TOBACCO September 16, 1997 September 1997, TBS-239 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- TOBACCO is published three times a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. This release contains only the text of TOBACCO--tables and graphics are not included. See supplemental files in Lotus 123 .WK1 format. Subscriptions to the printed version of this report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #TBS, $27/year. ERS-NASS accepts MasterCard and Visa. ----------------------------------------------------------------------------- Summary U.S. tobacco production is forecast at 1.61 billion pounds as of September 1, 1997. The 1997 crop is up 6 percent from last year because of higher acreage. Flue-cured auctions are currently underway, with about 42 percent of estimated production sold through September 11th. The supply of U.S.-grown tobacco for 1997/98 will likely decrease slightly as lower carryin more than offsets increased production. Carryin of U.S.-grown stocks (July 1 for flue-cured and cigar wrapper types, October 1 for all other types) is likely to decline about 4 percent from a year earlier. Total stocks of imported leaf advanced 13 percent to 1.26 billion pounds on July 1, 1997, compared with July 1, 1996. Estimated U.S.-grown leaf use advanced about 12 percent to 1.65 billion pounds in 1996/97 from 1995/96's 1.47 billion pounds. The growth in U.S.-grown leaf use in 1996/97 results from larger cigarette production and domestic supplies and tighter foreign supplies. The proportion of foreign-grown leaf used in cigarette production is expected to decrease slightly. U.S. leaf tobacco exports in 1996/97 (July-June) increased 9 percent, reaching 534 million pounds, declared weight. In 1997, U.S. cigarette production is expected to decline to 733 billion pieces, down from 755 billion a year ago. Domestic consumption and exports are expected to decrease in 1997. Cigarette exports declined during the first half of 1997 due to greater offshore production by U.S. manufacturers. In 1996, per capita consumption fell from 2,482, to 2,399 cigarettes per person 18 years or older. Price increases by manufacturers and impending tax increases will dampen future cigarette consumption. The Federal excise tax will increase by 10 cents per pack in 2000 and 5 cents in 2002. Six States will raise excise taxes in 1997. As of September 1, the 1997 flue-cured crop was estimated at 964 million pounds, up 6 percent from 1996. On-farm carryover this year was about 17.6 million pounds. Consequently, this season's marketings may exceed production. Beginning stocks on July 1 were 1.12 billion pounds, 4 percent below 1996. The total 1997 supply of U.S.-grown flue-cured was estimated at 2.08 billion pounds, up slightly from 1996. Total use this season may decline from 1996/97's 947 million pounds because of expected lower cigarette production. Flue-cured sales began July 22, and by September 11 growers had sold 464 million pounds of leaf, with 15 percent going under loan. Quality is good, but not as good as the past few years. After 30 days of selling, flue-cured auction prices are 13 cents per pound lower than last season. Sales through September 11 averaged $1.64 per pound. Cash receipts should advance in 1997/98 as more marketings offset lower prices. This year's burley crop is expected to be 8 percent above last season's due to greater harvested acreage. Beginning stocks in 1997 may be about 100 million pounds less than in 1996 due to increased use. Burley supplies on October 1 will be lower than a year earlier as larger 1997 production is more than offset by lower carryin. Larger crops are forecast for Maryland, dark air-cured, and cigar types, while dark fire-cured tobacco production is expected to decline. The national marketing quota for the 1998 flue-cured crop must be announced by December 15, 1997. Individual farm quotas and allotments will reflect undermarketings and overmarketings for the current crop. For burley, the marketing quota will be announced by February 1, 1998, and allotments for other types will be announced by March 1, 1998. Price supports for 1998 flue-cured and burley tobaccos will be based on a 5-year moving average of market prices and changes in costs of production. For other types, changes in support will continue to be based on the average of the parity index during the previous 3 years compared with 1959. Tobacco Products Cigarette Consumption Falls; Exports Slide U.S. cigarette consumption is expected to decline about 2 percent in calendar 1997, falling to 477 billion pieces (table 1). Cigarette prices increased twice in 1997, by $2.50 per 1,000 pieces in March and $3.50 per 1,000 pieces in September. Higher prices, a growing number of prohibitions and restrictions on where people can smoke, and continuing publicity about smoking and health have dampened consumption. Six States increased cigarette excise taxes in 1997. On July 1, New Hampshire's excise tax rose 12 cents per pack to 37 cents; Rhode Island's increased 10 cents per pack to 71 cents; and Utah's rose from 26.5 cents per pack to 51.5 cents. On September 1, Hawaii's excise tax rose 20 cents per pack to 80 cents. Hawaii's tax is also set to rise another 20 cents on July 1, 1998. On October 1, Alaska's cigarette excise tax increased from 29 cents per pack to $1.00, making it the highest in the nation. Maine's cigarette excise tax jumps from 37 cents per pack to 74 cents per pack on November 1. Discount brand cigarettes took 28.5 percent of the market during 1996, compared with 30 percent in 1995. The proportion of low-tar and low-nicotine cigarettes was greater than in 1995 but was still lower than the record high reached in 1981. Per capita cigarette consumption during 1997 (population 18 and over) is forecast at about 120 packs of 20 (2,399 cigarettes), down 3 percent from 2,482 cigarettes the previous year. Based on a population of 16 years of age and over, per capita U.S. cigarette consumption was 2,319 pieces in 1996. During the first 6 months of 1997, U.S. cigarette exports fell 9.4 percent (table 3). Compared with the same period last year, shipments to the European Union and Russia declined sharply. Cigarette exports during 1997 are expected to fall about 14 billion pieces. Some U.S. manufacturers have shifted production to other countries. Retail prices for tobacco products gained 4 percent in July 1997, compared with July 1996. The wholesale cigarette price increase in March was the main factor in the change. In March 1997, wholesale prices for premium cigarettes rose by $2.50 per 1,000 cigarettes, a 4.2-percent increase (including tax). In September 1997, prices advanced $3.50 per 1,000 cigarettes, a 5.6-percent increase. However, wholesale premium cigarette prices are still 9 percent below mid-1993 levels. The future price of cigarettes and other tobacco products depends in a large part on the outcome of the negotiations concerning the proposed Global Tobacco Settlement, which are currently underway and/or individual State settlements. President Clinton signed legislation on August 5, 1997, increasing the Federal cigarette tax from 24 cents per pack to 34 cents per pack, beginning January 1, 2000. Taxes on other tobacco products will increase as well. On January 1, 2002, the Federal cigarette tax will increase an additional 5 cents to 39 cents per pack, with other tobacco product taxes keeping pace. The Proposed Global Settlement On June 20, 1997, the Global Settlement between the State Attorney Generals and the cigarette manufacturers was signed. The settlement currently is undergoing congressional scrutiny and, if it passes in its original form, will likely lead to another 25-to 50-cent increase in the retail price of cigarettes. The agreement requires cigarette manufacturers to pay up to $368 billion to settle lawsuits and