Now that we finally have a tobacco buyout it may be a good time to look at what has led to this action and at the potential ramifications of the historic legislation.
A quick look at the statistics tells us that U.S. tobacco quotas and acreage have declined drastically over the past five to seven years. The average flue-cured tobacco quota has declined by about 50 percent, from 900 million pounds to 471 million pounds. That has caused a corresponding decline in acreage, to the point of a U.S. tobacco crop — both flue-cured and burley — of just more than 400,000 acres.
The buyout addresses three current problems of U.S. tobacco, says Kelly Tiller of the University of Tennessee Agricultural Policy Analysis Center. The primary problem, she says, is the competitiveness of U.S. tobacco in world and domestic markets. Another problem is the level of government intervention in the tobacco industry, and how that has hindered a move toward a freer market.
"The federal tobacco program is one of the last remaining federal programs, and there's a lot of pressure from trade agreements and foreign exports to move toward a freer market," she says.
The third problem addressed by the buyout, says Tiller, is the widening gap between quota owners and active growers, which is largely a result of the competitiveness issue. The tobacco program itself, she says, perpetuates this widening gap.
Addressing the problem of competitiveness, Tiller says the U.S. tobacco price is far out of line with world prices. "In large part, that's a result of the structure of the program itself. The formula used to determine the price essentially does not allow the price to decline. It pressures the price up slightly over time."
That high price, she continues, has been supported for a number of years because of the difference in quality between U.S. tobacco and leaf grown outside the United States. "But that difference is rapidly eroding, and the quality of foreign-grown tobacco is improving significantly," she says.
Another competitiveness issue is the cost of owning, renting and leasing quota, says Tiller. These costs are factored into the cost of production, leading to higher costs in the United States than in other countries. Added to this is the higher cost of labor and other inputs in this country, she adds.
Another factor hindering U.S. competitiveness, she says, is the limited ability to move production to more efficient regions of the country due to the confines of the tobacco program.
"In addition, within the program, U.S. growers have limited ability to react quickly to changing market conditions. When tobacco production was cut in Zimbabwe due to political turmoil, Brazil stepped in to fill the gap. Because of the tobacco program, U.S. growers were unable to respond in the world market."
As for government intervention, most commodity programs — with the exception of tobacco — have been reformed and are moving towards a free-market approach, says Tiller. The buyout allows tobacco to be consistent with the current direction of U.S. trade policies, she says.
Looking at ramifications of the tobacco buyout, Tiller says that $10.1 billion immediately will be pumped into the economy, primarily in the six major tobacco-producing states. About half of all U.S. growers — potentially more in some regions — will exit tobacco production, she predicts.
"In the intermediate run, in the three to five-year range, production levels will increase. Prices will decrease, but we really don't have a good way of estimating that now. But it's likely they will decrease significantly and approach the cost of production."
Tiller also expects the size of operations to increase. "Production will begin to move geographically to more efficient areas, out of the Appalachian region and into the Piedmont," she says.
Several niches will need to be filled in a post-buyout environment, says Tiller. "Primarily, there will be a need for some form of market stability, both for domestic and export markets. There also will be a hole to be filled for export market promotion. Centralized grower support functions also will need to be filled, including market information, grower and public education, and intermediaries between growers and the manufacturers providing contracts."