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Tobacco in Transition: Tobacco Policy Impacts on the U.S. Tobacco Grower
Dr. Bob Pearce Associate Extension Professor
Plant and Soil Sciences Department University of Kentucky
Outline
• Brief history of tobacco production• The tobacco program• The decline of the tobacco program• The “buyout” and its impact• Production practices after the buyout• Future of tobacco in Kentucky
Tobacco in the United States
• Widely established as a cash crop in little more than a century
• 1600’s– Ravenous demand for N. tabacum in England– English settlers established Jamestown in 1607
• Spain held monopoly• Native Americans using N. rustica• John Rolfe illegally acquires seeds of tabacum from Cuba• Tobacco flourishes and becomes foundation of economy
Tobacco in the United States
Export to England– 20,000 lbs in 1618– 24 million by 1664– Production spread
• Maryland• Pennsylvania• The Carolinas
– 1780s first record of commercial production in Kentucky
Tobacco attacks– Sensual indulgence– Dirty habit– Doctors tried to restrict
to medicinal uses only– King James I
• Vocal critic• Counterblaste to
Tobacco– Vile, obnoxious weed
Tobacco in Kentucky Spring of 1864
– George Webb & Joseph Fore• Brown Co., Ohio• Ran low of seeds for sewing beds• Bought extra seeds from George
Barkley• Bracken Co., KY• Transplants looked unusual• Destroyed plants
– 1865• Sewed unused seeds from previous
year• Grew to harvest & cured leaf
– Plant characteristics• Pale green• Creamy stalk• White veins
– Cured leaf• Fine, light texture• Smoked bitter• No heavy load of sugars
– Saved seed from 1865 crop– Produced 20,000 lbs– High price at Cincinnati
market– Attracted attention
“white burley”
Agricultural Adjustment Act 1933
• Tobacco growers frustrated by repeated cycles of oversupply and low prices
• Established the precedent for paying farmers not to produce a crop
• Set area limitations & loan rates• Ultimately led to the tobacco “program”
Tobacco program • Growers agreed to limit production (quota) in
return for guaranteed prices.– Assigned a grade by a federal grader– Tobacco sold at auction– Tobacco that did not sell for the minimum price was
purchased by a grower owned cooperative for the minimum price.
– The cooperative received low interest government loans to fund its operations.
– The cooperative processed the tobacco and stored it for later sale.
Tobacco Program• 1938 – 1972
– Production limited by area– Growers become more efficient– Production somewhat erratic
• Over produce in good years• Under produce in bad years
• 1972 – 2004– Production limitation switched to weight basis– No matter how much was produced a grower could
only sell the number of kg that were allotted.
Calculation of Quota• National quota determined by formula.
– Domestic tobacco companies submitted purchase intentions to the federal government
– 3 year avg. of tobacco leaf exports– Adjustment for stock held by the cooperative
• Individual quotas based on historical share of production.– No new quotas were being issued– Quota had real estate value
• Bought and sold• Leased -- A grower might pay $1.00 or more per kg just for the
right to grow the crop for one year.
