Tobacco contracting program expanded Building on a successful pilot program among burley tobacco growers, Philip Morris USA will offer marketing contracts to flue-cured growers in 2001.
The company will also expand their burley contracting program.
The much anticipated announcement of the expanded Tobacco Farmer Partnering Program came days before domestic cigarette manufacturers announced 2001 flue-cured purchase intentions of 297 million pounds (farm sales weight). This is a slight increase above 2000 purchase intentions of 286 million pounds.
USDA uses domestic purchase intentions, average annual flue-cured exports for the preceding three years, and the amount of tobacco needed to attain reserve stock levels to determine the annual flue-cured tobacco marketing quota.
Declining exports pushed the export average down to 297.7 million pounds from the previous three-year average of 334.1 million pounds.
At press time, tobacco industry leaders were predicting a 2001 flue-cured quota ranging from a nine percent decline to a 10 percent increase, with most anticipating a level quota to a three percent increase. Flue-cured quotas have been cut each of the last three years, resulting in a cumulative quota cut of nearly 50 percent.
This steady decline in production and marketing quota has greatly reduced the volume of American flue-cured tobacco available to the trade, making it increasingly difficult for cigarette manufacturers to find and purchase the specific volume and grades of leaf they need. Several companies have begun purchasing leaf directly from growers, thus assuring themselves of relatively predictable supplies of leaf.
Some purchasers have retrofitted growers' barns with heat exchangers and offered premiums for contracted tobacco. Philip Morris will release the details of its Partnering Agreements sometime in January.
"We were prompted to launch our Burley Pilot Program because of ongoing concerns about our ability to procure the grades and styles of tobacco we need for our blends," says Michael A. Farris, vice president of leaf for PM USA. "We continue to have concerns about the security of our tobacco supply, and we believe that expanding our partnering program will address those concerns.
"We are very pleased with burley growers' reception of our pilot program and the enthusiasm with which they have embraced this alternative way of marketing their tobacco," Farris continues. "Farmers who chose to participate in our Burley Pilot Program seem very pleased. They are especially happy to receive our same day, on-site payments when they deliver their tobacco, and many have already expressed an interest in continuing their partnering agreements into the future.
"We believe that flue-cured growers who choose to participate will be equally pleased with this direct partnering program."
Philip Morris' purchasing program will operate within the framework of the Federal Tobacco Program. The company will purchase the entire crop that a participating grower can sell without penalty under the tobacco program.
"We believe our Tobacco Farmer Partnering Program will help provide participating growers with a reliable and steady source of income for the upcoming growing season. It will help them plan with confidence and use their assets more efficiently. Our experience with the Burley Pilot Program certainly affirms that many farmers like the security of a PM USA partnering program," Farris says.
Now that the largest U.S. cigarette manufacturer has announced a grower contracting program, industry leaders anticipate most other purchasers will soon offer their own contracts. Increasing direct contracts will reduce demand for auction warehouses and auctions, generating concern among some growers.
Other growers are concerned that widespread contracting will lead to the demise of the tobacco program.
North Carolina State University Agricultural Economist Blake Brown addressed some of those concerns at the recent Tobacco Day in Raleigh.
"Will tobacco contracting lead to the end of the tobacco program?" he asked. "It's possible. But, contracting is prevalent in all of agriculture. Peanuts are sold under marketing contracts and direct sales within the peanut program. Contracting will cause some stress on the tobacco program. Issues of how to collect assessments and how to accurately monitor quota and other issues will have to be addressed. But, there is no reason the program cannot continue to function, even with widespread contracting."
Harmony, N.C., flue-cured grower Richard Renegar urges each individual producer to carefully evaluate all available tobacco marketing alternatives.
"This is just a change in the way we can market some tobacco," he notes. "I believe there will continue to be warehouses and auctions, just not on every corner. I believe where there is change there is also opportunity. The industry is trying to develop a more efficient way to purchase the grades and styles of tobacco they need for their blends. If we will produce what the companies want, I believe there is a demand for our tobacco."
While he does not actively promote contracting, Renegar seems to anticipate increased contracting of flue-cured tobacco as inevitable. His personal experiences with contracting in the hog business have given him a valuable perspective on tobacco contracting.
"Five years ago we decided not to get involved with contracts with our hogs," he recalls. "We wanted to remain independent. You know where that puts us now. It became more and more difficult for us to find places to sell our hogs. Small, independent hog producers have gone by the wayside. We are barely in the hog business today. I don't intend to let that happen with our tobacco."
The Old Belt grower sees at least one other positive side to contracting. He notes that flue-cured market prices tend to fall off in the Old Belt as the marketing season nears its close each year. With contracting, he reasons, growers in each belt will know what price they will receive for each pound of each grade of tobacco, from the first day of marketing to the last.
Marketing tools available to cotton producers continue to evolve. Thus, a group of merchants and cooperative officials will talk about those trends and what forces are bringing about those changes during the 2001 Beltwide Cotton Production Conference, Jan. 10-11 in Anaheim, Calif.
Moderated by Texas cotton producer William Lovelady, the panel will offer cotton producers guidance on various marketing alternatives by evaluating and comparing current marketing tools and opportunities and sharing what changes will occur in next few years, said NCC's Anne Wrona, who serves as program coordinator.
Panelists include: Bruce Groefsema and Ernst Schroeder, Bakersfield, Calif.; Edward Price, Kinston, N.C.; Robert Weil, II, Montgomery, Ala.; and John Mitchell, Memphis, Tenn. Dan Logan, Jr., Gilliam, La., will offer grower perspective.
For more information about Beltwide Cotton Conferences, Jan. 9-13, Anaheim, CA, visit www.cotton.org/beltwide or call NCC's Debbie Richter, (901) 274-9030.