U.S. Tobacco Production, Consumption, and Export Trends

Order Code RL30947

Report for Congress

Received through the CRS Web

U.S. Tobacco Production,

Consumption, and Export Trends

Updated June 3, 2003

name redacted

Agriculture Policy Specialist

Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

U.S. Tobacco Production,

Consumption, and Export Trends

Summary

Examination of historical tobacco data reveals a declining long-term trend in the

utilization of tobacco by U.S. manufacturers and leaf exporters. While world tobacco

exports increased over the past two decades, U.S. leaf tobacco exports declined in

relative and absolute terms. Cigarette manufacturers have been increasing the use of

less expensive foreign tobacco and decreasing the use of more costly U.S.-grown

tobacco. Now, actions taken as a result of the 1998 Master Settlement Agreement

between cigarette manufacturers and states’ attorneys general are further diminishing

the consumption of tobacco products in the United States. Cigarette exports also

have been declining recently in contrast to a history of growth.

! Total utilization of U.S.-grown tobacco has been declining since 1975, from

1.941 billion pounds to 1.121 billion pounds in 2001 (a 42% drop in the farm

weight).

! Exports of tobacco leaf peaked in 1978 at 765 million pounds (farm weight),

and then declined to an estimated 399 million pounds in 2002. This decline

occurred during a time when world exports were growing. The U.S. share of

world exports has declined from 27% in 1969 to 7% in 2002.

! Even when U.S. cigarette manufacturing output was growing, the use of

domestic leaf was declining. Manufacturing use declined from 1.6 billion

pounds in 1952 to 688 million pounds in 2001. Use of domestic leaf tobacco

has declined because: the amount of tobacco in each cigarette is now about

40% less than what it was 45 years ago; the total number of cigarettes

consumed in the United States has declined from 640 billion in 1981 to an

estimated 420 billion in 2002; and cigarettes now contain only about 52%

domestic tobacco while they once contained more than 90% (a reflection of

the declining competitiveness of U.S.-grown tobacco).

! The only growth market for U.S. tobacco since 1984 has been through the

export of cigarettes. Cigarette exports climbed from less than 60 billion in the

early 1980s to 244 billion in 1996. This market has since declined to 127

billion in 2002. The drop in cigarette exports is the equivalent of about 119

million pounds of U.S.-grown tobacco.

! The federal tobacco price support program keeps U.S. tobacco prices higher

than they would otherwise be and encourages the use of less expensive foreign

tobacco. Foreign producers have been increasing the quantity and improving

the quality of their tobacco. In 2002, imported cigarette tobacco was delivered

to the United States for about 40% of the cost of U.S.-grown tobacco.

! The farm price of tobacco and the total value of production have trended

upward when measured in current dollars. However, since 1980 reduced

output and inflation have caused a decline in the inflation-adjusted value.

Contents

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

U.S. Tobacco Production and Farm Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Utilization of U.S.-Grown Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

U.S. Tobacco Leaf Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Manufacturing Use of Leaf Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Cigarette Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Cigarette Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

U.S. Consumption of U.S.-Grown Cigarette Tobacco . . . . . . . . . . . . . . . . . . . . . 22

Cigarette Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

List of Figures

Figure 1. U.S. Tobacco Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Figure 2. U.S. Tobacco Acreage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Figure 3. Farms Growing Tobacco in the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Figure 4. Average Farm Price for Leaf Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Figure 5. Farm Value of Tobacco Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Figure 6. Deflated Average Farm Price for Leaf Tobacco . . . . . . . . . . . . . . . . . 10

Figure 7. Deflated Farm Value of the U.S. Tobacco Crop . . . . . . . . . . . . . . . . . 11

Figure 8. Utilization (Manufacture and Export) of U.S.-Grown Tobacco . . . . . 12

Figure 9. Exports of U.S.-Grown Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Figure 10. U.S. Tobacco Exports as Share of World Total Exports . . . . . . . . . . 14

Figure 11. Domestic Manufacturing Use of U.S.-Grown Tobacco . . . . . . . . . . 17

Figure 12. U.S. Cigarette Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Figure 13. U.S. Cigarette Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Figure 14. Cigarette Smoking Prevalence of the U.S. Adult Population . . . . . . 20

Figure 15. Number of Adult Smokers in the U.S. Population . . . . . . . . . . . . . . 21

Figure 16. Total Tobacco Consumed by U.S. Smokers . . . . . . . . . . . . . . . . . . . 22

Figure 17. Tobacco Content of U.S.-Manufactured Cigarettes . . . . . . . . . . . . . 23

Figure 18. Share of Imported Tobacco in U.S.-Manufactured Cigarettes . . . . . 24

Figure 19. Consumption of U.S.-Grown Tobacco by U.S. Smokers . . . . . . . . . 25

Figure 20. World Cigarette Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Figure 21. U.S. Cigarette Exports as Share of Foreign Consumption . . . . . . . . 27

Figure 22. U.S. Cigarette Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Figure 23. Exported Cigarettes as Share of U.S. Output . . . . . . . . . . . . . . . . . . 29

Figure 24. U.S. Share of World Cigarette Exports . . . . . . . . . . . . . . . . . . . . . . . 30

List of Tables

Table 1. Farms, Acres, and Average Acres of Tobacco, by State, 1997 . . . . . . . . 3

Table 2. Selected U.S. and World Tobacco Statistics, 1998-2002 . . . . . . . . . . . . 4

U.S. Tobacco Production,

Consumption, and Export Trends

Overview

This report portrays the current supply and demand situation for U.S. tobacco

in the context of historical trends.1 An examination of historical patterns combined

with the knowledge of current forces shaping domestic and export demand for U.S.

tobacco underscores the pessimism heard from farmers about prospects for the future.

