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John Ellen:

[He] apologized for not being able to attend, he had earlier commitments, and he very quickly suggested that his associate in the tobacco division, B. G. Andrews, would be an excellent choice for our luncheon speaker. Without further ado, here's Mr. Andrews. [Applause]

B.G. Andrews:

Thank you, Dr. Ellen. I do feel like I'm with some of my friends, some of my college mates, and most of all I feel like I'm home. Greenville is near my hometown and I've been here a number of times. I've been here to the [00:49] Restaurant in its earlier days. The food is still good.

I would like to comment, Professor Ellen, that I am not directing my comments towards the history of tobacco, even though I could write a book on the history of tobacco in North Carolina and particularly in this area. I grew up on a tobacco farm. I spent my life, except for one or two diversions, in the production and the harvesting and marketing and in the economy of flue-cured tobacco, and for my thirty years of service associated with the Department of Agriculture I have directed most of that time towards the economics and the marketing of tobacco, and in the last years and presently I am associated with the Foreign Agricultural Service, a part of the Department of Agriculture, in researching, analyzing, and evaluating the international economics of tobacco. I feel that I do have some experience in tobacco but I don't have the answers. I do wish to share with you today how [the prospects] for the international trade of flue-cured tobacco appear to us, how we see it. We certainly are not offering this as the answer to some of the problems that this group may see, may visualize, or may analyze in the tobacco industry.

I am delighted to have this invitation to participate in this third annual Tobacco History Symposium. It has been my privilege to work in tobacco for a long period and in recent years I have developed a broadening interest in foreign trade. You've asked me to direct my comments toward the export prospects for flue-cured tobacco. This is a timeless subject and one that is most significant to the commerce of North Carolina. The United States leads the world in tobacco production and exports and North Carolina is the leading state in this industry. North Carolina has hit the press in recent days as having a number of firsts. I will add to that number that North Carolina is one of the first in terms of leadership in tobacco production and export.

Since tobacco exports substantially exceed imports, they make a sizeable contribution to the U.S. balance of payments position. In fiscal year 1974, North Carolina was one of the ten leading states in agricultural exports, with a total value of about $800,000,000. This is agricultural exports. Tobacco exports put North Carolina in that position with an export value of $456,000,000 out of a U.S. total for un-manufactured leaf of $813,600,000. North Carolina also manufactures about fifty-five percent of all cigarettes exported--now I said exported, but of course this is the total cigarette industry--which in exports reached a value of nearly $301,000,000 in 1974. Gentlemen, this is exports of cigarettes, so that, too, is a sizeable industry.

Even though commerce in leaf tobacco was a part of the early history of our country, the worldwide cigarette industry as we know it today had its real beginning in the early part of this century. The great thrust in tobacco consumption and trade began with the advent of the blended cigarette made on mechanical machines. This cigarette industry has undergone a steady growth, both here and abroad. Following a trend of recent years, world cigarette output continues to set new record levels. Now, I want to caution you that this is cigarette output in numbers of sticks of cigarettes.

Now, let me briefly give you our analysis or evaluation, if I may, of the current world tobacco situation, and then I will get more specific into the flue-cured part. The 1974 world tobacco crop reached over 11,000,000,000 pounds--a new record--seven percent above the previous year. About forty-two percent of this crop was flue-cured varieties, with the U.S. crop contributing over one third of the total. This of course is excluding China, that is the People's Republic of China, and I do this for a special reason. China produces as much flue-cured leaf as the United States, but practically all supplies are consumed at home. In spite of this increase, available supplies of light cigarette tobaccos remain short, resulting in prices substantially above those of previous years. This again is the worldwide situation. World production of flue-cured tobacco was up nine percent in 1974 and is expected to be larger in 1975. While the U.S. crop was reduced in recent years by a strict poundage control program, production in foreign areas have expanded rapidly, and some of the gentlemen in this audience may not exactly agree with the way I'm saying it, but I think in the whole we can point out areas of this expansion that would support what I'm endeavoring to say here. However, available supplies of quality leaf have generally tightened and prices have advanced sharply in most areas. There again, when you get into a discussion of defining quality I am not the expert, but quality is the one characteristic of flue-cured tobacco and cigarette tobacco in U.S. production that is demanded worldwide.

