What led to the tobacco quota buyout?

Tobacco growers now have a tobacco quota buyout. Either that’s good or it’s bad, depending on how each individual grower views it. Tobacco leaders tried so hard to pass a buyout, and almost everybody begged for relief from quota declines, high rents and inflated market prices that made competing in the world market almost impossible.

U.S. growers continued to lose production to overseas farmers. So relief in the form of a buyout was the final option. What many of us didn’t know was the road to the buyout stretched further back than most had expected.

Several unsuccessful attempts to fix the problem led to the tobacco quota buyout, says Jasper Womach, senior analyst in the Agricultural Policy for Congressional Research Service in Washington, D.C. Womach addressed growers and industry leaders and presented his views during the annual Raleigh, N.C., meeting of Tobacco Associates Inc., based in Washington, D.C.

Attempts to repair the program go back to the 1980s. The tobacco industry began working to fix its problem in 1982. Growers complained that absentee landlords were earning loads of money from renting quota while the grower had to fork out part of his hard-earned wages toward rent. Womach said growers were saying, “If we could cut those landlords out of the business and eliminate these rents, we would be able to make money. We could sell our tobacco at a lower cost, because we would have lowered expenses — no rent expenses.”

After a push by industry leaders, Congress passed legislation that would prohibit the lease and transfer of flue-cured quota. Did it work? No. “As you know — those of you who are paying rent — that legislation did not eliminate rental costs for flue-cured tobacco,” Womach said. “So that one didn’t work.”

In 1986, the industry reduced the support price of tobacco in an attempt to fix the program. Congressional legislation dropped the flue-cured loan rate 15 percent. The rate fell from $1.70 per pound to $1.44 per pound. “It didn’t solve the problem,” Womach says.

On top of trying to fix the program, cooperatives were dealing with their own problems. In 1986, the Commodity Credit Corp., upon legislation passed by Congress, acquired some burley cooperative inventories that were under loan. The tobacco, called disaster inventories, was of low quality from poor growing seasons. The surplus leaf had to be destroyed to avoid high grower assessments the next growing season.

The problem arose again in 1999 and met high grower assessments if the problem wasn’t dealt with by the federal government. Congress passed legislation, but with a twist. The Commodity Credit Corp. could dispose of the surplus stocks but at the corporation’s expense. Congress informed the corporation that “you can’t sell them [inventories] domestically, and you had better not try and sell them globally either, because we probably would be found in violation of our trade agreements,” Womach said, “and there is explicit legislation that says the Department of Agriculture can not promote the export sale of tobacco leaf or tobacco products. So those products were buried, and that cost $625 million.”

Congress tried again in 1993 to fix the tobacco program. Lawmakers adopted domestic content legislation, saying that 75 percent of a U.S. manufactured cigarette’s contents would consist of U.S. leaf. Once Congress adopted the legislation, it was informed that the law was a violation of the General Agreement on Tariffs and Trade, better known as the GATT agreement, with the United States’ global trading partners.

The agreement was proposed to promote free trade through regulation and reductions of tariffs on traded goods. It also was designed to resolve trade disputes.

“Well, action was brought, and the GATT panel said that was a violation. Change your law,” Womach said, “and we did.”

Congress replaced the legislation with tariff-rate quotas in order to limit imports. “We have never reached the trigger level under tariff-rate quotas that would impose duties that would usually block the imports, because the tariff-rate quota level is not at a very generous level,” Womach said.

At the time, he said cigarette manufacturers were importing tobacco when the U.S. tobacco was being shipped out. “Any of the imported tobacco that gets blended in and re-exported really doesn’t count as an import item,” Womach said. “So the only tobacco really coming under the tariff-rate quota requirement would be imported tobacco manufactured and consumed in the United States, and cigarette consumption hasn’t been growing in this country.”

So the import restriction didn’t work either. The program desperately needed mending, and Womach said it was unlikely that Congress was going to pass legislation again to destroy pool inventories at taxpayers’ expense.

The only alternative to fix the program was a tobacco quota buyout.

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