Farmers and rural communities in tobacco regions have received some and are

seeking additional economic adjustment assistance, and the reasons why are made

obvious by the data.

Graphical presentations of historical data show the time path that has brought

the U.S. tobacco industry to its current situation. In addition, with the aid of linear

regression techniques, trend lines are plotted that project through the year 2005.

These trend lines are not intended as predictions of the future and they are not

constructed from explanatory models of the tobacco economy. The trend line

projections assume that the forces in place in the past will continue without change.

Changes in consumer preferences, changes in regulations or laws that affect

consumption or international trade, or large changes in purchasing power, if they

occur, can be expected to substantially alter the projections from the trend lines.2

A number of forces already are in place and others could arise that likely will

shift the utilization of U.S. tobacco below the historical trend. It is not the purpose

of this report to analyze these forces, but some of the obvious ones are listed and

should temper any evaluation of the time-series projections.

1

Unless otherwise noted, basic data are from the U.S. Department of Agriculture’s

Economic Research Service (ERS) and Foreign Agriculture Service (FAS). Historical data

are published in U.S. Tobacco Statistics, 1935-92, ERS Statistical Bulletin Number 869,

April 1994. Current data are published in recent issues of ERS’s Tobacco Situation and

Outlook and FAS’s Tobacco: World Markets and Trade.

2

In many cases, the data plotted in the numerous graphs are interrelated. Several graphs

simply offer different ways of viewing the same factor. It would be a mistake to see the data

as additive. The trend lines are constructed using linear regression to create a “best fit” and

the R-squared (R2) value of the trend line (listed with each graph) measures how well the

actual data fit the trend line. Sizable and important deviations from the trend line may have

little impact on the R2 because of the numerous observations in the time series. The closer

R2 is to 1.0, the closer the data and the trend line are to a perfect fit. However, even a

perfect fit does not impart predictive value to a time series correlation. A trend line is

visually helpful in identifying the directional momentum (i.e., increasing, decreasing,

constant) of the data, not in making forecasts. The functional form of the linear equation

used to construct the trend lines is: y = a + b1x + b2x2.

CRS-2

Contributing to an outlook of substantially reduced U.S. demand for tobacco

products is the November 1998 Master Settlement Agreement (MSA) between

cigarette manufacturers and states’ attorneys general. The MSA requires

manufacturers to pay $206 billion over 26 years to states. The manufacturers have

raised wholesale prices 67¢ per pack primarily to help meet their MSA obligations.

Furthermore, while states individually will determine how to spend the funds, some

portion likely will be used to discourage smoking.

Tobacco farmers anticipated that the MSA would negatively impact production

and therefore the economic welfare of themselves and their communities. In fact, the

utilization of U.S.-grown tobacco has dropped more than expected from domestic

cigarette price increases alone. In 1997, U.S. tobacco production was 1.787 billion

pounds and by 2002 it was down to 890 million pounds – a 50% decline in five years.

Federal and state excise taxes also continue to increase. The federal excise tax

increased to $0.34 per pack on January 1, 2000, and to $0.39 on January 1, 2002.

State and local excise taxes vary widely but the weighted average was $0.42 per pack

over the 2001/02 period. The highest tax rate as of January 1, 2003, was $1.51 per

pack in Massachusetts and the lowest was 2.5¢ per pack in Virginia.

Health education and anti-smoking efforts are developing in many other

countries, and these could negatively influence global consumption and trade. In

May 2003, the World Health Organization adopted the Framework Convention on

Tobacco Control (FCTC) aimed at curbing tobacco-related deaths and disease.

U.S. leaf tobacco has long been losing competitive strength in global export

markets. The primary reason is the high price for U.S. tobacco, caused by the federal

price support program. The quality characteristics that have long made U.S. tobacco

more valuable than tobacco from other countries are becoming less important. The

quality of foreign tobacco is improving. Also, cigarette manufacturers have learned

how to utilize lower quality tobacco in cigarettes without adversely impacting on the

final product.

Export markets long have been the growth opportunity for U.S.-manufactured

cigarettes. Now it appears that world cigarette markets are likely to be supplied the

light blend American style cigarette from overseas plants, many owned by U.S.

companies.

Tobacco farmers and their communities want and have received some assistance

to help offset the decline in sales revenues associated with reduced production.

