WPCFN i<(帔uϚuUt]v):W m];ٙ -@[֯sYtGYȮ[\8zuчץ"?ŭ;+~aΌ[ԱGv/>1t7b gA C?F`" (k7+L>!gBGe84e3rNAW'CJ86fjx/#B{4(BQ;3 ԛ]hrՔ-B@Q1]6,--%w!A0nH#!C)#_Y+`eDUzYlLx}PDoǑPǥV %|lC<.M{,0i-2l2FQe43֕M`KF|bm#UN % 0( ^ 3 w? 4C W f mh 0c 1u 0wW 0 0X 0 0 0s 0N 1= 0 72f N 0l 0D&j= 0D_e 1b 72 0+  08 0# 0 ! 0! 0" 0# 0$ 0f% 0<& 0' 0' 0( 0) 0j* 07+ 0, 0, 0- 0g. 0?/ 00 00 01 02 0J3 04 04 0k5 0<6 0?6 06 07 0^: 0{< 0c? 0A 0rpD 0F 0xeI 1UK 7 2L B->LU2kLU>LU6LU,M.=M=M=MkMkM BMMM"MfMaM D5MMMMMMMMM C N N N N i!%NLexmark Optra E312,,,,,,0(9 Z6Times New Roman RegularX($뀃* Tn|*d C3|xU(;3$2#  0  .3  0  3#37=CIQYag1.a.i.(1)(a)(i)1)a)(O;$0  2#  a  .3  0` (#(#(b$0  0` (#(#2#   .3  0 ` (#` (#(xir$0  0` (#(#0 ` (#` (#2#(  0  )3  0 (# (#($0  0` (#(#0 ` (#` (#0 (# (#2#(  a  )3  0h(#(#(F$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#2#(   )3  0h(#h(#($0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#2#  0  )3  0(#(#({$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#0(#(#2#  a  )3  0p(#(# hAG_cgkosw{Bullet ListBullet List`! :Body Text InBody Text Indent 2             i) Multiyear((3$ !      0  (#$  0    $    4    _ԀArelativelyhighpercentageofU.S.fluecuredtobaccoisalsoexpectedtobecontracted  forthe2001season.Inaddition,someotherU.S.tobaccotypes(includingorganicallygrown p tobacco,cigartobaccos,darktobaccos,andgeneticallymodifiedtobacco)willalsobesoldeither \ viadirectsalesorcontract. { $    1    _ԀThispaperisanupdatedversionof IssuesSurroundingtheDebateonDirect  MarketingofTobacco ,WilliamM._Snell_,UniversityofKentucky,Dept.ofAgricultural t Economics,June2000.  C  $    1    _ԀThanksisextendedtoBlakeBrown,NCStateUniversityandRussSutton,Clemson  Universityfortheirhelpfulcomments.  $    2    _ԀAround4.5millionpoundsofU.S.burleywasalsosoldasnonauctionlastyear,which  isnotincludedinthe87.5millionpoundsreportedbyAMSascontractsales.(F$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#0(#(#0p(#(#2#     )3  0p(#p(#  U $    5    _Currently,acoupleofthecontractingfirmsareplanningtoemployUSDAgradersat  theirreceivingstations,butatthepresenttime,mostofthecontractedtobaccofor2001willbe p gradedsolelybycompanypersonnel.  $    6    _ԀInadditiontowarehouseowners/operators,otherbusinessesinsomeruralcommunities  thatlosemarketcenterswillalsobeadverselyaffected.Furthermore,warehouse p owners/operatorsandruralcommunitieswillbeforcedtoaddresstheissueofanypotential \ alternativeuseortherelativelyexpensivedisposalcostofthesevacatedtobaccowarehouses. xCcgkosw{TrianglesTriangle Bullet"2G+J 0_level1  X /%4 4 <DL/23  ..  2( 4 <DL2   ! $    3    _ԀCommentsbyMike_Farriss_,VicePresidentofLeafforPhilipMorrisU.S.A.,beforethe  KentuckyGeneralAssemblysTobaccoTaskForce,August28,2000.2D+J 0_level2   ," <DL,23  ..  2( 4 <DL2  2A+J 0_level3   ) <DL)23  ..  2( 4 <DL2  2>+J 0_level4  ` &<<DL&23  ..  2( 4 <DL2  2;+J 0_level5   #DL#23  ..  2( 4 <DL2  28+J 0_level6    DL 23  ..  2( 4 <DL2  25+J 0_level7  h DDL23  ..  2( 4 <DL2  22+J 0_level8   L23  ..  2( 4 <DL2  2/+J 0_level9    L23  ..  2( 4 <DL2  2GJ 0_levsl1  X /%4 4 <DL/23  Ԁ  2( 4 <DL2  2DJ 0_levsl2   ," <DL,23  Ԁ  2( 4 <DL2  2AJ 0_levsl3   ) <DL)23  Ԁ  2( 4 <DL2  2>J 0_levsl4  ` &<<DL&23  Ԁ  2( 4 <DL2  2;J 0_levsl5   #DL#23  Ԁ  2( 4 <DL2  28J 0_levsl6    DL 23  Ԁ  2( 4 <DL2  25J 0_levsl7  h DDL23  Ԁ  2( 4 <DL2  22J 0_levsl8   L23  Ԁ  2( 4 <DL2  2/J 0_levsl9    L23  Ԁ  2( 4 <DL2  2GJ 0_levnl1  X /%4 4 <DL/23   2( 4 <DL2  2DJ 0_levnl2   ," <DL,23   2( 4 <DL2  2AJ 0_levnl3   ) <DL)23   2( 4 <DL2  2>J 0_levnl4  ` &<<DL&23   2( 4 <DL2  2;J 0_levnl5   #DL#23   2( 4 <DL2  28J 0_levnl6    DL 23   2( 4 <DL2  25J 0_levnl7  h DDL23   2( 4 <DL2  22J 0_levnl8   L23   2( 4 <DL2  2/J 0_levnl9    L23   2( 4 <DL2  61 $4heading 1  XXX     XXX61 $4heading 2     XXX  <:Default Para.22,Title    XXX    XXX<G+J :Outline001_1  X /%4 4 <DL/23  ..  