Weigh tobacco buyout payments wisely

Before quota holders and tobacco growers accept tobacco quota buyout payments, they must decide how they want to receive that compensation. The answer isn't always as clear as walking into the Farm Service Agency and signing up for payments.

Under the Tobacco Transition Payment Program, quota holders and active producers can elect to receive annual payments over 10 years from the federal government, or they can accept a lump-sum payment through a financial institution, private entity or person. No lump-sum payments will come from the federal government, said Moot Truluck, director of the U.S. Department of Agriculture and Farm Service Agency's Tobacco Division in Washington, D.C. Truluck addressed quota holders and growers during the annual meeting in Raleigh, N.C., of Washington, D.C.-based Tobacco Associates Inc.

If quota holders and growers wish to receive a lump-sum payment, they can accept an assignment contract or a successor-in-interest contract from a third party.

Under an assignment contract, a third party or financial institution will pay out a lump-sum to the quota holder or grower in return for the rights to part of that payment over a specified period. The quota holder or grower will continue to retain ownership of the contract while the financial institution or third party holds it for them. All parties must abide by the terms of the contract. Those electing to go with assignments may begin the process in Fiscal Year 2005.

Under a successor-in-interest contract, the quota holder or grower receives a lump-sum payment from a financial institution, entity or person but gives up his contract with the federal government and sells it to the third party, Truluck said. The third party may issue a certain percentage of the payments up front to the quota holder or grower, depending on what percentage the two parties agree to up front. Then, the third party will hold the contract for the remainder of those funds. Truluck said the percentage that two parties agree on should not exceed the cap that the Farm Service Agency puts on it. The federal government will announce the cap in the published ruling of administrative regulations in the Federal Register. An exact published date was not known at press time.

Both the assignment and successor-in-interest contracts require careful thought and understanding. “The word we have been telling producers and quota owners is please take your time,” said Blake Brown, economist with North Carolina State University, during the Tobacco Associates meeting. “Please shop around. There will be some good options here. Do not get in a hurry, because there will be some scams out there. There always is when there's this much money around.”

Those choosing successor-in-interest contracts may begin the process in Fiscal Year 2006. Brown said lump-sum payments won't be issued the first year. Forms explaining how to transfer payments from the federal government to a private party are available from local Farm Service Agency centers.

For tax purposes, the government will tax quota holders' share of tobacco quota payments as long-term capital gains, Brown said. Growers' share will be taxed as ordinary income.

Sign up for tobacco quota buyout payments started March 14 and continues through June.17, 2005. Failure to sign up will result in that quota holder or grower not receiving any payments in 2005, Truluck said. Checks should start arriving in the mail sometime between June and September 2005.

For active producers, what does the future hold? Brown said they will see lower prices for their product in 2005 and a possible increase in production within time. In 1998, U.S. flue-cured growers marketed 815 million pounds of tobacco. By 2004, the figure had nose-dived to 520 million pounds. Brown predicted in the future, that flue-cured production could climb to 700 million pounds. In Eastern North Carolina, he predicted production could eventually reach 1998 levels again. The Border Belt production could rise near or surpass 1998 levels. The Middle and Old Belt of North Carolina would increase production but not quite as much as the other belts.

In 2005, Brown said the average flue-cured tobacco price will be between $1.34 and $1.48 per pound. The average price for burley tobacco will be between $1.50 and $1.56 per pound.

Working against and for U.S. growers in 2005 is a large Brazilian crop but of less than premium leaf. “There is some quality issues associated with that, which highlights the fact that you may have an incentive by international leaf manufacturers who would like to diversify some of that risk of having so much premium quality flue-cured supply in one area,” Brown said. “I don't know how much of that will come back up here.”

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