Can you afford to grow tobacco if price doesn't cover depreciation?

Last winter, Randall Morris of Uvalda Ga., calculated and calculated and calculated again. But no matter how he figured it, it just didn’t make good business sense to grow tobacco at the contract prices he was offered.

So he and his brother Howard made the decision to end their large tobacco operation.

“We didn’t like the price levels being offered,” he says. “They weren’t attractive enough for staying in tobacco for the long-term.”

This was no small decision. The Morrises had grown 218 acres of flue-cured in 2004 and more in the past, and they had earned a fine reputation for skill at leaf production.

“We definitely had psychological and sentimental attachments to the crop,” Morris says. “We would like to have continued to grow it. But that didn’t look like the right decision then, and it still doesn’t.”

The contract prices available in their area of south Georgia fell in the mid $1.40 range, and Morris says that just wasn’t enough.

“The price would have to be high enough to recover not only our variable costs but our fixed costs as well,” he says.

“And in addition, it should give some return on investment. For us, that would have meant a price in the $1.60 a pound range, at least. It would have taken 20 cents more per pound than we were offered to interest us.”

Once they decided not to grow tobacco in 2005, they had another tough decision: whether to keep their tobacco equipment in hopes that tobacco prices might be more appealing at some point in the future, or to sell it.

“That was a harder choice to make,” says Morris. “Surely prices are going to come up, and maybe we would want to come back in. But we decided that for that to happen, prices would just have to be high enough that we could afford to buy more equipment. So we auctioned off the whole shooting match in February.”

To make up for some of the lost tobacco income, the Morrises nearly doubled their peanut acreage in 2005. up to 650 acres, and they started a small cow-calf herd. A sideline that is showing promise may take up more of their resources in the future.

They grow Vidalia onions and market them directly by mail order or for fund-raising campaigns. They increased Vidalia plantings up to 40 acres this year, and further expansion could be on the way.

The Morrises also grow 600 acres of cotton, 400 acres of soybeans and 200 acres of wheat, along with the 650 acres of peanuts.

In the Piedmont of North Carolina, flue-cured grower Hassel Brown of East Bend went ahead and signed a contract for 2005, but is not sure he made the right choice.

“Right now, I don’t see that the profit margin is going to be there to really continue growing tobacco at the price they are offering, especially in a bad year,” he says. “We have to make enough to cover depreciation. We might make it two or three years without replacing any equipment, but we can’t do that indefinitely.”

The only strategy in 2005 will be to economize.

“We are going to have to be more efficient than we ever have been before. We can’t cut back on fertilizer or curing gas. We may be able to make our barns more energy efficient and find some other areas for economy.”

Quota lease costs have been eliminated. But that is not as much help as you might think in Brown’s area of the Carolina Piedmont, because the lease price last year was less than the price cut.

“I would hate to think it might get to the point where we see farmers getting out of tobacco and taking public jobs instead because they can make more money,” says Brown. “But the profit margin is definitely going to be reduced.”

Brown farms with his brother Dayton and nephew Jesse. They increased their flue-cured acreage slightly compared to last season, from 110 acres to 130 acres, all on contract with RJ Reynolds. They are also growing one acre of burley as part of the experiment with RJR. They grow about 500 acres of soybeans, about 200 acres of wheat and a little fescue and orchardgrass hay.

So where should fixed costs and return on investment fit into the decision to take a contract or not? In the current unsettled times, it may be worth staying in at a low profit as Brown has done, in order to still be in the game if things improve.

But Morris thinks that on the other hand that getting back in won’t be that difficult if the price makes it worthwhile.

One way or another, you can ignore fixed costs for just so long.

“In the short-run, you might get by just covering variable costs,” notes Steve Isaacs, Kentucky Extension agricultural economist. “But in the long-run, you have to cover everything,” he says.

“Your barns are not free and your land is not free. You have to pay for them sooner or later.”

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