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This study aims to provide a forward picture for world tobacco leaf consumption, production and trade to the year 2010. The projections take account of the various factors that influence tobacco consumption, production and trade. The study analyses, first, trends and determinants in tobacco consumption, production and trade during the period 1970 to 2000, and it provides consistent projections to 2010 using a standard commodity model approach.

Trends and determinants in the period 1970 to 1998

Demand for tobacco products increased rapidly and world tobacco leaf consumption increased by about 2 percent annually between 1970 and 1998, from 4.2 million tonnes to 6.5 million tonnes of tobacco leaf equivalent in dry weight. In 1998, over 65 percent of the world total, that is about 4.2 million tonnes, was consumed in the developing countries and the remaining 2.2 million tonnes was consumed in the developed countries. The trends over the examined period in developing and developed countries are quite divergent. Consumption in developed countries declined by about 0.2 percent annually while consumption in the developing countries increased at a rate of 3.1 percent annually. Much of the increase in developing country consumption is accounted for by China where consumption increased from a little under 0.7 million tonnes in 1970 to 2.6 million tonnes in 2000. The major factors that fuel increasing consumption in developing countries are principally high population and income growth give a strong boost to consumption of tobacco products in developing countries, thus increasing their share in world consumption to 65 percent in 1998.

Global production of tobacco leaf increased from 4.2 million tonnes in 1971 to 5.9 million tonnes in 1997 in dry weight. However, this growth took place almost entirely in developing countries, while production in developed countries declined, thus reducing further the share of developed countries in world production and in the world tobacco economy. Production has been shifting to developing countries. China, with over 35 percent of world production, is the major producer. Although its production declined after a peak in 1997, this decline should be seen as temporary and is mainly due to stock accumulation in the past. Growth is expected to revive.

Production policies supporting tobacco in developed countries are under constant pressure and tobacco profitability at farm level is expected to decline further. Conversely, tobacco production returns and tobacco profitability in most developing countries are much higher than in any other cash crop and thus there are good prospects for increasing production, especially of those types of tobacco which have an expanding world market. Thus, the developing countries are expected to further increase their share in world tobacco production.

Cigarette production was in the past located mostly in developed countries, but since the mid-1980s cigarette manufacturing has been increasing rapidly in developing countries and is surpassing the production level of developed countries. Much of this change is attributed to developments in China. Also, major multinationals with foreign direct investment have increased cigarette production in developing countries, where most of the growth takes place. Trends among tobacco types show that the Virginia type has stronger growth, reflecting consumption choices for certain cigarette types. A third point is that, in almost all tobacco types, a shift of production is observed from developed to developing countries, thus increasing developing country share in world tobacco leaf production.

Trade in tobacco was in the past almost entirely in the form of tobacco leaf, but trade in cigarettes has increased rapidly. Tobacco leaf is not a homogenous product and, thus, it is difficult to speak about a world market for tobacco. Various types of tobacco leaf are traded and many countries are involved in the trade as exporters and importers.

About 25 percent of world tobacco leaf production is traded internationally and this proportion has remained rather stable or increased slowly during the period 1970 to 1998. Developing countries evolved during this period as major exporters of tobacco leaf with Brazil, Zimbabwe and Malawi in particular considerably increasing their exports over time. Traditional exporters such as the United States, the EU and Turkey are losing export market shares, while the developed countries are becoming major importers of tobacco leaf. The United States, the EU, and the area of the former USSR are the largest importers.

Also, trade in cigarettes increased rapidly from the mid-1980s to the mid-1990s, showing, however, a rather strong decline in the late 1990s. The decline can be attributed mainly to the decline in imports in the developed countries. This observation implies a continuing shift in cigarette production from developed to developing countries, as happened with the production of tobacco leaf.

Projections to 2005 and 2010

The objective of the study is to project likely consumption, production and trade patterns for tobacco leaf to the year 2010. The methodology used in the projections is a standard commodity model, albeit with significant simplifications, mainly due to lack of price data and other constraints and limitations.

Projections were undertaken using two alternative scenarios, a baseline and a policy scenario. The baseline scenario assumes continuation of present policies with respect to production support and consumption taxation. It thus assumes no change in real prices throughout the projection period. The policy scenario assumes adoption of strong policy measures against tobacco consumption and production that include increasing consumption taxation and reducing production support. As a result of such measures, it is assumed that consumer prices would increase by 30 percent and production support would be reduced by 40 percent in the developed countries and by 20 percent in the developing countries.

Demand. World tobacco demand in the baseline scenario is expected to increase in 2010 to 7.1 million tonnes in dry weight, reflecting, however, two different tendencies. In developed countries overall demand is declining slowly and it is expected to be at about 2.05 million tonnes in 2010, or about 10 percent lower than the 2.23 million tonnes consumed in 1998. However, consumption in developed countries in 2010 is expected to represent only 29 percent of the world total, down from 34 percent in 1998, the remaining 71 percent being the demand in the developing countries. Thus, the world picture of tobacco demand in the future is determined mainly by the developing countries.