reimburse States for smoking-related Medicaid expenses. The settlement also contains provisions intended to reduce teen smoking, limit advertising, levy punitive damages on cigarette manufacturers, and provide smoking cessation programs. The impacts of the settlement on the industry will not be clear until Congress passes legislation codifying the final version of the agreement. Cigar Output and Consumption Increase U.S. large cigar and cigarillo output will rise by 600 million cigars to an estimated 3.1 billion in 1997. Cigar consumption, which includes imports, may increase to 3.3 billion cigars. Per capita consumption per male 18 years and over increased from 32.7 to 33.6 cigars, rising for the fourth consecutive year. Total large cigar consumption reached 3.1 billion in 1996. Output of small cigars (weighing 3 pounds or less per 1,000 cigars) advanced 5 percent to 1.5 billion during 1996. Small cigar output reached a high of 4.4 billion in 1973 and declined to under 1 billion in 1986. Smoking Tobacco Consumption Down Output of smoking tobacco, used in pipes and roll-your-own cigarettes, fell by 642,000 pounds in 1996/97 (July-June), continuing a decade-long decline in 1997. Output for the 1996/97 period fell to 11.7 million pounds from 11.8 million pounds the previous year. On a July-June basis, 1996/97 smoking tobacco consumption declined by 5 percent. After increasing in 1996, chewing tobacco production is expected to decline 6 percent to 57.4 million pounds in 1997. For the year ending June 30, 1996, consumption (invoiced to domestic customers) slid 2 percent. Snuff output is expected to increase for the ninth straight year. Production in 1996 will exceed 1995 by 2 percent. Output in 1997 is expected to be 63.9 million pounds. Restrictions on where one can smoke continues to cause a shift to snuff. July 1996-June 1997 snuff consumption (invoiced to domestic customers) was higher than the previous year. U.S. Exports and Imports U.S. exports of unmanufactured tobacco during 1996/97 (July-June) increased to 534.7 million pounds, (687.8 million pounds farm sales weight). The 12.6-percent increase is due largely to lower supplies in many exporting countries, higher consumption, and lower world stocks last year. July-June flue-cured shipments from the United States were nearly steady for the third year, while burley shipments gained 15 percent. Export value for all unmanufactured tobacco reached $1.57 billion, 16 percent greater than 1995/96. Both quantity and higher unit values advanced. Leaf exports in 1997/98 are expected to decline slightly due to higher expected world supplies. World Cigarette Trade The United States is the world's leading exporter of cigarettes and second in cigarette production only to China, which produces 30 percent of world output (table 27). In 1996, the United Kingdom replaced Germany as the second largest exporter of cigarettes at less than half U.S. levels. World cigarette production rose 3 percent in 1996 as output in China, the United States, the United Kingdom, Former Soviet Republics, Japan, and Brazil advanced. Tobacco Imports for Consumption Continue To Advance U.S. unmanufactured tobacco imports for consumption totaled 718 million pounds, declared weight, during July 1996-June 1997. Imports in 1995/96 were 593.8 million pounds. Stems gained 34 percent, and cigarette tobacco gained 21 percent; both less than last year's gains. Cigar leaf imports advanced 5 percent (tables 10 and 11). General imports (arrivals) in 1996/97 gained 21 percent, reaching 746 million pounds. Stocks of imported cigarette leaf totaled 1.04 billion pounds (farm sales weight) on July 1, 1997, 14 million pounds more than a year ago. U.S. cigar and cigarette manufacturers use imported leaf in their blends. For the year ending June 30, 1997, cigarettes and other products, and semiprocessed tobacco using cigarette leaf and stems, contained about 35 percent foreign tobacco, the same as in 1995. U.S. cigarette leaf imports for consumption (January-June) averaged $1.72 per pound, excluding ocean freight and duty. Leaf and Product Exports Value Gains The value of U.S. tobacco leaf and product exports in 1996/97 (July-June) was $6.7 billion, $66 million higher than the previous year. Cigarette unit value gains accounted for much of the increase. Cigarette export volume declined slightly during the period. On a July-June basis, the value of leaf exports exceeded leaf imports for consumption by nearly $500 million. The total tobacco balance of trade (leaf and product) was positive at $5.2 billion for 1996/97. U.S. Tobacco Leaf Situation and Outlook 1/ ------------ 1/ All quantities in this section are farm-sales weight unless otherwise noted. ------------ During the past marketing year (1996/97), about 66 percent of U.S.-grown tobacco leaf was used for domestic manufacture and 34 percent was exported. Estimated disappearance of U.S. leaf gained 12 percent to 1.65 billion pounds. For 1997, higher effective marketing quotas for flue-cured and burley boosted production. With increased acreage, the September 1 production forecast for all tobacco is 1.61 billion pounds, 6.4 percent over last year. Efforts To Eliminate Unauthorized Pesticides Continue Pesticide use on U.S. tobacco has been restricted for many years. Furthermore, the Food Security Act of 1985 extended adherence standards. The act requires USDA to inspect domestic and imported flue-cured and burley tobacco to determine if pesticide residues exceed established limits. Before selling their tobacco, growers must certify to the Farm Service Agency (FSA) that any pesticides used in production have been approved by the Environmental Protection Agency (EPA) for use on tobacco and were applied in accordance with labeled directions. Growers lose price support if they falsify the certification, fail to certify, or refuse to provide samples for testing. Growers who are found filing a false report will be required to refund any price support advances received on the current crop. In addition, violators are subject to a $10,000 fine, 5 years imprisonment, or both. To ensure the integrity of U.S.-grown tobacco, efforts to eliminate unauthorized pesticides include 1) tests of samples taken from auction warehouse floors, 2) efforts to educate growers about nonapproved pesticides, and 3) intensified monitoring of pesticide use and penalties for misuse. U.S. Industry Buys 603 Million Pounds of 1996 Flue-Cured Tobacco U.S. cigarette manufacturers purchased 603 million pounds (farm sales weight) of flue-cured tobacco during the July 1996-June 1997 marketing year, 15 million pounds less than the previous year. Actual purchases were 127 percent of manufacturers purchase intentions of 475.5 million pounds. Legislation requires each major domestic cigarette manufacturer to purchase an amount equal to at least 90 percent of their stated purchase intentions to avoid the assessment of a penalty. Manufacturers purchased 617.5 million pounds of flue-cured tobacco in 1995. Marketing Quota and Price Support in 1998 By December 15, USDA will announce the flue-cured poundage quota and matching acreage allotment for 1998. Individual farm quotas and acreage allotments for the next year will reflect this year's overmarketings and undermarketings. Marketings this year are expected to be below this year's effective quota (table 15). By February 1, 1998, USDA will announce the 1998 burley poundage quota, and by March 1, it will announce the 1998 acreage allotments for other kinds of tobacco. Growers of flue-cured, burley, fire-cured, dark air-cured, and Virginia sun-cured have approved marketing quotas applicable to the 1998 crops. The quota law provides that flue-cured and burley quotas equal the sum of buying intentions of domestic cigarette manufacturers, the 3-year average of unmanufactured tobacco exports, and