Tobacco buyout impact far-reaching

Ending the government tobacco program “will have unprecedented effects” on the U.S. tobacco industry, according to USDA's Interagency Agricultural Projections Committee.

“Initially, an exodus of farmers will cause leaf production to decline,” the February 2005 Agricultural Baseline Projects report notes. But after that, expansion by remaining growers will result in a recovery of production as costs decline due to the elimination of expenses associated with acquiring quota and as economies of scale are achieved on fewer, larger farms.

Additionally, production is expected to shift to areas where producers can achieve more economically viable scales of operation.

Since 1938, tobacco production in the U.S. was under a marketing quota program, with price supports. Legislation enacted in October 2004 ended the marketing quota and price support programs after the '04 crop year and provided a buyout of tobacco quotas.

With the elimination of the tobacco program, growers are no longer restricted as to the location or quantity of tobacco they produce, nor will they receive price support for the tobacco they sell.

Mandatory inspection of imported tobacco will end, although inspections will continue for some domestic types. As part of the quota buyout, stocks of tobacco currently held by grower-owned cooperatives will be sold in a manner that does not destabilize tobacco markets.

Lower prices will make U.S. leaf more competitive in domestic markets and global trade, the committee said, although the tobacco industry will continue to face declining domestic cigarette consumption and will confront increasing trade competition from foreign producers, particularly Brazil.

With lower prices, a greater share of U.S. leaf is expected to be used in domestic production of tobacco products, with an increase in total domestic use. Lower prices also underlie projected increases in U.S. exports of tobacco leaf. The projected gains in domestic use and exports will reverse the general downward trend in those markets in recent years.

Cigarette sales in the U.S. are expected to continue declining at 2 percent to 3 percent per year through the baseline period to 2014. Per capita consumption will also decline as smokers find fewer opportunities to smoke in public places and the cost of cigarettes increases due to higher prices/taxes. Exports of cigarettes are expected to stabilize near current levels.

After an initial multi-year adjustment period following the end of the tobacco program, the committee said, the market “will stabilize at higher production levels in the second half of the projection period and reflect rends in domestic and global demand for tobacco leaf.”

The interagency committee includes the World Agricultural Outlook Board, the Economic Research Service, the Farm Service Agency, the Foreign Agricultural Service, the Agricultural Marketing Service, the Office of the Chief Economist, the Office of Budget and Program Analysis, the Risk Management Agency, the Natural Resources Conservation Service, and the Cooperative State Research, Education, and Extension Service.

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