Tobacco Buyout a Reality

Farm Business Management Update, December 2004/January 2005

Dixie Watts Reaves, Associate Professor, Agribusiness Management and Marketing, Agricultural and Applied Economics, Virginia Tech

After years of uncertainty surrounding the future of the tobacco program, and following major efforts by politicians and farm organizations, a tobacco buyout bill was signed by President Bush on October 22, 2004. The Tobacco Buyout Bill, a component of the American Jobs Creation Act of 2004 and officially named the Fair and Equitable Tobacco Reform, ends all aspects of the Federal tobacco marketing quota and price support programs, effective with the 2005 crop. When the marketing year officially ends (June 30, 2005, for flue-cured tobacco and September 30, 2005, for all other types), tobacco producers may market their tobacco to any buyer at any time. Beginning with the planting of the 2005 crops of tobacco, there will be no geographical or acreage restrictions.

Under the provisions of the buyout, tobacco quota holders and producers of quota tobacco will receive compensation, funded through assessments on manufacturers and importers of all tobacco products sold in the United States. Total assessments are estimated at $10.14 billion over a ten-year period.

Tobacco quota holders (who owned a farm as of the date the President signed the bill, with an established 2004 basic marketing quota on their farm) will receive a $7 per pound payment based on their basic quota at the 2002 marketing year level. Producers who produced quota tobacco in 2002, 2003, and 2004 will receive a $3 per pound payment, $1 per pound for each year he/she produced the tobacco. The payments will be made in ten equal annual installments beginning in 2005, although the exact date of the first payment is not yet known. Producers and quota owners will have the option of assigning their rights to the stream of payments to a financial institution, in exchange for a single lump-sum payment. Before deciding to accept a lump-sum payment, individuals should carefully assess the tax implications and fully understand the trade-offs associated with taking the one-time payment.

The Farm Service Agency of the United States Department of Agriculture will work with producers and quota owners in the disbursement of payments. FSA's question and answer website served as the source for the information contained in this article, and additional information can be found there (http://www.fsa.usda.gov/tobacco/Default.htm). Additional resources include the Agricultural Policy Analysis Center at the University of Tennessee (http://apacweb.ag.utk.edu/tobacco.html), the Tobacco Economics site at North Carolina State University (http://www.ces.ncsu.edu/depts/agecon/tobacco_econ/Buyout.html), and University of Tennessee at http://tobaccoinfo.utk.edu/.

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