tma annual meeting and conference global leaf trends changing dynamics / future trends presentation...
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TMA Annual Meeting and Conference
Global Leaf Trends Changing Dynamics / Future Trends
Presentation By:
Jim Starkey
Williamsburg, VirginiaMay18, 2009
• Some Significant Changes• Market Implications• Current Supply and Demand Situation• Future Trends / Potential Beneficiaries• Final Observations
2008 Estimated World Leaf Production
Significant Changes
• Sources of leaf have shifted dramatically
Flue-Cured Tobacco Production
1960 2008
Burley Tobacco Production
1960 2008
A Dynamic Industry
• Sources of leaf have shifted dramatically• Consolidation has reduced the number of
industry players– Leaf dealers– Manufacturers
Leaf Industry Consolidation
Past
Universal LeafSocotab (49%)Thorpe & RicksGKCasalee
DibrellIntabexA.G. MonkAustin
TranscontinentalAdamsMeridional
Present
Universal Leaf
Alliance OneMonk Austin
DIMON
Standard Commercial
Manufacturer Consolidation
JT RJI/Gallaher
Imperial Altadis / Commonwealth
BAT ETI / RJ(42%) / Tekel / Scantoco
PM USA John Middleton / UST
PMI Lakson / Sampoerna / Rothmans, Canada
RJ Conwood
The Current SituationA Dynamic Industry
• Cigarette manufacturers expand portfolio– New products/smoking devices– New categories
• Cigars• Smokeless• Snus• Other
Market Implications
• New origins entail greater production risk– Less irrigation– Shift from large commercial farms to small scale– Shift from auction to contracting
• Result is greater downside production risk
Market Implications
• Increased production risk• Buyer/user consolidation
– Smaller numbers– No unplanned inventory– Shorter durations
• Higher market volatility
Market Implications
• Increased production risk• Market volatility• Higher production costs
– Fertilizers– Pesticides and herbicides– Fuel– Labor
• Plus alternative crops– Tobacco growers have alternatives– Crop prices have risen dramatically
Market Implications
• Cost of buyer-mandated programs– Improve leaf quality– Eliminate foreign matter– GAP– Social responsibility
Market Implications
Attractive Alternatives
Buyer Mandates
Higher Leaf
Prices
Increased: Production Risk Market Volatility Production Costs
The Current SituationSlow Growth in Leaf Markets
Cigarette Production Trend
The Current SituationSlow Growth in Leaf Markets
• Growth mainly in:– Asia– Eastern Europe– Middle East
• Declines in developed countries– Characterized by:
• Increasing taxation• Increasing regulation• Production shifts
Population growth
Rising income levels
The Current SituationSlow Growth in Leaf Markets
• Less clear how much leaf utilization has increased, if at all outside PRC– New manufacturing technology uses less leaf/stick– Impact of industry consolidation
• Supply chain efficiency• Waste reduction/increased utilization
– American blend growth has stalled – affects burley demand
The Current Situation
FC Leaf Production 2003-2008 (Million Green Kgs)
3,3153,513
3,792 3,702 3,6563,969
PRC Other Exporters
The Current SituationFlue-Cured Leaf Production
• Two very different stories– PRC
• Dramatic growth• 500 mKgs or 28%• Only slightly greater than cigarette production growth (24%)
The Current SituationFlue-Cured Leaf Production
• Exporters down 2%
World Flue-Cured Exporters’ Leaf Production (x-PRC)
The Current SituationFlue-Cured Leaf Production
• 2008 declines in Brazil, Zimbabwe, other Africa and Canada
• More than offset increases in US, EU and India
The Current SituationBurley Leaf Production
• Production recovered in 2008 from weather-reduced 2007 crops
685
806704
664563
Primarily Flavor Primarily Filler
+ 39%
+ 0%
688
The Current SituationBurley Leaf Production
• However– Filler primary beneficiary– Flavor styles flat– Burley supplies, particularly flavor remain tight
The Current SituationBurley Production - Flavor
Selected Countries
2000Million
Green Kgs
2007Million
Green Kgs
2008Million
Green Kgs
2007-08%
2000-08%
US 143 102 102 - -29
Brazil 95 105 100 -5 +5
Argentina 39 37 42 +14 +8
The Current SituationBurley Production - Filler
*EU exporters include Poland for all years
Selected Countries
2000Million
Green Kgs
2007Million
Green Kgs
2008Million
Green Kgs
2007-08%
2000-08%
Malawi 142 87 170 +95 +20
Mozambique 6 28 44 +57 +633
Zambia 3 5 12 +140 +300
India 9 15 23 +53 +185
Thailand 28 43 36 -16 +29
EU Exporters*
87 53 56 -3 -36
PRC 62 25 38 +52 -39
Philippines 27 8 9 +13 -67
Mexico 23 10 10 - -57
S. Korea 22 9 9 - -59
The Current SituationUnsold Stocks
• Last piece of market puzzle– Flue-cured unsold stocks
• At lowest level since 1991• Reflects lower 2008 production x-PRC
The Current SituationUnsold Stocks
85
128
151
187
98
72
U.S. Pool Others
World Uncommitted Flue-Cured Stocks as of June 30
The Current SituationUnsold Stocks
• Flue-cured markets balanced heading into 2009
The Current SituationUnsold Stocks
• Burley unsold stocks– Essentially gone
49
86 8572
29
U.S. Pool Others
9
World Uncommitted Burley Stocks as of June 30
The Current SituationUnsold Stocks
• Burley markets remain– Extremely tight for flavor– Still tight for filler
Future Trends/Potential Beneficiaries
• Cigarette Production– China will be main growth engine– Growth outside China will be slow (0-0.3%)
• Growth in Asia, Middle East, and Eastern Europe• Offset by continued declines in developed countries• Leaf markets will be at best flat
Future Trends/Potential Beneficiaries
• Leaf production – short term– 2009 Flue-cured
• Total production forecast to increase due to mainly PRC• Production by exporters x-PRC projected to rise
Estimated Flue-Cured Production in Million Green Kgs
2007 2008E 2009P Change over 08
Brazil 643 608 595 -13
India 260 270 280 10
US 220 231 227 -4
All x-PRC 1,706 1,669 1,750 81
PRC 1,950 2,150 2,200 50
Others 216 217 210 -7
World Total 3,873 4,028 4,160 132
Future Trends/Potential Beneficiaries
– 2009 Burley• Production increase forecast
Estimated Burley Production in Million Green Kgs
2007 2008E 2009P Change over 08
Malawi 87 170 250 80
US 102 102 98 -4
Brazil 105 100 109 9
Argentina 37 42 49 7
Mozambique 28 44 53 9
Exporters 563 688 803 115
Others 57 56 54 -2
Total 621 743 857 114
Future Trends/Potential Beneficiaries
• Will not materially change tight supply situation, particularly flavor
• Significant downside risk
Future Trends/Potential BeneficiariesSlow Growth – What Could Change Trend?