2( 4 <DL2  < :Outline001_2   ," <DL,XXXKR<6X9`(Courier NewK23  XXXSQ\  `&Times New RomanSXXXKR<6X9`(Courier NewK..XXXSQ\  `&Times New RomanS  2( 4 <DL2  < :Outline001_3   ) <DL)XXXGPKr`WingdingsG23  XXXSQ\  `&Times New RomanSXXXGPKr`WingdingsG..XXXSQ\  `&Times New RomanS  2( 4 <DL2  < :Outline001_4  ` &<<DL&XXXAS(\ Y`SymbolA23  XXXSQ\  `&Times New RomanSXXXAS(\ Y`SymbolA..XXXSQ\  `&Times New RomanS  2( 4 <DL2  < :Outline001_5   #DL#XXXKR<6X9`(Courier NewK23  XXXSQ\  `&Times New RomanSXXXKR<6X9`(Courier NewK..XXXSQ\  `&Times New RomanS  2( 4 <DL2  < :Outline001_6    DL XXXGPKr`WingdingsG23  XXXSQ\  `&Times New RomanSXXXGPKr`WingdingsG..XXXSQ\  `&Times New RomanS  2( 4 <DL2  < :Outline001_7  h DDLXXXAS(\ Y`SymbolA23  XXXSQ\  `&Times New RomanSXXXAS(\ Y`SymbolA..XXXSQ\  `&Times New RomanS  2( 4 <DL2  < :Outline001_8   LXXXKR<6X9`(Courier NewK23  XXXSQ\  `&Times New RomanSXXXKR<6X9`(Courier NewK..XXXSQ\  `&Times New RomanS  2( 4 <DL2  < :Outline001_9    LXXXGPKr`WingdingsG23  XXXSQ\  `&Times New RomanSXXXGPKr`WingdingsG..XXXSQ\  `&Times New RomanS  2( 4 <DL2  DEFGHIJK 359=AEIMQ1PoPoPoML)Hairline dKr`Wingdings\  `&Times New Roman<6X9`(Courier New(\ Y`Symbol $          d     єTABLE AYYYY)!dxdx d_Yh !  _  8XXdd8  TAWh\*  TobaccoContractingIssuesandUpdatefor2001 _ #  1      _   WilliamM._Snell_ԀandDanielGreen \ UniversityofKentucky H Dept.ofAgriculturalEconomics 4 March2001    G  AfterdecadesofrelativelyminorchangesinthemarketingofU.S.tobacco,theindustry  t isinthemidstofsignificantchanges.Lastyear,PhilipMorris,thenationslargestbuyerofU.S.  L  tobaccoinitiatedapilotcontractingprojecttopurchasetobaccodirectlyfromKentuckyand  $  Tennesseeburleytobaccofarmerswithintheguidelinesofthecurrentfederaltobaccoprogram.   Accordingtocompanyofficials,thisactionwastakenprimarilyinresponsetobettercontrolling X  theveryspecificgradesandstylesoftobaccothatmaynotbeavailableinadecliningquota 0 (supply)market.Whilethecontractsofferedunderthispilotprogramdidofferafewgeneral  productionguidelines,theagreementwasbasicallyamarketingcontract.Underthearrangement, \ contractingfarmersdeliveredtobaccotoadesignatedreceivingstation.Companyofficials 4 gradedthetobacco,checkedmoisturelevels,andestablishedpricesbasedonapreannounced   priceschedule.Nonetcostandburleypromotionfeeswerededucted,butcontractingfarmersdid h nothavetopaygradingorwarehousefees.Contractingfarmershadtheoptionofrejectingthe @ offeredpriceandsellingtheirtobaccothroughthetraditionalauctionmarketsystem,which   consistedoffederalgradesandpricesupports. !l!  Reviewof2000Season  #D #   Finaldataforthe2000U.S.burleycropindicatedthatapproximately87.5millionpounds %"% (28%ofnetmarketings)weresoldwithinthecontractingsystem.\ #  2      ׀PhilipMorrisofficials x'#'  TA T   T  indicatedthatcontractagreementsrangedfromgrowerscontractingmorethan100,000poundsof  quotatosomecontractinglessthan100pounds,withapproximately50%oftheagreements \ beinglessthan5,000pounds._% #  3      _ԀGrosspricesunderthisalternativemarketingsystemaveraged 4 $198.43/cwt,oralmost3centsperpoundabovetheaverageauctionprice.Accountingforthe   gradingfeeandwarehousefees(lesshaulbillrebates),pricesunderthecontractingsystemnetted  ` approximately10centsperpoundhigherthantheauctionmarket.Dataarenotavailableto  8  assessthequalityinducedpricedifferentialbetweenthetwomarketingsystems.However,itis   likelythatsome,butcertainlynotall,ofthepricedifferentialbetweenthetwomarketingsystems l  waspartiallyduetoanoverallhigherqualityoftobaccosoldunderthecontractingsystem. D   Giventheapparentsuccessofthepilotproject,PhilipMorrisannouncedthatthe  companyplannedtoexpandU.S.burleycontractingin2001,whilealsoinitiatingcontractingin p U.S.fluecuredregions.Concernedaboutthepotentialsupplyavailablefortheirownneeds,the H othermajorU.S.tobaccobuyersmovedquicklyfollowingthePhilipMorrisannouncementto   initiatetheirownburleymarketingcontractsfor2001.PhilipMorris,BrownandWilliamson | (throughitsleafpurchasingdivision,ExportLeaf),and_R.J_ԀReynoldswilloffertheirown T contracts,while_Lorillard_Ԁwillsecureitscontractedleafthrough_Dimon_.Leafdealers,Universal , and_Dimon_Ԁwillalsobecontractingtopartiallyfulfilltheiranticipatedexportorders.Presently, !  