• By Adam Probst, Extension Agent

Tobacco import trends and policy

Source: Dr. Will Snell, UK Tobacco Economist

Since the late 1990s tobacco production has seen a steady decline in Woodford County. Although in decline, Woodford County producers raised over 1.8 million pounds of burley in 2016. Last week, Woodford County hosted the Central Kentucky Tobacco Growers Conference in which producers heard from Dr. Will Snell on the projected outlook for burley tobacco in Kentucky. Below is a summary of what we may expect to see for 2018.

Declining global cigarette production, coupled with the introduction of new tobacco products and technologies requiring less tobacco leaf, continues to reduce demand for U.S. tobacco. Domestically, another factor that is currently eroding the demand for U.S burley tobacco has been the increasing use of imported leaf. In recent years, U.S. tobacco manufacturers have been importing around 120 million pounds of foreign burley annually - close to the size of a typical U.S. burley crop and accounting for approximately 2/3 of total burley use in the U.S. market. Slumping U.S. burley exports totaling around 60 million pounds annually in 2016 and 2017 has resulted in a U.S. burley trade deficit averaging 60 million pounds annually for the past two years.

While ample supplies of foreign burley have affected this trend, a growing price differential between U.S. and foreign burley likely contributed to the trade imbalance. In 2013, the differential between the average price of burley tobacco imported into the U.S. and the average price of U.S. burley exported was close to $1.00/lb, with the trade price differential between U.S. burley and our closest competitor, Brazil, only a 25 cent/lb difference. This past year, the overall trade price difference swelled to nearly $1.40/lb, with the U.S. burley export/Brazilian import price differential approaching $1.00/lb. Consequently, utilization of imported burley versus using U.S. burley this past year resulted in a cost savings of approximately $170 million for U.S. cigarette manufacturers or around 1.4 cents/pack of cigarettes (0.3% of the average U.S. retail price).

The U.S. adopted import restrictions on tobacco in 1993, which required U.S. cigarette manufacturers to use at least 75% U.S. tobacco in their blends. However, this legislation was ruled to violate international trading rules and thus was replaced by an acceptable tariff rate quota (TRQ) system in 1995. Under the TRQ, cigarette leaf imports that exceed predetermined quota levels for specified countries are subject to an import duty of 350%. Collectively the annual TRQ was set at 150,700 metric tons (332.2 million pounds) in 1995 when cigarette production totaled 755 billion pieces. The annual TRQ level remains at 150,700 metric tons today with annual U.S. cigarette production levels close to 250 billion pieces. However, U.S. tobacco imports under the TRQ have rarely approached the maximum level and have generally only been around 50% utilized in recent years.

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