U.S. leaf is still the most expensive to enter world trade, but a number of competing countries are experiencing explosive increases; for instance, farm level prices of flue-cured tobacco in 1973--and I'm going back that far because our international intelligence doesn't bring us up through 1974 and I am leaning heavily on annual statistics rather than intermittent or monthly statistics--the farm level prices of flue-cured tobacco in 1973 jumped forty-nine percent in Malawi, about twenty percent in India, thirty-two percent in Brazil, seven percent in Japan, and five percent in Canada. For the 1974 U.S. flue-cured market season, the auction prices rose nineteen percent to a new record, $1.05 per pound. This again is growers' receipts, average. These rapid increases were due to reduced availability in most areas and in a continuing strong world demand. With that kind of price increase, you know there had to be some limited supplies of what we call quality cigarette tobacco.

Now, let me leave that behind us and look at some of the factors that we think will have an impact or does have an impact on the current flue-cured supply-demand situation, and also the ones that we have endeavored to get a hold on and evaluate in terms of the impact looking what are the prospects in the future, one of those the world cigarette consumption. Cigarette consumption as we know it today, or cigarette manufacture as we know it today, takes two thirds of the total leaf consumption worldwide. That's in the machine-made cigarette. That shows you the importance of cigarette consumption versus the other kinds of tobacco products, to mention a few, snuff, chewing tobacco, pipe tobacco, and so forth. Following an upward trend of recent years, world cigarette consumption continued to set new record levels in 1973. Again I'm going back to the latest final statistics that we have, but I will add that we do at this state anticipate that that general rise will continue in 1974 and so far as we can see we would expect somewhat that same trend in 1975. Output gained--and output there means the manufacture--output gained 3.7% in 1973, for a record of 3,600,000,000,000 pieces. Now I could take time to put that in packages and so but 3,600,000,000,000 is a heck of a lot of cigarettes. This is a leaf equivalent of almost 8,000,000,000 pounds of tobacco or seventy percent of the world crop of leaf tobacco. This rate of gain in cigarettes is slightly above the annual average rate of growth of the 1960s.

The current growth in cigarette consumption is rising significantly in most major markets for exports of U.S. tobacco and for U.S. tobacco end products, and these areas, the major markets for U.S. exports of tobacco, are the European Community, which is made up of the nine of the marketing union that is now in Europe, and Japan. These countries--that is the nine countries of the European Community and Japan--took sixty-nine percent of U.S. exports in 1973 and sixty-two percent in 1974. These countries took sixty-two percent of flue-cured tobacco in 1974. Even though the EC trade has faltered, Japan became the U.S. major tobacco market in 1974, exceeding both the United Kingdom and West Germany as traditional leaders. So what I'm imparting here is that the nine countries of our traditional market for tobacco and particularly flue-cured tobacco faltered in 1974, they have slipped some, but Japan has pretty much made it up. Japan and other Asian countries are the growing giant in the tobacco consumption industry as we see it today.

Now, let's take a look at the supply position. Tobacco stocks are low in major importing countries. Let me preface this a little bit by going back. When I said in the U.S. we do have a strict control program, this is true. It is so strict that each individual producer, as all of you know, has a poundage card and that is the limit of his marketings, and the department does police that marketing very closely. Trade in tobacco in almost every country overseas--and I've traveled most of them with the exception of the South African countries and the South American countries--the tobacco industry in most of the major countries is either directly government controlled or indirectly the government exercises substantial supervision or control over the tobacco industry from the standpoint of production, trade, and manufacture, and some places probably even consumption. But, tobacco stocks are low in major importing countries. An analysis of the supply and distribution position of a number of markets indicates that leaf stocks have been reduced materially in relation to requirements in recent years. Since 1965--and this was the year just prior to the embargo of Rhodesia, who was and to some extent still is a major competitor to U.S. flue-cured tobacco and North Carolina flue-cured tobacco in world markets--since 1965 the annual beginning stocks, this is the stocks on hand of old crop tobaccos at the beginning of the new crop year, relative to manufacture and use ratios has declined in each country. This is evident in West Germany, the United Kingdom, and Japan, which are major flue-cured tobacco importers, and the United States, the world's largest flue-cured exporter.

