Tobacco On The Way Up

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Tobacco On The Way Up

ATLANTA -- The Farm Press recently reported that since U.S. tobacco acreage was removed from a government buyout two years ago, its acreage and production are increasing in some parts of the nation.

"They're not back yet to those pre-buyout levels, and they're not expected to be back at those levels in the foreseeable future, but it does appear that things have hit the bottom and have started back up somewhat," Kelly Tiller, University of Tennessee Extension economist, said at the recent Southern Region Agricultural Outlook Conference in Atlanta, Ga.

Almost 92 percent of tobacco grown in the nation is used for cigarette production, according to Tiller. "It's important to look at the trends and the cigarette and the tobacco industry in general. It can give us an idea about what we can expect in the near future," she said. However, she noted that over the last decade, cigarette production has decreased by about 34 percent. "This is primarily because a lot of the cigarette manufacturers are finding it more efficient to produce cigarettes overseas than to produce them in the United States and ship them out," she noted.

Additionally, cigarette consumption is down by 24 percent, to approximately 370 billion cigarettes consumed in the U.S. for 2006, the report stated. "There are a number of reasons for this decline, and a lot of them are health related. Many of those who continue to smoke are reducing the amount they smoke because of health reasons," said Tiller. "In addition, there are a lot of new restrictions on smoking and cigarette prices are higher, so a continued decline is expected." She estimated that cigarette consumption will continue to decrease by 1 or 2 percent each year.

Tiller continued: "The current federal excise tax rate is 34 cents per pack, but the average state excise tax is 96 cents per pack, and that's up tremendously over recent years. Twenty-one states have an excise tax rate above $1 per pack, and seven states have an excise rate above $2 per pack. There are several places in the United States where a pack of 20 cigarettes cost more than $8."

However, cigarette consumption is being offset by moist snuff consumption, according to Tiller. While cigarette consumption declines, moist snuff consumption has increased by 41 percent in the last 10 years. This will continue to increase by 5 percent annually, compensating for the decrease in cigarettes, said Tiller.

"Because of these trends in consumption, a lot of the cigarette companies are starting to move into the smokeless category -- snuff and chewing tobacco. Over the past year, Reynolds American paid $3.5 billion for a private smokeless tobacco company, which was significantly above the market value of the company. Phillip Morris -- the leading cigarette manufacturer -- is introducing new smokeless products. Both these companies, as well as others, are currently test marketing some spitless products," she said.

Regulations and high taxation are another cause for the tobacco industry to jump into the moist smokeless pool. "Under FDA authority, they can market and advertise these products as a reduced or lower health risk," she noted. "That's significant incentive to expand into these categories."