adjustments of loan association inventories needed to reach the reserve stock level. The Secretary of Agriculture may adjust this three-part total either up or down by a maximum of 3 percent. Support levels for 1997 average $1.621 per pound for flue-cured and $1.760 per pound for burley. Grade loan rates for flue-cured range from $1.06 to $1.92 per pound for flue-cured and $1.11 to $1.88 per pound for burley. Price supports for other supported types range from $1.326 per pound to $1.623 per pound. For 1998, the flue-cured and burley price support will be the level for 1997 adjusted by changes in the 5-year moving average of prices (two-thirds weight) and changes in a cost-of-production index (one-third weight). Costs include general variable expenditures, but exclude costs of land, quota, risk, overhead, management, marketing contributions, and other costs not directly related to tobacco production. The Secretary of Agriculture can set the price support at the previous year's level adjusted by between 65 and 100 percent of the calculated increase or decrease. For other kinds, changes in price support will continue to be based on the average of the parity index during the 3 previous years compared with 1959. However, loan associations can request lower support levels if market conditions warrant. Data in table A-1, showing estimated flue-cured production costs for 1997, are expected to be used by FSA in determining the cost component for the 1998 support level. The combined effect of price and cost changes will likely result in a slight increase in the flue-cured support level in 1998. Growers of Maryland, Pennsylvania filler, and Connecticut binder tobacco turned down marketing quotas in their last referenda (1995), so Government price support is not available for their 1997 crop. Pennsylvania filler has never had marketing quotas. For Maryland and Connecticut binder, quotas last applied to the 1983 crop. Shade-grown wrapper tobacco (type 61) is not covered by marketing quota legislation. Flue-cured A mild winter followed by a prolonged cool damp spring caused problems with planting and early growth. Warm weather held off until mid-June for most of the growing area and then was followed by very hot and dry weather in June and July, creating difficult growing conditions and early flowering. Leaf quality should be good, but slightly below the last few years. Prices in 1997 are lower than a year earlier. Early markets saw more carryover tobacco than last year. Prices will likely be 8 to 10 cents per pound below last year's levels. The Georgia-Florida markets opened July 22, and South Carolina and North Carolina border markets opened on July 23. Weekly sales were below sales opportunities (USDA sanctioned schedules) during the first few weeks of sales. Loan receipts are considerably ahead of last season. The large quota, and a good, but not high, quality crop together with larger world supplies, have resulted in loan takings equal to 15 percent of net marketings. Last year, loan takings were 0.4 percent of sales at this time. Through September 11, auction prices averaged $1.64 per pound, 13 cents below the average for the same number of sales days last season (table 14). By September 11, about 14 percent of the total expected marketings had been sold. To receive price support in 1997, flue-cured tobacco growers must: o Certify pesticide use and absence of nesting. o Designate one or more warehouses within 100 miles of their county seat where they plan to sell their crop. o Contribute to a no-net-cost account and a budget deficit marketing assessment that totals 1 cent for the producer and 1 cent for the purchaser for each pound of 1997-crop flue-cured tobacco that is marketed. Under quota legislation, growers receive price support on marketings up to 103 percent of their farm poundage quotas. However, marketings above the poundage quota are deducted from the following year's quotas. For marketings above 103 percent, growers must pay a penalty of $1.38 a pound (75 percent of the average market price for the preceding year). Based on the September 1, USDA estimate, 1997 production will total about 964 million pounds. Growers carried over 17.6 million pounds of the 1996 crop. The effective quota is 1,019.4 million pounds, so enough quota is available to sell the estimated production and some of the 1996 carryover. Marketings are expected to total about 970 million pounds. Lease and transfer of flue-cured quotas has applied, since 1988, for disaster conditions only. Disappearance Higher in 1996/97 Flue-cured tobacco disappearance in 1996/97 totaled 947 million pounds, about 72 million pounds higher than 1995/96. Both domestic use and exports gained. Lower world supplies helped boost demand for U.S. tobacco, both in the United States and foreign markets. Flue-cured exports reached 391 million pounds, farm sales weight, 14 percent higher than last year and the largest since 1992. For 1997/98, U.S. flue-cured leaf exports will likely decline because world production is expected to rise and greater exportable supplies from other countries will be available. Supplies Up Flue-cured supplies for 1997/98 are estimated about 1 percent higher than last season after rising 1 percent the previous year. Harvested acreage rose 7 percent compared with 1996/97, but yields are expected to be lower. The domestic flue-cured carryover held by manufacturers and dealers on July 1, 1997, totaled 1.2 billion pounds, 4 percent lower than a year earlier. Flue-cured supply (indicated marketings plus carryover) was estimated at about 2.3 times prospective use, close to the traditional benchmark level. Marketings this year are likely to exceed use, and stocks will likely rise. Loan takings of 62.3 million pounds through September 11 have boosted loan stocks. Most uncommitted stabilization stocks of flue-cured tobacco (excluding the current year's crop) were purchased before the season began. With higher loan takings this year, unsold loan stocks on January 1, 1997, should be close to 150 million pounds. Use of foreign-grown flue-cured leaf and stems gained 9 percent in 1996/97. Stocks of foreign-grown flue-cured were 16 percent higher on July 1, 1997, than a year earlier. Stocks are rising because cigarette manufacturers are continuing their shift to greater use of cheaper imported leaf for manufacturing cigarettes. Burley Total burley tobacco use likely fell in 1996/97. In the marketing year ending September 30, 1997, about 74 percent of the crop will be used for cigarettes, 25 percent exported, and the remainder used for other products, primarily smoking tobacco. Disappearance Rises For 1996 (October 1996-September 1997), domestic use of U.S. burley is expected to increase from 551 million pounds used in 1995/96 by about 13 percent to about 620 million pounds (table 16). Higher cigarette output and leaf exports contributed to the increase in use. Carryover of U.S.