DEMAND FOR TOBACCO LEAVES

Most of the tobacco produced in the world is not consumed as a final consumer product, but is used to produce tobacco products. Cigarette production accounts for most of the tobacco use in the world. In the United States, for example, cigarette production utilized 90 percent of the total tobacco consumed in 1996 (USDA, 1996). Other products include smokeless tobacco and cigars.

Demand for tobacco is primarily derived from consumer demand for cigarettes. Thus, factors influencing demand for cigarettes would also affect the demand for tobacco. These factors will be discussed in the later section on demand for cigarettes. Cigarette manufacturers use tobacco and other inputs to produce cigarettes. An important question in determining the factors affecting demand for tobacco is whether there exists a substitutable relationship between raw tobacco and other production inputs.

Sumner and Alston (1987) examined this question using a generalized Leontief cost function with data from United States cigarette production. Their results showed that utilization of United States-grown tobacco was not a fixed proportion of cigarette outputs. Both imported tobacco and other inputs were substitutes for United States produced tobacco. The estimated output-constant price elasticity of demand for United States tobacco was -2.3. The cross-price elasticity of demand for imported tobacco with respect to the price of United States tobacco was 2.0. Substituting tobacco for the other production inputs according to their study occurred in two different forms: increasing the proportion of additives to cigarettes and reducing tobacco wastage.

These substitution processes were accomplished through developing new production technologies. The leaf-conserving technology had increased the filling capacity of tobacco. Other technology also permitted the use of the entire leaf. Because of this substitution, the amount of tobacco used to produce 1000 cigarettes had fallen from 2.70 pounds in 1950-54 to 1.70 pounds in 1987 (Sumner and Alston, 1987).