thesebuyershaveestablishedmorethantwodozencontractreceivingstationsforburleytobacco "X" acrossKentucky,Tennessee,andVirginia. $0!$   Inadditiontocontracting,PhilipMorris,BrownandWilliamson,_Lorillard_,Universal, &#& and_Dimon_Ԁindicatedthattheystillplantobuyaportionoftheir2001burleyneedsthroughthe d($( traditionalauctionmarket.However,_R.J._ԀReynoldsstatedthattheyintendtoacquirealltheir  2001U.S.burley(andfluecured)purchasesviacontracts.Anotherleafmerchant,Standard \ Commercialentertainedtheoptionofcontracting,butduetocostconsiderationseventually 4 decidedtopurchasealltheirburleyneedsfromthe2001cropatauction.Whileitremains   unclearthepercentageofU.S.burleythatwillbesoldauctionvsnonauctionthisyear,currently  ` mostestimatesindicatethat50to75%oftheburleycropwilllikelybemarketeddirectlyvia  8  contractsin2001. #  4      ׀    ContractingTrendsinU.S.Agriculture:ImplicationsForTobacco  l    ContractingisbecominganincreasinglypopularmarketingoptioninU.S.agriculture.A D recentUSDAstudyindicatedthatapproximatelyonethirdofthevalueofU.S.agricultureis  producedundercontracts.Todayalmostallbroilersaregrownunderproductioncontracts,with p anincreasingvolumeofhogproductionalsobeingcontracted.Othercommoditiesproduced H undercontractincludemilk,fruits,vegetables,turkeys,eggs,cotton,peanuts,andidentity   preservedgrains. |   Agriculturalcontractsaregenerallyclassifiedaseither production or marketing  T contracts. Productioncontracts aremorecommoninverticallyintegratedindustries(e.g., , poultry,hogsintheU.S.andtobaccoinsomepartsoftheworld)whereafarmerreceivesa !  predeterminedfeeforraisingaspecifiedquantityandqualityofacommodity,withthe "X" contractingfirmprovidingsomeinputs,management,andtechnicaladvice.Thecontractingfirm $0!$ inaproductioncontractingsystemusuallyretainsownershipofthecommoditythroughoutthe &#& Wh W W  productionprocess.Sincethecontractingfirmbearsagreaterportionoftherisk,thefirm  generallyretainsalargerportionoftheprofits. \    Marketingcontracts typicallyspecifythequantity,quality,priceanddeliverydatefora 4 givencommodity,withtheproducerretainingownershipuntildelivery.Grain,cotton,and   peanutsareoftengrownundermarketingcontracts,whichincludepricedifferentialsfordifferent  ` gradesandqualities.  8    Contractingisthemarketingmethodutilizedfortobaccoinmanypartsoftheworld(e.g.,   Brazil,Argentina,andMexico).Infact,contractingistheonlymeanstoselltobaccoinmostof l  thesemarkets.Thecompanysintensivemanagementcontrolisanecessaryfunctioninmany D countriesgivennoavailableextensionservice,producersoverallmanagementskillsand  producerslackofaccesstoinputs(particularlyfinancing).Inthesecountries,thetobacco p companies(usuallyleafdealers)typicallyprovidegrowerswithseeds,fertilizers,pesticides,and H facilitatefinancing,whilealsoofferingtechnicalassistance.Producerandindustry   representativesusuallynegotiateaseriesofpricesforvariousgradesbasedonestimatedcostsof | production.Productioncontractsareofferedtoarelativelylargenumberofsmallfarmsgiventhe T structureoflandholdingsinmanyofthesecompetingcountries. ,   Accesstotheproductioninformation(viatheextensionservice),inputs,financing,and !  managementskills,arenotlimitingfactorstoU.S.tobaccoproduction.Inaddition,thefederal "X" tobaccoprogramguaranteesgrowersaccesstomarketsandminimizespricerisk.However, $0!