-grown burley is expected to fall about 10 percent because marketings last year were below use. For the first 9 months of 1996/97, burley exports totaled 198.2 million pounds, farm sales weight, about 29 percent above a year earlier. For the 1996/97 marketing year, exports may reach 215 million pounds, a record high. Production Up for 1997/98 The September 1 forecast of the 1997 U.S. burley crop is 562 million pounds, about 8 percent greater than last year. A wet spring delayed planting and was followed by drought, which caused plants to flower early and reduced leaf development. Yields for the 1997 crop are expected to decline from last season. Marketings in 1996/97 are forecast at about 550 million pounds, compared with 516 million pounds last year. The effective quota of 880 million pounds will likely be underproduced by more than a third compared with 20 percent last year. Since 1985, marketings have fallen short of the effective quota, especially in Tennessee. Beginning in 1991, the quota law was changed to permit greater use of burley quota, including belt-wide sales of burley quotas within counties, and lease and transfer of quotas across county lines in Tennessee. The projected marketings, combined with lower carryover, are likely to reduce supplies 4 percent. This is about 2.2 times the expected disappearance, less than last year. U.S. auction sales usually begin in late November. The 1996 crop sold for an average of $1.922 per pound, 6.7 cents above the previous marketing year. In 1997, price supports will average $1.760 per pound for all burley grades, a gain of 2.3 cents per pound. The no-net-cost fee and the budget deficit assessment combined total 1 cent per pound each for growers and purchasers. Of the 1 cent, the budget deficit assessment accounts for .88 cent and the no-net-cost assessment is .12 cent. The budget deficit assessment was implemented in 1991. Southern Maryland Southern Maryland tobacco (type 32), a light air-cured tobacco, goes almost entirely into cigarette production. About 34 percent of the crop was exported in 1996. Disappearance Continues Slide Maryland tobacco disappearance totaled 10.6 million pounds during October 1996-June 1997, 3.6 million below a year earlier. Total use in 1996/97 is expected to be 14 million pounds, down from 1996/97, with less than half exported. Prices of 1996 Maryland tobacco advanced 35 cents per pound due to export demand, a good quality crop, and tight supplies of other cigarette tobaccos. By January 1, 1998, carryover may increase from last year's 15 million pounds. Exports of Maryland tobacco are up 13 percent to 5.5 million pounds during the first 9 months of the marketing year. Production and Supplies Up The 1997 crop of Maryland tobacco is estimated at 17.6 million pounds, 9 percent over 1996. Production is expected to rise in Maryland and decline in Pennsylvania. The 1981 farm act prohibits growing and marketing Maryland tobacco in quota areas. However, quotas are not applicable to Pennsylvania seedleaf tobacco, so with seedleaf's usually lower prices, some growers have changed to Maryland production. About 31 percent of total Maryland production will be grown in Pennsylvania in 1997. Fire-Cured Fire-cured tobacco is mainly used in making snuff and plug and twist chewing tobacco. About half the crop is usually exported. During the last four seasons, production and use have rebounded. Favorable supply-use ratios have resulted in strong prices. Disappearance Up Disappearance of fire-cured (types 22-23), during the first 9 months of the 1996/97 marketing year (beginning October 1, 1996) was 18 percent higher than the same period last year, at 36 million pounds. Domestic use and exports both advanced. Output of snuff, the major domestic use of fire-cured, has been increasing. Disappearance of types 22-23 for the entire marketing year (October 1996-September 1997) is estimated at 43 million pounds, 15 percent greater than 1995/96. Carryover is expected to decline slightly. Kentucky-Tennessee tobacco (types 22-23) exports reached 12.7 million pounds during the first 9 months of the 1996/97 marketing year, up from last season. Disappearance of Virginia fire-cured (type 21) is projected to increase from 1.7 to 2.8 million pounds in 1996/97 partly because of higher snuff production during that time period. Both domestic use and exports advanced. Dark Air-Cured Dark air-cured (types 35-37) is used in plug and twist chewing tobacco, snuff, and to some extent, smoking tobacco. Production and use have declined by more than half over the last 2 decades. Exports usually account for 10 to 20 percent of total use. Disappearance Steady Disappearance of dark air-cured (types 35-36) tobacco totaled 7.7 million pounds during October-June, slightly below 1995/96. Domestic use gained and exports declined. During 1996/97, total disappearance of types 35-36 is expected to decline slightly to 10.1 million pounds. The resulting carryover to 1997/98 should be about 24 million pounds--less than the previous year. Disappearance of sun-cured tobacco (type 37) is about the same as last year at 100,000 pounds. Production Gains But Supplies Fall The September 1 estimate of dark air-cured (types 35-37) tobacco production is 9.0 million pounds, 3 percent above last season. Lower carryover will dampen 1997/98 supplies. Next season's supplies represent about 3.1 times this season's estimated use. Cigar Tobacco Cigar leaf (types 41-61) is classified according to its traditional use: filler, binder, and wrapper. Most cigar wrapper is exported, but loose leaf chewing tobacco takes most of the filler and binder. Exports of filler and binder are negligible. Cigar Leaf Production Up Total U.S. cigar leaf production gained 7 percent in 1996/97, reaching 20.9 million pounds. During July 1996-June 1997, imports of cigar leaf rose while imports of cigar scrap fell, both for the second year. Total cigar leaf imports advanced 11 percent. About 100 million pounds were used domestically for cigar and loose leaf chewing tobacco production. For 1996/97, imports accounted for about 75 percent of total domestic use, slightly more than last year. Filler Disappearance Rises For the first 9 months of 1996/97 (October-June), disappearance of U.S. cigar filler tobacco (types 41-46) totaled 12.6 million pounds, 29 percent above the previous year. Stocks are lower. After declining in 1995/96, disappearance is expected to reach 14.1 million pounds for the entire 1996/97 marketing year (October-September), a gain of 2.3 million pounds. Binder Disappearance Gains Cigar binder disappearance (Wisconsin and Connecticut) is expected to rise by 2 percent as higher marketings boost supplies in 1996/97. For Wisconsin binder tobacco (types 54-55), loose leaf chewing is the major outlet. Output of loose leaf chewing for the first 9 months of 1996/97 gained 9 percent compared with the previous year, despite reduced chewing tobacco production. Disappearance of Wisconsin binder tobacco will again exceed production, resulting in lower beginning stocks in 1997/98. Disappearance of Connecticut Valley binder (type 51) is expected to increase slightly in 1996/97 due to higher cigar production. Production in 1997 is projected at 3.4 million pounds. Disappearance of Connecticut Valley binder is expected to exceed production, resulting in lower beginning stocks in 1997/98. Wrapper Disappearance Up For the June 1996-July 1997 marketing year, shade-grown cigar wrapper (type 61) disappearance rose 13 percent to 1.8 million pounds. Production in 1996 was 2.1 million pounds. Much of the shade-grown cigar wrapper is shipped overseas for processing, either to foreign buyers or to subsidiaries of U.S. firms in the Dominican Republic. Imported Cigar Tobacco Use Declines During October 1996-June 1997, manufacturers used 47.3 million pounds of imported cigar tobacco, compared with 55.4 million pounds during the same period the previous year. U.S. stocks of foreign-grown cigar leaf totaled 104.9 million pounds on July 1, 1997, about 13.7 million pounds more than July 1996. Cigar Leaf Supplies To Advance in 1997 Supplies of U.S.