| OU 343 | December 30, 1998 |
The 1999 flue-cured basic quota was recently announced by USDA/FSA. The quota reduction of 17.5 percent was not good news for producers but was more positive than previously thought. The basic quota level was 666.2 million pounds (m.p.) as compared to 807.4 m.p. in 1998. This was a decrease of nearly 32 percent over the past two years.
On December 1st, the first major component of the quota formula
became known when the
companies announced purchase intentions 28 percent below 1998.
These intentions were 327
m.p. and not surprising because of recent action such as the national
agreement between
companies and states Attorneys General, cigarette price increases,
and a multitude of other
industry activity/potential future activity. Based on this, it
appeared quota could be decreased by as much as 32 percent.
Since the beginning of December, the other known parts of the quota formula were: (1) Exports at 355.2 m.p. as compared to 371.9 m.p. in 1998; and, (2) Reserve Supply Level (15% of previous year) at 121.1 m.p. vs. 146.1 m.p. in 1998.
Another important, but not finalized, December 1 variable was
stabilization stocks. As of this
time, stabilization held over 250 m.p. of surplus leaf. Based
on these stocks, the 1999 quota
would have been an economic disaster for producers and would have
had serious long-term
impacts on export offerings and domestic supply. In an eleventh
hour agreement between
stabilization and the companies, an additional 104 m.p. were sold.
This was accomplished despite a considerable amount of industry
and political activity during this short but important period.
The final part of the quota formula calculation was the Secretary's Discretionary Adjustment. The Secretary of Agriculture had the option of adjusting the formula between -3 to +3 percent. For the second year in a row, the adjustment was +3 percent.
Tobacco, once the stable component of agriculture can no longer be classified as such. This was the smallest flue-cured quota in the history of the U.S. tobacco program. In 1987, while program changes were taking place, quota dipped to 707 m.p. South Carolina cash receipts (which is the grower income) will be significantly down for this next year. Although the absolute figures have not been announced, this state tobacco acres should drop from about 47 thousand acres to slightly over 42 thousand acres. In 1998, South Carolina growers marked 100.1 percent of their effective quota. Although some areas of the state were hard-hit by weather, fall leasing allowed those areas with excess production to market most of their surplus pounds. FSA reports only 700 thousand pounds of carry-over on farms -- this is significantly below recent years. Given the 99.991 m.p. sold in 1998, South Carolina should have a quota of about 82 m.p. for next year. This will likely will result in over a $30 million loss in farm-level income.
Not only will this large reduction significantly impact growers
and quota owners, but will also
affect lenders, warehouses, input suppliers, and local businesses.
This will also likely slow capital purchases such as balers.
For the future, it is uncertain what is ahead for U.S. tobacco
production. Given all the
agreements, turmoil, etc. in the industry, it is currently unknown
how the companies, exporters,
and dealers will react. Much of this is dependent upon such factors
as the tobacco settlement(s), price increases, exports/imports,
potential taxes, legal activity, and possible changes in regulations
and restrictions.
For the present, although unknown, it does not appear that
near-term legislative action will eliminate or significantly change
the present tobacco program. If so, this could mean
several more years with the current program and possibly this
could give some stability to the
quota and market. If we remain with the current program and assuming
middle-of-the-road but conservative projections, the 2000 basic
quota could be around 700 m.p. or higher. Based on the above situation,
it is projected that the flue-cured industry could settle around
650 to 750 m.p (or more.) Much of this will depend on cigarette
exports, domestic factors, etc.
Outlook
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