I think those of you who have followed the tobacco industry in our country are aware that with the strict control program that the industry and the government has assisted in operating in the United States for a number of years has been designed to hold back production, to reduce supplies that were considered surplus, if I may use the word. For a number of years we had substantial quantities stored away in the government pools. These tobaccos were there available for purchase by first come, first served foreign traders or domestic and the control programs were designed to reduce supplies and move those stocks into consumption trade. The U.S. now, as I said, has low stocks. The pool stocks are for all practical means depleted. These reduced stocks--I'm going back to worldwide--these reduced stocks relative to needs among major importers coincide with a decline in the stock disappearance ratio for flue-cured leaf in the United States. Hence stocks relative to anticipated demands have fallen in both the exporting and importing countries. In that, let me add, that we evaluate this as a tight supply situation on quality tobaccos. There are still some tobaccos even in terms of flue-cured varieties that are available, I wouldn't say that they are surplus, but they don't carry what we call the quality characteristic that is really in demand worldwide. As of January 1, 1975, the reserve stocks of flue-cured tobacco held by the Cooperative [18:22 Loan] Association was practically depleted. When these stocks are gone, and I think now that they are pretty well committed or the part that is not committed is the smallest that we have had since we have been operating the loan program as we know it today, so when these stocks are gone export dealers must rely on current U.S. crops to supply their needs or they must increasingly look to foreign producers for more of their supply.

Now let's look at the increased competitive production worldwide, and this again is flue-cured tobacco. The United States produced forty percent of the world's flue-cured tobacco crop during the 1960-64 average period, but only twenty-six percent in 1974. Remember, I said we have been following a program of holding back our production in this country to move the reserve stocks of what we call the extra tobaccos held in the growers' cooperative pool. Outside the U.S., significant upward trends are noted in Brazil, India, the Republic of Korea, Rhodesia, Argentina, Thailand, Poland, Yugoslavia, and some African areas. This increased production has been used to meet domestic demand--that is in the local country--but also to increase exports. Particularly the developing countries, and this is where you are getting most of this expansion, are looking to tobacco as a good foreign currency earner. If they can just get into the exports it makes a good item that they can trade, bring in foreign currencies, and then they can use that to purchase other more essential things that they have in their country, so the government encourages production in these countries, particularly for export. As the supply and quality of tobaccos improve in other countries, it puts more pressure on U.S. producers to import cost-reducing innovations and maintain a consistent source of high quality leaf. Current high world tobacco prices will encourage many countries to step up production for export as a means of earning those foreign exchange currencies and/or to become more self sufficient.

Let's look at another factor that I evaluate and analyze will have an impact on the future of our tobacco trade, and that is the [field 21:26] of trade restrictions. I've already mentioned that in many or most of these foreign countries the governments have a direct interest and many of them direct control of the tobacco industry. World trade in tobacco is influenced by a wide range of governmental measures. These measures include tariff, non-tariff barriers. Many of these measures are discriminatory in that they provide more restriction on high-priced tobacco such as that from the United States than it is in the case of other areas and particularly in the European Community. The European Community traditionally takes half of all U.S. flue-cured exports. The EC excise tax provisions, which are being harmonized by stages in the nine countries, make high-quality cigarettes made with U.S. leaf carry a larger proportional tax than cheaper brands using lower quality leaf.

I would like to comment on that further by saying this: In terms of these tax proposals, for many years we've always said that there is no world price for tobacco. If you take flue-cured tobacco of a certain grade--we'll use a U.S. grade, and there is no international grade or standard for tobacco--if you take one quality or one lot of tobacco from the United States you can go to several countries and you'll find a different price for that same tobacco, so we've always said there is no world price as such for tobacco. But, at the same time, prices have become very significant in our international trade. I'm sure that the dealers here today will agree with me that price is one of the first things that the buyer wants to talk about now when you visit the buyers overseas to talk about U.S. tobaccos.