While not included in the MSA, the manufacturers did agree to give tobacco farmers

$5.15 billion over 12 years as compensation in order to help them adjust (called the

Phase II Settlement). In addition, Congress provided $328 million in compensation

to tobacco farmers for the reductions in marketing quotas in 1999 (P.L. 106-78, Sec.

803(c)), $340 million in 2000 (P.L. 106-224, Sec. 204(b), $129 million in 2001 (P.L.

107-25, Sec. 4), and $53 million in 2003 (P.L. 108-7, Division N, Title II, Sec. 205).

In other legislation (P.L. 106-387, Sec. 844), the large inventory of 1999 crop burley

tobacco under price support loan was turned over to the federal government and

likely will never be marketed. (See CRS Report RS20802, Tobacco Farmer

Assistance.)

CRS-3

Policy makers are now examining a range of alternatives to provide assistance

in the future. Farmer assistance options range from compensatory payments for

quota reductions (as was done for the 1999 and 2000 crops) to quota buyouts (an

option debated by Congress in 1998, 2002, and 2003 (see CRS Report RL31790,

Tobacco Quota Buyout Proposals in the 108th Congress). Other suggestions include

helping farmers to shift to alternative agricultural enterprises, non-farm business

development, training for non-farm occupations, household income support, and

possibly even support for the economic infrastructure and social services that will

suffer with a shrinking tobacco economy.

In general, future prospects for U.S. tobacco growers do not look good. The

states feeling the greatest impact of the declining tobacco production and sales are

North Carolina and Kentucky. These two states have 64% of the farms and 69% of

U.S. tobacco acreage (see Table 1). Tobacco is a much smaller part of the

agricultural economy of the other tobacco growing states. Table 2 presents a

summary of tobacco data, but only for the most recent years. The remainder of this

report discusses the current situation and provides a historical context, as well as an

explanation and graphic demonstration of trends.

Table 1. Farms, Acres, and Average Acres

of Tobacco, by State, 1997

State

NC

KY

TN

SC

VA

GA

OH

IN

PA

MD

FL

MO

WV

CT

WI

MA

AL

KS

Others

U.S.

Farms With

Tobacco

12,095

44,967

14,995

1,275

5,870

1,180

2,811

2,017

1,357

711

186

481

839

74

744

68

17

13

6

89,706

Tobacco

Average Tobacco

Acres

Acres Per Farm

320,599

26.5

255,053

5.7

59,427

4.0

54,660

42.9

54,035

9.2

41,083

34.8

11,457

4.1

8,507

4.2

7,953

5.9

7,939

11.2

6,881

37.0

2,667

5.5

2,553

3.0

2,529

34.2

1,630

2.2

1,176

17.3

290

17.1

29

2.2

62

10.3

838,530

9.3

Source: Primary data are from the U.S. Census of Agriculture, 1997.

CRS-4

Table 2. Selected U.S. and World Tobacco Statistics, 1998-2002

1998

1999

2000

2001

2002

718

647

472

432

430

Tobacco yield (lbs./acre)

2,062

1,997

2,229

2,293

2,068

Tobacco production (mil. lbs., farm weight)

1,480

1,293

1,053

992

890

World tobacco production (mil. lbs., farm

weight)

14,390

14,503

14,535

13,553

13,809

Farm price for tobacco ($ per lb.)

$1.83

$1.87

$1.91

$1.92

$1.91

Farm value of tobacco production (bil. $)

$2.701

$2.356

$2.002

$1.952

$1.726

Total tobacco utilization, manufacture &

export (mil. lbs., farm weight)

1,442

1,195

1,465

1,121

na

Leaf exports (mil. lbs., farm weight)

537

433

414

432

399

Leaf exports (mil. lbs., dry weight)

467

423

397

359

338

World leaf exports (mil. lbs., dry weight)

4,253

4,565

4,339

4,646

4,622

Manufacturing use of leaf (mil. lbs., farm

weight)

905

762

1,050

688

na

Cigarette production (bil. pieces)

679.7

606.6

594.6

562.4

565.0

World cigarette production (bil. pieces)

5,372

5,407

5,469

5,471

5,464

465

435

430

425

420

Tobacco in cigarettes (lbs./thou. pieces)

1.575

1.653

1.638

1.757

na

Consumption of U.S. tobacco by U.S.

smokers (mil. lbs., farm weight)

405

455

438

419

na

Per capita cigarette consumption (cigarettes

per adult per year)

2,320

2,136

2,056

2,026

1,979

Adult smokers (% of adult population)

24.1%

23.5%

23.3

23.4%

na

Consumer expenditures for tobacco (bil. $)

$56.0

$70.6

$77.7

$82.8

na

Wholesale premium cigarette price ($ per

pack, excluding federal excise tax)

$1.19

$1.88

$1.97

$2.25

$2.37

Cigarette exports (bil. pieces)

201.3

151.4

147.9

133.9

127.2

World cigarette exports (bil. pieces)

1,301.3

886.4

906.7

897.7

928.6

U.S. share of world cigarette exports

20%

17%

16%

15%

14%

U.S. cigarette exports as share of U.S.

production

30%

25%

25%

24%

22%

Tobacco acreage (thou. acres harvested)

Cigarette consumption (bil. pieces)

Sources: Primary data are from Economic Research Service, Tobacco Situation and Outlook Report, recent

issues; Foreign Agriculture Service, Tobacco: World Markets and Trade, recent issues; Center for Disease

Control and Prevention, Office on Smoking and Health. All data for 2002 are preliminary and subject to

revision. Unless otherwise noted, data are for the United States. Na, not available.