-grown cigar tobacco will rise in 1997. Filler supplies are down, but binder and wrapper supplies are up. As of July 1, 1997, no cigar filler or binder was held by cooperatives. Filler: As of September 1, the Pennsylvania filler crop was indicated at 9.7 million pounds, about 3 percent more than 1996. The new crop, plus estimated carryover, will provide a supply that is about 4.4 million pounds below last season. Production of Ohio filler has ceased because of high no-net-cost assessments. Puerto Rican filler is no longer included in the program, as production has ended. Binder: Cigar binder acreage increased by 3 percent in 1997/98 and production is expected to rise 15 percent. As of September 1, production was estimated at 9.2 million pounds. Supplies will fall in 1997/98, however, due to lower beginning stocks. Wisconsin binder production is expected to increase 14 percent to 5.8 million pounds in 1997/98. Carryover is expected to fall as use exceeds production for the third consecutive year. Supplies are expected to decline again in 1997/98 as use increases slightly. Wrapper: Acreage of Connecticut Valley wrapper is expected to be up in 1997 with production estimated at 2.0 million pounds, 90,000 pounds lower than the previous year due to lower yields and blue mold. Supply will fall in 1997 due to lower production and beginning stocks. Use is expected to advance. Special Article Costs of Producing and Selling Flue-Cured Tobacco: 1995, 1996, and Preliminary 1997 by Dargan Glaze 1/ ----------- 1/ Agricultural economist, Rural Economy Division, Economic Research Service, USDA. ----------- Abstract: The variable costs of producing and selling flue-cured tobacco are expected to increase slightly, from $2,026 per acre in 1996 to $2,052 in 1997. Total costs per acre, excluding land and quota costs, also are expected to increase, from $2,841 per acre in 1996 to $2,880 in 1997. The variable costs of producing flue-cured tobacco per 100 pounds was about $96 in 1997. The total cost per 100 pounds, excluding a charge for land and quota, averaged $132 in 1996 and is expected to increase to $135 in 1997. Keywords: Flue-cured tobacco, variable costs, total costs, costs of production. Cost Changes: 1995 to 1996 Revised 1996 variable costs of producing an acre of flue-cured tobacco averaged $2,026, up almost 7 percent from 1995 (table A-1). Among the cost components, selling costs (includes warehouse fees, no-net-cost, marketing assessments, and inspection and grading fees) increased the most (17 percent). The next largest expense item change was in fuel-related costs (up 15 percent), followed by chemical costs (up 4 percent). Selling and labor costs increased by $21 and $24 per acre, respectively, from 1995 to 1996. Variable production costs per hundredweight (cwt) averaged about $94 in 1996, down 4 percent due primarily to higher yields. Total 1996 ownership costs per acre declined by about 1 percent ($564 to $559). Of the ownership costs, taxes and insurance costs decreased the most (4 percent). Both general farm overhead and land and quota costs increased by 14 and 12 percent, respectively, reflecting the effects of an increase in yield of 218 pounds per acre. Total ownership costs per cwt of flue-cured tobacco declined from $29.18 in 1995 to $26.01 in 1996, with capital replacement costs decreasing by $1.67 per cwt. General farm overhead and land and quota charges per cwt were essentially unchanged between years. Cost Changes: 1996 to 1997 Preliminary 1997 estimates indicate a slight increase in the variable costs of producing an acre of flue-cured tobacco, from $2,026 to $2,052 (table A-1). Relatively stable prices for production inputs resulted in only slight changes for some cost items. The largest change between individual expense items per acre was interest expense (up 13 percent), followed by labor (up 4 percent), and fuel-related costs (down 2 percent). Costs per cwt also reflected the relative input price stability, especially cash expenses, between 1996 and 1997. Variable production costs per cwt were $94 in 1996 and $96 in 1997. The largest change between individual cost items per cwt was labor (increased by $0.94). Total 1997 ownership costs per acre rose 4 percent ($559 to $583). The continued strength of machinery prices and higher capital costs resulted in an increase in capital replacement costs from $320 in 1996 to $329 in 1997. Taxes and insurance costs increased by more than 10 percent. Total ownership costs per cwt of flue-cured tobacco rose from $26.01 in 1996 to $27.31 in 1997, with taxes and insurance constituting about 75 percent of the change. General farm overhead declined by about 5 percent from 1996 to 1997. Land and quota costs decreased from $898 in 1996 to $877 in 1997, which reflects both a decrease of $7.70 per cwt for the average market price of flue-cured tobacco and only a 13-pound per acre decrease in yield. General farm overhead and land and quota charges declined slightly between 1996 and 1997 (50 and 71 cents, respectively). Data Sources The production costs presented in this article are based on production data collected in the USDA's Farm Costs and Returns Survey (FCRS). The survey data were collected from 243 flue-cured producers in Georgia, North Carolina, South Carolina, and Virginia. The survey represents about 97 percent of the U.S. flue-cured tobacco production. The Economic Research Service (ERS) develops costs of production data in the form of an enterprise budget that summarizes all operator and landlord costs and returns associated with the production of an acre of flue-cured tobacco. The per-acre and per-100-pound cost estimates are weighted averages of the production surveyed. Production data about flue-cured tobacco farms recently collected from the Agricultural Resource Management Study (ARMS) are being processed. Information from ARMS will be included in the next costs and returns estimations. Data from the FCRS flue-cured producers, along with data from National Agricultural Statistics Service (NASS) reports, such as Agricultural Prices, Crop Production, and Farm Labor, were used to calculate and update the flue-cured cost of production budgets. The market price for the flue-cured tobacco crop averaged $1.790 per pound for 1995 and $1.837 per pound for 1996. Because the 1997 flue-cured markets are still open, the season-average price is not yet available. A price of $1.760 per pound was estimated for the 1997 crop based on market prices to date. The yields for 1995 and 1996 were based on actual U.S. yields from NASS, averaging 1,933 and 2,151 pounds per acre, respectively. Although 1996 yields were higher than 1995, they were influenced by adverse weather. Yields for 1997 were those indicated by NASS as of September 1, averaging 2,138 pounds per acre. Procedures for Estimating Costs Some costs were initially calculated by ERS' Budget Generator Model. The model uses survey information, such as field operations, machinery and equipment, and power sources, to calculate taxes and insurance, capital replacement, and return to nonland capital. Costs obtained directly from the FCRS include labor (paid and unpaid), fertilizer and lime, plant bed materials, chemicals, custom operations, noncash labor benefits, fuel and lubrication, curing and heating fuel, repairs, and quota rental costs and arrangements. These items are updated in nonsurvey years with price indexes. Other variable cost items, such as no-net-cost, marketing, and inspection and grading fees, were obtained from other sources. Finally, the quantities and costs from the survey farms were weighted to reflect the acreage represented by individual farms and aggregated to the national level. A more detailed explanation about ERS' estimation procedures can be obtained from the ERS Web site on the Internet (http://www.econ.ag.gov/Briefing/fbe/car/meth1.htm). Special Article U. S. Tobacco Import Update by Tom Capehart 1/ ----------- 1/ Agricultural economist, Market and Trade and Economics Division, Economic Research Service, USDA. ----------- Abstract: U.S. imports (arrivals) of foreign-grown leaf and stems rose 22 percent during 1996/97 (July/June). Much of the gain was in stems and unstemmed cigarette leaf. Use of foreign-grown flue-cured and Oriental tobaccos rose, while consumption of burley declined. Tight supplies in the United States may further increase 1997 imports, although the proportion of foreign-grown leaf used in cigarette production may not change