impacts on tobacco producers - Dixie Watts Reaves, 5/7/01 4:53PM
Greetings from Virginia. I realize that this summary arrives after the last Commission meeting. However, I would still like to share this information. Given teaching demands during the academic semester, I was not able to get these comments organized until now. I hope they can still be helpful somewhere in the process. In addition to be inserted below, they are attached as a word file.
Impacts of a
Changing Tobacco Industry on Producers and Their Communities
Much has been written about changes in the
tobacco industry in recent years. Tobacco
producers have been impacted by numerous factors that have been beyond their
direct control. A number of years
ago, producers began to feel threatened by increased excise taxes, potential FDA
oversight, multiple lawsuits against their industry, and changes in the demand
for manufactured tobacco products. Land-grant
universities in tobacco-producing states began to take a more proactive role in
seeking agricultural enterprises that could supplement tobacco income.
common concern that has surfaced in recent years is the producers’ lack of
control over their own destinies. Based
on a quota and price support system that had been in place for over half a
century, producers had been making management and investment decisions with both
their short-term and long-term farm business success in mind.
With the numerous pressures facing the industry, the future of that
program began to be called into question. One
of the main concerns was the uncertainty surrounding the future of the program.
Master Settlement Agreement brought hope that stability would return to the
industry and that some of the external pressures and uncertainty would be
lessened. The disbursement of
settlement funds in the tobacco-producing states offered an opportunity for
indemnification for lost quota values and for economic development activity to
enhance long-term sustainability of farm communities. Battlegrounds developed in state legislatures as decisions
were made about how settlement dollars should be allocated.
challenges include the mandate to retrofit barns to produce reduced nitrosamine
tobacco and the decision of whether or not to direct contract tobacco sales to
manufacturers. A yearly concern has
been decreases in quota: prior to the 2001 growing season, producers had faced
three consecutive years of quota decline, with cuts leading to approximately
half of the 1997 pounds being produced.
economic importance of tobacco is well-documented. In many of the top-producing states, tobacco ranks as the
number one cash crop. In Virginia,
for example, tobacco generates 250% more cash receipts than the second-ranked
crop. Production is widespread in
some states and highly regionalized in others.
In Virginia, the top three flue-cured producing counties generate 60% of
production while the top three burley-producing counties produce 70%.
The economic importance of the crop stretches into the farm supply
sector, including production supplies (seed, fertilizer, chemicals), equipment,
credit and services, and the marketing sector, including warehousing, stemming
and redrying, and transportation. Furthermore,
tobacco dollars tend to be spent in the home community, generating a large
multiplier effect within the counties of production.
has been absent from many previous assessments of the changing tobacco industry
is the producer-level impact. To
better inform decision-makers and the general public about the plight of the
tobacco farmer, results of conversations with agricultural extension agents in
the flue-cured tobacco producing counties of Virginia are presented here.
1: A number of changes have been
taking place in the county, with much of the change attributable to the
cumulative effect of quota cuts, contracting, and barn conversions.
A growing number of farmers who once worked 100% on the farm have been
forced to find off-farm work (examples include running heaving equipment,
working construction, and contract planting of pine trees).
Based on discussions with local officials, it is estimated that at least
one spouse in one-third of tobacco farm families has had to seek income from
off-farm jobs over the last five years. It
is estimated that growers are utilizing approximately 40% of producer-owned bulk
barn capacity in the county and 65% percent of greenhouse capacity.
It is very difficult to estimate quota rental rates, because so many
different arrangements exist. In
some cases, the land-owner/producer relationship has existed for many years; in
some cases, family members are renting from each other; and in some cases the
rental occurs on a cost and income share basis.
With the knowledge that there is a broad range of rental values, it is
estimated that average fair market value for lease rates on quota has
increased approximately 65% in the past five years (from 30-35 cents per pound
to 50-58 cents per pound) due to the competition for pounds after the drastic
quota cuts. There are reported
cases of lease rates as high as 80 cents per pound.
2: Over the past several years, it
is estimated that approximately 10% of growers per year are exiting tobacco
production, in some cases seeking off-farm employment.
Two particular cases were noted where average-sized growers (35 to 50
acres) rented out their tobacco, with one taking a job driving a truck
full-time. Quota cuts would have
had much more severe effects had it not been for the settlement payments.
Many producers are using payments to service debt, or even to meet living
expenses. Additionally, settlement
monies have been used to supplement cost-share dollars in barn conversions.
In this area, it is estimated that producers are utilizing approximately
half of existing barn capacity. Lease
rates are high, with limited quota available and a high level of competition for
the pounds that are available. Discussion
about a possible buy-out has influenced rental rates, since some producers are
trying to obtain more quota in the event that a buy-out does occur, while others
are holding on to pounds that they might otherwise have given up. Quota rates in existing rental relationship have inched
upward, while the biggest increases occur when a producer stops growing the
poundage and the quota goes on the open market.
This agent fears that “lease rates will eventually doom some growers if
settlement monies dry up.” The
feeling is that there are no new ideas for farmers to invest in and, for many,
growing tobacco is still the best thing they can do.
3: In this area, urban encroachment
and the accompanying increase in property values and tax rates is a key issue.
