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Tobacco Producers Face another Difficult Year

Farm Business Management Update, February/March 2004

By Dixie Watts Reaves

Virginia's burley and flue-cured tobacco producers faced another difficult season in 2003, both starting the year with another quota cut and seeing an increasing amount of leaf going to the Cooperatives. The amount that producers are allowed to grow has been cut by more than half over the past few years. Weather challenges and uncertainties surrounding a buy-out clouded most of 2003.

Despite the weather difficulties and the continuing uncertainty surrounding the future of the industry, many producers were pleased with the prices they received in 2003. The average flue-cured price was about 2.5 more per pound than the previous year, with contract prices averaging about $7 per hundredweight higher than auction prices. Approximately 81% of the 2003 flue-cured crop was sold through contract. Of the tobacco sold at auction, just over 71% was purchased by the Flue-cured Stabilization Corporation (an increase from the 50% mark set in 2002). This represents just over 13% of all flue tobacco sold in 2003, through both auction and contract sales. Burley tobacco markets are still open, with an estimated 86% of the crop sold to date. Auction prices have averaged $196.12, with contract prices averaging $198.68. As of January 28, 77% of burley tobacco has been sold through contract. More tobacco has gone to the Burley Cooperative, 60.8% of auction sales (14.1% of all burley sales), compared to 24.8% of auction sales at the same time last year.

The quota announcement for 2004 brought continued bad news for flue-cured producers, but good news for burley growers. The quota level is determined from manufacturers' buying intentions, three-year average exports, and tobacco stocks held in reserve. For flue-cured, buying intentions were 254.3 million pounds, down from 283.3 million in 2003; average exports were 228.7 million pounds, down from 254.7 million; and the tobacco stocks held in reserve led to a downward adjustment in quota of 25.4 million pounds. The Secretary of Agriculture exercised her discretionary authority to add 3% (13.7 million pounds) to the formula calculation to arrive at the 2004 flue-cured marketing quota of 471.3 million pounds, down from 526.3 million in 2003: a 10.45% decline in basic quota. However, when 2003 "undermarketings" are added back to the national quota, effective quota is approximately 500 million pounds, or a 7% reduction from 2003.

For burley, both buying intentions and three-year average exports increased, leading to a quota increase of approximately 5%. The 302.1 million pound quota is based on domestic cigarette manufacturer purchase intentions of 194.6 million pounds (up from 184.9 million in 2003); three-year average exports of 144.5 million pounds (up from 137.9 million in 2003); and a reserve stock adjustment of negative 37 million pounds.

Entering the 2004 season, growers continue to be hopeful for a tobacco buy-out. A number of bills have been carried over from the previous legislative session, but many issues are still to be discussed. Any buy-out proposal must have something to offer to the non-tobacco states. Funding mechanisms continue to be an issue, as are FDA oversight, the base year for the buy-out, and post-buy-out program issues. The ultimate buy-out, if it does occur, may not be all that growers had initially hoped for. However, given the increasingly competitive global marketplace, declining domestic cigarette consumption, increasing lease rates, and rising average age of farmers, many growers will see any type of buy-out as an improvement to the current situation.

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