Tobacco Program

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PRESIDENT’S TOBACCO COMMISSION GROWER SUB-COMMITTEE RECOMMENDATIONS FOR DISCUSSION

Compensation to Quota Owners and Growers of All Kinds of Tobacco Allotments and Quotas under a Tobacco Equity Reduction Program (TERP)

Recommend TERP compensation for all tobacco allotments and quotas. (TERP is defined as a payment to current tobacco quota owners and growers for the loss in value of the assets associated with most U.S. tobacco production.)

	Burley, flue-cured, fire-cured (type 21), fire-cured (types 22 & 23), dark air-cured (types 35 & 36), VA sun-cured (type 37) and cigar filler and binder (types 42-44 & 54-55).
	Base year(s) to be used for TERP - 1997 crop year.
	TERP compensation level - $8.00 per pound for quota owners, $4.00 per pound for producers not continuing in tobacco production and $2.00 per pound for producers wanting to receive a production "permit". USDA’s Economic Research Service has been asked to provide costs and related production forecasts for this recommendation.

TERP Compensation and Related Issues

TERP compensation should not be restricted to any payment limitation since the loss in asset (quota or allotment and related tobacco farming assets) value has been declining over several years. Establish an investment account (like a 401K/IRA) for compensation proceeds and establish investment guidelines to reinvest in agriculture or community projects that give tax preference or treat compensation as capital gains for income tax purposes.

TERP compensation should be paid over a short period of time - 2 to3 years versus 20 years - and should be a non-revocable contract between the Federal government and farmers.

Modification to the Current Tobacco Program under TERP

Modify the Agricultural Adjustment Act of 1938 and the Agricultural Act of 1949 (permanent legislation) to:

	Continue a production and price support control program - with production controls in the form of permits (permits issued on an annual basis and lost if not utilized).
	Production permits (quotas) issued to active growers (individual or entity) only.

A grower is an active grower if they are 100 percent "at risk" in the crop and remain so. Empower Farm Service Agency (FSA) county committees to determine 100 percent "at risk" active growers. (Proof of active grower status would be based on invoices, including evidence of payments, for labor, pesticides, other chemicals, fertilizer, equipment, fuel, repairs, and tobacco sales bills; operating loan documentation or other source of operating capital and related management decisions; or other proof acceptable to the FSA committee that the grower is 100 percent at risk in the tobacco crop.)
Establish initial production permits for active growers based on the prior year’s effective quota for which the grower was 100 percent at risk in the crop.

Permits would be issued to and in the name of active growers with 1 permit per active grower per county.

Permits will be considered fully utilized if at least 75 percent of the permit is marketed. If not utilized the permit quota will be subject to permanent forfeiture. Empower FSA county committees to make determinations on permit forfeitures within specified parameters (such as conditions beyond the control of the active grower).

When production permits are forfeited, permit pounds return to a county pool for redistribution within the county. If not redistributed in the county, permit pounds go to a state pool for redistribution within the state. If not redistributed in a state, such pounds would be redistributed nationally. (Note: This process could slow notification of active growers of their effective permit pounds.)

Allow heirs (surviving spouse or direct descendants) of an active grower to assume the permit of the active grower and establish a new active grower status. Empower FSA county committees to make these determinations.

	Require all tobacco buyers to submit accurate purchase intentions and if 90 percent of their intentions are not purchased (if production is available), be subject to the same marketing penalty (75 percent of the previous years average market price for the respective kind of tobacco) as producers for program violations on each pound not purchased.
	Price Support - FLUE-CURED ONLY: adjust support prices to reflect "zero" quota rental costs.
	See other suggestions for changes to the program not included in recommendations from the tobacco sub-committee working group at the end of this document.

Other Tobacco Program Changes Recommended by the Tobacco Sub-Committee

	Maintain a viable auction marketing system in face of increasing company contracting.
	Require all tobacco to be graded and inspected by USDA, whether sold at auction or directly to buyers via contracts or otherwise.
	All imported tobacco should meet the same pesticide regulations as U.S. grown tobacco. Currently, USDA’s Agricultural Marketing Service tests for the presence of certain pesticides on imported flue-cured and burley tobacco. These imports account for approximately 50 percent of all imported tobacco.

TERP Funding

TERP funding should be reliable and guaranteed. Options to be considered include:

Voluntary funding from tobacco buyers in exchange for guaranteed program modifications.

Modification to the Phase II settlement funds provided by major cigarette manufacturers.

Increase in manufactured tobacco sales prices by manufactures to cover the cost of TERP compensation.

Earmark a portion of current tobacco excise taxes to cover the cost of TERP compensation.

Increase in Federal excise taxes (even though Phase II payments would be reduced).

General funds.

USDA Funding

	Provide adequate funding to the Foreign Agricultural Service for collection and dissemination of world tobacco information regarding production, consumption and related industry information.
	Support and enhance the tobacco data collection and dissemination functions of the Economic Research Service.
	Amend legislation to permit tobacco to participate in USDA’s export credit programs. (Prohibited by The Agricultural, Rural Development, and Food and Drug Administration, and Related Agencies Appropriation Act of 1994.) This would not be an expansion of consumption but simply allow U.S. leaf to be substituted for leaf from other suppliers.

FDA Regulation

	Authorize meaningful FDA control over manufacturing, labeling, distribution and marketing of tobacco products. With respect to labeling, at a minimum, provide labeling of content by country of origin of raw tobacco used in the manufactured product. Continue USDA oversight and control of on-farm tobacco production.
	Involve tobacco companies in discussions of all Commission issues.

Other Program Changes for Consideration under a Permit System or TERP

	Eliminate all tobacco transfers, including spring lease and transfer, purchase and sale, and disaster transfer provisions.
	Issue 1 marketing card for each active grower regardless of the number of farms on which tobacco was planted.
	Continue current overmarketing provisions. (Currently limited to 3 percent of the effective quota and is deducted from subsequent quotas.)
	Continue a new grower provisions. (Currently, these provisions include experience growing the crop in 2 out of the past 5 years, must have land, labor and equipment available for production, and must expect to receive at least 50 percent of income from farming, excluding the requested quota.)
	With the emergence of contracting, implement an auction warehouse designation program for all kinds of tobacco requiring the grower to designate how many pounds are to be sold at auction and at which warehouse(s) and pounds to be sold at non-auction?
	All imported tobacco should be subject to the same no-net-cost assessments as domestically produced kinds of tobacco? (Currently, flue-cured and burley imports are the only tobaccos subject to such assessments.)
	An active grower be allowed to produce the tobacco subject to the permit in the issuing county or any contiguous county to the issuing county.
	Continue an allotment control provision for flue-cured tobacco but adjust farm yields to reflect more current yield per acre levels.
	Production permits should not be subject to Conservation Reserve Program reductions. (Currently, tobacco allotments and quotas are reduced by the same percentage as cropland accepted in the CRP is of the total cropland in the farm.)