much. Under the tariff-rate quota currently in place, imports of leaf are not severely restricted. Keywords: Imports, arrivals, Oriental, flue-cured, burley, TRQ. Introduction This article updates articles published annually in the September 1992-96 issues of the Tobacco Situation and Outlook report. Arrivals or general imports of unmanufactured tobacco increased by 22 percent from 1995/96 to 1996/97 (July-June). The increase was largest for unstemmed leaf and stems, but other major categories, such as Oriental and flue-cured leaf, were up as well. U.S. leaf imports for consumption had climbed from 413 million pounds in 1990 to more than 1 billion pounds in 1993. The main reason for this surge was the rising popularity in the United States and abroad for low and mid-priced cigarette brands (discounts). To meet this demand, manufacturers imported an increasing amount of lower cost foreign tobacco. After imports reached 44 percent of domestic disappearance, Congress acted to restrict imports by implementing the Domestic Marketing Assessment (DMA). The DMA was in effect from January 1, 1994 to September 13, 1995. If foreign leaf content of U.S. cigarettes exceeded 25 percent, a penalty was assessed on the manufacturer for calendar 1994 only. The DMA was eliminated on September 13, 1995 (retroactive to January 1, 1995), when President Clinton proclaimed a tariff-rate quota (TRQ) for cigarette leaf tobacco, mainly flue-cured and burley. The proclamation also eliminated duties on Oriental and cigar wrapper, binder, and filler tobacco. Imports of cigarette leaf tobaccos which exceed predetermined quota levels will be subject to an import duty of 350 percent ad valorem. A draw-back provision allows most of the duty to be refunded if the same leaf that is imported is re-exported as product. Tariff-Rate Quota Activity For the period September 13, 1996, through September 7, 1997, U.S. leaf imports within the TRQ totaled more than 254.9 million pounds. With less than a week left in the TRQ year (September 13-September 11), only 77 percent of the total quota allocation of 332.5 million pounds had been imported. Under the TRQ, the volume of tobacco imports for consumption under nine harmonized tariff subheadings, primarily flue-cured and burley, during the period from September 13 in any year to September 11 of the following year, are restricted to the following quantities: Country 1995/96 Imports TRO Used ____________________________________________ Million Pounds Percent Argentina 26.5 26.5 100.0 Brazil 176.8 147.5 83.4 Chile 6.1 5.1 84.3 EU 22.0 5.1 23.2 Guatemala 19.6 8.4 43.1 Malawi 26.5 26.5 100.0 Philippines 6.6 0.6 9.6 Thailand 15.4 14.6 94.4 Zimbabwe 26.5 14.0 53.0 Other 6.6 6.6 100.0 Total 331.7 254.9 76.7 Imports Continue To Surge in 1996/97 On a farm sales-weight basis, estimated U.S. use of imported flue-cured tobacco gained 9 percent from 1995/96 to 1996/97 (tables B-1 and B-2). However, since domestic disappearance gained only 5 percent, the import share of total flue- cured use rose to 28.1 percent from 23.4 percent. During the same period, foreign-grown flue-cured stocks held by U.S. tobacco dealers and manufacturers rose 15 percent (table B-3). Burley imports declined 19 percent from 1995/96 to 1996/97. Domestic use gained 15 percent and foreign use fell 19 percent. The import share of total burley use fell from 27.8 percent to 22.8 percent. Foreign-grown burley stocks declined 5 percent from October 1, 1996, to June 1, 1997 (9 months into the burley marketing year). Based on arrival data (adjusted for stock changes), Oriental leaf use declined 11 percent in 1996/97. Stocks on hand rose 11 percent from July 1, 1996, to July 1, 1997. Cigar leaf imports rose 5 percent to almost 80 million pounds. For the sixth consecutive year, cigar leaf imports represented about three-fourths of cigar leaf disappearance (use) in the United States. Tobacco Dollars and Jobs by Fred Gale 1/ -------- 1/ Agricultural Economist, Market and Trade and Economics Division. -------- Abstract: Tobacco growing, manufacturing, and marketing supports an estimated 500,000 jobs directly, and many more jobs indirectly, but the exact number is difficult to determine. Nationally, lost tobacco jobs due to reduced tobacco spending could be offset by gains in other sectors. Some tobacco-growing areas are experiencing income growth that can replace lost tobacco dollars, but others are more vulnerable. Keywords: Tobacco industry, employment, input-output model, regional economics. Introduction The steady stream of proposals to regulate, tax, or ban tobacco products has generated considerable interest in the economics of the tobacco industry. Many people and businesses rely on tobacco income, and its elimination could cause considerable economic dislocation. This article accounts for dollars spent on tobacco products and estimates the number of workers in various sectors supported by those dollars. This information is used to characterize the impacts of lost tobacco production. A better understanding of where tobacco dollars go and who benefits from them can inform participants and observers in this high stakes debate. Where Tobacco Dollars Go The tobacco industry is large and complex. This section estimates the share of tobacco dollars accruing to various sectors from the consumer to the farm level in 1995, the most recent year for which complete data are available. In 1995, U.S. consumers spent an estimated $48.7 billion on tobacco products. The farm value of U.S.-grown tobacco leaf was less than $2.6 billion, and a large share of that was exported as either raw leaf or manufactured products. Tobacco is grown on about 124,000 farms in about 20 States, mainly in the South, although it is also grown in areas of Wisconsin, Missouri, Pennsylvania, and the Connecticut River Valley. In addition, many persons receive payments for rental or lease of tobacco quota. Grise estimates that about 236,000 tobacco quota holders do not grow tobacco, but receive income from renting their farm (with its assigned tobacco quota) or leasing their quota to others. Although their share of the final value of tobacco products is relatively small, tobacco growers and quota owners provide much of the political support for tobacco programs and opposition to tax increases and Federal regulation. The value of domestically grown tobacco represents only about 2 cents of the domestic retail tobacco dollar, while imported leaf represents another 1 to 2 cents. Of the 2 cents received as gross receipts, tobacco growers keep only a fraction. According to U.S. Department of Agriculture cost of production estimates, about 30 percent of the gross farm value of tobacco goes to hired workers, operators, and family workers. An additional 27 percent goes to owners of land and quota, which includes the farm family when they own the land and quota, but is often paid to landlords and owners of quota who do not actually grow tobacco. The remaining 43 percent pays for farm inputs, capital costs, farm overhead, and marketing costs. Considerable value is added to tobacco leaf as it is funneled from thousands of small labor-intensive farms through a handful of capital-intensive tobacco manufacturers and distributed to consumers by several thousand wholesale establishments and more than 280,000 retail stores. Value added in manufacturing accounts for the biggest share of the retail tobacco dollar (about 38 cents) while nontobacco materials represent about 5 cents. A further 27 cents is added by wholesale and retail marketing. Finally, about 26 cents of the tobacco dollar is collected by State, Federal, and local Governments as excise tax revenue. Compensation to workers directly employed in tobacco production, distribution, and sales accounts for only 15 percent of the value added in tobacco products. Purchases of nontobacco