OU 370

December 20, 2002

2003 FLUE-CURED TOBACCO QUOTA
R.W. Suttton, Extension Ag Economist
D.T. Gooden, Extension Agronomist

The 2003 flue-cured quota was announced on December 16, by USDA. The 2003 basic quota (Table 1) will be 526.3 mil lbs or 9.6 percent below last year. This was compared to 582 mil lbs in 2002. Flue-cured tobacco production and price has been governed by a federal program for more than 60 years. This means a national marketing quota is set annually by the Secretary of Agriculture. The formula for the quota consists of three major parts: (a) the total amount of tobacco domestic cigarette manufacturers estimate they intend to purchase during the marketing year; (b) the average quantity of tobacco exports during the three most recent years; and (c) the amount the Secretary determines is necessary to increase or decrease the producer association inventory to reach the reserve stock level. Components of this formula are discussed below.

Purchase Intentions: Domestic cigarette manufacturers who account for more than one percent of U.S. cigarette production and sales are required to submit annual purchase intentions by December 2^nd of each preceding year. For 2003, buying intentions were 283.3 mil lbs or 8.6 percent below the previous year. This was compared to 310 mil lbs in 2002 and 297 mil lbs in 2001. The 2003 intention figure was the lowest ever and 3 mil lbs below 2000. It should be kept in mind that this is, for the most part, a reflection of domestic use which is declining.

Average Exports: The three-year average exports for flue-cured unmanufactured tobacco was 254.7 mil lbs as compared to 249.9 mil lbs in 2002. Individual years that were used: 2000, 238.0 mil lbs; 2001, 276.0 mil lbs and 2002, 250.0 mil lbs.

Reserve Supply Level: Or called the reserve stock level adjustment, is the amount of addition or subtraction to the national marketing quota needed to bring the inventory of flue-cured stabilization to the goal specified in the law. For flue-cured, this level was changed by the recent Farm Bill from the greater of 100 mil lbs or 15 percent of the previous year's marketing quota to the greater of 60 mil lbs or 10 percent of the marketing quota. The reserve stock level for the 2003 marketing year is 60.0 mil lbs because 582.0 mil lbs (2002 basic quota) times 10% = 58.2; therefore, the higher of 60 is used.

This law change was a drastic one-year decline in the formula and essentially removed 40 mil lbs or resulted in a 6.5 to 6.9 percent additional decline in basic quota. The reasoning behind this change was to bring the reserve stock level more in line with the lower industry usage. The big problem with this change was a need for a transition period of something like three years to incorporate the 40 mil lbs reduction. One wonders if the companies were also considering this change (the impact on basic quota) when they reported their purchase intentions. If not, there could be a short supply of specific grades this coming year and, if so, it is hoped that no one would have to go off-shore to fill demand.

Stabilization Stocks: The 2002 crop loan take was 59.0 mil lbs. Stabilization currently holds 12.7 mil. lbs. of old crop tobacco net of deferred sales; the total Dec.1 figure was 71.7 mil lbs. Thus, the reserve stock level adjustment for the 2003 quota was a minus 11.7 mil. lbs. The adjustment for 2001 was plus 22.1 mil lbs. One interesting point about the 2002 loan take was that nearly one-half of all open market (non-contract) sales went to stabilization.

Secretary Discretion: The Secretary of Agriculture may increase or decrease the quota level up or down by a maximum of 3 percent. With quota already increased by 6 percent last year, the adjustment was zero. Unfortunately, the Secretary also used the zero adjustment this year. With a 9.6 percent decline, the logic of not utilizing a plus 3 percent adjustment is unclear. Based on historical experience, this discretionary adjustment has often been questionable from the stand-point of the objective. An explanation along with the adjustment would be helpful.

Support Price: The 2003 support price will be slightly higher. The 2003 F.C. price support level will be $166.3 /cwt as compared to $165.6 /cwt in 2002. For this next year, the average of auction prices (2/3 weight in the formula) is projected up by 2.9 cents/lb. while the cost index (1/3 weight) is down by near the same amount. The Secretary utilized his discretion of 65 percent of formula change.

Quota: The 2003 flue-cured basic quota will set another modern low at 526 mil lbs. This will be some 46 percent below 1997. The effective quota for next year will be around 540 mil lbs as compared to 566 mil lbs in 2002. Some wonder how much longer this program can last and this is much of the basis for the need of an immediate buy-out.

Table 1. Quota and Support Price Data for U.S. Flue-Cured Tobacco; 1997-2003.

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