By Nico Grant
The auction looked like a scene from the 1950s, maybe even the 1850s: a handful of men inside a rusty warehouse, walking through waist-high bales of tobacco and scratching bids on slips of paper.
But in at least one important way, this auction, held in August in Wilson, North Carolina, was a very 21st-century transaction: Many of these leaves would end up half a world away, shredded and rolled in a Chinese factory.
In recent years, U.S. tobacco growers have helped offset tumbling domestic demand by selling more of their product overseas, especially in China. But now the struggling global economy is threatening to bring the good times to an end. And unlike other U.S. industries, domestic demand looks unlikely to plug the gap.
So tobacco farmers are making money wherever they can, which includes replacing some of their tobacco acres with more stable crops. Most have contracts to sell their product to specific companies. But with demand cooling, auctions have become the only way to move leftover or lower-quality tobacco.
“We work with a couple hundred farmers,” said Mann Mullen, owner of Big M Tobacco, which ran the August warehouse auction. “Ninety-nine percent have contracts. But there’s still a certain amount of tobacco that’s not good enough to go to the contract.”
American tobacco farmers have faced a number of challenges in recent years, not least of which is declining tobacco use in the U.S.
The number of American adults and high school students who smoke cigarettes has plunged in the last 15 years. The result has been a nosedive in sales. Americans bought 560 billion cigarettes in 2001, but only half that amount in 2015.
It’s a phenomenon that the tobacco industry calls “domestic disappearance.”
“If you want to point to area of concern, it’s domestic sales,” said Blake Brown, an agricultural economics professor from North Carolina State University. “Domestic disappearance was 231 million pounds for the 2008 crop.”
China seemed like the perfect candidate to save struggling U.S. tobacco growers. The Asian nation has 350 million smokers – mostly men, scattered from Xinjiang in the west to Shanghai in the east – and, as of the early 2000s, was a largely untapped market.
Source: USDA Foreign Agricultural Service
In 2002, China imported less than $600,000 worth of tobacco from the U.S.
When China began observing new World Trade Organization guidelines in 2004, U.S. farmers seized the opportunity. Since 2004, the real value of U.S. tobacco exports to China increased almost 8,000 percent, according to the USDA. In 2015, China imported $200 million worth of American tobacco, even though the Asian nation grows more tobacco than any other country in the world.
For a state like North Carolina, this was a welcome development.
“China last year bought 50 or 60 million pounds – 10-12 percent of our crop,” said Graham Boyd, head of the Tobacco Growers Association of North Carolina.
But now the boom shows signs of slowing. The Chinese smoking population is growing at a slower rate than it used to, even as the strong dollar has made U.S. tobacco exports more expensive in China. Some farmers are losing their contracts in favor of cheaper tobacco from developing countries such as Brazil and Zimbabwe.
“Chinese consumption usage of various products is still pretty good compared to Western Europe,” said Jack P Russo, an analyst of Edward D Jones & Co, LP. “But the growth rates aren’t what they used to be.”
Optimists in the industry hope the slowdown will prove temporary and that exports will rebound when the dollar weakens. Brown, the agricultural economist, said exports “may stagnate a while” but will eventually come back.
But in an industry so marked by instability, some are concerned about their futures.
“No one knows what China’s going to do but China,” said Dennis White, the head of Old Belt Tobacco Sales, an auction company.
American tobacco agriculture has seen a lot of changes in recent years. Besides a shift in consumers of tobacco goods, tobacco deregulation in the U.S. has changed the sector. For 70 years after the Great Depression, the American government set limits on the amount of tobacco farmers could produce, which elevated the price and made tobacco a more lucrative crop. In 2004, the government ended the quota, which led to fewer tobacco farmers, lower tobacco production and more industry consolidation.
“With the loss of quota system, we’ve seen a fair bit of farmers exit that were smaller scale or close to retirement,” said Gordon Groover, a professor of agricultural economics at Virginia Tech. “Others have expanded their production because the industry has moved to more contract production. They needed a contract to produce the tobacco.”
In the face of these challenges, American tobacco farmers have made concerted efforts to diversify their business interests.
Between 2014 and 2015, tobacco farmers in North Carolina, the biggest tobacco producer in the U.S., planted 20,000 fewer acres of tobacco. The number fell by the same amount in Kentucky over the same time period, according to the Department of Agriculture.
Rod Kuegel has a family farm in Owensboro, Ky. Kuegel plants 80 acres of tobacco, compared to 1000 acres for grain and another 1000 for pasture.
For the last two years, Keugel has had a contract to supply tobacco for the liquid nicotine in e-cigarettes to USA Nicotine, of Albany, Ga.
“It’s just an avenue to diversify or add some longevity which otherwise may not be there,” he said, “if e-cigarettes are safer.”
Keugel said he thinks a lot about the harms of tobacco.
“I’ve never smoked a cigarette in my life. I think it’s a very poor choice when you’re burning something to go into your lungs,” he said.
“Regardless, there are a number of people in this country and around this world who are going to do that. As long as someone is going to do it, I think I can produce it with less risk than anywhere else in the world.”