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Modest changes in 2016 U.S. burley contract volume and prices

 

University of Kentucky College of Agriculture, Food and Environment

 

LEXINGTON, Ky. - The global burley supply/demand balance has improved greatly over the past year, resulting in modest changes in U.S. burley contract volume for 2016 following significant reductions in 2015.

Smaller crops in South America, Africa and the United States, coupled with a surprising modest increase in U.S. cigarette production, helped offset the impacts of a strengthening U.S. dollar on U.S. burley international competitiveness. Globally, world burley production is down around 20 percent over the past two years.

 

USDA’s March 2016 planting intentions report did indicate U.S. burley tobacco growers are expected to increase planted acres 5% in Kentucky, but planting intentions were flat across Tennessee and the entire U.S. burley belt. Assuming average yields, the planting intentions report would yield a 2016 crop around 165 million pounds (vs 145 million pounds in 2015 and 213 million pounds in 2014), which would likely be in the neighborhood of anticipated U.S. burley leaf export and domestic use for the 2016-2017 marketing year.

 

Burley prices

U.S. burley contract price schedules vary among the buyers, but generally indicates slightly lower contract prices for the 2016 crop. U.S. burley prices have averaged around $1.95 for the past two growing seasons, compared to $2.06 in 2013. Accounting for inflation, U.S. burley grower prices have declined by more than 20% relative to the pre-buyout era. Although the value of the U.S. dollar has weakened slightly in recent weeks, it has more than doubled its value relative to the Brazilian real since 2012, resulting in a significant reduction in U.S. burley competitiveness versus the all-important Brazilian leaf.

Fuel and fertilizer prices will be lower for the 2016 growing season, but labor (which accounts for nearly 50 percent of production costs) continues to increase. Higher labor costs, coupled with anticipated flat prices will require better yields and quality leaf to insure profits for the 2016 crop.

 

Labor reform remains an important issue for tobacco growers, but don’t anticipate any policy action in this presidential election year. Other key items to monitor are changes in the U.S. exchange rate, FDA action on tobaccoregulations, federal crop insurance reform, and how tobacco leaf and products are treated in U.S. trade agreements.

 

This article was written by Will Snell, an agriculture economist at the University of Kentucky College of Agriculture, Food and Environment. The article first appeared in the April 26 edition of Economic and Policy Update.