Tobacco auctions face difficult times

An appeals court judge ruling that upheld the right of the Flue-Cured Tobacco Cooperative Stabilization Corporation to operate marketing centers puts even more pressure on the already-taxed independent warehousemen, says the warehouseman who brought the suit. But more than two dozen continue in the 100-plus-year-old tradition of the auction.

Early this year, Mac Bailey and a group of tobacco warehousemen went to court asking the judge to reverse a decision that sanctioned the Stabilization's marketing centers.

Going into the courtroom in Raleigh, N.C., Bailey, the principal who brought the suit, said he thought the odds were stacked against him. “I just feel like we put up the best fight we could. We did what was right.”

At the heart of the warehousemen's suit was Stabilization operation of non-commissioned auctions, Bailey says.

The Stabilization contracted with 14 warehouses to operate marketing centers in four flue-cured states last year. Unlike traditional auctions, the centers don't charge growers a commission on sales. Warehousemen, who are also Stabilization members, felt they were discriminated against in the selection process.

“My contention was, if they're going to subsidize 14, they should subsidize others who want to stay open,” Bailey says.

In an earlier decision, the North Carolina Business Court, citing a 1921 law, said Stabilization had the right to use its farmer-supplied money to do business. The court cited contracting as a prime reason for the demise of the more than 100-year-old auction system.

Bailey says the ruling leaves both growers and warehousemen little choice but to either use the marketing centers or contract their crop. “I told my customers they can't afford to pay me commission when they could get it for free,” Bailey says. “I can't afford to hire people to keep a warehouse open and not charge commission.”

It's not the first setback for warehousemen in the rapidly changing environment of the golden leaf.

More than 100 warehouses were open going into 2001. In the winter of that year, major cigarette manufacturers announced the move to widespread contracting. Warehousemen responded by closing numerous auctions. By 2002, the number declined to less than 30 independent warehouses. This year, 25 independent auction warehouses continue to operate in flue-cured country for the 2003 season, says Terry Campbell of the Bright Belt Warehousemen's Association.

“To be fair, the warehousemen should have been polled as to their interest in staying in business,” Bailey says. “That would have protected the auction system more. It basically told the farmer you have two choices: Contract or go with the marketing centers. Farmers don't like to be told what to do, because farming is a way of life. But when you can get something for free, versus paying commissions, the farmer has no choice to go where it's not costing him directly. They put every warehouse on the verge of going out of business.”

Bailey, who owns S&M Brands, sold 400,000 pounds of tobacco out of his warehouse last year. He'll open his Virginia-Carolina Warehouse in Clarksville again this year.

Last year, in the second year of widespread contracting, only 26 warehouses operated.

Billy Yeargin operated his warehouse in Oxford, N.C. last year, staying open until late November. He also operated a produce auction during the summer and into the fall.

He sold more than a million pounds and reported overall prices 5 cents to 10 cents above the marketing centers. “By staying open until Nov. 21, a lot of farmers were able to sell tobacco that might not have been able to.” Oxford, N.C., has three warehouses; two independents and one Stabilization marketing center.

Yeargin's Warehouse saw tobacco that had been rejected at receiving stations, but some producers chose to bring their tobacco to the auction first. Despite the odds — another cut in quota, the possibility of a buyout and the end of the program — Yeargin says a lot more people may be coming back to the auction system. “The companies got to buy what they wanted. At least with the auction system, the grower could accept or reject the price support.”

Yeargin accuses cigarette manufacturers of “picking the cream of the crop, leaving the rest of the tobacco without a home.” He says the auction is that home.

Ralph Tuck of Virgilina, Va., sees the benefit of Yeargin's auction, but wonders about the benefits of contracting and the marketing centers. He grows organic tobacco for Santa Fe Tobacco Company, which RJ Reynolds recently bought, as well as conventional tobacco. “If you're growing a special tobacco for a special purpose, you have to have a contract,” he says. “But a contract is not necessary for conventional tobacco. Farmers are barking up the wrong tree. It will eventually be like the chickens, turkeys and hogs — an integrated commodity.”

For Yeargin, the marketing center idea rubbed him the wrong way. “I feel like they should leave the farmers' money alone.”

He fought the idea and decided to stay open. The tobacco warehouse business is in his blood. His grandfather operated the warehouse in Oxford. Yeargin bought the business from his grandfather's estate shortly after graduating high school. There's a lot of tradition here. “He offers a service,” says Tuck.

Yeargin's Warehouse is a combination auction and feed and seed and tack for local farmers as well as other consumers.

“A lot of my customers depend on me so they can operate, to be able to plant in some cases,” Yeargin says. “The two businesses go hand in hand.”

As to the future, it's still up in the air. “Something needs to be done to give farmers security so they can plan. The insecurity and cuts in quota have created “a shark frenzy” for pounds. One reason, he says, is production history hasn't been updated since the 1970s, creating a situation where producers are producing tobacco in excess of their quotas.

Still, Yeargin feels like he's straining to make a point that's already moot.

“The future is up in the air,” he says.

As he walked out of the courthouse in Raleigh, Bailey continued to think the auction still has a place, all the while wondering. “I believe we will see more tobacco through the auction system. I wonder if the marketing centers weren't a move to get 10 to 15 markets where manufacturers could send the tobacco they don't need. We'll likely never know or get more control over the farmer, since they won't have warehousemen to stand up for the farmers.”

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