OU 364

April 30, 2002

POTENTIAL TOBACCO BUY OUT PROPOSALS
R.W. Sutton, Extension Ag Economist

Situation

Lately, most tobacco groups have been meeting and deliberating potential buy out issues. Discussion has been taking place within the industry since the failed 1997-98 legislative proposals. This was followed by a 2001 tobacco/health commission comprehensive study. Many industry groups have been concerned that the present program cannot survive long term, given the massive recent changes in production, marketing and company level. Part of the reason has been because many of the current changes or short-term resolutions often lead to other, more in-depth problems or issues.

The critical policy question is, if there is a buy out should it be one that eliminates the program or a buyout with program continuation? And, if the program continues, what improvements (if any) of the system are needed and how should quota be reorganized? In essence, most farm groups have stated the need for program continuance (with or without changes) and a one-time voluntary adjustment of quota. This concept would allow inactive/ voluntary quota holders and producers to receive compensation while allowing active growers and owners to continue. There could also be the possibility of including other program issues in this action.

However, a more overriding concern for many is the economic survival of producers. For example, the 2002 flue-cured basic quota was 6 percent larger than last year but still only 60 percent of five years ago (and similar for burley.) This means that tobacco growing families have had major economic problems with the significantly lower quantities. Thus, for many producers the primary concern is not about whether there will continue to be a program; they need immediate compensation.

Buy Out Activity

New buy out tobacco legislation has recently been introduced and could be followed by more. One recent opportunity for change might have been the farm bill but time has passed for this to be accomplished.

A 2001 report of the President's Commission (charged by President Clinton) called for, among other things, a tobacco production control program being in the best interest of the public health and tobacco producer communities, the voluntary buying out of existing quota owners/growers, and tobacco growing states and communities receiving funds to enhance economic infrastructures. This has been the one recent comprehensive policy analysis and has been relied on heavily regarding changes.

A U.S. House bill, HR 3940, was recently introduced by Representatives McIntyre(NC) and Davis(VA). Among several other things, this bill calls for the termination of the tobacco program for all tobacco types (beyond burley and flue-cured) with a buy out attached. The program would be paid for by a FDA user fee.

We have attempted a comparison worksheet (table 1) that summarizes some of the recent issue stands by various groups during 2002. It also includes the President's Commission, one tobacco company and the mentioned bill.

From the worksheet, all groups/commission except the one tobacco company and the McIntyre-Davis Bill expressed need to continue with a tobacco program. It is interesting that this buy out bill disagrees with the farm groups and commission (farm and health groups) and is closer to the one company. If this bill is seriously considered, farm groups will likely face some re-thinking and tough decisions.

All reported payment amounts in table 1 are in close agreement. All recommend $8.00 per pound for the inactive (selling) quota owners and $4.00 for the producers exiting the system. Compensation for the continuing producers is either $2.00 per pound or nothing. There are some differences between who can or must sell, who can remain and the base quota or grower periods. However, considering the complexity and importance, these differences are not that great and could be resolved. For the most part, the grower groups have already put considerable effort and time into their recommendations; there could be more work in the near future.

Future

The future remains uncertain for U.S. tobacco production. Several producers have been wondering if they should support the McIntyre-Davis legislation or if there could be more legislative activity in the near future. Another major question is, if there is a buy out, what will happen to the nearly four billion dollars left in the phase II monies? Although there are currently conflicting views on this, many feel the phase II monies would be lost..

There are still problems for maintaining future production levels necessary to support economic survival. The industry will continue to transform and the future is not easy to predict. If there is appropriate legislation (or if McIntyre-Davis is appropriate), we have the possibility of making potential changes for keeping our system productive, competitive and viable. The industry is in the midst of making decisions that will affect it forever.

The Clemson University Cooperative Extension Service offers its programs to people of all ages, regardless of color, sex, religion, national origin, disability, political beliefs, sexual orientation, marital or family status and is an equal opportunity employer.

Clemson University Cooperating with U.S. Department of Agriculture, South Carolina Counties, Extension Service, Clemson, South Carolina. Issued in Furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of May 8 and June 30, 1914.

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