MMM 402

February 26, 2001

We feel there are three broad developments that will be driving this industry in the future. These are:

(1) Settlement Process - the impact has largely been increased product prices and even more future increases; reduced usage and expected declines in the next few years; modifications in company policies; change in public perception; massive reductions in quota; profound changes in quota leasing; and, short-term payments.

(2) Contracting - as this becomes the primary production system, probably the biggest change will be in the minimum acceptable production standards. These standards are primarily based on three or more harvests and low/no TSNA in tobacco. This will impact producers and the remaining open market system which (under present conditions) will have lower minimum standards. In turn, this could cause a massive build-up of cooperative stocks of below standard tobacco. Other impacts could include the lack of availability of higher quality (or possibly any quality in large quantity) for the export markets.

(3) Nitrosamines - through contracting and other sources, the buyers have indicated that this is very important. Unfortunately, we still have a program system that does not place any premium (or even any standard) on low TSNA production. Because of the lack of time, stabilization was not able to require barn retrofitting this year. We highly recommend that producers give every consideration to completing this process prior to harvest this year. Not only will they receive partial compensation but will increase the possibility of an actual sale (of at least $1.00/cwt more) and will also allow those who so desire, the capability of considering a contract. In addition, it is likely there will be phase I payments this tax year.

These examples are but a few issues that will be having immense impacts on the future industry. These, and others, will be significant whether there is a program or not.

If there are positive program adjustments, then tobacco producers and other parts of the industry have a massive task ahead of them and these modifications must be accomplished soon. For this reason, we have listed some thoughts for discussion about possibilities for the future. We have tried to be unbiased and have attempted to consider what would allow the industry to change to meet market conditions, produce economically viable quantities, reduce quota variability and costs, maintain or improve quality, and to make a reasonable living.

OUR ASSUMPTIONS:

A. PRESENT SITUATION:

1. Present program is working but must be modified in the near future;

2. Industry is undergoing a major transition of which much is still uncertain;

3. A significant quantity of Bur/FC will be contracted this year or in the near future but not all of the production; this means that contracting will soon be the major marketing system and the auction system will be minor or residual;

4. Congress micro-manages the program – change is difficult;

5. Nitrosamines are an important recent development but have not been incorporated into the system;

6. Producer economic chaos due to: a. Massive quota cuts; b. Settlement payments causing complexity and increases in quota rent; and c. Significant increases in production costs primarily due to energy, fertilizer, labor.

7. Producer economic turmoil due to:a. Marginal producers to remain in business; b. Awards low-quality producers; and, c. Advantages to those who choose loop-holes in the system.

B. TRANSITIONAL REQUIREMENTS:

1. Legislation would be necessary;

2. Transition capital is mandatory - several tobacco producers suggest utilizing the present federal excise tax with no increase;

OUR RECOMMENDATIONS:

A. TOBACCO PROGRAM - GENERAL:

1. Keep program but change to accommodate contracting and other transitional changes;

2. Remove micro-management from Congress;

3. Suggest a new system such as industry (and possibly other) board over-sight;

4. Assume legislative changes are possible; and,

5. Also assume, that necessary transition capital is available from sources such as excise tax.

B. QUOTA:

1. Move quota to active growers and compensate present quota holders of which transition capital would be required;

2. Create an on-going and self supporting open market and mandatory process for keeping quota in active growers hands;

3. Change formula - possibly require buying intentions to separate contracting and non-contracting;

4. Consider changing geographic regions to allow across county lines (within region) within (or possibly across) states;

5. Multi-year quota formula; this would give more stability to present year-to-year changes - contracting will give a multi-year estimate anyway;

6. Reduce/eliminate excessive carry-over production (may be done with price); and

7. Reduce complexity and double-dipping (re-renting after receiving insurance benefits).

C. PRICES/PRICE SUPPORT:

1. Given that most but not all tobacco will be contract, all quota must be USDA graded as it will be even more important to the companies under contracting. If USDA grading were eliminated, it will be next to impossible to get it back. Grading/inspection should also be expanded to include measures like TSNA.

2. Support Price level concept must be changed - this may be a safety-net instead of a sale price;

3. Price formula:

a. Analyze and re-think formula for ways to project future instead of past - for example, a needs-to-use ration for specific qualities;

b. Make flexible for surplus/short grades; and,

c. Incorporate possibility that support level will be a "dumping" market IF price support levels are out of line with contracts for specific grades;

4. Consider a support price with adjustments:

a. Possibly a higher support for first-offered, non-carry-over, open market production; and,

b. Possible penalty for producers with history of high deliveries (like crop insurance).

D. COOPERATIVES:

1. Should be maintained;

2. Only one cooperative per type of tobacco (the original purpose should be investigated);

3. Expand their purpose to possibly include purchasing and other activities such as:

a. Exporting (this would be important there be one cooperative per type); and/or

b. Clearing house - all contractors are buying the entire crop of all grades. When contractors take the entire stalk (all grades), this means that each contractor (company/dealer) will have surplus and deficits of specific grades or qualities.

E. NITROSAMINES:

IF there are ANY positive benefits to low/no TSNA tobacco then:

1. All FC quota tobacco must be low/no TSNA;

2. FC and Bur cooperatives:

a. Test all stocks; and,

b. If high TSNA, destroy (paid for from changeover capital).

3. Burley – High priority changeover capital for changing management practices to produce low/no TSNA tobacco;

a. Start known recommended practices for quota compliance;

b. High priority changeover capital for research into best cultural practices for low/no TSNA production; and,

c. Five-year (or multi-year period) for compliance.

4. TSNA Testing:

a. High priority changeover capital to improve testing procedures; and

b. Long-term – require all quota tobacco be tested.

F. MANAGEMENT PRACTICES:

1. This should include environmental, sustainable, agronomic, and other practices that affect quality;

2. Minimum harvest practices to equal contracting and eliminate/reduce undesirable quantity build-up in cooperatives;

a. FC – require a minimum of three harvests;

b. Bur – require a minimum of three stripped grades.

3. FC Barn Conversion – all barns must be converted and maintained:

a. On-going testing program to ensure low TSNA production;

b. Low income farm compensation/loan from change-over capital; and

c. Possible partial help for other/new growers from change-over capital.

4. Possible minimum record keeping requirements.

G. RESEARCH:

Long-term research monies from transition/other capital for possible genetic improvement for low/no TSNA and other tobacco characteristics.

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