Tobacco consumption in developing countries is expected to increase to 5.09 million tonnes in dry weight, up from 4.2 million tonnes in 1997-1999. This represents an average annual growth rate of 1.7 percent between 1998 and 2010, significantly lower than the 2.8 percent rate observed in the developing countries in the period 1971 to 1998. About 80 percent of the projected increase in demand is expected to be in the Far East, particularly in China. The share of China in total world tobacco demand is likely to increase to 43 percent in 2010, up from 38 percent in 1991.

The overall increase in world tobacco consumption, however, conceals the fact that tobacco consumption per adult is declining, in both the baseline scenario and the policy scenario. The projection results show that in the baseline scenario consumption per adult in 2010 will decline below 1.5 kg/year and in the policy scenario to about 1.3 kg/year, or a decline of almost 10 percent in the baseline scenario and almost 20 percent in the policy scenario. Consumption per adult is declining not only in developed countries, but also in developing countries and in China, albeit modestly. This significant development, however, is concealed by the fact that overall world tobacco use is expanding with population.

Production. World tobacco production is projected to reach over 7.1 million tonnes in 2010 in the baseline scenario and over 6.4 million tonnes in the policy scenario, or about 8 percent more than 1998 production levels. However, this production level is a still lower than the record world production level of 1992-1993.

Production of tobacco leaf in developed countries declined steadily during the 1990s and is expected to continue to decline during this decade with overall production expected to be a little over 1.0 million tonnes in 2005, but declining to below one million tonnes in 2010. In developing countries, however, tobacco leaf production continues to increase, thus expanding the developing countries' share in world production from about 76 percent in 1991 to 87 percent in 2010. China is projected to remain the world's largest producer with over 2.6 million tonnes in 2010, well above India and Brazil. Malawi and Zimbabwe, although major exporters, have much lower production levels.

Trade flows are determined by trends in demand and supply in trading countries and regions of the world, but are also influenced by policies such as tariffs and non-tariff barriers, export promotion and domestic policy. In projecting trade flows in the baseline and policy scenarios no changes were assumed other than those for supply and demand. That is, in both the baseline and the policy scenarios, it is assumed that there would be no change in any policies such as tariffs or non-tariff barriers, and export promotion policies.

The volume of tobacco exports is projected to increase but at a much slower annual rate of about 0.8 percent in the baseline scenario and 0.6 percent in the policy scenario during the period 1998 to 2010. The volume of exports is expected to reach 2.2 million tonnes in the baseline scenario and 2.16 million tonnes in the policy scenario, up from 2 million tonnes in 1998 and 1.7 million tonnes in 1991. The volume of imports is expected to increase to about 2.2 million tonnes in both the baseline and policy scenarios, showing an average growth rate of 0.7 percent per year. In the developed countries import requirements are expected to increase considerably while export availability declines. Conversely, in the developing countries, export availabilities are projected to expand more than import requirements, as production shifts from developed to developing countries.

Exports from developing countries such as Brazil, Malawi and Zimbabwe are very price-competitive and their economies, in particular the last two, depend heavily on tobacco. These countries are likely to continue to compete successfully with other exporting countries. For example, the export unit value of tobacco leaf from the United States is more than twice the world average, reflecting the higher quality but also higher production cost of US tobacco. The wage rates in developed countries are much more higher than in these developing countries. With cigarette manufacturers able to develop new processing technologies that allow them to use lower quality leaf, countries such as Brazil, Malawi and Zimbabwe would be able to compete more effectively with the United States and other countries in tobacco markets, increasing their shares of the world market. Any reduction in support for tobacco production, for example, would change the location of world tobacco production in favour of developing countries, such as Brazil, Zimbabwe, Malawi, and perhaps India, Turkey and China.

Overall conclusions and policy implications

Tobacco demand at the world level, during the period to 2010, is increasing but at much lower rates than in previous periods This increase is expected in spite of declining tobacco consumption on a per adult basis by as much as 10 percent between 1998 and 2010 in the baseline scenario and by as much as 20 percent under an aggressive anti-smoking and anti-tobacco policy. According to the projection results, the expansion of demand in the developing countries is expected to drive the tobacco economy of the world. Production of tobacco leaf responds to demand trends and is increasing in countries where demand is increasing, production costs are low, and there are no production restrictions, as well as in countries with good transportation systems and access to the international market. Hence, some further shift of tobacco leaf production towards developing countries is expected.

Given the above general conclusions, public policy that aims to reduce tobacco use may need to focus on demand. Reducing demand markedly in the developing countries in the medium term, as has happened during recent years in developed countries, would be a rather difficult task given projected trends in population and income growth. Mitigating these trends, however, reducing consumption with a combination of tax and direct restriction policies is feasible and would be an important achievement.

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