$ marketinginefficiencies,coupledwithconcernsoversuppliesandqualityofU.S.tobacco,have &#& enticeddomesticcompaniestopursueanalternativemarketingsystem.Inaddition,tobacco d($( buyersmaybeshiftingtocontractingasameanstomorecloselymonitorinputuseand <*&* productionpracticesinanticipationofpotentialfutureregulationofthetobaccoindustrybythe ,(, FoodandDrugAdministration. -h*. \* \  \  CharacteristicsofCurrentU.S.BurleyTobaccoContracts     ThecontractscurrentlybeingofferedtoU.S.burleygrowerswouldbeclassifiedas \ marketingcontracts.However,ingeneral,thecontractsdomakespecificreferencetoselected 4 productionpracticesandotherissuesincludingthefollowing:      (Notethatthisisnotanexhaustivelistandtheseindividualcontractcharacteristicsvary  ` amongcontractingcompanies,andinsomecasesarenotdiscussedinallcontracts.  H  Furthermore,contracttermsandpricesaresubjecttorevision.Checkindividualcompany  0  contractsforcompleteandupdatedcontractterms.)       (Ax3 " 3"     3N,2A3  0 `   Contractedtobaccomustbeproducedandcuredusingrecommendedagronomic p  andculturalpractices,usingonlyseedvarietiesthatmeetminimumstandards. 3N,,݌\ ` (#` (# Ќ  " 3"     3-2A3  0 `   Onlygovernmentapprovedchemicalsmaybeusedintheproductionofthecrop 4 andtheymustbeappliedinaccordancewithapplicablerecommendedratesand   regulations. 3--݌ ` (#` (# Ќ  " 3"     3N/2A3  0 `   Contractedtobaccomustbestrippedandseparatedintoatleastthree(and ` preferablyfour)stalkpositions,adheringtonormalgradedistributionsbystalk L position.   h      p     . 3N//݌8` (#` (# Ќ  " 3"     3412A3  0 `   Contractedtobaccomustbedeliveredfreeofforeignmatter,weighinglessthan  100poundsperbale,separatedbycropyear,andwithamoisturecontentofless  thanspecifiedlevel(24%inmostcontracts). 341m1݌l` (#` (# Ќ  " 3"     322A3  0 `   Contractedtobaccomustbemarketedunderthefederaltobaccoquotaprogram D andadheretoallotherapplicablerulesandregulationsoftheUSDAandother 0 governmentagencies. 32,3݌` (#` (# Ќ  " 3"     342A3  0 `   Contractlengthsvaryamongcompanies,rangingfromonetothreeyear  p  agreements. 344݌!\!` (#` (# Ќ  " 3"     352A3  0 `   Proceduresforsubmittingthegrowersmarketingcardandnotificationofchanges #4 # infarmquota,includingleasedinpoundsareoutlined. 355݌$ !$` (#` (# Ќ  " 3"     372A3  0 `   Contractingsellermustofferentirecropundercontractterms,withsome |&"& companiesdisclosingpenaltiesforunauthorizedsales. 37Q7݌h'#'` (#` (# Ќ  " 3"     3o82A3  0 `   Contractingsellermaynotleaseoutanypartofthecontractedcrop. 3o88݌@)%)` (#` (# Ќ  " 3 "     3w92A3  0 `   Terminationclauses,alongwithrejectionandrevocationtermsfor non +'+ conformingcontractedtobaccoarediscussed. 3w99݌,(,` (#` (#    ,l)- " 3 "     3:2A3  0 `   Deliveriesofcontractedtobaccotoaspecifiedreceivingstationarescheduledto   accommodatebybuyerandseller. 3:";݌p` (#` (# Ќ  " 3 "     3=<2A3  0 `   Minimumpricesofferedbygradeandstalkpositionaredisclosed,alongwith H anticipatedweightdistributionsbystalkposition. 3=<v<݌4` (#` (# Ќ  " 3 "     3=2A3  0 `   Gradingproceduresandoptionsavailableifagradingdisputearisesareoutlined.    3==݌ ` (#` (# Ќ  " 3 "     3>2A3  0 `   Samplingandtestingprocedures,whichvarybycompany,(e.g.,moisture,  ` temperature,pesticideresiduelevels)arestated. 3>>݌ L ` (#` (# Ќ  " 3"     3 @2A3  0 `   Agreementscontainprovisionspresentingthemaximumallowablecarryover  $  tobaccosales(i.e.,pre2001crop)andoptionstomarketdisasterleasepounds. 3 @C@݌ ` (#` (# Ќ  " 3"     3zA2A3  0 `   Paymentproceduresandtermsaredisclosed. 3zAA݌l ` (#` (# Ќ  " 3"     3hB2A3  0 `   Contractingfirmsrightstotheaccessofthecontractingfarmarestatedinsome D agreements,alongwithgrowerproductionpracticerecordkeepingrequirements 0 (ifany). 3hBB݌` (#` (# Ќ  " 3"     3D2A3  0 `   Disclosureofinformationandconfidentialityofinformationtermsarepresented. 3D9D݌p` (#` (# Ќ  " 3"     3E2A3  0 `   Termsregardingtheresolutionofdisputesareoutlined,includingtheapplicable H stateslawgoverningtheagreementandthelocationofanyactions,suits,or 4 proceedingsarisingfromtheagreement. 3EME݌ ` (#` (# Ќ  " 3"     3F2A3  0 `   Contracttermsaresubjecttorevisionuponmajorchangesoreliminationofthe | federaltobaccoprogram. 