Some concessions have been gained--and this is going back to the tariff barriers--some concessions for the U.S. have been gained through negotiations in the general agreement on tariffs and trade but further improved access for high priced leaf may be difficult. Reduced trade barriers and freer tobacco trade are being sought in the upcoming multinational trade negotiation meetings. Whether we gain more for tobacco than we lose will determine how much tariff duties will affect our trade in future years, and I might add that of course our policies here support and lean to reduced trade barriers and reduced duties because the United States already has the lowest duties on tobacco coming into this country of any significant importing country in world trade.

Now let me comment just a bit on export prices of U.S. tobacco, and I've already indicated that prices have become significant in international trade. Export prices of U.S. tobacco have traditionally been much higher than from most of other producing countries. Our competitive advantage has remained in superior quality and availability of adequate supplies. Some temporary advantage in price competitiveness accrued to the United States by the devaluation of the dollar, but world economic conditions can have a pronounced influence on our future trade. The recent escalation in petroleum costs has increased production and consumer cost, upset national budgets, and affected economic activity on a worldwide basis. I think we all agree on that. As long as energy costs remain so high, petroleum deficit countries, which must import energy products, will have less money to buy other things, particularly high-cost tobacco. Rising U.S. prices are causing tobacco importers to seek alternatives and cheaper sources of supply. What I'm saying there is that every country that's importing tobacco is looking in every producing area to see if he can get what he wants in the kind of tobacco, the variety of tobacco, and the quality of tobacco that he needs for his manufacturing consumption, and price again is an influencing factor.

Now, with those brought out, let me just generally talk about the prospects for U.S. flue-cured exports. I've already indicated I don't have the answers and I certainly wouldn't propose that I know how to get the answers. The tobacco industry is going through so much change that you would have to almost evaluate each of the factors that have an impact on foreign trade and set that up: If this does so-and-so, then we can expect such-and-such to develop. But putting the whole package in one ball of wax, we think that this is the best analysis that we would propose.

Prospects for U.S. flue-cured exports: The outlook for all tobacco trade is promising and there is an increasing demand for more and better quality leaf. Population is increasing, economies are growing. Buying power is rising in most countries. Consumption of cigarettes made from light tobacco is trending upward worldwide. I'm speaking again of sticks, numbers of cigarettes. Even exports of U.S. cigarettes have grown over one-third in the past three years, and as I indicated earlier, that export trade was a $301,000,000 export value in the past year. We estimate that world cigarette output will double during the last quarter of this century and exceed 7,000,000,000,000 pieces by the year 2000. Gosh, that's a lot of cigarettes. [Laughter]

During this period, if current trends continue, it is likely that the American blend cigarette will gain even faster in popularity. This means a growing demand for more and better tobacco, so there is reason to be positive about the future that our farmers and our tobacco [29:04] with long experience and technical skill will become increasingly competitive. Whether the present proportion of high-quality tobacco can be reduced and substituted by cheaper supplies and lower quality alternative sources remains to be seen. I hope Bill Humphries maybe can give a better answer to that later today. We believe the quality problem will continue to be a significant factor and one to which foreign countries wishing to compete in international trade must pay greater attention. For the 1975 U.S. flue-cured crop, the marketing quotas, as you all know, have been raised fifteen percent to meet anticipated demands. Expected production plus old crop carryover stocks should provide an available supply adequate to meet anticipated domestic and export demands. Domestic utilization in the current season will probably remain at or near last year's level and exports are expected to remain near the recent high level in volume, but some higher in value. If the individual monthly export values, that is dollars and cents per pound, continue to build up like they did in January, that increase in value is going to be very significant. I don't know whether that's a positive or a negative factor to the future of U.S. trade.