• Higher production and leaf use– Development and consumer acceptance of reduced
risk products that look and act like traditional products– Increased consumption of OTP and snus could create
increased demand for dark air-cured leaf at expense of flue-cured and burley
Future Trends/Potential BeneficiariesSlow Growth – What Could Change Trend?
• Lower production and leaf use– Serious government effort to reduce PRC cigarette
consumption– Development and consumer acceptance of reduced
risk products using heating rather than burning technology
– These products require less leaf
Future Trends/Potential Beneficiaries
• Not much change from current situation• Flue-cured – Flavor
– Brazil• Will continue to dominate • Not immune to weather risk• Strong real raises dollar costs and prices
– U.S.• Termination of program improved leaf competitiveness• Quality remains best• Highest priced but dollar weakness reduces gap
Future Trends
• Flue-Cured - Flavor– U.S.
• Termination of program improved leaf competitiveness• Quality remains best• Highest priced but dollar weakness reduces gap• Probably will remain mainly domestic supplier
– Zimbabwe• Future depends on political/economic change• Would be strong demand, particularly from Europe and as
alternative to Brazil• Production will not recover quickly• Unlikely to reach past levels
Future Trends
• Flue-Cured – Filler
Future Trends
• Flue-Cured – Filler– PRC
• Will grow to meet domestic demand• Exports face increasing competition from India• Reliable supplier concerns make PRC alternate choice
• Questions:– Will PRC continue domestic focus or seek to expand
exports– Can PRC produce significant quantities of an
“acceptable” flavor style
Future TrendsWinners and Losers
• Flue-Cured – Filler– Other Africa
• Zambia, Malawi, Tanzania and Uganda have potential• Excellent conditions including land, labor and climate• Lack of infrastructure/high cost of expansion• Affects competitiveness in market• Absence of land tenure systems is a major problem in some
African countries
– India, Pakistan, Bangladesh• Very competitive in price/quality• Production increasing• Could benefit from European decline• However all have growing domestic markets
Future TrendsWinners and Losers
• Flue-Cured – Filler– Europe
• Full decoupling in 2011 could result in significant decline in production
• Some member states have talked about national subsidies to maintain industry/employment
– Canada• Is essentially a domestic crop now
Future TrendsWinners and Losers
• Burley situation is very tight and demand remains strong
• Uncommitted stocks likely continuing at very low levels
• Burley flavor– Brazil
• Only Brazil has potential for significant increases in short term
• Costs/prices will go up– Strength of real– Prices of other crops – maize, soybeans
Future TrendsWinners and Losers
• Burley flavor– U.S.
• Little interest in producing more even at higher prices in traditional areas
• Further U.S. increases will depend on developing non-traditional areas
Future TrendsWinners and Losers
• Burley – Filler– Malawi
• May be reaching practical limits• Weather risk, particularly drought may be increasing• Prices likely to increase
– Mozambique• Could double production with existing infrastructure• Additional increases possible with additional infrastructure
investment• Dollar prices will have to double to offset impact of strong
currency on local costs and grower incomes
Some Final ObservationsManufacturers Will Determine Where Leaf is Produced
• Price/quality• Risk diversification
– Weather– Political/economic– Reliability of supply
• Scale is important• Other factors
– Social responsibility– Sustainable production practices– Environmental stewardship
Some Final ObservationsProduction Will Likely Remain in Traditional Origins
• New origins are expensive to develop• Dealers can’t afford w/o manufacturer support• More than enough capacity in traditional areas
Some Final Observations
• Production volatility will increase– Shift to non-irrigated production– Little irrigation in new origins– Long term (20-50 year) forecast is:
• Drier weather patterns in Southern Hemisphere• Periods of much wetter and much drier weather
• Shift from auction to direct contracting shifts risk from growers to dealers
Some Final ObservationsContinued
• Leaf prices will rise– Offset dollar decline on local currency costs and
incomes outside U.S.– Rising prices of alternative crops– Cover costs of programs promoted by manufacturers
to:• Improve quality• GAP• Social responsibility
Some Final ObservationsContinued
• Reduced risk products could revolutionize and revitalize industry– Impact level of cigarette and other product
manufacture– Leaf requirements– Future origins
TMA Annual Meeting and Conference
Global Leaf Trends Changing Dynamics / Future Trends
Presentation By:
Jim Starkey
Williamsburg, VirginiaMay18, 2009