December 17, 2004 | By: Laura Skillman
LOUISVILLE, Ky.

As Kentucky's tobacco producers move into a world without a program, quality leaf and productive yields will be the key to profitability, according to a University of Kentucky College of Agriculture tobacco economist.

For 25 years, Kentucky's average production per acre of burley has been 2,100 pounds but that won't likely be enough to be profitable in a post-buyout market based on one company's price list for the coming year, said Will Snell, UK Extension agricultural economist. 

Many tobacco producers will have to improve production efficiency to make a profit based on a cost-of-production estimate of $1.55 per pound for 2,100 pounds per acre. That compares to the average estimated price for No. 2 quality tobacco at $1.53. No. 2 quality is where the majority of Kentucky's contracted burley falls based on previous sales history.

"So obviously, average-yielding producers are going to find it difficult to survive under this post-buyout environment, unless they are willing to accept a lower return for their own labor," he said. "Growers who traditionally achieve yields of 2,500 pounds or more will have some profit opportunities, assuming they do not sacrifice quality.”

But as quality decreases below No. 2 tobacco, prices further decline, making any profitability even more difficult.

Cash receipts for tobacco in 2004 likely will exceed $450 million but it will be a challenge to sell $400 million in 2005, Snell said, during the annual Kentucky Agricultural Economic Outlook conference held in conjunction with the Kentucky Farm Bureau Federation convention. However, buyout money will begin to flow into the state next year. At the minimum, Kentucky quota holders and growers are expected to receive $250 million and some may take accelerated payments increasing the state's buyout money in 2005.

There remains a lot of uncertainty as Kentucky growers enter into this new production era, Snell said.

"There's uncertainty in who's going to grow it, where's it going to be grown and what's the profit potential all the way down to when are the buyout checks going to arrive, what about Phase II payments and the grower lawsuit settlement," he said.

"Undoubtedly, we are looking at a considerable amount of consolidation. If you look at the data, in the past couple years more than two-thirds of owners have leased out their tobacco quotas," he said. "So, I think most of us realize those folks will not be a part of a post-buyout era. On top of that there are the individuals who'd like to retire and individuals that can't compete. So, when you roll those together, we are looking at a very consolidated number of individuals involved in producing the 2005 crop and beyond."

Production gradually will shift to central and midwestern parts of Kentucky, he anticipates. On demand side, Kentucky's burley will be more competitive but that will be constrained by the response of foreign markets to U.S. price changes, a declining domestic market and the availability of U.S. burley.

Snell said he has a big concern about whether Kentucky and Tennessee producers will supply the amount of tobacco manufacturers want in 2005 and if they don't what will happen. Will manufacturers look elsewhere or increase prices?

Based on a survey of county Extension agents in 70 counties that represent more than 75 percent of last year's quota, Snell said if prices average $1.65, about 10 percent of the production would be lost while at $1.50 average, they anticipate losing about 30 percent.

To help producers with buyout decisions and general buyout questions, information can be found at www.uky.edu/ag/TobaccoEcon. In addition, Snell and colleagues at the University of Tennessee and North Carolina State University are working on a national Web site that will be available sometime after the first of the year.

Contact: 

Writer: Laura Skillman  270-365-7541 ext. 278

Contacts: Will Snell 859-257-7288