Global Economics Driving the Downturn in Tobacco

 

Since we last heard from NC State Ag Economist Dr. Blake Brown, things have changed, and tobacco contracts being offered to producers are different than what was anticipated:

“Yes, and it’s disappointing, and we’d hoped that we could get by with a small decrease in pounds, maybe 10% or so, but it’s apparent now, even though we don’t’ have hard numbers, tha the decline is going to be more substantial than that.

And of course, it’s not even in its distribution, some farmers are losing their contracts which is making it extremely hard for them given that other commodity prices are very low right now, there’s just not a lot of bright spots in the farm economy.  So, yeah, it’s very disappointing.”

Brown explains that there’s not only micro economic forces at work, conditions here at home, but macro economic conditions, conditions in other countries, driving the downturn:

“There’s a lot of different factors going on.  First of all, the positive that actually, believe it or not, things aren’t as bad as they could have been…first of all Brazil had one of the smallest crops of tobacco that they’ve had in probably 15 years.  And that was because of extremely wet conditions, they just weren’t able to get the tobacco in the ground in some cases.  So, they had a very small crop.

And then Zimbabwe, the other competitor to US tobacco had a very small crop due to extremely dry conditions.  So, weather reduced the size of both of those crops, and therefore reduced the very large inventories we had going into the 2015 season.  Believe it or not, if we had not seen those reductions in world inventories because of the weather-related problems, it would be worse than it is now.”

Plus, the value of the dollar in the global economy is playing a role:

Now, on the other side of that, a really difficult that’s going on, not only for tobacco, but for a lot of agricultural products; is that Brazil, who is a chief competitor for soybeans, corn, cotton, as well as tobacco, their currency has been devalued dramatically.  It’s worth almost half of what it was two years ago.  And at the same time the US dollar has strengthened, and so, that means that export products, of which we export most of our agricultural production here, they’re much higher on the world market because of the strength of the dollar, and Brazil’s agricultural products, which compete with ours are much cheaper.

So, the exchange rate situation has, I think, caused global leaf dealers and other to try to look at Brazil in terms of trying, perhaps to get some more tobacco there, when they plant this fall.  And that just puts the US in a difficult competitive position, and it’s probably not going to get better for a while, maybe two or three years.”

Brown says good advice is hard to come by:

“I wished I had a silver bullet, this is just a difficult year.  It’s a difficult year in terms of tobacco, and even though things weren’t great in 2015, it was still a profitable product and it held a lot of farms in place, even when soybean, corn, cotton prices are down.  And so if you’re unfortunate enough to be one of those farmers that lost their contract and you’re looking at these other commodity prices, I think you just have to some really hard looking at talking to your banker, it’s just not a pretty situation.  I really feel for those farmers that lost those contracts.”

NC State Ag Economist Dr. Blake Brown.


A native of the Texas Panhandle, Rhonda was born and raised on a cotton farm where she saw cotton farming evolve from ditch irrigation to center pivot irrigation and harvest trailers to modules. After graduating from Texas Tech University, she got her start in radio with KGNC News Talk 710 in Amarillo, Texas.