One producer became heavily leveraged four years ago with the purchase of
some good crop production land. However,
after the purchase, he was faced with three consecutive years of quota cuts, and
he is now facing interest payments of $100 per day.
In this case, 100% of the grower’s settlement payment is going directly
to the lender. Growers are
undertaking barn conversions, and the cost share is helpful.
However, when one considers that only about one-half of the cost to
convert one-half of the barns is subsidized, a substantial amount is left to be
funded by the growers. Many growers
are not in a financial position to contribute significantly to barn conversion
costs. For those producers who choose not to grow their acreage and
who want to sell their barns, non-converted barns are selling for $100 to $200.
Growers in some counties in this area are receiving unsolicited mailings
from land speculators, indicating an interest in purchasing their farm property.
At one time, quota was being used to plan for and fund retirements: now,
land is often looked to as the retirement fund. What implications does this have for a future generation of
agricultural producers? In some
counties in the area, quota is selling for $3.90 or $4.00 per pound and renting
for 50 to 60 cents per pound. In
the words of the agent, “There are few loyalties: people go where the deepest
pockets are.” In terms of
transition, there has not been a mass exodus from tobacco production: older
growers are hanging on for the possibility of a buy-out and are postponing
retirement. There have not been a
large number of forced sales, since settlement payments have been available to
pay off lenders. In some cases, the
settlement payments have not been high enough to cover annual debt payment, but
lenders have been accepting that payment level.
The majority of quota sales have occurred through settlement of estates.
4: The primary message this agent
has heard from his producers is that there is a need for a quota buy-out that
will maintain a supply control program. It
is estimated that half of the producers would exit production, while the younger
producers would continue to operate under supply controls.
The combination of quota cuts and barn conversions has been a problem for
this area’s growers. It is
estimated that 50 to 75% of barns in the area will never be used again.
With the recent quota cuts, some growers are paying as much as $4 per
pound to buy quota and 75 to 90 cents to lease in certain parts of the county:
however, it is noted that the high lease rates are driven by a few large
farmers. In some cases, producers
are driven to rent additional pounds so that they will have sufficient capacity
to receive a contract to grow for one of the manufacturers.
Although quota has been cut by almost 50% in a three-year period, some
producers are still making payments on the full value of quota that they bought
a few years ago. Settlement dollars
are being used to pay down debt and to convert barns.
Since some of the tobacco companies are requiring baling of tobacco at
sale time, some producers have purchased balers.
There has been little investment in new agricultural enterprises: four or
five farmers have tried sweet potatoes over the past two years, but little else
is being attempted. One of the most
telling situations encountered by this agent occurred last spring as he was
visiting farmers’ greenhouses. He
visited seven farms in one day and found that four of the producers were not on
the farm when he stopped to visit: they were working part-time jobs, the first
time they had ever had to work off of the farm. To date, there have been no forced bankruptcies that he is
aware of, but there will likely be only a handful of next-generation tobacco
farmers. As one father stated, he
would love to see his son do something else for a living, but he wanted the
tobacco farm to be there for him if he wanted to continue it.
5: With quota cuts, the challenge
has been to find enough quota to fully utilize barns and workers.
With less quota available, producers have established what this agent
terms “unreasonable quota value through competition”.
Producers must ultimately cover their fixed costs of production, but many
do not think in those terms: they think more about short-term survivability and
covering variable costs. As a
result of continuously thinking “next year will be a better year,” they have
bid quota costs up in an attempt to get enough pounds to utilize existing
capacity on the farm. It was noted
that the quota cuts helped some producers who were ‘on the fence’ to make a
decision about their futures: since they could not afford to hire sufficient
labor or to convert their barns, they made changes in their farm operation.
the change and uncertainty facing tobacco producers, a group of faculty at
Virginia Tech created a Managing for Success program designed to help
producers plan in the face of uncertainty.
The program, specifically addressing strategic planning and decision
making in an uncertain environment, assists farm families in achieving their
farm and family goals and objectives. It
is designed to help people help themselves to be better business managers
through understanding their motivating values, examining what drives their
desire to work the land, and establishing a framework of management concepts and
skills to strengthen their chances of success.
Goals of the Managing for Success program are to teach farm
families how to apply
planning methods to their businesses and personal lives,|
problem solving skills to current situations,|
skills to intrafamily and intergenerational decision making, and|
and financial management skills in evaluating alternatives.|
in the initial workshop identified critical issues for tobacco-farm businesses
of control over the future|
options and the associated emotional issues of change|
opportunities for those wanting to produce|
options and the adjustments required|
labor supply and wages|
on rural communities and loss of political influence|
of these same issues continue to face producers as they anticipate potential
changes in the quota and price support program that has governed tobacco
production since 1938. As decisions
are made regarding the future of the Tobacco Program, perhaps the insights from
extension agents in the flue-cured tobacco-producing region of Virginia, and the
input from Managing for Success participants, will help to tell the story
of the tobacco producers as they attempt to survive the ongoing challenges
facing their way of life.
 The discussion of the Managing for Success program is taken from “Facing Uncertainty,” Dixie Watts Reaves, Eluned Jones, Gordon Groover, and Rick Peterson, Horizons, Volume 11, Number 2, March/April 1999.
Dixie Watts Reaves
Associate Professor & Extension Specialist
Agricultural & Applied Economics