CRS-5

U.S. Tobacco Production and Farm Revenue

Tobacco production is the supply side of the economic supply-demand equation.

In spite of the tobacco price support program, which has attempted to stabilize

supplies by limiting production through acreage allotments and marketing quotas,

tobacco production has shown substantial fluctuations from year to year (Figure 1).

These wide annual fluctuations reflect weather impacts on yield as well as

administered marketing quota changes intended to bring longer-term supply into

balance with demand. Over time, production has necessarily followed a downward

trend that nearly matches the utilization trend line (shown in Figure 6). Tobacco

production in 1950 totaled 2.030 billion pounds, and in 2002 it was 881 million (a

46% decline). Wide fluctuations in production from year to year give the trend line

little or no short-term predictive value.

Figure 1. U.S. Tobacco Production

Primary data source, USDA, ERS. Trend, R2 = .63.

CRS-6

The decline in production is reflected in the decline in acreage. Tobacco harvest

declined from 1,599,000 acres in 1950 to 428,660 acres in 2002, a 73% decline

(Figure 2). Tobacco yields have gradually increased over time and for that reason

the decline in acreage is greater than the decline in production in percentage terms.

Figure 2. U.S. Tobacco Acreage

Primary data source, USDA, ERS. Trend R2 = .84.

CRS-7

Tobacco farming long has been consolidating into fewer but larger farms, but

the scale of production remains small compared to other crops. The number of farms

growing tobacco decreased from about 512,000 in 1954 to about 90,000 in 1997

(shown in Figure 3). The average tobacco acreage of 9.3 in 1997 shown in Table

1 is a 210% increase over the 3-acre average in 1954.

Figure 3. Farms Growing Tobacco in the U.S.

Primary data source, U.S. Census of Agriculture, various issues. Trend R2 = .98.

CRS-8

The average annual price received by farmers for all tobacco has increased over

time and at a relatively steady rate (Figure 4). This is predictable because the federal

price support program has created a floor under market prices since the 1930s (see

CRS Report 95-129 for a more detailed explanation of the program). Manufacturers

and exporters of U.S.-grown tobacco must outbid the support price at the auction sale

or farmers’ tobacco is placed in storage and held off the market until market prices

increase. Tobacco does not deteriorate in storage, but rather must be aged (cured)

before it is suitable for manufacturing. Farmers receive the federal support price with

funds borrowed from the USDA’s Commodity Credit Corporation (CCC). The

stored tobacco serves as loan collateral. This is called putting tobacco under loan.

The 2003 crop support price is $1.656 per pound for flue-cured tobacco and $1.835

for burley tobacco.

Figure 4. Average Farm Price for Leaf Tobacco

Primary data source, USDA, ERS. Trend R2 = .92.

By law, the tobacco price support program must operate at no net cost to

taxpayers. The CCC is assured of recovering the loan principal, plus interest,

because a no-net-cost assessment is levied on all domestic tobacco as well as

imported tobacco. The assessment proceeds are held in reserve to offset any future

losses should the loan tobacco fail to bring a sufficiently high price in the future.

The support price for tobacco is calculated according to a formula written into

law. The formula includes the support price of the preceding year, adjusted by

CRS-9

changes in the 5-year moving average of market prices (excluding the highest and

lowest), and changes in the cost-of-production index. The element of the formula

that continuously pushes the support price up (with occasional interruptions) is an

index of tobacco growers’ cost of production (the prices paid index). On occasion,

Congress has acted to retard the rate of increase in the tobacco support price. This

has happened when inventories of loan tobacco have reached such high levels that

large loan losses appear inevitable. Congress most recently enacted a relatively sharp

cut in the support price in the mid-1980s.

Because the market price for tobacco is heavily influenced by the federal

support price, and because the support price can be altered by legislative fiat, the

trend line projection of average prices received by farmers has little value as a

forecast. Short of a legislative change, the tobacco support program loan operations

keep the average market price from falling below the mandated loan price.

The farm value of a tobacco crop is equal to production times the average price

received by farmers. This calculation does not exactly equal farm cash receipts, but

it does serve as an approximation. In spite of the downward trend in production, the

trend in crop value has been upward (Figure 5). This has happened because the

increasing support price has more than offset declining production. The farm value

of the 2002 tobacco crop is estimated to be about $1.726 billion. This is about half

the $3.5 billion peak of 1981 and 1982.

Figure 5. Farm Value of Tobacco Production

Primary data source, USDA, ERS. Trend R2 = .63.