Over the longer period, our maintenance of flue-cured export trade will depend upon the ability of U.S. producers to compete in foreign markets. Most of the countries which compete with the U.S. in world market for flue-cured tobacco are developing countries. With lower production costs and trade preferences--trade preferences meaning that they get the trade preference in the markets that we export to, such as the European Community--with this lower production cost and with their trade preferences, many of these countries are expanding their tobacco production for export. However, their ability to produce and export good quality flue-cured leaf may be limited by a number of factors. These include as we see it: the political instability in the country, the necessary financing in the country, the research programs needed and as yet not developed in the country, adequate marketing systems, and lack of know-how in cultural and harvesting practices. Now, we say this for this reason: We know the interest is there and we know the potential is there. We know the government has goals of expanded production. We know that our World Bank has made loans to some of these developing countries to get directly involved in production and export of flue-cured tobacco. Some development has progressed but it is, as we see it, far below what the goals were set up in these countries. They have had and they are having difficulties and we think those difficulties will continue until these factors are stabilized.

One of the strongest selling points we have in world markets is an assured supply of high-quality leaf. The future of U.S. tobacco exports will depend largely upon the availability of adequate supplies of flue-cured tobacco to fully meet both domestic and export requirements at competitive prices. I stuck that in there for this reason: The increase in the flue-cured crop this year was fifteen percent in the available marketings. The reports came back that the grower organizations and many of the producers were against producing more tobacco. My comment here is that we are not producing the tobacco to meet current demands. Our stocks are short, our supplies are low, our demand is growing, and unless we increase the supply to meet that demand, then the future of the trade in export is going to be determined by that action. If the exporters want our tobacco to export, the importers and the buyers want to buy it. If we don't have it, we see it that the export trade would be the first trade that would be affected in relation to our domestic trade.

One further comment--and I know I'm going over time--I've been speaking there from the standpoint of how we see it in USDA. I would like to leave with you, too, that in addition to USDA there is an organization in Rome, Italy, called the Foreign Agricultural Organization, which is made up and contributed to by all countries in FAO. They took an interest in tobacco a year or so ago, and they came out with these projections of consumption in terms of manufactured tobacco and not just flue-cured, but I've already indicated that flue-cured tobacco is the major cigarette-type tobacco in world consumption. FAO came out with projections saying, or indicating, that by 1980--and this is in--. Well I won't give you the metric tonnage; I'll give you the percent increase. By 1980 the world consumption of tobacco would be up thirty-three percent over 1970 and 1975 would be up fourteen percent over 1970. The USA, as a part of that world projection, the USA consumption by 1980 would be up one percent over 1970 and about the same in 1980 as 1975. We won't disagree with these findings for the simple reason that the USA as a developed country, we have reached a point that the cigarette increase has been rising in numbers but the utilization of the leaf and the technology and manufacture has been such that the industry is making more and more sticks each year with the same pound of leaf.

Now, it may not be from 1975 to '80, if cigarettes in our country continue to grow at two, three percent, that we won't need more leaf, because the period that FAO used for this projection was the period when the technology in our country was developing to the extent that the manufacturers were using the stems in cigarette manufacture, whereas stems in earlier years had been a waste. The manufacturers dumped them, threw them away, and they were not used. So I say again, depending on what develops in the cigarette industry and growth in our country, I believe, and the further technology in manufacture, will determine whether we need more tobacco than is being consumed now by 1980. But worldwide, FAO says that the consumption of tobacco will be up thirty-three percent in 1980 over 1975. China--there again I say it's as large a tobacco producer as the United States--will also be up one-third in consumption, the USSR twenty-nine percent, the centrally planned countries thirty-one percent, the developing countries forty-seven percent.

Now, I may not be in the industry in 1980, 1985. You can't come back and say, well, you left a glowing report that things are going to be so good by that time. But I do think that even with all the talk about substitutes, all of the anti-tobacco industry, it does appear that the more agitation that comes up the more increase we get in cigarette consumption. Whether this will go on or not, we say that in the near future we expect it to, and it has been projected by other organizations that it will continue. Thank you. [Applause]

John Ellen:

Thank you very much, Mr. Andrews. We certainly appreciate the lengthy discussion and impressive figures you produced for us. Would anyone like to ask any questions at this time? Would you be open to questions or not?

B.G. Andrews:

I'll try.

John Ellen:

All right.

Questioner One:

Mr. Andrews, in Foreign Agricultural Service studies do they find any indication from any governments, particularly in the Far East or in Africa, pressure to put more land in agricultural commodities due to world hunger than they would into tobacco?

