A Closer Examination of the Domestic Cigarette Market: Implications for U.S. Burley Demand

The current world burley surplus combined with a strengthening U.S. dollar has played havoc on the international demand for U.S. burley. What about the domestic market? Changes in burley demand in the U.S. mirrors changes in domestic cigarette consumption/production as virtually very little burley is used to manufacture other tobacco products. U.S. cigarette sales have plummeted over the years in response to health concerns, taxes, smoking regulations/restrictions, and more recently, the emerging e-cigarette vaping market has also become a very modest, but yet contributing factor to the overall decline. Over the past 20 years, U.S. cigarette consumption has plummeted 52% while U.S. cigarette production has fallen by 63%. (Note: production has declined greater than consumption with the shifting of cigarette manufacturing overseas practically wiping out U.S. cigarette exports – off 93% since its peak in 1996).

Obviously U.S. cigarette manufacturer’s demand for U.S. (and foreign) burley are impacted by these significant declines in the domestic cigarette market. But has imported burley declined at the same rate as U.S. produced-burley for the domestic market during this time frame? To get a better gauge of these trends one should look at a multiyear period instead of comparing single years when supply factors (i.e., the availability of U.S. or foreign burley) could radically alter the analysis. Looking at the most recent five year period (2010-2014) versus the 1996-2000 period reveals that while U.S. cigarette production has declined 55% during these two periods, U.S. burley imports have only declined 27% compared to a 76% plunge for domestic use of U.S. burley.

Looking at early data for 2015 provides some interesting observations for the current U.S. cigarette market. It’s certainly a very, very small sample, but U.S. cigarette sales and production are both actually slightly higher for the first five months of the year compared to the same period last year. How can that be the case? After all the extreme cold weather in many parts of the U.S. this past winter likely limited smokers from lighting up outside in midst of growing in-door smoking restrictions. Plus, cigarette price increases have been running 4x the overall inflation rate. Perhaps lower gas prices might be impacting cigarette sales as convenience stores, (most of which sell gasoline) sell an estimated 65-70% of smokes. Or could it be that the growth in electronic cigarettes is waning as tobacco consumers prefer to get their nicotine from cigarettes? Is this just some inventory adjustment by the manufacturers to impact their financial position? Or is this just a short term anomaly? At this point it in unclear how this surprising short-term trend may impact the market for the 2015 crop and contract volume for 2016.

One thing that is for sure is that Mother Nature has certainly helped in our supply/demand balance. USDA issued its first crop report on the 2015 burley crop on August 12th which projected a 157.3 million pound U.S. burley crop (-26%), with Kentucky’s estimate forecast to total 117.8 million pounds (-28%). Beltwide acres are down 18%, according to the USDA survey, while the average U.S. burley yield is off 11%. It appears production is extremely variable across the belt, states, and even within the same county. While the crop outlook may have improved in recent weeks, the general feel among the industry is that the probability that the crop is lower than the current USDA estimate is probably greater than a future upward adjustment in USDA’s August forecast. Thus, this much smaller crop may be more in line with, or perhaps even below anticipated U.S. burley needs in the current demand environment.

U.S. Burley Production (Millions of Pounds)