CRS-10

Even with the tobacco price support program, farmers claim they have trouble

paying their expenses and making a profit. This concern has some merit despite the

data showing crop values trending upward. In fact, the average market price has

gone up very little over the past 15 years while inflation has eroded its purchasing

power (Figure 6). From 1950 through the 1970s, the inflation adjusted price of

tobacco did not drop very much below the 1950s equivalent of about $3.50 per pound

in 2002 dollars. However, by 2002, the purchasing power was down to $1.92.

Figure 6. Deflated Average Farm Price for Leaf Tobacco

Trend R2 = .91.

CRS-11

Corresponding to the decline in the deflated tobacco price, the deflated value of

tobacco production also shows a comparatively sharp drop after 1980 (Figure 7).

Certainly, an assessment of farmers’ economic condition requires an examination of

costs and net revenues, but these are beyond the scope of this report.

Figure 7. Deflated Farm Value of the U.S. Tobacco Crop

Trend R2 = .85.

The historical data on tobacco production, prices, and crop value show a tobacco

farm sector struggling to maintain itself since 1980, but sometimes not able to keep

up with inflation. Even prior to the 1998 Master Settlement Agreement, there was

little reason to expect future growth. The long-term trend in production of U.S.

tobacco has been downward, which matches the declining utilization of U.S.-grown

tobacco by manufacturers—as necessary to balance supply with demand. The 1998

MSA envisions a drop in U.S. cigarette consumption, particularly among teenagers

and children. Financial terms of the Settlement imply higher cigarette prices, reduced

consumption in response to the higher prices, and reduced use of leaf tobacco by the

manufacturers.

CRS-12

Utilization of U.S.-Grown Tobacco

More than 94% of the tobacco grown in the United States is used in the

manufacture of cigarettes (either domestically or overseas). The remainder is

processed for chewing, snuff, cigars, and pipes. For the most part, data in this report

include all tobacco unless the focus is limited to cigarette tobacco. But even when

the data apply to all tobacco, cigarette tobacco overwhelmingly dominates.

The manufacture and export of U.S.-grown tobacco fluctuated around 2.0 billion

pounds until around 1975. Since then, utilization has followed a declining long-term

trend, dropping to an estimated low of 688 million pounds in 2001. As shown in

Figure 8, there have been substantial departures from the trend line. To better

appraise the likelihood of future utilization prospects, it is helpful to separately

examine the leaf export and domestic manufacturing markets.

Figure 8. Utilization (Manufacture and Export) of U.S.-Grown

Tobacco

Primary data source, USDA, ERS. Trend R2 = .85.

CRS-13

U.S. Tobacco Leaf Exports

Exports of unmanufactured tobacco have shown a large amount of annual

variation, with fluctuations of 10% to 15% being quite common. This annual

variation eliminates any predictive value of a statistical trend line. However, it does

appear that tobacco leaf exports were increasing through 1978 (when they reached

a peak of 765 million pounds) and then began to decline (Figure 9). Estimated

exports, of 399 million pounds in 2002, are 48% below the 1978 peak.

Figure 9. Exports of U.S.-Grown Tobacco

Primary data source, USDA, ERS. Trend R2 = .62.

CRS-14

How does the United States look as a competitor in global leaf export markets?

Until recently, this nation was the world’s leading exporter of unmanufactured

tobacco. It held the leading position until 1993, when Brazil moved ahead. The

United States is now a distant second, exporting 36% as much as Brazil. However,

the historically dominant export position of the United States belies the long-term

loss of export share (Figure 10).

In 1960, the United States accounted for 27% of world exports of

unmanufactured tobacco. By 2002, the U.S. share had fallen to 7.3%. The drop in

export share is the result of two compounding forces. First, the volume of U.S.

tobacco exports has been on a downward trend since 1978. Second, and in contrast

to declining U.S. exports, exports by other countries have been increasing. The

biggest export gains have been made by Brazil, Argentina, Malawi, and Thailand.

The tobacco produced and exported by these countries is directly competitive with

U.S. flue-cured and burley tobacco. In fact, the United States itself has become a

major destination for shipments from these competing countries.

Figure 10. U.S. Tobacco Exports as Share of World Total Exports

Primary data source, USDA, ERS. Trend R2 = .95.

CRS-15

Historically, the United States’ dominant export position was due to its ability

to deliver large supplies of high quality cigarette tobacco. This tobacco has proven

quite desirable in the milder American-style cigarettes that have gained in worldwide

popularity over the traditional stronger cigarettes so common outside the United

States. Until as recently as 20 years ago, only small quantities of foreign tobacco

could be blended successfully with U.S.-grown tobacco in the American-style

cigarettes. To a large degree U.S. tobacco growers had a monopoly in the production

of high quality mild tobaccos used to manufacture American-style cigarettes.

