015 2016*

US Flue-Cured Exports and Domestic Disappearance 700 600 500 400 [VALUE] 300 268 100 291 2005 -2006 -2007 -2008 -2009 -2010 -2011 -2012 -2013 -2014 -2015 -2016 Exports Domestic Use

US Flue-Cured Domestic Disappearance and Imports for Consumption 300 250 200 150 100 50 0 2010 -2011 -2012 -2013 Domestic Use 2013 -2014 Flue-Cured Imports 2014 -2015 Other Imports 2015 -2016

U. S. Unmanufactured Exports of Flue-Cured Tobacco (stemmed) (lbs farm weight) 350000000 30000 250000000 World EU 28 PRC 20000 150000000 Switzerland 10000 50000000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: USDA-FAS

China’s Cigarette Market: Euromonitor International Forecast 2016 2017 2018 2019 2020 Sales of Cigarettes (bn sticks) 2, 428. 0 2, 398. 0 2, 383. 2 2, 375. 8 2, 372. 1 Sales Value of Cigarettes (CNY bn) 1, 472. 0 1, 515. 7 1, 554. 0 1, 587. 4 1, 616. 3 Source: Euromonitor International

China National Tobacco Corporation -financial performance Revenue $ billion Operating Profit $ billion 2012 167. 5 20. 2 2013 175. 3 21. 5 2014 197. 2 24. 2 2015 211. 2 26. 0 Source: IBISWorld

US Tobacco Products Market • Cigarette consumption continues steady decline • Industry revenue declines at annual rate of 2. 3% 20122016 to $37. 6 billion • Strong profit growth over last 5 years; $12. 1 billion in profit estimated to account for 32. 7% of revenue in 2016 • Industry revenue expected to decline at an annual rate of 2. 4% to $33. 3 billion in 2021 Source: IBISWorld

Global Tobacco Manufacturing • Annual growth 2011 -2015 of 3. 6% in VALUE of sales to $643. 8 billion in 2015 • From 2016 -2020 Value of sales expected to increase at an annual rate of 1. 8% to $703. 8 billion • Continued volume declines in mature markets with growth in emerging markets • Number of smoking age adults increases • Increases in disposable income cause some smokers to trade up to premium tobacco products Source: IBISWorld

Share of Global Market by Manufacturer % of Global Tobacco Products Market China National Tobacco Corp 32. 8% Philip Morris International Inc. 12. 2% British American Tobacco PLC 10. 6% Japan Tobacco Inc. 9. 6% Imperial Tobacco Group PLC 5. 0% Altria Group Inc. 3. 9% Other 25. 9% Source: IBISWorld

THE FUTURE Some future vapour scenarios rated by likelihood 85% FDA regulation lays waste to US market and allows tobacco companies to dominate market 75% 60% Significant liberalisation of cannabis legislation creates new front for vapour technology 50% Reduced-risk becomes a ‘premium’ positioning slowing cannibalisation 33% 10% Widespread taxation impairs growth of e-cigarettes globally Technological leap which replicates the combustible experience and drives significant adoption Consumption of vapour products exceeds 30% of total tobacco consumption by 2030 From: “GLOBAL TOBACCO KEY FINDINGS PART 2: VAPOUR PRODUCTS” Euromonitor International, PASSPORT.

2014: “heat-not-burn” products CONTAIN TOBACCO LEAF • • PMI introduces “Marlboro Heat. Sticks” in Japan and Italy – $680 million invested in reduced-risk factory in Italy • Reynolds American to introduce heat-not-burn product in Wisconsin in February 2015

• “Philip Morris could stop making conventional cigarettes” BBC News November 30, 2016 • i. QOS did well in test markets…PM plans to introduce into additional markets

Some Take-Aways • Global surpluses, especially of flavor-style fluecured, were reduced in 2016

Some Take-Aways • Global surpluses, especially of flavor-style flue-cured, were reduced in 2016 • Exchange rates favored increased Brazilian production; 2017 Brazilian flue-cured production is up at around 1. 4 billion pounds

Some Take-Aways • Global surpluses, especially of flavor-style flue-cured, were reduced in 2016 • Exchange rates favored increased Brazilian production; Brazilian flue-cured production is up at around 1. 4 billion pounds • Despite continued reductions in cigarette consumption and increases in taxation and regulation, industry profits remain strong

Some Take-Aways • Global surpluses, especially of flavor-style flue-cured, were reduced in 2016 • Exchange rates favored increased Brazilian production; Brazilian flue-cured production is up at around 1. 4 billion pounds • Despite continued reductions in cigarette consumption and increases in taxation and regulation, industry profits remain strong • Watch the “heat-not-burn” category • Opportunities for flavor style producers are in countries where smokers are expected to “trade up” to premium brand cigarettes www. tobaccogrowerportal. org

Executive Farm Management Program for NC Sweet Potato and Tobacco Farmers Key Topics • Strategic Planning • Human Resource Management • Financial Management • Leading Change • Risk Management • Family Business Issues • Assessing Markets • Assessing and building key partnerships • Strengthening your value proposition February 5 -10, 2017 December 10 -15, 2017 www. tobaccogrowerportal. org Go to the Economics page