A Post Tobacco Buyout Update
Farm Business Management Update, February/March 2006
By Dixie Watts Reaves (firstname.lastname@example.org), Associate Professor, Agribusiness Management and Marketing, Department of Agricultural and Applied Economics, Virginia Tech
During the 2004 growing season, prior to the October announcement of the tobacco buyout, Virginia producers harvested nearly 30,000 acres of tobacco, with the majority (23,000 acres) being flue-cured. Following the buyout, and with marketing moving almost completely to direct contracting with manufacturers, acreage dropped nearly 43 percent to just 17,050 acres. After being the number one cash crop in Virginia for years, often bringing in more than 1.5 times the cash receipts of the second ranked crop, the lower acreage combined with lower average prices led tobacco to drop from the number one spot in 2005.
During the 2005 Virginia Tobacco Growers Conference in Halifax last February, attendees voluntarily completed a survey focused on the tobacco buyout. Ninety-five percent of respondents indicated that they were "glad the tobacco buyout occurred," while the remaining five percent were uncertain. When asked what they planned to do with their year-one buyout funds, nearly a third indicated that they would pay down debt. Almost the same percentage stated that they would invest for retirement. The remainder planned to invest in non-tobacco agricultural production (13%), use it for other expenditures such as education or paying taxes (13%), invest in a non-agricultural business enterprise (3%), invest in tobacco production (3%), and buy a new vehicle (2%).
Survey respondents included both growers and former quota holders. Of those who grew tobacco in 2004, 59 percent stated that they would produce in 2005. Only four percent said they would not produce, with the remaining 37 percent being unsure, even though it was already February. Respondent characteristics are summarized here: 32 percent reported having an off-farm job, while 54 percent had a spouse with an off-farm job. They estimated that 64 percent of their total family income was from the farm and that 55 percent of total family income was from tobacco. The average age of respondents was 53 years (this can be compared to the average age of all Virginia farmers, 57, according to the 2002 census). A follow-up survey is now being planned to determine what growers actually did in the 2005 season.
To begin to get a sense of grower decisions in 2005, a small focus group of tobacco farm families of selected Virginia Tech Agricultural Economics students was conducted. This can be considered a case study of six producers in Southside Virginia. Of the six respondents, four had used some of their tobacco buyout funds to pay down debt. Five had invested for retirement, three had invested in non-tobacco agricultural enterprises and three in a non-agricultural enterprise, and two had used some of the funds for education. One had "bought something for the family." During the 2005 growing season, all six produced less tobacco than they had the previous year. One went out of production completely. Another stopped producing flue-cured and just continued with his dark-fired production. Two of the six tried growing burley for the first time. When asked what elements of their contracts they were satisfied and dissatisfied with, three producers specifically indicated that they were satisfied with the grading, while another said he was satisfied with everything about his contract. Dissatisfaction centered around prices and not getting as many pounds as desired. Going into the 2006 season, three of the producers plan to grow more acreage, in all cases exceeding their acres produced in 2004 (their pre-buyout levels). The grower who exited production does not plan to re-enter, and one grower who produced in 2005 will not do so in 2006. The final producer plans to continue growing dark-fired and no flue-cured. The two producers who experimented with burley in 2005 plan to grow it again in 2006.
While these results are simply a snapshot of a small sample of producers, it is interesting to see the different strategies that were taken in the post-buyout environment. A survey of growers will help to provide additional information on how Virginia producers are faring in the post-buyout world.
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