3FG݌h` (#` (# Ќ    ContractPriceAnalysis  @   Theselectionofacontractingcompany,ifoneelectstocontract,shouldnotbemade   solelyonprice.However,undoubtedlycontractpriceswillbeoneofthekeyvariablesonewill !l! considerwhendebatingwhethertosignanagreement.Interestingly,theintroductionof #D # contractingisboostingthepriceofU.S.burleytobaccointheshortrunasindividualtobacco %"% companiesanddealersattempttoluretobaccoawayfromothercompaniesandawayfromthe x'#' auctionmarket.Thisenhanceddegreeofcompetitionwouldonthesurfaceappearfavorableto P)%) thegrower,butpresentssomeimmediateandlongtermconcernsfortobaccogrowers. (+'+ Anticipatedhighergrowerpricesareoneofseveralfactorsthatarecurrentlyboostingleaseprices -|)- andthuscausingsomeofthebenefits(i.e.,rents)tobepassedontoquotaowners.Inaddition,  thesehigherpricesarecontinuingtofurthererodethepricecompetitivenessofU.S.burleyinthe \ internationalmarket,whichmayadverselyaffectfutureU.S.burleyexportsandcouldencourage 4 moreimports.Ahigherqualityproductinducedbythischangingmarketingsystemmayoffset   someofthesepriceconcerns.But,thehigherpricesevolvingfromthiscurrentmarketsituation  ` willlikelyresultinafurthererosionoftheU.S.burleymarketshareinbothdomesticand  8  internationalmarkets.     Somespecificobservationsfromthecontractpriceschedulesincludethefollowing:  l  (Note:Thelistbelowoffersonly generalcommentsaboutthemajortobaccobuyersprice D schedulesknownasofmidMarch,2001.Severalcontractingfirmshaverevisedinitialprice , schedulesandthecurrentpricesdisclosedinthesecontractscontinuetobesubjecttorevision.  Checkindividualcompanycontractsforspecificpricesandgrades.Alsonotethatprice x supportsforindividualUSDAburleygradeshavenotbeenestablishedforthe2001crop. ` TheseloanratesaregenerallyannouncedbytheUSDAsometimeduringthesummer H months.)  0 " 3"  0   3R2A3  0` (#(#  Contractpricesdovaryacrosscompanies,withsomecompaniesnotofferinga  priceforcertaingradessuchasmixed,greenorvariegatedtobaccos. 3RRR݌t` (#` (# Ќ  " 3"  0   3S2A3  0` (#(#  QXXXXOutofthe109USDAburleytobaccogrades,thenumberofgradescurrentlylisted L asacceptableinthecontractsrangefrom71to101,withanaverageof90across 8 allreviewedcontracts. 3SS݌$` (#` (# Ќ  ,<( 4 <DLX< ,?( 4 <DL4X?" 3"  0   3U2A3  0` (#(#  Thedifferenceinthequalityoftobaccoacceptedacrossthecontractswarrants x specialconsiderationwhencomparingprices.Forexample,whileonecontact  d  mayofferhigherpricesforthebetterqualitygrades,significantdiscountsare !P! placedonlowerqualitygrades(ifthesegradesareacceptedatall). 3U%V݌"<"` (#` (# Ќ  " 3"  0   3'X2A3  0` (#(#  Assumingthemostrecent5year(19962000)distributionofmarketingsbygrade, $!$ theaveragecompanypriceforthe2001crop(basedoncurrentcontractprices) %"% rangedfrom$176.1/cwtto$190.4/cwt.Notetheseaveragestakeinto p&"& considerationthatsomecontractpricesarezeroforcertaingrades. 3'X`X݌\'#'` (#` (# Ќ  " 3"  0   3]Z2A3  0` (#(#  Giventhefollowinggradedistributionofmarketings,_flyings_Ԁ(8%),cutters(30%), 4)%) leaf(50%)andtips(12%),theaveragecompanypriceforthe2001crop(basedon  *&* thecurrentcontractprices)#XXXQXT#QXXXXԀrangedfrom$199.4/cwtto$202.5/cwt,assuming  +'+ 100%ofthetobaccofellinthecompanystopqualitygradegrouping. 3]ZZ݌+t(,` (#` (#    ,`)- " 3"  0   3"]2A3  0` (#(#  Giventhesamegradedistributionasabove,theaveragecompanypriceforthe   2001crop(basedonthecurrentcontractprices)rangedfrom$194.4/cwtto p $197.5/cwt,assuming100%ofthetobaccowascategorizedinthecompanys \ secondhighestqualitygradegrouping.#XXXQX\#QXXXX 3"][]݌H` (#` (# Ќ     `    `   Contract,SupportandAuctionPricesforSelectedGrades   ` _*]Y^lddd Xdd Xdd X(#(#,dd ,dd",dd",dd",dd"+  $ 8  8  $Selected   Grade '   '2000Price   Support    ($/cwt) 't " '2000Average   AuctionPrice    ($/cwt)#XXXQX%_#QXXXX 't " '2000Contract   Price    ($/cwt)#XXXQXb#QXXXX 't " '2001Contract   PriceRange1/    ($/cwt)#XXXQXDc#QXXXX ,"t " ,X3F E;x  g@188Pg@E$188 bX/x P g@188 g@ h@192Ph@b$192 bX/x P h@192 h@ h@192Ph@b$192 A7/x P h@192 h@ PA$192$200 )x P  )X4F E; g@188Pg@E$188 bX/P g@188 g@ g@191Pg@b$191 bX/ P g@191 g@ h@192Ph@b$192 A7/!P h@192 h@ PA$192$197 $"P $C3F E; # `g@187P`g@E$187 bX/ $P `g@187 `g@ g@188Pg@b$188 bX/ %P g@188 g@ h@192Ph@b$192 A7/ &P h@192 h@ PA$190$198 $ 'P $C4F E;( `g@187P`g@E$187 bX/)P `g@187 `g@ g@188Pg@b$188 bX/*P g@188 g@ g@191Pg@b$191 A7/+P g@191 g@ PA$190$198 $,P $B3F E; - @g@186P@g@E$186 bX/ .P @g@186 @g@ @h@194P@h@b$194 bX/ /P @h@194 @h@ `g@187P`g@b$187 A7/ 0P `g@187 `g@ PA$188$198 $ 1P $B4F E;2 @g@186P@g@E$186 bX/3P @g@186 @g@ h@192Ph@b$192 bX/4P h@192 h@ `g@187P`g@b$187 A7/5P `g@187 `g@ PA$188$198#XXXQXc#QXXXX $6P $B3FR E; 7  h@193P h@E$193 bX/ 8P  h@193  h@ h@198Ph@b$198 bX/ 9P h@198 h@ h@197Ph@b$197 A7/ :P h@197 h@ PA$199$201#XXXQX{m#QXXXX $ ;P $B4FR E;<  h@193P h@E$193 bX/=P  h@193  h@ h@196Ph@b$196 bX/>P h@196 h@ h@197Ph@b$197 A7/?P h@197 h@ PA$199$201#XXXQXFo#QXXXX $@P $T3FR E; A i@206Pi@E$206 bX/ BP i@206 i@ i@207Pi@b$207 bX/ CP i@207 i@ @j@210P@j@b$210 A7/ DP @j@210 @j@ PA$207$212#XXXQXq#QXXXX $ EP $T4FR E;F i@206Pi@E$206 bX/GP i@206 i@ i@207Pi@b$207 bX/HP i@207 i@ @j@210P@j@b$210 A7/IP @j@210 @j@ PA$207$212#XXXQXr#QXXXX $JP $T3R E; K i@206Pi@E$206 bX/ LP i@206 i@ i@207Pi@b$207 bX/ MP i@207 i@ @j@210P@j@b$210 A7/ NP @j@210 @j@ PA$207$212#XXXQXt#QXXXX $ OP $T4R E;!P i@206Pi@E$206 bX/!QP i@206 i@ j@208Pj@b$208 bX/!RP j@208 j@ @j@210P@j@b$210 A7/!SP @j@210 @j@ PA$207$212#XXXQXqv#QXXXX $!TP $ $" U P$ !" VP P! !" WP P! !" XP P! $" YP $X5M E;$ Z e@168Pe@E$168 bX/$ [P e@168 e@ e@174Pe@b$174 bX/$ \P e@174 e@ @f@178P@f@b$178 A7/$ ]P @f@178 @f@ PA$0$190 $$ ^P $B4K E;% "_ b@149Pb@E$149 bX/% "`P b@149 b@ d@164Pd@b$164 bX/% "aP d@164 d@ e@172Pe@b$172 A7/% "bP e@172 e@ PA$60$160#XXXQX;x#QXXXX $% "cP $C4G E;'#d @\@113P@\@E$113 bX/'#eP @\@113 @\@ `@135P`@b$135 aW/'#fP `@135 `@  W@92PW@a$92 @6.'#gP  W@92 W@ P@$60$155 $'#hP $M4FR E;( %i _@127P_@E$127 bX/( %jP _@127 _@ d@164Pd@b$164 UK/( %kP d@164 d@ # PU$0 4*"( %lP #  P4$0$175#XXXQX6|#QXXXX( %mP  #XXXQXi#1/Thisrangeisbasedonthescheduleofpricesofferedbythefivelargestcontractingfirmsasof *'n midMarch2001. +(o   \-)q  PotentialAdvantages/ConcernsOverTobaccoContracts     Theadoptionofcontractingintobaccohaspotentialbenefitsandconcernsforboth \ buyersandsellers.Thesebenefitsandconcernswillvaryacrosscompaniesandgrowersandare 4 likelytovaryovertime.     Potentialadvantagesforthebuyer:  `   (Axx " 3"     32A3  0 `   enhancedqualitycontrolintermsofobtainingthedesiredleafcharacteristics,  8  stalkpositions,moisturelevels,andoveralluniformitybymoreclosely  $  monitoringinputuseandmanagement 3 ݌ ` (#` (# Ќ  " 3"     3x2A3  0 `   improvedsupplymanagementintermsofthetotalvolume,specificgrades,and l  flowoftobaccotothemarket 3x݌X ` (#` (# Ќ  " 3"     32A3  0 `   increasedrateofadoptionoftechnologicalinnovationsnecessarytoaddress 0 specificqualityorregulatoryconcerns(e.g.,reduced_nitrosamines_/nicotinelevels) 3݌` (#` (# Ќ  " 3"     3R2A3  0 `   potentiallowerlongtermmarketingcostsduetoconcentrationofmarkets/buying p personnel 3R݌\` (#` (# Ќ  " 3"     32A3  0 `   improvedstripyieldsinresponsetoreducedtobaccoleaflossandlowermoisture 4 levels 3݌ ` (#` (# Ќ  Potentialconcernsforthebuyer: | " 3"     32A3  0 `   reducedselectivity,assumingbuyercommitstopurchasingtheentirecropofthe T contractinggrower 3(݌@` (#` (# Ќ  " 3"     3)2A3  0 `   additionalshortruncostsassociatedwithestablishingreceivingstationsinterms   ofrent/buildingacquisition,buyingagents,labor,andtechnologicaladoption 3)b݌! ` (#` (# Ќ  " 3"     32A3  0 `   additionalstrainedrelationswithintobaccoindustry(e.g.,growers,warehouse "X" owners,andfarmgroupswhoopposecontracting) 3ی݌#D #` (#` (# Ќ    ObservedAdvantages(fromthe2000season)fortheContractGrower: &#& " 3"     3e2A3  0 `   reducedmarketingcosts 3e݌d($(` (#` (# Ќ  " 3 "     3?2A3  0 `   highernetreturnrelativetotheauctionmarket 3?x݌<*&*` (#` (# Ќ  " 3 "     322A3  0 `   potentialofsellingtobaccoearlierintheyear 32k݌,(,` (#` (# Ќ  " 3 "     3%2A3  0 `   notobaccoplacedundergovernmentloan(i.e.,pool) 3%^݌-h*.