U.S. Flue-Cured Tobacco Situation & Outlook by Dr. Blake Brown
This report presents data on EU and US cigarette consumption trends, global supply of flue-cured tobacco from the US, Brazil, and Zimbabwe, US flue-cured exports vs. domestic disappearance, contracted pounds for 2018, adverse effect wage rates in North Carolina, labor issues, and implications of next-generation tobacco products for growers. The analysis highlights key statistics and market dynamics shaping the tobacco industry.
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U.S. Flue-Cured Tobacco Situation & Outlook Dr. Blake Brown Hugh C. Kiger Professor Agriculture & Resource Economics College of Agriculture & Life Sciences
EU & US Cigarette Consumption billions of cigarettes 800 728 billion 700 600 493.0 billion 500 387.4 billion EU 400 258 billion 300 US 200 100 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: Tax Burden on Tobacco, Historical Compilation. V51, 2017 Orzechowski and Walker. Releases for consumption of cigarettes 2002-2016. Taxation & Customs. European Commission
Global Supply: U.S., Brazil and Zimbabwe Flue-Cured Tobacco Production 2500 2000 1500 1000 500 Zimbabwe US 0 2017E 2018P 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Brazil Source Brazil & U.S.: Universal Corporation. World Leaf Production as of November 7, 2017. Source Zimbabwe: Zimbabwe Tobacco Association Weekly FCV Report 17.07.2017
US Flue-Cured Exports and Domestic Disappearance 700 600 500 295.2 231 314.4 310.3 262.5 400 183 160.5 262.4 209.8 159.2 117.9774.58 300 200 305 304 304 289.7 269 268 262 259 258 248 247 234.6 100 - Exports Domestic Use
Contracted pounds for 2018??? Global stocks of flue-cured are not excessive US $ is not as strong relative to the Brazilian Real as last year Brazilian production is up but not excessive => not much reason to expect big changes in contracted pounds
Adverse Effect Wage Rates for North Carolina 2012 2013 2014 2015 2016 2017 2018 $9.70 $9.68 $9.87 $10.32 $10.72 $11.27 $11.46
Next Generation Tobacco Next Generation Tobacco Products Implications for Growers Products Implications for Growers
Philip Morris could stop making conventional cigarettes BBC News November 30, 2016 iQOS did well in test markets PM plans to introduce into additional markets
CURRENT AND FUTURE TRENDS IN CIGARETTE MANUFACTURING The progress of next-generation products is key for new plants The whole vapour category is forecast to grow to USD34 billion by 2021. Vapour Products: Global Retail Value 2016-2021 40.0 30.0 USD billion 20.0 10.0 Forecast data suggests that by 2021 heat-not-burn will be the single largest vapour category with 45% (USD15.4 billion). 0.0 2016 2017 2018 2019 2020 2021 Heated Tobacco Products: Global Retail Value 2016-2021 20.0 USD billion 10.0 0.0 2016 2017 2018 2019 2020 2021 Euromonitor International, Sept 2017
Building capacity for next-generation products: PMI leading the way CURRENT AND FUTURE TRENDS IN CIGARETTE MANUFACTURING PMI is aiming to have total PMI is aiming to have total annual installed capacity of 100 annual installed capacity of 100 billion heat sticks by the end of billion heat sticks by the end of 2018 2018. This currently represents 12% of PMI s total cigarette shipments. PMI Factory Investments Related to Next-generation Products Location Action Invested (million) Start date Capacity Focus Bologna region, Italy (2 factories) New factories EUR500 +EUR500 2014 and 2016 Currently 30 billion heat sticks Heets for IQOS Aspropyrgos, Greece Upgrade EUR300 Jan 2018 20 billion heat sticks Heets for IQOS Italian PM at Bologna inauguration Dresden, Germany New factory USD320 Early 2019 Heets for IQOS Otopeni, Romania Upgrade EUR490 2020 Heets for IQOS PMI Papastratos plant in Greece Euromonitor International, Sept 2017
Preparing for next-gen products: BAT and JTI are also taking action BAT will turn its factory in Romania into its second largest factory in Europe investing EUR1 billion. BAT will start producing glo iFuse Neopods for its next-generation heated tobacco product. Other BAT factories that will receive noticeable upgrades to accommodate the production of glo are located in South Korea and Russia. One of the main goals of this restructuring is to turn the plant into a global hub for exporting Neosticks for glo. BAT s facility in Romania BAT s facility in South Korea JTI s facility in Trier, Germany Euromonitor International, Sept 2017
Preparing for next-gen products: BAT and JTI are also taking action JTI: Since Ploom was released, the popularity of the device has soared immensely. Currently, JTI is unable to keep up with the demand. JTI will invest about USD481 million in factories in Japan and China. The ultimate goal of the company is to increase production capacity tenfold in the course of the next year. JTI also works on Ploom in Trier, Germany, where the company owns a state-of-the-art research and development centre. BAT s facility in Romania BAT s facility in South Korea JTI s facility in Trier, Germany Euromonitor International, Sept 2017
FDA REGULATION: Modified Risk Tobacco Products MRTP Applications Currently Under Scientific Review Product/ Company Comment Period Closes Regulations.gov Docket # TPSAC Meeting Date/Info IQOS system with Marlboro Heatsticks/Philip Morris Products S.A. TBD** FDA-2017-D- 3001 January 24-25, 2018 * Due to the large size of the Philip Morris Products S.A. MRTP applications, FDA will post the application documents in batches on a rolling basis as they are redacted in accordance with applicable laws.
What do we know about the leaf needs for iQOS? High quality leaf...but what high quality means is not well defined Consistent quality how can we make quality more consistent? Strict adherence to GAP Leaf quantity per stick will be 1/3-1/2 that of combustibles by weight Leaf in the Heet stick is highly processed
Who is in the best position to service this new market? larger commercial growers major HNB manufacturer Growers who can exert more control over growing and curing Computerized curing Hand harvest for higher quality GAP compliant What can be done to exert more control over the growing process? Italy, US, maybe Brazil Probably flue-cured growers But will buyers be willing to pay for higher costs?
Some Take-Aways Exchange rates more favorable toward US: $ is slightly weaker, Brazilian Real is stronger
Some Take-Aways Exchange rates more favorable toward US: $ is slightly weaker, Brazilian Real is stronger Despite increased Brazilian production, global stocks are not excessive
Some Take-Aways Exchange rates more favorable toward US: $ is slightly weaker, Brazilian Real is stronger Despite increased Brazilian production, global stocks are not excessive Will we see 2018 contracted pounds remain near 2017 levels?
Some Take-Aways Exchange rates more favorable toward US: $ is slightly weaker, Brazilian Real is stronger Despite increased Brazilian production, global stocks are not excessive Will we see 2018 contracted pounds remain near 2017 levels? Labor reform probably not in 2018
Some Take-Aways Exchange rates more favorable toward US: $ is slightly weaker, Brazilian Real is stronger Despite increased Brazilian production, global stocks are not excessive Will we see 2018 contracted pounds remain near 2017 levels? Labor reform probably not in 2018 Heat-not-burn .potentially a game changer
Some Take-Aways Exchange rates more favorable toward US: $ is slightly weaker, Brazilian Real is stronger Despite increased Brazilian production, global stocks are not excessive Will we see 2018 contracted pounds remain near 2017 levels? Labor reform probably not in 2018 Heat-not-burn .potentially a game changer Continued consolidation of flue-cured farms
