Global Competitiveness of the US Tobacco Industry

Tobacco Farming in the US

In the US, North Carolina and Kentucky dominate tobacco production with 65,154 and 32,496 acres harvested in 2017, respectively. Since 1992, producer prices of tobacco have risen from $1.74 per pound in North Carolina and $1.84 per pound in Kentucky to $2.00 per pound and $2.14 per pound in 2017. The USDA expects that US national tobacco production quantity will fall to 293,362 tonnes in 2018, down from its peak of 1.6 million tonnes in 1963. The total production value of US tobacco was $1.47 billion in 2017 compared to $3.22 billion in 1997.

The golden age of cigarette smoking in the US occurred in the early 1960s. Domestic consumption in 1962 was 890,426 tonnes, compared to 349,021 tonnes in 2013. The average number of cigarettes smoked annually per capita in the US is 1,017 while in China it’s 2,043. This highlights a fundamental problem for US tobacco farmers. Can an industry thrive while domestic consumption dwindles and foreign markets compete on price? For decades, US tobacco farmers have sought government help against market forces.

Subsidies Buffer US Tobacco Losses

Following the Great Depression, the US government supported the tobacco industry by setting production limits and offering price supports. In 2004, Congress voted to terminate government subsidy of tobacco, an unpopular commodity to be propped up with US taxpayer dollars.

The Tobacco Transition Payment Program (TTPP), a program aimed at sunsetting federal support of tobacco, was also enacted to protect US tobacco farmers from losses due to competition from cheaper foreign sources. With about $9.6 billion paid out to US tobacco farmers between 2005 and 2014, the TTPP phase out in 2014 precipitated a firestorm of controversy among farmers accustomed to government backing through the maintenance of artificially high tobacco prices. As of 2012, $1.74 billion has been paid out directly to farmers through TTPP, while $4.11 billion had been paid out to tobacco quota owners,a group of farmers who owned farmland where the quotas were applied. During the era of price supports that ended in 2005, tobacco quota owners would vote on whether or not to continue the price assistance every three years. Financial institutions also benefited from the TTPP. Eligible recipients were even allowed to sell structured payouts to financial institutions in exchange for lump sums, and the USDA allocated a total of $1.79 billion to these institutions as of 2012.

With about $9.6 billion in payments to tobacco quota owners and growers over 10 years (2005-2014), the TTPP has had a large impact on rural economies in tobacco growing states. In 2005, $392.4 million worth of payments were paid out to tobacco producers and quota owners in North Carolina. In Kentucky, the second largest tobacco producing state, payouts totaled $221.8 million in 2005. By 2014, 45 percent of TTPP payments went to North Carolina and 22 percent went to Kentucky. The rest was shared among South Carolina, Virginia, Georgia, and Tennessee.

With the sunsetting of the TTPP in 2014, farmers became more vulnerable to the vagaries of global tobacco markets. For more than a decade, demand for US tobacco has been declining due to an increase in US excise taxes, emergence and growing popularity of e-cigarettes, and competition from other tobacco producing countries. Because of this, many farmers have gotten out of the business of tobacco farming in anticipation of full government deregulation. In 2002, there were 56,879 tobacco quota owners, but as of 2015 only 4,268 tobacco farmers remained. As the farmers abandoned tobacco, foreign competitors picked up the slack.

Global Tobacco Boom

As the US tobacco industry shrinks, prospects for the global tobacco industry have never been stronger. China devotes 3.57 percent of its agricultural land to tobacco production. In 2014, the China produced 2.99 million tonnes of tobacco. Yields have increased from 1.78 tonnes per hectare in 2000 to 2.23 tonnes per hectare in 2016. In 2013, Chinese consumption of tobacco was 3.06 million tonnes compared to the paltry 350,000 tonnes consumed in the US. Today, China retains its status as the single largest producer and consumer of tobacco in the world.

India has the second largest domestic consumption of tobacco at 552,288 tonnes in 2013. As in China, the proportion of Indian tobacco dedicated to the export market remains relatively low because of strong domestic demand. In 2016, China and India exported $5.78 million and $6.71 million of tobacco, respectively.

While cigarette smoking rates have dropped off drastically in the United States, cigarette smoking among leading tobacco-producing countries has increased. China’s smoking demand has increased markedly, and Brazil is becoming a strong exporter of tobacco helping to fill global demand. Brazil exported $2.05 billion worth of tobacco in 2016, compared to US exports at $1.14 billion.

The Brazilian tobacco industry has been eclipsing that of the US. It has experienced 94 percent growth in tobacco production between 1993 and 2014. Furthermore, export value was $2.13 billion (USD) in 2016 despite tobacco companies have a 80 percent tax burden. Harvested area of tobacco was 375,622 hectares in 2016, and the industry employed 52,000 people in that year. Brazil exports about 85 percent of it’s tobacco production accounting for 1.35 percent of all exported goods and services.

Conclusions

The case of the US tobacco industry highlights how difficult it is for developed-country agricultural commodities to be truly competitive in the global economy without government subsidy. It requires a strong domestic market, globally competitive prices, and soaring global demand. On the demand side of the equation, it remains to be seen whether international cooperation against the negative health effects of smoking can deter the growing tide of non-US demand. The World Health Organization Framework Convention on Tobacco Control was passed in 2003 in an effort to reduce tobacco consumption and tobacco smoke exposure globally. The US, however, is not a signatory to the framework, thus abdicating its seat at the table in negotiating more favorable terms for its domestic tobacco industry. As the US tobacco industry is further eclipsed by other foreign producers, Gro Intelligence provides subscribers with the data and analytics necessary to stay ahead of trends in the tobacco industry.