Tobacco in Transition: Tobacco Policy Impacts on the U.S. Tobacco Grower

Dr. Bob Pearce Associate Extension Professor

Plant and Soil Sciences Department University of Kentucky

Outline

• Brief history of tobacco production• The tobacco program• The decline of the tobacco program• The “buyout” and its impact• Production practices after the buyout• Future of tobacco in Kentucky

Tobacco in the United States

• Widely established as a cash crop in little more than a century

• 1600’s– Ravenous demand for N. tabacum in England– English settlers established Jamestown in 1607

• Spain held monopoly• Native Americans using N. rustica• John Rolfe illegally acquires seeds of tabacum from Cuba• Tobacco flourishes and becomes foundation of economy

Tobacco in the United States

Export to England– 20,000 lbs in 1618– 24 million by 1664– Production spread

• Maryland• Pennsylvania• The Carolinas

– 1780s first record of commercial production in Kentucky

Tobacco attacks– Sensual indulgence– Dirty habit– Doctors tried to restrict

to medicinal uses only– King James I

• Vocal critic• Counterblaste to

Tobacco– Vile, obnoxious weed

Tobacco in Kentucky Spring of 1864

– George Webb & Joseph Fore• Brown Co., Ohio• Ran low of seeds for sewing beds• Bought extra seeds from George

Barkley• Bracken Co., KY• Transplants looked unusual• Destroyed plants

– 1865• Sewed unused seeds from previous

year• Grew to harvest & cured leaf

– Plant characteristics• Pale green• Creamy stalk• White veins

– Cured leaf• Fine, light texture• Smoked bitter• No heavy load of sugars

– Saved seed from 1865 crop– Produced 20,000 lbs– High price at Cincinnati

market– Attracted attention

“white burley”

Tobacco Production Areas in the

United States

Agricultural Adjustment Act 1933

• Tobacco growers frustrated by repeated cycles of oversupply and low prices

• Established the precedent for paying farmers not to produce a crop

• Set area limitations & loan rates• Ultimately led to the tobacco “program”

Tobacco program • Growers agreed to limit production (quota) in

return for guaranteed prices.– Assigned a grade by a federal grader– Tobacco sold at auction– Tobacco that did not sell for the minimum price was

purchased by a grower owned cooperative for the minimum price.

– The cooperative received low interest government loans to fund its operations.

– The cooperative processed the tobacco and stored it for later sale.

Tobacco Program• 1938 – 1972

– Production limited by area– Growers become more efficient– Production somewhat erratic

• Over produce in good years• Under produce in bad years

• 1972 – 2004– Production limitation switched to weight basis– No matter how much was produced a grower could

only sell the number of kg that were allotted.

Calculation of Quota• National quota determined by formula.

– Domestic tobacco companies submitted purchase intentions to the federal government

– 3 year avg. of tobacco leaf exports– Adjustment for stock held by the cooperative

• Individual quotas based on historical share of production.– No new quotas were being issued– Quota had real estate value

• Bought and sold• Leased -- A grower might pay $1.00 or more per kg just for the

right to grow the crop for one year.

U.S. Burley Basic and Effective QuotaU.S. Burley Basic and Effective Quota

0100200300400500600700800900

1000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Mil

Lbs

Basic Effective

U.S. Attitudes on Tobacco Use• 1960s, 70s, and 80s

– US surgeon general reports smoking is harmful to health– Mounting medical evidence of harmful effects– Health warning on packs– Advertising restrictions imposed

• 1990s and 2000s – Rise in anti-smoking activism– Mounting legal action against tobacco companies– Increasing tobacco taxes– Increasing concerns about second hand smoke – Indoor smoking bans implemented

Master Settlement Agreement - 1998

• Tobacco Companies agree to “reimburse” states for medical expenses paid out to treat smoking related diseases.– $196 Billion over 25 years– Funded by cigarette price increases– Other company concessions:

• Further advertising restrictions• Fund stop smoking programs• Ingredient disclosure

– Kentucky $3.45 billion over 25 years• 50% pledged to Agricultural redevelopment

Phase 1

U.S. Cigarette Consumption

0

100

200

300

400

500

600

700

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004

Bill

ions

of p

iece

s

Master Settlement Agreement - 1998

• Companies agree to additional payments to tobacco growing states to be paid to growers to offset expected losses due to cigarette price increases.– 5.15 billion over 12 years– Payments based on amount of tobacco grown in the 3

years prior to the agreement.– Kentucky got 1.5 billion– Payments ended with the buyout in 2004

Phase 2

U.S. Tobacco Consumption

0

100

200

300

400

500

600

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Mill

ions

of p

ound

s

Imported Burley U. S. Burley

Late 1990s: A program in trouble • Program unpopular with public• Price stability = quota instability• Artificially high leaf price compared to world market• Cooperative surplus stocks

– High levels of stocks– Poor quality of tobacco in some stocks– 3 government “rescues” in 15 years

• High lease prices• Move away from auctions

Fair and Equitable Tobacco Reform Act of 2004

• “The most important policy shift in Kentucky agriculture since the AAA of 1933”

• Put an end to the tobacco program• Provided quota owners compensation for the

value of their quota• Allowed many to exit the industry• Move to contract sales direct to tobacco

companies

“The Buyout”

Ky’s Burley Tobacco Outlook in the Early Post-Buyout Era

Who would stay in?How much would be grown?Where would it be grown?Company incentives?Demand opportunities?