U.S. Burley Basic and Effective QuotaU.S. Burley Basic and Effective Quota
0100200300400500600700800900
1000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Mil
Lbs
Basic Effective
U.S. Attitudes on Tobacco Use• 1960s, 70s, and 80s
– US surgeon general reports smoking is harmful to health– Mounting medical evidence of harmful effects– Health warning on packs– Advertising restrictions imposed
• 1990s and 2000s – Rise in anti-smoking activism– Mounting legal action against tobacco companies– Increasing tobacco taxes– Increasing concerns about second hand smoke – Indoor smoking bans implemented
Master Settlement Agreement - 1998
• Tobacco Companies agree to “reimburse” states for medical expenses paid out to treat smoking related diseases.– $196 Billion over 25 years– Funded by cigarette price increases– Other company concessions:
• Further advertising restrictions• Fund stop smoking programs• Ingredient disclosure
– Kentucky $3.45 billion over 25 years• 50% pledged to Agricultural redevelopment
Phase 1
U.S. Cigarette Consumption
0
100
200
300
400
500
600
700
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
Bill
ions
of p
iece
s
Master Settlement Agreement - 1998
• Companies agree to additional payments to tobacco growing states to be paid to growers to offset expected losses due to cigarette price increases.– 5.15 billion over 12 years– Payments based on amount of tobacco grown in the 3
years prior to the agreement.– Kentucky got 1.5 billion– Payments ended with the buyout in 2004
Phase 2
U.S. Tobacco Consumption
0
100
200
300
400
500
600
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Mill
ions
of p
ound
s
Imported Burley U. S. Burley
Late 1990s: A program in trouble • Program unpopular with public• Price stability = quota instability• Artificially high leaf price compared to world market• Cooperative surplus stocks
– High levels of stocks– Poor quality of tobacco in some stocks– 3 government “rescues” in 15 years
• High lease prices• Move away from auctions
Fair and Equitable Tobacco Reform Act of 2004
• “The most important policy shift in Kentucky agriculture since the AAA of 1933”
• Put an end to the tobacco program• Provided quota owners compensation for the
value of their quota• Allowed many to exit the industry• Move to contract sales direct to tobacco
companies
“The Buyout”
Ky’s Burley Tobacco Outlook in the Early Post-Buyout Era
Who would stay in?How much would be grown?Where would it be grown?Company incentives?Demand opportunities?
???
Will Snell, University of Ky
U. S. Burley Hectares
• Down 35% from 2004
0
20
40
60
80
100
120
140
160
1997 1999 2001 2003 2005
1000
Hec
tare
s
Average Tobacco area per farm
0
2
4
6
8
1992 Census 1997 Census 2002 Census 2005 2006
Hec
tare
s
Source: USDA/KY County Agent Survey (December 2005)
Number of Growers Needed to Number of Growers Needed to Produce 136 Million kgProduce 136 Million kg
6,0006,5218 Hectare Average
12,00013,0434 HectareAverage
2800 kg Yield2575 kg Yield
Burley production
0
50
100
150
200
250
300
350
1997 1998 1999 2000 2001 2002 2003 2004 2005
Mill
ion
kgs
U.S.
KY
Adair
Allen
Anderson
Ballard
Barren
Bath
Bell
Boone
Bourbon
Boyd
Boyle
Bracken
Breathitt
Breckinridge
Bullitt
ButlerCaldwell
Calloway
Campbell
Carlisle
Carroll
Carter
Casey
Christian
Clark
Clay
Clinton
Crittenden
Cumberland
Daviess
Edmonson
Elliott
Estill
Fayette
Fleming
Floyd
Franklin
Fulton
Gallatin
Garrard
Grant
Graves
Grayson
Green
Greenup
Hancock
Hardin
Harrison
Hart
Henderson
Henry
Hickman
HopkinsJackson
Jefferson
Jessamine Johnson
Kenton
Knott
Knox
Larue
Laurel
Lawrence
Lee
Leslie Letcher
Lewis
Lincoln
Livingston
Logan
LyonMccracken
Mccreary
Mclean
MadisonMagoffin
Marion
Marshall
Martin
Mason
MeadeMenifee
Mercer
Metcalfe
Monroe
Montgomery
Morgan
Muhlenberg
Nelson
Nicholas
Ohio
Oldham
Owen
Owsley
Pendleton
Perry
Pike
Powell
Pulaski
Robertson
Rockcastle
Rowan
Russell
ScottShelby
Simpson
Spencer