The near monopoly situation for U.S. tobacco made it possible to create a

domestic price support program with high and continuously increasing prices. In

fact, the profits created by the price support program have become capitalized into

annual quota rental rates that have averaged 43¢ per pound over the past 10 years,

increasing to 53¢ over the past 3 years (about $1,000 per acre). Similarly, the sale

of farmland with tobacco quota has brought a premium of about $1.85 per pound

over the past 10 years, and $2.14 over the past 3 years (about $4,200 per acre).3

Ultimately, the federal support program created an umbrella of price protection

for foreign producers. With assistance from cigarette manufacturers, tobacco

growers in especially Brazil, Zimbabwe, Malawi, and Argentina have improved the

quality of their tobacco and expanded production. At the same time, cigarette

manufacturers have developed methods for utilizing larger proportions of lower

quality tobacco while still maintaining acceptable smoking quality. Finally,

consumers have shown a willingness to accept the so-called lower quality “generic”

cigarettes in return for lower prices. Together, these factors have enabled foreign

tobacco to displace U.S.-grown tobacco in American-style cigarettes.

The obvious motivation for cigarette manufacturers to use non-U.S. tobacco is

to lower their input costs. Currently, foreign-grown tobacco is being delivered to

U.S. buyers at about 40% of the cost of domestic tobacco. Data from invoices

examined at ports of entry in 2002 show the landed value of imported tobacco

averaged $1.25 per pound. In contrast, sales invoices report the export price of U.S.

tobacco averaged $3.10 per pound.4

There are two reasons that the price of U.S. tobacco is currently 2.3 times as

high as imported tobacco. First, and most important, the federal tobacco price

support program establishes a floor under market prices. If commercial buyers do not

offer bids higher than the support price, farmers are paid the support price with

3

While these data apply directly to Kentucky, they are probably not far from lease and sale

prices in North Carolina, according to experts in North Carolina and the U.S. Department

of Agriculture. Data are not available on North Carolina. These data are compiled and

published by Dr. William Snell, University of Kentucky, in an annual report titled The

Kentucky Quota Sales and Leasing Market.

4

Import and export quantity and value data are collected by the Department of Commerce.

These calculations are from data published in USDA, FAS, Tobacco: World Markets and

Trade, April 2003. All tobacco undergoes certain processing, packing and storage before

it is ready for manufacturing. These processing and handling costs account for the price

being higher at the export terminal than at farm auction.

CRS-16

money lent by the Commodity Credit Corporation. This tobacco goes into storage

and is held off the market until prices improve. Second, much U.S.-grown tobacco

has a quality advantage that manufacturers are willing to pay extra for, as

demonstrated by its continued use in domestic cigarettes and its export to foreign

cigarette manufacturers.

In the absence of a federal support program, the price of U.S.-grown tobacco

would decline, but probably not as low as the price of foreign tobacco. Some

economists predict that prices would decline by 25% or more, which translates into

a decline of about $0.50 from the 2002 average of $1.91 per pound.5

In 1993, the congressional reaction to the competitive price advantage achieved

by foreign tobacco was to impose high penalties on cigarette manufacturers who used

less than 75% U.S.-grown tobacco in their cigarettes. Contained in the Omnibus

Budget Reconciliation Act of 1993 (P.L. 103-66) was a provision that effectively

established a 75% domestic content requirement on U.S.-manufactured cigarettes.

The domestic content requirement soon was determined to be in violation of

international trading rules. As part of the implementing legislation for the Uruguay

Round Trade Agreement, the domestic content rule was replaced with tariff rate

quota provisions.6 However, this tariff rate quota does not effectively limit imports.

First, the quota quantity is sufficiently large that it has not been reached. Second,

duty drawback rules allow the recovery of duty on all imported tobacco that is

exported in cigarettes. The policy of duty drawback, which applies to all imports, not

just tobacco, encourages manufacturing jobs in the United States yet the end products

do not compete in the domestic market because they are exported.

5

This estimate is based upon the separate analyses of Dr. Blake Brown of North Carolina

State University and Dr. William Snell of the University of Kentucky, as they reported in

testimony before the Senate Committee on Agriculture, Nutrition, and Forestry on

September 18, 1997.

6

The dispute settlement panel of GATT issued its report July 15, 1994. In addition to

determining that the domestic content requirement violated the Agreement, the panel found

that a Budget Deficit Assessment on imported tobacco was also in violation, but the no-netcost assessment on imported tobacco did not violate GATT. A tariff rate quota allows

imports of a specified quantity (quota) with a minimal tariff and above that quantity imposes

a prohibitively high tariff. Imposition of a tariff rate quota obligates the United States to

negotiate compensation with exporting countries who lose access to the U.S. market.

Failure to negotiate acceptable compensation entitles the injured countries to retaliate.

However, to date the tariff rate quota on tobacco has been sufficiently large compared to

imports that it has not been restrictive.

CRS-17

Manufacturing Use of Leaf Tobacco

At the peak in 1952, U.S. manufacturers utilized nearly 1.6 billion pounds of

domestically produced tobacco in the manufacture of tobacco products. Following

45 years of decline, estimated 2001 utilization of 688 billion pounds is already down

to the trend level projected for the year 2005.

Figure 11. Domestic Manufacturing Use of U.S.-Grown Tobacco

Primary data source, USDA, ERS. Trend R2 = .86.

Much of the decline in domestic manufacturing utilization of U.S.-grown

tobacco can be attributed to reduced cigarette consumption by Americans.