` (#` (# Ќ  " 3 "     32A3  0 `   pricepremiumsforquality 3U݌p` (#` (# Ќ  " 3 "     32A3  0 `   paymentdayofdelivery 33݌H` (#` (# Ќ  " 3"     3ԓ2A3  0 `   improveddirectcommunicationwithbuyerregardingcompany/consumer   preferences   3ԓ ݌ ` (#` (# Ќ  Grower/Warehouse/IndustryConcernsofContracting   `   ItappearsthatbothPhilipMorrisandtheircontractinggrowersagreedthatcontracting  8  workedwellforthe2000crop.Ingeneral,itwasaverygoodqualitycropandonethatwas   producedduringaperiodoftighteningsupplyofqualitytobaccointheworldmarket.Despite l  thesuccessofthe2000season,manygrowers(bothcontractingandnoncontracting),farm D groups,andpolicymakershaveconcernsregardingthepotentialfutureimplicationsofcontract  growing.Atthetopofthelististheissueofhowwillcontractgrowingaffectthefederaltobacco p programandtheUSDAgradingservice? H   TheonlytwoentitiesthatcaneliminatethetobaccoprogramaretheU.S.Congressorthe   quotaowners/growers.SupportfortheprograminWashingtonD.C.appearstohavebeen | enhancedinrecentyearsinresponsetoanimprovedunderstandingoftheeffecttheprogramhas T ontobaccoconsumption,taxpayercosts,andsmallfamilyfarms.Inaddition,thecurrent , administrationhasvoiceditscontinuedsupportoftheprogram.Quotaownersandgrowershave !  resoundinglyexpressedtheirsupportoftheprogramforthenextthreeyearsintherecent "X" referendum.Thetobaccocompaniesdonothaveavoteinthecontinuationoftheprogram. $0!$ Publically,theystatethattheysupporttheprogramaslongasthequotaowners/growerssupport &#& theprogram.Butwhiletheydonothaveavoteintheprogram,inreality,theactionsofthe d($( tobaccocompaniesaffectthepoliticalandgrowersupportoftheprogram.Somegrowersmay <*&* askthequestionifcontractingprovidesmewithaguaranteedmarket,priceandproductionlevel, ,(, thendoIreallyneedaprogram?Inreality,theprogramhelpsestablishtheparameterscontained -h*. _inthecontracts.Contractedtobaccodoesnothaveapricesupportlevel,butobviouslythe  contractpricesofferedareinfluencedbythecurrentsupportprices.Presently,anygrower \ disappointedwiththecontractpricehastheoptionofremovingtheirtobaccofromthereceiving 4 stationandsellingthetobaccoatthetraditionalauctionmarketwheretheywillreceiveaprice   supportthatisattachedtoafederalgrade.Thus,thetobaccoprogramandthepresenceofa  ` federalgradingserviceatauctionmarketscontinuestoprovideasafetynetforgrowersunderthis  8  dualmarketingsystem.Butwithahighpercentageofthe2001cropanticipatedtobe   contracted,thefinancialsecurityoftheUSDAgradingserviceisverymuchinquestion.  #  5       l  Withoutafederalgrade,technicallyresultsinatobaccoprogramwithproductioncontrols(i.e., D quotas),butwithoutpricesupports.Inresponsetothisconcern,farmgroupsarepresently  lobbyingpolicymakerstorequirethatalltobaccobefederallygraded. p   Anothermajorissueassociatedwithdirectmarketingisthelikelyconcentrationof H traditionalauctionmarkets.Currently,mostcontractingfirmsareworkingwithafewselect   warehouseoperatorstoassisttheminsolicitinggrowersand/orusingtheirwarehousefacilitiesas | receivingstations.However,theotherwarehouseowners/operatorsnotassociatedwitha T contractingfirmareverynervousanduncertainregardingtheirfuture.Somehavealreadyclosed , theirdoors,withmanywaitingtoseewhatunfoldswiththe2001season.Somewarehouse !  officialshaveproposedthatabuyerspremiumbeaddedtothecostoftobaccoatauction(inlieu "X" ofsellerspayingmarketingfees)inorderto leveltheplayingfieldbetweentheauctionand $0!$ contractprice.However,tobaccobuyershaveexpressedtheirconcernsthatsuchactionwould &#& furthererodethecompetitivenessofU.S.burleyexportsandcauseanevengreatermovementto d($( contractbuying.Consequently,itappearsthatasignificantconcentrationofwarehouseswill  likelyevolveby2002.! #  6      ׀Inresponsetothispotentialenvironment,theBurleyTobaccoGrowers \ CooperativeAssociationispresentlyexaminingthefuturepotentialofestablishingsomeregional 4 receivingstationsforgrowerswhocannot,oroptnot,tosignacontractandwhodonothave   accesstoanearbyauctionmarket.  `   Inreality,mostbuyersmay,atleastintheshortterm,liketohavesomedegreeof  8  selectivityprovidedbytheauctionmarket.Thisisespeciallytruewhenexaminingtheneedsof   theexportmarketwherebuyershaveveryspecificordersofcertaingradesandstalkpositions.In l  addition,somegrowerswillcontinuetosupporttheauctionmarketgiventheirconcernsover D contracting,allegiancetocertainwarehouseowners/operators,aninmanycases,thedependence  ofthewarehouseasasourceofcredit.Thus,itappearsthatatleastinthenearfuture,adual p burleymarketingsystemwillcontinuetoemergeconsistingofcontractreceivingstationsanda H fewregionalauctionmarkets.Ifanauctionsystemsurvives,manyotherquestionsarise   including: | " 3"  0   32A3  0` (#(#  Howmanywillsurviveandwherewilltheybelocated? 3ĭ݌T` (#` (# Ќ  " 3"  0   32A3  0` (#(#  Whatvolumeofsaleswilltheyattract? 3׮݌,` (#` (# Ќ  " 3"  0   32A3  0` (#(#  Whatchangeswillthesurvivorsadopttoattractbuyersandgrowers? 3ɯ݌! ` (#` (# Ќ  " 3"  0   32A3  0` (#(#  Howmanybuyerswillparticipate? 3ذ݌"X"` (#` (# Ќ  " 3"  0   32A3  0` (#(#  Howmanysalesperyear? 3ű݌$0!$` (#` (# Ќ  " 3"  0   3o2A3  0` (#(#  Willauctionmarketsbecomeamarketforprimarilylowqualitytobacco? 3o݌&#&` (#` (# Ќ  " 3"  0   32A3  0` (#(#  Howwillauctionmarketpricesbeaffectedbycontractprices? 3݌d($(` (#` (# Ќ  _   Asthistransitionperiodunfolds,itremainsunclearhowthisrevolutionarychangewill p ultimatelyaffectmanyothergrowerandindustryissuesincluding: H " 3"   32A3  0    Whatwillbethetypicalsizeofthefuturecontractgrower? 3݌ (#(# Ќ  " 3"   3r2A3  0    Willallgrowerswhowantacontractbeabletoobtainone? 3r݌ t(#(# Ќ  " 3"   3d2A3  0    Willcontractproductioneventuallybeconcentratedincertaingeographicareas? 3d݌ L (#(# Ќ  " 3"   3k2A3  0    Whatwillbethedegreeofproducerindependenceinmakingfuturemanagement  $  decisions? 3k݌ (#(# Ќ  " 3"   32A3  0    Willcontractingproducersbeobligatedinthefuturetomakelargecapitalinvestments? 3݌l (#(# Ќ  " 3"   32A3  0    Whatwillbethedegreeofbuyercompetitioninawardingcontracts? 3ɺ݌D(#(# Ќ  " 3"   32A3  0    Howwillthedistributionandoverallaverageofpriceschange? 3û݌(#(# Ќ  " 3"   32A3  0    Willthehigherpricesinitiallyinducedbycontractingresultinlongtermlossesinexports p andencouragemoreimports? 3݌\(#(# Ќ  " 3"   3н2A3  0    Willachangingproductionandmarketingsystemcontinuetoimprovethequalityand 4 integrityofU.S.burley?Ifso,howwillthisaffectfuturequotalevels? 3н݌ (#(# Ќ  " 3"   392A3  0    Willgradingbedonebyathirdpartyorcompanyrepresentatives,orboth? 39f݌|(#(# Ќ  " 3 "   3;2A3  0    Willgradingevaluationsvarydependingoncurrentsupply/demandconditions? 3;h݌T(#(# Ќ  " 3!"   3>2A3  0    Howwillthecontractingfirmsrespondtoaverylowqualitycrop? 3>k݌,(#(# Ќ  " 3""   372A3  0    Willcontractingfirmscontinuetocommittocontractthefarmersentirecrop? 37d݌! (#(# Ќ  " 3#"   3@2A3  0    Willcontractingcompaniesinthefutureoffergrowerfinancingand/orotherinputs? 3@m݌"X"(#(# Ќ  " 3$"   3K2A3  0    Willtheindustryexperienceareductioninpublicmarketinformationonprices, $0!$ quantities,gradedistributions,etc.,asaresultofcontracting? 3Kx݌%"%(#(# Ќ     `     h     Theanswerstomanyofthesequestionsremainunclearastheindustrymovesintoits x'#' secondyearofcontracting.Obviouslyfarmers,farmgroups,warehouseoperators,policymakers, P)%) andtobaccocompanieswillbecloselymonitoring,evaluating,andrespondingtothe (+'+ developmentsofthisalternativemarketingsystem.Furthermorethisrapidlychangingmarketing -|)- systemwilllikelyspawnadditionalchangesinthecurrenttobaccoprogramandthecurrent  auctionmarketingsysteminanefforttoenhancetheefficiencyandcompetitivenessoftheU.S. \ burleytobaccoindustry.Followingthistransitionperiod,U.S.burleytobaccowilllikelyremain 4 animportantenterpriseformanyentities,butthestructureoftheU.S.burleytobaccoproduction   andmarketing systemwillbeconsiderablydifferentfromwhattheindustryhasbeenaccustomed  ` tointhepast.