Conference Held on Impacts of Tobacco Buyout

Farm Business Management Update, October/November 2005

By Dixie Watts Reaves, (dixie@vt.edu), Associate Professor, Agribusiness Management and Marketing, Agricultural and Applied Economics, Virginia Tech

Tom Capehart of USDA's Economic Research Service (ERS) organized a conference focused on the impacts of the Tobacco Buyout held at the ERS facility in Washington, DC to provide an opportunity to discuss impacts on various stakeholders. The conference brought together individuals from industry, government, and academia.

The first session focused on domestic policy implications. Scott Sanford and Bill Coats discussed the impacts of the buyout on the Farm Service Agency (FSA) and Agricultural Marketing Service (AMS), respectively. Sanford detailed the efforts taken by FSA to notify some 600,000 individuals about the Tobacco Buyout. In addition to individual letters, notices were placed in farm publications and on regional radio programs. The primary message was that the Fair and Equitable Tobacco Reform Act terminated the quota and price support program and transitional payments were being made available to producers and former quota holders. Sign-ups took place between March 14 and June 17, and as of September 16, over $900 million had been paid out. Over a ten-year period, the buyout will disburse a total of $9.6 billion to producers and quota holders. The remainder of the $10.14 billion buyout price tag will be utilized for disbursement of stocks held in inventory.

Coats detailed the impacts on AMS, the organization that had previously provided mandatory testing and grading of tobacco. In 2004, AMS employed 169 people. With the Tobacco Buyout, the number of employees dropped to 46. AMS has talked with the industry to determine the demand for services now that inspection and testing is voluntary. They are currently providing testing services on imported tobacco, particularly focusing on pesticide residues. They are also conducting some tests on domestic tobacco for the flue-cured tobacco cooperative. One concern that was raised from the audience is that there will no longer be market news on prices since there is no longer a public auction where buyers bid on tobacco.

Scott Balin with the Alliance for Health, Economic, and Agriculture Development provided a perspective from the health community. He indicated that we are in a new era of tobacco production and that the interests of the public health community, producers, manufacturers, consumers and other stakeholders will continue to converge. Now that Congress dismantled the program that had regulated tobacco, he pointed out the need to discuss tools and incentives to produce tobacco with high quality, health and safety standards. He questioned how and who would monitor tobacco products and where is the science to back up claims of a "safer cigarette." He encouraged a continued civil dialog among all stakeholders, reminding participants that without discussions between the health community and producers years ago, there would not have been a buyout.

Discussions then focused on competitiveness of U.S. tobacco in world markets. Kirk Wayne of Tobacco Associates shared his optimism for the U.S. tobacco industry. He felt that the U.S. position as "the world's most dependable supplier of the best quality leaf" would be enhanced, even though the U.S. may not recapture its once dominant position in the industry. His optimism was generated from the potential in non-traditional export markets, including central and Eastern Europe, the Mideast, and Southeast Asia, where consumers desire mid-range and premium cigarettes that contain U.S. tobacco. Tobacco Associates works closely with manufacturers in other countries to develop cigarette blends utilizing U.S. leaf. To date it has helped to develop 22 new cigarette blends. Tommy Bunn with the Leaf Tobacco Exporters Association shared some of Wayne's optimism. Bunn, too, indicated that the U.S. position in the marketplace has improved, citing good quality, source diversification, and production stability offered by the U.S.

The next session turned to impacts on growers, quota holders and markets. Smithson Mills with the Center for Assessment and Research Alliances at Mars Hill College discussed the impacts on communities, families, and farmers, indicating that tobacco had traditionally been the foundation of states' economies. Tobacco supported small farms and rural landowners, with quota often serving as economic security. With the tobacco buyout, there will be major implications for land use. Mills introduced Allen Parnell from the Cedar Grove Institute for Sustainable Communities who detailed a research project that will attempt to track changes in land use over time as a result of the tobacco buyout. Utilizing GIS and working with property parcel data and with assistance from FSA and Farmland Trust, Parnell will track land use in four North Carolina counties to determine the effects of the tobacco policy change. Results can then be used to assist local decision makers in planning with implications for zoning, infrastructure, extension needs, agritourism, etc.

Next in the session were the three pre-eminent university-level tobacco economists in the U.S., all of whom worked closely with tobacco buyout issues as the buyout was being discussed and developed: Blake Brown from North Carolina State University, Will Snell of the University of Kentucky, and Kelly Tiller from the University of Tennessee. Brown provided supply and price estimates for the 2005 season. USDA estimates had the 2005 crop at 389 million pounds, down from 519 million in 2004. Expected prices for flue-cured contracts ranged from $1.34 to $1.48 across all stalk positions, with burley contracts ranging from $1.50 to $1.56. North Carolina extension agent surveys across 100 counties revealed that producers were generally satisfied with their Philip Morris contracts and that grades and prices were as expected. Feelings regarding Universal contracts were neutral, but there was disappointment with other contracts. North Carolina acreage for 2005 was down, except for Eastern North Carolina. The number of producers decreased in 2005, and Brown expects a large decline in 2006. He pointed out that producers and quota holders will have financial resources from the buyout over the next nine years. He indicated that a key question is how resources will be used to replace tobacco income.

Snell reported that two-thirds of Kentucky quota owners had traditionally leased out their quota. Combining these owners with retirees, noncompetitive producers, and those who cannot find land or barns to rent, he predicted that 75% of owners and growers would exit the tobacco industry in Kentucky. His estimate was that 50% of growers exited in 2005. With estimated costs of production at $3,150 per acre, the average yield of 2,100 pounds per acre yields a cost of production of $1.50 per pound. Thus, the average grower with typical yields will not be able to stay in business with the average actual contract price of $1.53 per pound. With yields at 2,500 pounds, cost of production drops to $1.25 per pound. Actual yields in 2005 averaged only 1,800 pounds.

Tiller reported on the impacts on manufacturers and state economies. Combining the assessments placed on manufacturers to fund the buyout, with leaf cost savings due to lower prices, in addition to Phase II savings, the net burden to the industry is between 1.3 and 2.7 cents per pack of cigarettes, or less than 1% of the price of a pack. To measure impacts on manufacturers, Tiller conducted a study that looked at stock market response to various event dates associated with the tobacco buyout. Events were generally viewed as positive for the companies. Tiller estimated the community impacts to be $4 billion in North Carolina, $2.5 billion in Kentucky, and between $600 and $700 million in Tennessee, South Carolina, Virginia, and Georgia. She is currently conducting an input-output assessment which will determine direct, indirect, and induced effects from the buyout, including impacts on output, employment, and value added.

The final session focused on the future of tobacco cooperatives. Dan Green reported that the Burley Cooperative has set its priorities as managing inventory, grower organization and advocacy, export promotion and market expansion, contracting support, alternative marketing options, production technology, communication, education, research support, and crop insurance. He sees opportunities due to lower post-buyout prices. Kenneth Bopp discussed recent actions undertaken by the Flue-cured Cooperative, including the purchase of a processing facility. He reported that membership in the cooperative dropped from 800,000 members 18 months ago to 3,800 members currently. The processing facility is expected to make a profit in the future, which will be returned to the member-owners.

The conference was an informative session that looked at buyout impacts on a number of stakeholders. The hope is that future research will focus on some of the issues identified during the conference.

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