Nevertheless, cigarette output has actually followed an upward trend over the same

period that domestic tobacco utilization has been declining. This seeming

contradiction can be explained by the changing character of U.S.-manufactured

cigarettes. The amount of tobacco in each cigarette has declined, and the proportion

of foreign-grown tobacco in U.S. cigarettes has been increasing.

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Cigarette Production

More than 94% of the tobacco produced in the United States is used in the

manufacture of cigarettes. Consequently, U.S. cigarette manufacturers are the

primary domestic users of U.S.-grown tobacco. The major cigarette tobaccos are

flue-cured (grown primarily in North Carolina and neighboring regions) and burley

(grown primarily in Kentucky and neighboring regions). Maryland-type tobacco

(grown in Maryland and Pennsylvania) also is used in cigarettes, but in relatively

small amounts. Some imported tobaccos also are used by U.S. cigarette

manufacturers. Oriental tobaccos, added for purposes of flavor and aroma, are a

traditional component of mild American-style cigarettes. Oriental tobaccos are not

grown in the United States but are imported primarily from Turkey. In addition,

cigarette manufactures have increasingly used less expensive imported flue-cured and

burley tobacco from South America, Africa, and Asia.

U.S. cigarette production increased at a nearly steady rate from 1950 through the

peak year of 1996, when output reached 754.5 billion cigarettes (Figure 12). Year

2002 production of 565 billion cigarettes is up slightly from the previous year’s

dramatic low and is substantially below the long-term trend. Will cigarette

production increase in future years? Or, will it decline even further? Examination

of data on domestic cigarette consumption and cigarette exports may suggest answers

to these questions.

Figure 12. U.S. Cigarette Production

Primary data source, USDA, ERS. Trend R2 = .89.

CRS-19

Cigarette Consumption

After World War II, U.S. consumption of cigarettes showed a long and steady

period of growth, until it reached a peak of 640 billion in 1982. Since then, the

decline has been about equally steep and steady. By 2002, consumption was down

to 400 billion cigarettes (Figure 13). (The difference between U.S. cigarette

production of 565 billion pieces (Figure 12) and consumption of 430 billion pieces

in 2002 (shown below) largely is exports, which is discussed later in the report.)

Figure 13. U.S. Cigarette Consumption

Primary data source, USDA, ERS. Trend R2 = .91.

CRS-20

What has happened to reduce the consumption of cigarettes? First, according

to periodic survey data published by the Center for Disease Control and Prevention,

the proportion of the adult population of smokers stopped increasing and began

declining shortly after the first Surgeon General’s report on the health effects of

tobacco in 1964 (Figure 14). After the proportion of adult smokers reached nearly

43% in 1966, it subsequently declined to about 23.4% in 2001.

Figure 14. Cigarette Smoking Prevalence of the U.S. Adult

Population

Primary data source, NIH, CDC.

CRS-21

Consequently, the size of the adult smoking population not only has failed to

grow, it actually has declined from a peak of about 55 million in 1983 to a current

level of about 49 million (a number about equal to the 1960 smoking population)

(Figure 15).

Figure 15. Number of Adult Smokers in the U.S. Population

Primary data source, NIH, CDC. Trend R2 = .72.

CRS-22

U.S. Consumption of U.S.-Grown Cigarette Tobacco

Since farmers grow tobacco, they likely are more interested in the consumption

of cigarette tobacco than of cigarettes. From a peak of 1.17 billion pounds

(processing weight) in 1963, U.S. annual cigarette tobacco consumption has declined

to 747 million pounds in 2001 (Figure 16).

Figure 16. Total Tobacco Consumed by U.S. Smokers

Primary data source, USDA, ERS. Trend R2 = .93.

CRS-23

The drop in pounds of tobacco smoked is a reflection of the declining number

of smokers combined with a smaller amount of tobacco in each cigarette. A long

steady decline in the amount of tobacco in cigarettes began in 1953 and continued to

the late 1970s (Figure 17). For the first half of this century, cigarettes contained

about 2.7 pounds of tobacco per thousand pieces. Since 1980, the tobacco content

has averaged about 1.7 pounds per thousand pieces—a 37% reduction from the level

of the 1950s.

Figure 17. Tobacco Content of U.S.-Manufactured Cigarettes

Primary data source, USDA, ERS. Trend R2 = .97.

CRS-24

The utilization of U.S.-produced tobacco in cigarettes has been further reduced

by the substitution of foreign-grown tobacco. The proportion of foreign tobacco in

U.S.-manufactured cigarettes has been increasing since 1950. In 1950, foreign

tobacco content amounted to 6%, but by 2001 it reached 48% (Figure 18).

Figure 18. Share of Imported Tobacco in U.S.-Manufactured

Cigarettes

Primary data source, USDA, ERS. Trend R2 = .97.

CRS-25

The share of foreign tobacco in U.S. cigarettes might have been expected to

decline in response to the 75% domestic content law that took effect January 1, 1994.