B.G. Andrews:

Bob, to truthfully answer your question, I'd say no. In fact you are aware that in terms of the African interest in growing tobacco, we in the department have always encouraged, through FAO and other international organizations, that we are always interested in helping our neighbors in the developing countries, but we feel that they should spend their energies and their efforts to producing more of their food requirements that are so short before they start encouraging the production of a commodity such as tobacco for international trade. But the governments still like to get into tobacco as an exportable item and their goal, as you well know, is for more production of tobacco for export.

John Ellen:

Are there other questions?

Questioner Two:

Yeah. B. G., you indicated that we're the world's largest producer, the world's largest exporter, and we're about the third world's largest importer of tobacco. All right, what do you foresee in the future with respect to imports into this country?

B.G. Andrews:

Well I could turn that question around and ask you the same thing because you've just been over there since I have, but let me try it this way. I say that the tobacco industry is going through change. Technology is still changing our industry. The trade is changing. The 1974 calendar year trade in terms of exports of tobacco leaf and manufactured products was, in a rounded figure, $1,200,000,000. That's a lot of money. The import value was 258--don't hold me to that exact figure--$258,000,000, leaving right at a $1,000,000,000 balance of trade for our tobacco industry in international markets. Now the point I'm seeing is here that the international market still looks good for our tobacco, if we maintain the supply and if we maintain the quality. It is a significant industry, and if you don't think it contributes to our economy, just look at the university. Just look at Greenville. Just look at eastern Carolina. This is the tobacco area, and tobacco is the economy of the agriculture in this--. Ask Joe Pugh. He's the man that holds the bank accounts. He knows that tobacco brings in the money at market time. But going back to your question, imports are increasing, and they are increasing more and more each month, and as the price of our tobaccos increase in relation to the price of foreign tobaccos, we expect this to continue. But we do feel, Ken, that unless we maintain adequate supplies of tobacco at competitive prices, the export trade is going to be the first trade that really gets the impact rather than our domestic trade. Saying it again, we think the imports will increase and of course as they increase and to the extent that they increase it will have an impact, not only on our domestic use and the utilization of our tobacco in our own home industry.

Questioner Three:

B. G., in our free enterprise system that we have here we have a lot of people developing new varieties of tobacco, and as you know we have a procedure in which these new varieties are placed into production to be sure that they are acceptable not only to domestic but to our export trade. Now you mentioned one thing earlier, something about the varieties that may not be acceptable? Could you [43:23]?

B.G. Andrews:

Well, I wasn't directing that towards a variety like Coker 139 or Coker [43:29]--. Right. I'm talking about the varieties of flue-cured tobacco that the U.S. with the quality versus the flue-cured varieties as such in India, where apparently they've grown our own seed in India. They've grown our own seed, and when I say our own seed they've grown our varieties, your recommended seed varieties. They've grown them in every country in the world, but they just don't come out with the same--. If the ladies will excuse me, as we call it in the tobacco industry, the leaf doesn't have the guts that the manufacturing industry's looking for when they're grown in these other countries. There's something in there that imparts to that smoke what the consumer is willing to pay the price for.

Questioner Three:

We're trying to keep it there.

B.G. Andrews:

[Laughs] And I'm saying if you don't keep it there, then my whole effort's wasted.

Questioner Four:

Mr. Andrews, you pinpointed some price rises for several of those competing countries. Do y'all see those price rises continuing at those percentage rates as far as [44:31]?

B.G. Andrews:

Not necessarily, and let me say it this way. Price information as intelligence in foreign countries is one of the most difficult things to come by in terms of an average, because if you ask somebody what does the Rhodesian grower get for his tobacco, you may get thirty cents a pound. Well, is that an average, or is it thirty cents a pound for the best lot that he puts on the market? The chances are, it's the best lot that he puts on the market. You can't get an average. So those price rises that I was showing, they are not exact. They are not precise. It's the best measure we can come to. But let me say again, in terms of relating prices in U.S. cents, when you are talking about bolivars in South America or you're talking about lira in Italy,--.

END OF RECORDING

Transcriber: Deborah Mitchum

Date: October 20, 2010