materials and inputs at the farm and manufacturing level account for only 6 percent of the retail value of tobacco products. Excise tax revenue (23 percent) accounts for a larger share of tobacco products value than does payroll. Manufacturers of cigarettes, cigars, chewing and smoking tobacco, and snuff used raw tobacco inputs estimated at nearly $3.7 billion in 1995. Other materials, which are largely paper, filters, and other wrappings, amounted to about $2.1 billion. These materials were transformed into shipments of manufactured tobacco products valued at $30 billion in 1995. Tobacco manufacturing workers are among the highest paid in the manufacturing sector, but payroll ($1.3 billion) is only a small part of manufacturers' value added. Advertising (nearly $5 billion) and Federal excise taxes ($5.9 billion) are much larger. The residual value added is still quite large, at $13.3 billion. This includes purchases of other services, overhead, and interest, as well as retained earnings and returns to stockholders. The large share of value added accruing to wholesale and retail trade is seldom recognized. Wholesalers and retailers accounted for nearly $19 billion of value added in the tobacco industry. Most wholesale distribution of manufactured tobacco products is performed by 1,700 establishments that specialize in wholesaling tobacco products. About 13 percent is handled by grocery and pharmaceutical wholesalers. Supermarkets and convenience stores are the biggest retail outlet for tobacco products. Convenience stores that sell food and/or gasoline (some are classified as food stores, some as gasoline service stations) account for 32.5 percent of retail sales, about the same as the share sold by supermarkets. The remaining third of tobacco sales is split among gas stations, general merchandise stores, drug stores, liquor, and other stores. Food stores and gas stations have increased their share of tobacco sales from about half of sales in the 1960's to nearly three-fourths in 1992. Most of this share was gained from eating and drinking places, drug stores, and vending machines, whose combined share declined from 35 to 9 percent between 1967 and 1992. In the 1990's, convenience and warehouse stores have been the fastest growing outlets for tobacco products. For many types of retail stores, tobacco products are an important source of revenue. Tobacco sales are more important for smaller stores that sell convenience food and gas. Tobacco accounts for nearly 20 percent of sales by convenience food stores that do not sell gasoline and about 10 percent for convenience food stores that do sell gasoline. Tobacco products account for about 3 percent of sales in supermarkets, 7 percent of vending machine sales, and 5 percent of liquor store sales. Tobacco accounts for about 3 percent of sales by drug stores and gasoline stations that do not sell convenience food. Tobacco products account for 1 percent or less of sales in other types of retail stores. Tobacco Employment Table C-3 shows the estimated number of jobs associated with the expenditure flows shown in table C-1. According to this estimate, the chain of tobacco farming, manufacturing, wholesale and retail trade, and transportation generates over 500,000 jobs. While this number is large, it overstates the economic dislocation that would result from declining tobacco production. Many of these jobs are either part-time or could be transferred to other sectors as consumer expenditures are reallocated to other products. For example, if tobacco products were eliminated, supermarket workers who spent part of their time stocking shelves with tobacco products might spend more time stocking beer, chewing gum, or magazines if sales of those products increased. There is little to argue about regarding tobacco manufacturing jobs. These jobs are clearly dependent on the production of tobacco products, and jobs in cigarette manufacturing are among the highest paid manufacturing jobs. The 25,600 workers who make cigarettes and other tobacco products would encounter significant short-term hardship if tobacco were eliminated. The number of jobs in tobacco farming is much larger, but most of them are part time, and relatively few people who work in tobacco farming depend on tobacco for the major part of their income. Tobacco is a labor-intensive crop, but farms are generally small and the work is seasonal, often done by casual and migrant laborers. Tobacco is not the primary year-round work activity for most growers either. While tobacco is a full-time enterprise for many growers, most tobacco farmers work off-farm and/or have other farm enterprises. The average tobacco grower had fewer than 7 acres of tobacco and gross tobacco sales of $21,600 in 1992. The estimate of 156,000 tobacco farming jobs in table 3 is based on the arbitrary assumption that each job is half-time (1,000 hours of work per year), but the actual number of persons who have some involvement in tobacco farming may be much larger. The exact number is impossible to determine, but it is clear that a large number of people are involved and each earns a modest amount of income from the activity. The nature of these jobs makes it somewhat misleading to count them equally with jobs in manufacturing and other sectors where most jobs are full time. The bulk of jobs attributed to tobacco are in retail and wholesale trade. Since tobacco sales are a small fraction of total sales for most retail businesses, the number of retail tobacco jobs were estimated by assuming that the number of jobs attributed to tobacco is proportional to the share of sales due to tobacco products. For example, since tobacco products account for 5 percent of food store sales, 5 percent of food store jobs were attributed to tobacco. The resulting estimate may overstate the impact of lost tobacco sales on retail employment if retail stores can replace tobacco with sales of other products (although other products may have a lower profit margin). It is likely that some marginally profitable stores, particularly small convenience stores, may not survive without profits from tobacco sales. Indirect and Expenditure-Induced Jobs Tobacco expenditures indirectly support jobs in sectors that supply inputs and materials (e.g. farm chemicals, paper, cellophane) to the tobacco sector. For example, a flue-cured tobacco farmer will spend approximately $2,600 for fertilizer, chemicals, fuel, and plant bed materials to grow a tobacco crop worth $10,000 in gross receipts. These indirect economic impacts generate business for local dealers and manufacturers who supply these products. In addition, the income received by farmers, workers, landlords, and quota owners will be spent on consumer goods and services, generating additional revenue for retail and service businesses. This is known as an expenditure-induced impact. Indirect and expenditure-induced impacts can be estimated with an input-output model of the U.S. economy that summarizes interindustry transactions. The IMPLAN input-output modeling system (Minnesota IMPLAN Group) estimates that the 1995 tobacco expenditures shown in table 1 should generate a total of 1.2 million jobs. This estimate seems a bit high (the estimate of direct employment exceeds the total in table 3), but the analysis is useful for gauging the relative importance of indirect and expenditure-induced jobs. The IMPLAN estimates suggest that for every 100 jobs directly involved in tobacco-related industries there are 27 indirect and 91 expenditure-induced jobs. Adding indirect and expenditure-induced jobs more than doubles the estimated economic impact of the tobacco industry. Shifting Tobacco Expenditures The estimates shown in this article provide a rough gauge of the magnitude of employment related to tobacco, but the exact number is impossible to pin down. In