However, the tariff rate quota, which replaced the domestic content law in September

1995, does not serve as an effective import barrier because of its generous size and

because manufacturers can recover the duty they pay on imported tobacco if it is

subsequently exported in cigarettes. During the September 13, 2001 through

September 12, 2002 quota year, 247.4 million pounds declared weight were imported

under the 332.2 million pound limit (amounting to 74% of the quota).

How do the combined forces of a gradually declining population of cigarette

smokers, a declining per capita consumption rate, a reduced quantity of tobacco in

each cigarette, and the substitution of foreign tobacco for domestic tobacco in

cigarettes translate into consumption of domestic tobacco by U.S. smokers? Figure

19 shows a relatively steady decline from 1,029 million pounds in 1966 to 419

million pounds in 2001. A simple linear projection puts the consumption of U.S.grown tobacco by U.S. smokers at 203 million pounds in the year 2005.

Figure 19. Consumption of U.S.-Grown Tobacco by U.S. Smokers

Primary data source, USDA, ERS. Trend R2 = .96.

CRS-26

Cigarette Exports

Cigarette manufacturers have not had to depend solely upon the U.S. market for

the sale of cigarettes. In sharp contrast to the declining domestic market, the rest of

the world has offered U.S. cigarette makers opportunities for expansion. World

cigarette trade has been increasing steadily for most of the past 30 years (Figure 20).

The ups and downs of the past 6 years are unusual and are partially attributed to

financial crises in Asia and Eastern Europe that impacted demand. However, with

increasing incomes and consumption in many of the developing countries of the

world, there is little reason to believe the longer term opportunity for growth in these

markets has stopped. However, there is a growing health concern throughout the

world combined with restraints on advertising that could reduce the growth prospects

for cigarette manufacturers.

World consumption in 2002 (using world cigarette production as a proxy for

consumption), excluding the United States, may have been about 5 trillion cigarettes,

with about one-third being American-style cigarettes made from primarily flue-cured

and burley tobacco. If the milder American-style cigarette is the preferred choice,

then manufacturers have a large market of existing smokers yet to be reached with

American-style cigarettes.

Figure 20. World Cigarette Exports

Primary data source, USDA, FAS. Trend R2 = .93.

CRS-27

U.S. domestic cigarette manufacturers captured a sizable part of the foreign

cigarette consumer market. In fact, between 1980 and 1996 the U.S. exports grew

from 2.18% to 4.70% of foreign consumption (Figure 21).

Figure 21. U.S. Cigarette Exports

As Share of Foreign Consumption

Primary data source, USDA, FAS. Trend R2 = .66.

CRS-28

In absolute terms, U.S. cigarette exports increased from about 82 billion pieces

to about 244 billion pieces — a 200% increase (Figure 22). Annual exports then

dropped dramatically to an estimated 127 billion pieces in 2002. The decline reflects

the financial crises in Asia and Eastern Europe, and more importantly the expansion

in overseas production by U.S. companies. The expansion in foreign production by

U.S. companies suggests less likelihood of recovery for U.S. cigarette exports in the

future.

Figure 22. U.S. Cigarette Exports

Primary data source, USDA, ERS. Trend R2 = .76.

CRS-29

Exports grew from less than 10% of the total market for U.S. cigarette

manufacturers in the mid-1980s to 32% in 1996, and dropped to 22% in 2002

(Figure 23). In spite of the recent decline, the foreign cigarette market remains

important to America’s farmers as an outlet for their tobacco, taking nearly 130

million pounds farm weight in 2002 (15% of production).

Figure 23. Exported Cigarettes as Share of U.S. Output

Primary data source, USDA, ERS. Trend R2 = .90.

CRS-30

The growth in U.S. cigarette exports was dramatic. In fact, the export of U.S.

cigarettes provided the only growth market for domestic leaf tobacco after 1978.

However, the future may not keep pace with the past. Domestic manufacturers have

actually lost market share. In the early 1960s, the United States accounted for more

than 33% of global cigarette exports. In 2002, by contrast, the U.S. share was 14%

(Figure 24). The data are too erratic to give statistical validity to a trend line, but the

large loss of market share does raise questions about the global competitiveness of

domestic manufacturers.

Figure 24. U.S. Share of World Cigarette Exports

Primary data source, USDA, FAS. Trend R2 = .30.

The apparent lack of competitiveness of domestic cigarette manufacturers may

be more of a problem for U.S. growers than for the manufacturers. Philip Morris, the

largest domestic manufacturer is addressing the problem by acquiring foreign

manufacturing plants. These foreign operations will likely be the source of cigarettes

supplying the growing global demand for American-style cigarettes. As anecdotal

evidence, Philip Morris claims in its 2002 Annual Report to stockholders a 3.5%

increase in sales from its international operations. That increase pushed Philip

Morris International’s total shipments (non-U.S.) to 723.1 billion cigarettes. In

contrast, total U.S. output was 565 billion (22% less than Philip Morris off-shore

production), and U.S. exports declined 5%. R. J. Reynolds Tobacco, the second

largest U.S. cigarette manufacturer, adopted a different strategy by selling its

international operations to Japan Tobacco Inc. in 1999.

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