???

Will Snell, University of Ky

U. S. Burley Hectares

• Down 35% from 2004

0

20

40

60

80

100

120

140

160

1997 1999 2001 2003 2005

1000

Hec

tare

s

Average Tobacco area per farm

0

2

4

6

8

1992 Census 1997 Census 2002 Census 2005 2006

Hec

tare

s

Source: USDA/KY County Agent Survey (December 2005)

Number of Growers Needed to Number of Growers Needed to Produce 136 Million kgProduce 136 Million kg

6,0006,5218 Hectare Average

12,00013,0434 HectareAverage

2800 kg Yield2575 kg Yield

Burley production

0

50

100

150

200

250

300

350

1997 1998 1999 2000 2001 2002 2003 2004 2005

Mill

ion

kgs

U.S.

KY

Adair

Allen

Anderson

Ballard

Barren

Bath

Bell

Boone

Bourbon

Boyd

Boyle

Bracken

Breathitt

Breckinridge

Bullitt

ButlerCaldwell

Calloway

Campbell

Carlisle

Carroll

Carter

Casey

Christian

Clark

Clay

Clinton

Crittenden

Cumberland

Daviess

Edmonson

Elliott

Estill

Fayette

Fleming

Floyd

Franklin

Fulton

Gallatin

Garrard

Grant

Graves

Grayson

Green

Greenup

Hancock

Hardin

Harrison

Hart

Henderson

Henry

Hickman

HopkinsJackson

Jefferson

Jessamine Johnson

Kenton

Knott

Knox

Larue

Laurel

Lawrence

Lee

Leslie Letcher

Lewis

Lincoln

Livingston

Logan

LyonMccracken

Mccreary

Mclean

MadisonMagoffin

Marion

Marshall

Martin

Mason

MeadeMenifee

Mercer

Metcalfe

Monroe

Montgomery

Morgan

Muhlenberg

Nelson

Nicholas

Ohio

Oldham

Owen

Owsley

Pendleton

Perry

Pike

Powell

Pulaski

Robertson

Rockcastle

Rowan

Russell

ScottShelby

Simpson

Spencer

Taylor

ToddTrigg

Trimble

Union

Warren

Washington

Wayne

Webster

Whitley

Wolfe

Woodford

Harlan

Purchase-57%

Mid Western-17%

Northern KY-33%

Central KY-41%

Bluegrass-47%

Eastern KY-62%

Source: KY County Agent Survey (December 2005)

Est. % of Tobacco Farmers Exiting in 2005 (Est. % of Tobacco Farmers Exiting in 2005 (--43%)43%)

Agricultural Economics

Adair

Allen

Anderson

Ballard

Barren

Bath

Bell

Boone

Bourbon

Boyd

Boyle

Bracken

Breathitt

Breckinridge

Bullitt

ButlerCaldwell

Calloway

Campbell

Carlisle

Carroll

Carter

Casey

Christian

Clark

Clay

Clinton

Crittenden

Cumberland

Daviess

Edmonson

Elliott

Estill

Fayette

Fleming

Floyd

Franklin

Fulton

Gallatin

Garrard

Grant

Graves

Grayson

Green

Greenup

Hancock

Hardin

Harrison

Hart

Henderson

Henry

Hickman

HopkinsJackson

Jefferson

Jessamine Johnson

Kenton

Knott

Knox

Larue

Laurel

Lawrence

Lee

Leslie Letcher

Lewis

Lincoln

Livingston

Logan

LyonMccracken

Mccreary

Mclean

MadisonMagoffin

Marion

Marshall

Martin

Mason

MeadeMenifee

Mercer

Metcalfe

Monroe

Montgomery

Morgan

Muhlenberg

Nelson

Nicholas

Ohio

Oldham

Owen

Owsley

Pendleton

Perry

Pike

Powell

Pulaski

Robertson

Rockcastle

Rowan

Russell

ScottShelby

Simpson

Spencer

Taylor

ToddTrigg

Trimble

Union

Warren

Washington

Wayne

Webster

Whitley

Wolfe

Woodford

Harlan

Purchase-16.8%

Mid Western+4.2%

Northern KY-35.9%

Central KY-23.2%

Bluegrass-41.0%

Eastern KY-55.6%

Source: NASS/USDA

Burley Production By Kentucky Crop Reporting District: 2005 vs 2004 (-34%)