fact, the current number of jobs related to tobacco is irrelevant to policy decisions that will affect tobacco production. More important is the incremental change in employment and resulting economic dislocation. If consumers were barred from purchasing tobacco products, they would shift those expenditures to other products. This would create new jobs in other sectors. This process is illustrated by simulating employment impacts of a shift of tobacco expenditures to a selected list of possible substitute products using IMPLAN. There is little information about which goods are substitutes for tobacco. A list of snack food and beverage products were chosen as potential substitutes. Tobacco expenditures were allocated in proportion to current expenditures on cookies, crackers, candy, chewing gum, nuts, alcoholic beverages, soft drinks, coffee, and other snack foods. It was assumed that tobacco exports would continue at current levels. Another important issue is loss of excise tax revenue from tobacco products. Without this revenue, governments would have to increase other taxes or increase their budget deficit (implying increased future taxes). It was also assumed that lost tobacco excise tax revenue would be offset by increased income taxes, reducing the after-tax income available to spend on tobacco substitutes. Nationally, shifting tobacco expenditures to these substitute products would produce a nearly identical number of jobs: 1.17 million. Of course, jobs in tobacco farming and tobacco manufacturing would be reduced considerably. About 77,000 manufacturing jobs would be added in nontobacco industries, more than offsetting the loss of tobacco manufacturing jobs because other manufacturing industries are more labor intensive than tobacco-products manufacturing. The new manufacturing jobs would be lower in pay, however. There would be net loss of farming jobs. Jobs added in other types of farming could not offset the number of jobs lost in tobacco farming. Somewhat more jobs would be gained in supplier and expenditure-induced industries. Regional shifts would be as described by Warner, et al. Southeastern States (primarily Kentucky, North Carolina, Virginia, and Tennessee) would lose tobacco farming and manufacturing jobs, while small gains would be spread more thinly across other States. Importance of Tobacco Farms to Local Economies The negative impacts of eliminating tobacco production would be concentrated in southern communities where tobacco is grown and manufactured. These communities are diverse. Tobacco manufacturing is limited to a handful of cities, primarily Richmond, VA, Winston-Salem, NC, and Louisville, KY, where the economic impact of lost jobs in tobacco manufacturing and supporting industries would be considerable, but these cities generally have fairly healthy economies. Many tobacco farming areas are also adjacent to fast-growing Sun Belt cities, and tobacco reliance is already declining as urban-based economic opportunities grow and tobacco fields become office parks and shopping centers. Other tobacco areas, however, are more vulnerable. Many are primarily rural areas with a history of poverty and little growth in off-farm opportunities. Many tobacco communities have also suffered from the decline of textile and apparel manufacturing. Gross tobacco receipts as a share of local earnings is a simple indicator of the importance of tobacco to a county's economic base. In 1992, this ratio averaged 4.9 percent for 311 counties that had over $1 million in tobacco sales. The share ranged as high as 55 percent in Robertson County, KY. Seven other Kentucky counties and Greene County, NC had ratios in the range of 20-30 percent. The 43 most reliant counties (with a tobacco share over 10 percent) are mostly in northern and central Kentucky, with a few along the North Carolina-Virginia border and Greene County in eastern North Carolina. An additional 62 counties scattered through the main tobacco States had ratios of 5 to 10 percent. A better measure of the vulnerability to loss of tobacco income takes into account the community's ability to replace lost tobacco income through economic growth. The tobacco income replacement quotient (TIRQ) for county I is the ratio of annual growth in inflation-adjusted local personal income (LPI, averaged over years 1990-94) to 1992 tobacco gross receipts (TOBINC) or TIRQ=Change(LPI)/TOBINC A larger ratio means that a county is creating more economic opportunities to potentially replace lost tobacco income. About half of tobacco counties have quotients greater than 1, which means that their overall income growth in one year is enough to replace the loss of all gross income from tobacco production. However, other counties are creating fewer nontobacco income. About 170 counties have quotients less than 1. They are concentrated in most of Kentucky, the Virginia-Tennessee, and Virginia-North Carolina borders, the coastal plain of the Carolinas, Georgia, and northern Florida. In general, counties in or adjacent to urban areas are in a better position to survive the loss of tobacco income, while those in more isolated rural areas are more vulnerable. Conclusions The tobacco industry is large, complex, and diverse. Disappearance of the tobacco industry would result in considerable short-term economic dislocation as tobacco expenditures are shifted to other sectors. Tobacco farming communities and tobacco manufacturing workers, perhaps the most vulnerable and visible groups, account for a surprisingly small share of the tobacco dollar. Convenience food stores also are highly dependent on tobacco sales. Most of the other workers whose jobs depend directly or indirectly on tobacco could be shifted to other sectors. The majority of the 311 major tobacco-growing counties have experienced economic growth that would cushion the loss of tobacco income, but many isolated rural counties are generating fewer alternatives. References Chase Econometrics. The Economic Impact of the Tobacco Industry on the United States Economy in 1983. Bala Cynwood, Pa: Chase Econometrics. 1985. Clauson, Annette. Costs of Producing and Selling Burley Tobacco: 1990, 1991, and Preliminary 1992.@ TBS-221. Economic Research Service, U.S. Department of Agriculture. Tobacco Situation and Outlook, December 1992, pp. 46-47. DeFord, Susan. Tobacco: The Noxious Weed that Built a Nation.@ The Washington Post. May 14, 1997, p. H1. Glaze, Dargan. Costs of Producing and Selling Flue-Cured Tobacco: 1994, 1995, and Preliminary 1996.@ TBS-236. Economic Research Service, U.S. Department of Agriculture. Tobacco Situation and Outlook, September 1996, pp. 31-32. Grise, Verner N. Tobacco: Background for the 1995 Farm Legislation. U.S. Dept. Of Agriculture, Economic Research Service. Agricultural Economic Report No. 709. April 1995. Minnesota IMPLAN Group, Inc. IMPLAN Professional Users Guide/Analysis Guide/Data Guide. Stillwater, MN: Minnesota IMPLAN Group, Inc., 1996. Price Waterhouse. The Economic Impact of the Tobacco Industry on the United States Economy: Update of 1990 Study. New York: Price Waterhouse, 1992. Tobacco Merchants Association. Tobacco's Contribution to the National Economy.@ Princeton, NJ, December 1995. U.S. Department of Commerce, Bureau of Economic Analysis. Regional Multipliers: A User Handbook for the Regional Input-Output Modeling System (RIMS II). Washington, DC: U.S. Government Printing Office, May 1992. U.S. Department of Commerce, Bureau of the Census. Annual Survey of Manufactures: Industry Statistics. _____________. 1992 Census of Retail Trade: Merchandise Line Sales. Warner, K.E., G.A. Fulton, P. Nicolas, and D.R. Grimes. Employment Implications of Declining Tobacco Product Sales for the Regional Economies of the United States.@ Journal of the American Medical Association 275 (April 24, 1996): 1241-1246. END_OF_FILE