Impacts of a Changing Tobacco Industry on Producers and Their Communities
Farm Business Management Update, June 2001
By Dixie Watts Reaves with assistance from Taylor Clarke, J.B. Daniel, Bob Jones, Bruce Jones, and Guy Sturt
This summary was prepared for the President's Commission on Improving Economic Opportunity in Communities Dependent on Tobacco Production While Protecting Public Health, in reaction to the Commission's interim report. Those individuals who work with producers on a daily basis felt a need for policy makers and the general public to have a better understanding of the impacts of a changing tobacco program on producers and their communities.
Much has been written about changes in the tobacco industry in recent years. Tobacco producers have been impacted by numerous factors that have been beyond their direct control. A number of years ago, producers began to feel threatened by increased excise taxes, potential FDA oversight, multiple lawsuits against their industry, and changes in the demand for manufactured tobacco products. Land-grant universities in tobacco-producing states began to take a more proactive role in seeking agricultural enterprises that could supplement tobacco income.
A common concern that has surfaced in recent years is the producers' lack of control over their own destinies. Based on a quota and price support system that has been in place for over half a century, producers had been making management and investment decisions with both their short-term and long-term farm business success in mind. With the numerous pressures facing the industry, the future of that program began to be called into question.
The Master Settlement Agreement brought hope that stability would return to the industry and that some of the external pressures and uncertainty would be lessened. The disbursement of settlement funds in the tobacco-producing states offered an opportunity for indemnification for lost quota values and for economic development activity to enhance long-term sustainability of farm communities. Battlegrounds developed in state legislatures as decisions were made about how settlement dollars should be allocated.
Recent challenges include the mandate to retrofit barns to produce reduced nitrosamine tobacco and the decision of whether to direct-contract tobacco sales to manufacturers. A yearly concern has been decreases in quota: prior to the 2001 growing season, producers had faced three consecutive years of quota decline, with cuts leading to approximately half the 1997 pounds being produced.
The economic importance of tobacco is well-documented. In many of the top-producing states, tobacco ranks as the number one cash crop. In Virginia, for example, tobacco generates 250% more cash receipts than the second-ranked crop. Production is widespread in some states and highly regionalized in others. In Virginia, the top three flue-cured producing counties generate 60% of production while the top three burley-producing counties produce 70%. The economic importance of the crop stretches into the farm supply sector, including production supplies (seed, fertilizer, chemicals), equipment, credit and services, and the marketing sector, including warehousing, stemming and redrying, and transportation. Furthermore, tobacco dollars tend to be spent in the home community, generating a large multiplier effect within the production counties.
What has been absent from many previous assessments of the changing tobacco industry is the producer-level impact. To better inform decision-makers and the general public about the plight of the tobacco farmer, results of conversations with agricultural extension agents in the flue-cured tobacco producing counties of Virginia are presented here.
Agent 1: A number of changes have been taking place in the county, with much of the change attributable to the cumulative effect of quota cuts, contracting, and barn conversions. A growing number of farmers who once worked full time on the farm have been forced to find off-farm work (examples include running heaving equipment, working construction, and contract planting of pine trees). Local officials estimate that at least one spouse in one-third of tobacco farm families has had to seek income from off-farm jobs over the last five years. It is estimated that growers are utilizing approximately 40% of producer-owned bulk barn capacity in the county and 65% percent of greenhouse capacity. Estimating quota rental rates is very difficult because of the many different arrangements that exist. In some cases, the land-owner/producer relationship has existed for many years; in some cases, family members are renting from each other; and in some cases the rental occurs on a cost and income share basis. With the knowledge that there is a broad range of rental values, it is estimated that average fair market value for lease rates on quota has increased approximately 65% in the past five years (from 30-35 cents per pound to 50-58 cents per pound) due to the competition for pounds after the drastic quota cuts. Lease rates as high as 80 cents per pound have been reported.
Agent 2: Over the past several years, approximately 10% of growers per year are exiting tobacco production, in some cases seeking off-farm employment. Two particular cases were noted where average-sized growers (35 to 50 acres) rented out their tobacco, with one taking a job driving a truck full-time. Quota cuts would have had much more severe effects had it not been for the settlement payments. Many producers are using payments to service debt or even to meet living expenses. Additionally, settlement monies have been used to supplement cost-share dollars in barn conversions. In this area, producers are utilizing approximately half of existing barn capacity. Lease rates are high, with limited quota available and a high level of competition for the pounds that are available. Discussion about a possible buy-out has influenced rental rates: Some producers are trying to obtain more quota in the event that a buy-out does occur while others are holding on to pounds that they might otherwise have given up. Quota rates in existing rental relationship have inched upward, while the biggest increases occur when a producer stops growing the poundage and the quota goes on the open market. This agent fears that "lease rates will eventually doom some growers if settlement monies dry up." The feeling is that no new ideas are available for farmers to invest in, and for many, growing tobacco is still the best thing they can do.
