| OU 336 | July 16, 1998 |
As harvest of the 1998 flue-cure crop takes place, growers
have mixed emotions about the out-come (or lack of) with the tobacco
settlement and future for U.S. tobacco production. As of this
time, it appears there will probably not be any legislation in
the near future. This also increases the possibility of another
year (or more) under the current program.
Although times are very uncertain for producers, they still
plan for the future and have been trying to evaluate some future
alternatives. These questions deal with matters such as the potential
change in quota levels next year if the current program remains
in place. This is because there are important relationships between
quota level and short-term decisions about harvesting bottom leaves,
selling very low quality grades, fall-leasing (if available),
etc. Longer-term decisions include issues such as asset replacement/purchases
such as a baler, sale of assets, leasing quota, value if selling/buying
quota, etc.
An attempt has been made to look at some likely scenarios for
1999. First, in table 1, the 1995-98 formula calculations are
shown and the 1999 flue-cured formula projections with no change
in the important formula variables.
Table 1. U.S. Flue-Cured Tobacco Formula Calculations, 1995-1998;
Formula Projections For 1999 With No Change in Major Formula Variables.
| Item | 1995 | 1996 | 1997 | 1998 | 1999p |
| - - - - - - - - - - - - - - million pounds - - - - - - - - - - - | |||||
| Buying Intentions | 569.9 | 475.5 | 535.5 | 454.6 | 454.6 |
| Three-Year Avg Exports | 371.5 | 344.8 | 343.3 | 371.9 | 371.9 |
| Total | 941.4 | 820.3 | 878.8 | 826.5 | 826.5 |
| Reserve Supply | 120.4 | 140.2 | 131.0 | 146.1 | 121.0 |
| Dec. Loan Stocks | 98.3 | 59.9 | 5.9 | 188.5 | 188.5 |
| Marketing Adjustment | 22.1 | 80.3 | 125.1 | -42.4 | -67.4 |
| Three-Part Total | 963.5 | 900.6 | 1,003.9 | 784.1 | 759.1 |
| Sec. Discretion-Quantity | -28.9 | -27.0 | -30.1 | 23.5 | 22.8 |
| Percentage | -3.0% | -3.0% | -3.0% | +3.0% | +3.0% |
| Basic Quota-Quantity | 934.6 | 802.6 | 973.8 | 807.6 | 781.9 |
| Percentage | +16.4 % | -10.0 % | +16.4 % | -17.1 % | -3.2 % |
One variable, the "Secretary's Discretion" can change
within +3 to -3 percent. In table 1, a +3 percent adjustment (same
as last year) is used. If the Secretary chose a "0"
adjustment and all other data remained constant, basic quota would
decline by 6.0 percent. If this value went to a -3.0 percent,
quota would be 8.8 percent less.
While the level of change for all the other important variables
is debatable, the magnitude can be estimated. For a 100 million
pound move in any variable, basic quota is adjusted upward or
downward by 12.7 percent. In other words, if next year Dec. Loan
Stocks changed from 188.5 mil. lbs. to 88.5 mil. lbs., then basic
quota would change by about +9.5 percent ( +12.7 due to 100 mil.
lbs. less stocks minus 3.2 from the above base). Likewise if Dec.
Loan Stocks increased to 288.5 mil. lbs., basic quota would decline
by 15.9 percent ( -12.7 plus -3.2). Of course an alternative method
would be to add/subtract the actual projected change and re-calculate
the formula.
In talking with one analyst, the following was projected:
(1) Buying Intentions being reduced to........................................
400 mil. lbs.;
(2) 3-Yr. Exports increasing to....................................................
380 mil. lbs.;
(3) Dec. Loan Stocks increasing by about 125 mil. lbs to.............
315 mil. lbs.;
(4) Secretary's Discretion remaining at +3 percent......................
18 mil. lbs.
If this happened, basic quota would be reduced to about 604
million pounds, or 25 percent less. This would hopefully be the
upper limit for likely possibilities. Although no one knows the
future, the most common range of likely alternatives resulted
in a decrease between 8 percent to 17 percent with the higher
side being the more likely outcome.
How companies buy the 1998 crop is uncertain. Whether a tobacco
settlement or not, the industry is facing the possibility of increased
costs -- either paying for the settlement and/or litigation, potential
tax increases, export restrictions, increased regulations, etc.
As of this time, it appears producers could be operating under
the current tobacco program for 1999, and if so, there could be
significant reductions in the basic quota.
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