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Tobacco Producers Continue to Face Uncertain Future

Farm Business Management Update, June 1998

By Dixie Watts Reaves of the Department of Agricultural and Applied Economics, Virginia Tech

Tobacco producers planted their 1998 crop under yet another cloud of uncertainty. Following the agreement reached in 1997 between the nation's tobacco manufacturers and 40 state's attorneys general, much attention has focused on pending tobacco legislation. The original settlement traded annual payments from manufacturers to the states for protection from future liability lawsuits. Since that agreement was reached, many different versions of legislation have been proposed to enforce the settlement, with a number originating from politicians in tobacco-producing states. While producers were largely ignored in the original agreement, their interests have figured prominently in recent proposals. A seemingly unlikely proponent of producer interests has been the health community. On March 16, the American Public Health Association urged Congress to safeguard both public health and tobacco farming families and communities in any national tobacco control legislation.

The bill currently being debated in the Senate, sponsored by Senator John McCain (R-Arizona), proposes a $1.10 per pack price increase for cigarettes. The measure is designed to reduce teen smoking, and the price increase would fund a variety of activities: reimburse states for health care costs, fund an advertising campaign to discourage teens from smoking, and provide payments for tobacco farmers, among other programs. One contentious issue in the bill is the limited lawsuit liability for tobacco manufacturers, currently set at $8 billion per year. A majority of lawmakers have indicated disapproval for the provision, while others argue that it is a reasonable compromise to have companies join in the anti-teen smoking effort and accept restrictions on advertising and other provisions in the bill. That one of the primary bargaining issues of the original agreement was the limit on liability is worth noting. As Senator Orrin Hatch (R-Utah) pointed out, "Without those liability provisions, ... the industry will not participate to the fullest extent possible in any tobacco program, and they certainly will not participate voluntarily." (Espo, p.2) With disapproval of the liability cap and with attacks by Republicans on the bill's tax increase, Senators left for a Memorial Day break without reaching any agreement on the bill. Cigarette makers say that the bill threatens the tobacco industry with bankruptcy and that it could cause hundreds of thousands of lost jobs and create a black market for cigarettes. Debate on the legislation is expected to go on for an extended period.

The House version of the bill, sponsored by Representatives James Hansen (R-Utah) and Marty Meehan (D-Massachusetts), has not yet passed through committee. The bill proposes a price increase of $1.50 over a three-year period and includes no lawsuit protection for manufacturers.

Dr. A. Blake Brown of North Carolina State University has conducted a number of studies to predict the impacts of increasing taxes or elimination of the current tobacco program or both. If the program is eliminated, Brown predicts that long-term production of tobacco will decline in higher cost areas such as the Appalachian region and the Piedmont of North Carolina and Virginia, where topography and soils make expansion and successful adoption of new technologies difficult (Brown, p.1). Furthermore, considerable consolidation of farms is predicted to occur, leading to increased farm size and perhaps more overall production on substantially fewer farms. He predicts that numerous adjustment costs will be imposed on tobacco farmers if the tobacco program is eliminated. The types of costs vary, depending on whether the producer chooses to exit farming altogether, attempts a new enterprise, or remains in tobacco production. For those who choose to exit farming, the following costs apply: acquisition of off-farm employment and the associated costs of gaining new skills or relocation or both; paying off farm debt without the farm operation to generate revenue; inability to sell specialized tobacco assets; and declining land values due to loss of tobacco production in the region. Farmers attempting to start or expand alternative farm enterprises must obtain new marketing and production skills, as well as make new financial investments. Producers remaining in tobacco production will need to invest in new technologies and additional land and equipment. Furthermore, they will need to acquire skills to manage risk in the newly deregulated market, which will likely be characterized by increased price volatility. Finally, creditors may be less willing to make loans in the deregulated market setting.

With the continued uncertainty facing the tobacco industry, producers should be proactive in considering actions that they will take under various scenarios. The Department of Agricultural and Applied Economics is preparing an extension program to assist producers in improving long-run, strategic decision-making skills in this changing environment.

Brown, A. Blake. March 12, 1998. "Potential Adjustment Costs Imposed on Tobacco Growers as a Result of Elimination of the Tobacco Program," North Carolina State University, Department of Agricultural and Resource Economics.

Espo, David. May 21, 1998. "Legislation Stumbles in Senate: Officials Vote Against Lawsuit Liability Limit," Associated Press.

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