What lies ahead for U.S. tobacco production?

These factors have changed drastically the production and profit potential of tobacco. But most growers today want to know two things: Will there be a quota buyout and when will it occur?

A recent report prepared by Economist Bill Givan and Agronomist J. Michael Moore of the University of Georgia and Economist Russell Sutton of Clemson University takes a look at the buyout question.

The first significant proposal for a quota buyout was made in 1997 by U.S. Senators McCain (R-Ariz.) and Ford (Tenn.), according to the report. Others surfaced before the Master Settlement Agreement was signed in November 1998, and many more have been introduced since then.

The proposals come at a critical time for U.S. tobacco growers. During the last two years, contracting has become the dominant means of marketing tobacco, replacing traditional auction markets.

The price support program functions in an auction where USDA grades of leaf are linked to different levels of price support. However, contract sales bypass the auction and are not eligible for price support.

Further, due to the declining demand for tobacco products and U.S. leaf overseas, there is less available quota, and quota rental rates and sales prices have risen. Growers who try to maintain economic scales of production face increasing costs and less aggregate income.

For these reasons, states the report, grower interest in a buyout is at an all-time high. Quota owners see this as an opportunity to exit with a generous payment. Some growers seem ready to give up the security of the price support safety net for greater freedom in making production decisions and selling directly to manufacturers.

Several quota buyout bills have been introduced in the most recent session of Congress, providing for the purchase of quota from growers or other quota holders. These would either modify or eliminate the tobacco program. Some would set up entities to explore new production alternatives.

Others would set up programs for rural development and funding in communities where tobacco is grown. Still others would grant provisions for FDA authority to regulate tobacco products.

Nearly all bills propose to pay quota owners $8 per pound for quota loss and $4 per pound to active growers to help replace lost income. This money generally would be paid over a five-year period. Most of them would terminate the current tobacco program. But some would retain an annual production right (non-transferable) — or limited transfer — to grow tobacco which would be placed in the hands of the growers. Still others would include a minimum price guarantee of leaf based on the cost of production.

A primary concern with all buyout proposals is funding. Current federal budget deficits effectively prohibit any public monies from being used. Consequently, most bills propose funding by tobacco manufacturers. This, of course, would be passed on to consumers in the form of a user fee. Total costs of these proposals, over a five-year period, range from $15 billion to $19 billion.

But there may be some opposition, according to the report. Initial payments that may have to come from the U.S. Treasury as user fee collections may not be sufficient to fund early payments. Of course, the intent would be for the Treasury to be repaid as fees are collected, but any payments from public monies (although to be repaid) will be opposed by some.

This is big money, say the university specialists, but future Phase II payments likely would be terminated upon passage of any buyout.

Congress currently has many pressing bills on the agenda (the possibility of war, agency appropriations, etc.). Most of these are in front of any tobacco buyout in the political process. Any quota buyout would have to get substantial support from representatives and senators from states that will not directly benefit from buyout money and would essentially impose higher prices on their tobacco-consuming public.

Only about 100 representatives in the House are from all tobacco states combined. Further, each tobacco state has only two senators.

No one knows for sure what effect the election might have on this legislation. Some think it could put a rush on buyout legislation, while others think Congress may take a wait-and-see attitude.

But there is support from the public health community for a buyout. Further, these groups have supported some type of tobacco program for growers along with FDA regulations over tobacco manufactured products. But once the situation moves into the political arena, most anything is possible.

Failure to enact a buyout means the current program would stay in place. Farmers would continue growing the current basic quota with the current price-support system. Continuation of contract selling would rest in the hands of the buyers.

If contracting does continue, states the report, there likely will be more specifications imposed on tobacco production. While tobacco product manufacturers often are viewed as large, impersonal entities, it should be kept in mind that their reason for existence is to make a profit, according to the report. And if the leaf content or characteristic affects the demand for their product, then they will set specifications for the leaf.

And with the size of today's basic quota, the industry has an excess capacity for farm-level production with the barns and harvesting equipment that were in place few years back.

But the continuation of the present system likely would result in smaller quotas due to future declining exports and domestic usage.

Export of U.S. tobacco (while it is of extremely high quality) must compete with tobacco grown in other countries.

Many of these countries have cheaper labor and lower production costs. One purpose of the quota buyout is to eliminate the equity inherent in the right to grow tobacco, so the producer growing tobacco is the only beneficiary of the right to grow it. This would eliminate quota as a factor in the cost of producing tobacco, thereby lowering overall costs and increasing competitiveness, predicts the report.

Currently, a producer who owns quota does not pay himself rent, but there is the opportunity cost of holding quota because it has value. A grower who rents quota must pay the quota owner, which boosts total costs.

When the cost of producing tobacco is inflated by the right to grow it, it’s more difficult for U.S. growers to be competitive with foreign tobacco. The proposals submitted would eliminate the equity issues associated with quota, concludes the report.

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