Agent 3: In this area, urban encroachment and the accompanying increase in property values and tax rates is a key issue. One producer became heavily leveraged four years ago with the purchase of some good crop production land. However, after the purchase, he was faced with three consecutive years of quota cuts, and he is now facing interest payments of $100 per day. In this case, 100% of the growerıs settlement payment is going directly to the lender. Growers are undertaking barn conversions, and the cost share is helpful. However, when one considers that only about half of the cost to convert half of the barns is subsidized, a substantial amount is left to be funded by the growers. Many growers are not in a financial position to contribute significantly to barn conversion costs. For those producers who choose not to grow their acreage and who want to sell their barns, non-converted barns are selling for $100 to $200. Growers in some counties in this area are receiving unsolicited mailings from land speculators, indicating an interest in purchasing their farm property. At one time, quota was being used to plan for and fund retirements; now, land is often looked to as the retirement fund. What implications does this have for a future generation of agricultural producers? In some counties in the area, quota is selling for $3.90 or $4.00 per pound and renting for 50 to 60 cents per pound. In the words of the agent, "There are few loyalties: people go where the deepest pockets are." In terms of transition, there has not been a mass exodus from tobacco production: older growers are hanging on for the possibility of a buy-out and are postponing retirement. Nor have a large number of forced sales occurred, since settlement payments have been available to pay off lenders. In some cases, the settlement payments have not been high enough to cover annual debt payment, but lenders have been accepting that payment level. The majority of quota sales have occurred through estate settlements.
Agent 4: The primary message this agent has heard from his producers is a need for a quota buy-out that will maintain a supply control program. He estimates that half the producers would exit production, while the younger producers would continue to operate under supply controls. The combination of quota cuts and barn conversions has been a problem for this area's growers: an estimated 50 to 75% of barns in the area will never be used again. With the recent quota cuts, some growers are paying as much as $4 per pound to buy quota and 75 to 90 cents for leases in certain parts of the county: however, the high lease rates are driven by a few large farmers. In some cases, producers are driven to rent additional pounds so that they will have sufficient capacity to receive a contract to grow for one of the manufacturers. Although quota has been cut by almost 50% in a three-year period, some producers are still making payments on the full value of quota that they bought a few years ago. Settlement dollars are being used to pay down debt and to convert barns. Since some of the tobacco companies are requiring baling of tobacco at sale time, some producers have purchased balers. Little investment has been made in new agricultural enterprises: four or five farmers have tried sweet potatoes over the past two years, but little else is being attempted. One of the most telling situations encountered by this agent occurred last spring as he was visiting farmers' greenhouses. He visited seven farms in one day and found that four of the producers were not on the farm when he stopped to visit. They were working part-time jobs: the first time they had ever had to work off the farm. To date, he is aware of no forced bankruptcies, but there will likely be only a handful of next-generation tobacco farmers. As one father stated, he would love to see his son do something else for a living, but he wanted the tobacco farm to be there for him if he wanted to continue it.
Agent 5: With quota cuts, the challenge has been to find enough quota to fully utilize barns and workers. With less quota available, producers have established what this agent terms "unreasonable quota value through competition." Producers must ultimately cover their fixed costs of production. But many do not think in those terms; they think more about short-term survivability and covering variable costs. As a result of continuously thinking "next year will be a better year," they have bid quota costs up in an attempt to get enough pounds to utilize existing capacity on the farm. The quota cuts, it is noted, helped some producers who were "on the fence" make a decision about their futures. Since they could not afford to hire sufficient labor or to convert their barns, they made changes in their farm operations.
Given the change and uncertainty facing tobacco producers, a group of faculty at Virginia Tech created a Managing for Success program designed to help producers plan in the face of uncertainty1. The program, specifically addressing strategic planning and decision making in an uncertain environment, assists farm families in achieving their farm and family goals and objectives. It is designed to help people help themselves to be better business managers through understanding their motivating values, examining what drives their desire to work the land, and establishing a framework of management concepts and skills to strengthen their chances of success. Goals of the Managing for Success program are to teach farm families how to apply
1 The discussion of the Managing for Success program is taken from "Facing Uncertainty," Dixie Watts Reaves, Eluned Jones, Gordon Groover, and Rick Peterson, Horizons, Volume 11, Number 2, March/April 1999.
Participants in the initial workshop identified critical issues for tobacco-farm businesses and families:
Many of these same issues continue to face producers as they anticipate potential changes in the quota and price support program that has governed tobacco production since 1938. As decisions are made regarding the future of the Tobacco Program, perhaps the insights from extension agents in the flue-cured tobacco-producing region of Virginia and the input from Managing for Success participants will help to tell the story of the tobacco producers as they attempt to survive the ongoing challenges facing their way of life.
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