Tobacco producers were not involved in the initial tobacco agreement but there appears to be an opportunity as Congress works on the details and especially how the fund will be divided. If the tobacco producers are to be included in this settlement, they must make some unified, logical decisions and present these to the policy makers. All this must be accomplished soon.

In Outlook Update 330, Tobacco Agreement Policy Issues - General, a brief description of the agreement was presented. Some general points regarding producers were also considered. The purpose of this report is to discuss some possible issues regarding the farm sector.

Amount of Fund: The amount of the fund will depend directly on the purpose of the fund and the timing of expenditures. The most often reported major objective is to compensate producers for lost equity and future income flow. First, how much estimated production will be lost and how soon? At the micro level, those assets that are tied to tobacco production (or the proportion) should be evaluated as to the future earning potential and discounted to the present.

Tenant-Landlord: If a fund is to be shared among tobacco producers, the tenant-landlord relationship must be considered. Since most types of tobacco are produced under a government program, there are quota holders or owners of allotment who have the right to grow a specific type of tobacco on a specific farm. Quota holders may grow their own quota or rent- out their quota or share-crop with a tobacco grower. The grower may or may not own any other quota. Therefore, when discussing tobacco producers this also must include the tenant-landlord. To further complicate this, there are rental differences between/within types of tobacco. When considering compensation for growers and non-producing quota owners the two relevant categories are shown in table 1.

Table 1. Different Categories Tobacco Rental Arrangements.

Lease Arrangement Explanation
CASH RENTING	Quota Owner does not share in risk of growing tobacco; tobacco is sold in the name of the farm.
GROWING ON SHARES	The quota shares in the risk of growing the crop.

Most entire farm lease arrangements would fit in the cash rent category. Thus, the basis of compensation to growers might be separate to those who share in the risk of producing tobacco and those non-producing quota owners. This has typically been the basis for many of the previous USDA programs (such as PIK).

A 1997 Clemson University flue-cured budget was used to estimate total costs. Assuming the budgeted production costs, a yield level of 2,200 pounds per acre and quota rent of $0.30 per pound, the landlord incurs nearly 20 percent of the annual production costs, not including risk costs. Using the same budget with $.50 per pound rent, the landlord share moves to almost one- third. This is not implying that total production cost is the figure that producers/landlords should be compensated. The point is that quota rent varies considerable from county-to-county (even within this range) and farm- to-farm. If some sort of formula were applied, there would need to be some finer measure than using a single figure for the entire belt. This is discussed (but not answered) later.

Value of Land: One difficult issue is the value of land. For most of those farms that could afford to do so, they have sold quota, usually in the range of $2-$5 per pound. Those farms that chose not to do so have generally indicated that they could not afford to sell. Why was this? Much/most of the production is on small/medium-sized Southeastern farms with current agricultural alternatives (to maintain this level or a satisfactory level) to be next to impossible. Thus, these land owners have had somewhat of an opportunity to sell quota but have found that the difference in the current value of quota and non-tobacco land potential was insufficient to maintain family continuance. This is further complicated by the fact that few, if any land taxes are tied to tobacco quotas but to acreage and location. In addition, it does not seem logical that only those acres utilized to grow the tobacco be considered but the entire farm operation. Many of the current tobacco farms could not or will not maintain themselves without tobacco production.

Although there is no simple solution, the best method may be for USDA to help estimate future income stream losses for the major types of tobacco. They maintain budgets for flue-cured and burley. They also have data on tobacco farms and for the major assets used to produce tobacco. This additionally should include an estimate for the reduction in the value of land.

Method of Reduction: If quota is removed from production because of this agreement, what method should be used to accomplish this? Farmers and farm groups have been considering this issue. It seems there are at least two options:

1. Allow producers to bid on removing pounds from production (this would be similar to the dairy buy-out); or
2. Let each producer reduce quota/production.

The second option would mean that each producer would share proportionally in such a fund. One variation of this is to let each producer reduce production but giving preference to the smaller entities.

Entire Tobacco Program: One important issue is the possibility that the entire tobacco program is dismantled vs. being reduced as discussed above. Is the elimination of the entire program possible over the next few years (say, 25 years) because of either direct or indirect actions from this agreement? Is this the opportunity to get the government out of tobacco production? If so, this should be part of the bargaining process (assuming producers have bargaining power). Another consideration might be any losses relating to the cooperatives. Given the economic and other prospects from the agreement, this section should be given very close scrutiny. A comprehensive transition plan must be timely and precise.

Others Sharing in the Fund: Should those other than tobacco producers share in such a fund? The tenant-landlord issue has been discussed. What about displaced farm workers? Tobacco is highly labor intensive and those people who can prove some proportion of their income came from this enterprise also should have some recourse.

In addition, should local communities and/or affected businesses participate? Once the tobacco settlement is signed and assuming impacts as discussed earlier, economic development will be very important to those local communities that now depend on the production of this commodity. There will also be some supporting businesses that will be financially affected.

In summary, these are but a few of the issues that producers, farm groups, decision makers, and others must quickly consider. Important farm-sector negotiations must attempt to find workable and fair solutions to these and other points. As stated earlier, the overall impact of this agreement appears to be: the industry/users will pay substantial sums, companies will radically change business procedures including cost reductions, tobacco will be much more highly regulated, and this should drastically reduce consumption over the next few years. Will the farm sector be a part of the settlement? If so, it is hopeful this crucial action will be based on careful and through assessment that will assist farmers with their future.

THE CLEMSON UNIVERSITY COOPERATIVE EXTENSION SERVICE OFFERS ITS PROGRAMS TO PEOPLE OF ALL AGES, REGARDLESS OF RACE, COLOR, SEX, RELIGION, NATIONAL ORIGIN, OR HANDICAP AND IS AN EQUAL OPPORTUNITY EMPLOYER.
COOPERATIVE EXTENSION WORK IN AGRICULTURE AND HOME ECONOMICS--STATE OF SOUTH CAROLINA, CLEMSON UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, AND SOUTH CAROLINA COUNTIES COOPERATING.

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updated 9/11/97