Agricultural Economics

Adair

Allen

Anderson

Ballard

Barren

Bath

Bell

Boone

Bourbon

Boyd

Boyle

Bracken

Breathitt

Breckinridge

Bullitt

ButlerCaldwell

Calloway

Campbell

Carlisle

Carroll

Carter

Casey

Christian

Clark

Clay

Clinton

Crittenden

Cumberland

Daviess

Edmonson

Elliott

Estill

Fayette

Fleming

Floyd

Franklin

Fulton

Gallatin

Garrard

Grant

Graves

Grayson

Green

Greenup

Hancock

Hardin

Harrison

Hart

Henderson

Henry

Hickman

HopkinsJackson

Jefferson

Jessamine Johnson

Kenton

Knott

Knox

Larue

Laurel

Lawrence

Lee

Leslie Letcher

Lewis

Lincoln

Livingston

Logan

LyonMccracken

Mccreary

Mclean

MadisonMagoffin

Marion

Marshall

Martin

Mason

MeadeMenifee

Mercer

Metcalfe

Monroe

Montgomery

Morgan

Muhlenberg

Nelson

Nicholas

Ohio

Oldham

Owen

Owsley

Pendleton

Perry

Pike

Powell

Pulaski

Robertson

Rockcastle

Rowan

Russell

ScottShelby

Simpson

Spencer

Taylor

ToddTrigg

Trimble

Union

Warren

Washington

Wayne

Webster

Whitley

Wolfe

Woodford

Harlan

Increased Production -25 to -40%

0 to -25% > 40% DeclineSource: Ky Ag Stats/NASS

Agricultural Economics

2005 vs 2004 Burley Production

Summary of Buyout Impacts• About a 20% reduction in price

– Tighter profit margin• A 30 to 40% reduction in total production• At least a 40% reduction in number of growers• Increase in average area per grower• Fewer people at Extension events but more interest• Shifts in production areas

– East to west in Kentucky– Non-traditional burley areas

Changes in Tobacco Extension• Need communication with tobacco companies• Innovative Tobacco Grower Program

– Multiple sessions– Cover all areas of production– Emphasize management

• Workshops– Hands-on instruction

• Fewer opportunities for on-farm research and demontrations.

Growing Burley Tobacco in a Post Buyout Environment

Contract Growing Tobacco• Marketing contracts• Growers must know their contract requirements:

– Use “screened” tobacco seed– No residues from unregistered pesticides– Some require 4 grade separation

• Future requirements??– Specific variety – Rate of fertilization– Limits on residue of registered pesticides

• Mistrust of company intentions– Long term stability– Concerns about grading consistency

Good Agricultural Practices

• Produced in a timely manner– Good management essential

• Use of agronomically sound practices• Economically viable returns

– High yield per acre• Reduce Environmental Impact of Production

Growers needed to improve management

• Before the buyout– Grower could make money even with poor

management– The program provided a safety net– State avg. yield about 2300 kg/ha

• After the buyout– Yield needs to be at least 2600 kg/ha for long term

viability.

Timely Production

• Seeding so that plants will be ready to set on time– Watch weather reports to reduce gas

expense

• Controlling environment to minimize temperature & disease related damage

• Disease prevention– To reduce delays– To improve transplant quality

Transplant on time• Can improve yield • Reduce disease incidence

– Blue mold– Virus complex

• Some curing concerns

What’s the difference between a good farmer and a poor farmer?

Screened Varieties Must be Used• In 2007 “LC” varieties may be required• To reduce TSNAs• Some older varieties will not be screened

– Grower choices may be limited

Fertilization not currently specified on most contracts

• Companies have “suggested” growers might want to use less nitrogen fertilizer.

• They have required lower nitrogen rates for growers in other countries like Brazil.

• Will this be required for US growers ?– More efficient fertilizer use

Disease Management• Crop Rotation• Prevention• Conservation Tillage

– Utilization of disease free land

Pesticide Concerns

• Illegal pesticides– Could void contract

• Indiscriminant use of labeled pesticides– Endosulfan (Golden Leaf)– MH

Having irrigation available can help insure a consistent supply.

Harvest Problems• Avoid Green• Sunburn• Mud

US Burley export price vs price for imported burley

0123456789

$/kg

pro

cess

ed le

af

2002 2003 2004 2005

ExportImport

U. S. Burley Disappearance

0100200300400500600700800

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Mill

ions

of p

ound

s

Domestic Export

Factors Impacting the Future for Tobacco in Kentucky ??

• Demand for high quality burley tobacco– Domestic consumption will continue to decrease– Developing countries – Rising popularity of the “American” blend

• Can we be price competitive?– Not directly

• Internal issues– Labor availability or improved mechanization

• Immigration policy– Farm population is aging – Social pressure against tobacco

Conclusion• Tobacco will continue to be a major contributor to

Kentucky’s farm economy over the next 5 to 10 years.

• Fewer people are directly tied to tobacco, so the industry will not carry the political power of times past.

• Growers with good management skills will be able to take advantage of the contracting system and will be successful in the long term.