Taylor
ToddTrigg
Trimble
Union
Warren
Washington
Wayne
Webster
Whitley
Wolfe
Woodford
Harlan
Purchase-57%
Mid Western-17%
Northern KY-33%
Central KY-41%
Bluegrass-47%
Eastern KY-62%
Source: KY County Agent Survey (December 2005)
Est. % of Tobacco Farmers Exiting in 2005 (Est. % of Tobacco Farmers Exiting in 2005 (--43%)43%)
Agricultural Economics
Adair
Allen
Anderson
Ballard
Barren
Bath
Bell
Boone
Bourbon
Boyd
Boyle
Bracken
Breathitt
Breckinridge
Bullitt
ButlerCaldwell
Calloway
Campbell
Carlisle
Carroll
Carter
Casey
Christian
Clark
Clay
Clinton
Crittenden
Cumberland
Daviess
Edmonson
Elliott
Estill
Fayette
Fleming
Floyd
Franklin
Fulton
Gallatin
Garrard
Grant
Graves
Grayson
Green
Greenup
Hancock
Hardin
Harrison
Hart
Henderson
Henry
Hickman
HopkinsJackson
Jefferson
Jessamine Johnson
Kenton
Knott
Knox
Larue
Laurel
Lawrence
Lee
Leslie Letcher
Lewis
Lincoln
Livingston
Logan
LyonMccracken
Mccreary
Mclean
MadisonMagoffin
Marion
Marshall
Martin
Mason
MeadeMenifee
Mercer
Metcalfe
Monroe
Montgomery
Morgan
Muhlenberg
Nelson
Nicholas
Ohio
Oldham
Owen
Owsley
Pendleton
Perry
Pike
Powell
Pulaski
Robertson
Rockcastle
Rowan
Russell
ScottShelby
Simpson
Spencer
Taylor
ToddTrigg
Trimble
Union
Warren
Washington
Wayne
Webster
Whitley
Wolfe
Woodford
Harlan
Purchase-16.8%
Mid Western+4.2%
Northern KY-35.9%
Central KY-23.2%
Bluegrass-41.0%
Eastern KY-55.6%
Source: NASS/USDA
Burley Production By Kentucky Crop Reporting District: 2005 vs 2004 (-34%)
Agricultural Economics
Adair
Allen
Anderson
Ballard
Barren
Bath
Bell
Boone
Bourbon
Boyd
Boyle
Bracken
Breathitt
Breckinridge
Bullitt
ButlerCaldwell
Calloway
Campbell
Carlisle
Carroll
Carter
Casey
Christian
Clark
Clay
Clinton
Crittenden
Cumberland
Daviess
Edmonson
Elliott
Estill
Fayette
Fleming
Floyd
Franklin
Fulton
Gallatin
Garrard
Grant
Graves
Grayson
Green
Greenup
Hancock
Hardin
Harrison
Hart
Henderson
Henry
Hickman
HopkinsJackson
Jefferson
Jessamine Johnson
Kenton
Knott
Knox
Larue
Laurel
Lawrence
Lee
Leslie Letcher
Lewis
Lincoln
Livingston
Logan
LyonMccracken
Mccreary
Mclean
MadisonMagoffin
Marion
Marshall
Martin
Mason
MeadeMenifee
Mercer
Metcalfe
Monroe
Montgomery
Morgan
Muhlenberg
Nelson
Nicholas
Ohio
Oldham
Owen
Owsley
Pendleton
Perry
Pike
Powell
Pulaski
Robertson
Rockcastle
Rowan
Russell
ScottShelby
Simpson
Spencer
Taylor
ToddTrigg
Trimble
Union
Warren
Washington
Wayne
Webster
Whitley
Wolfe
Woodford
Harlan
Increased Production -25 to -40%
0 to -25% > 40% DeclineSource: Ky Ag Stats/NASS
Agricultural Economics
2005 vs 2004 Burley Production
Summary of Buyout Impacts• About a 20% reduction in price
– Tighter profit margin• A 30 to 40% reduction in total production• At least a 40% reduction in number of growers• Increase in average area per grower• Fewer people at Extension events but more interest• Shifts in production areas
– East to west in Kentucky– Non-traditional burley areas
Changes in Tobacco Extension• Need communication with tobacco companies• Innovative Tobacco Grower Program
– Multiple sessions– Cover all areas of production– Emphasize management
• Workshops– Hands-on instruction
• Fewer opportunities for on-farm research and demontrations.
Contract Growing Tobacco• Marketing contracts• Growers must know their contract requirements:
– Use “screened” tobacco seed– No residues from unregistered pesticides– Some require 4 grade separation
• Future requirements??– Specific variety – Rate of fertilization– Limits on residue of registered pesticides
• Mistrust of company intentions– Long term stability– Concerns about grading consistency
Good Agricultural Practices
• Produced in a timely manner– Good management essential
• Use of agronomically sound practices• Economically viable returns
– High yield per acre• Reduce Environmental Impact of Production
Growers needed to improve management
• Before the buyout– Grower could make money even with poor
management– The program provided a safety net– State avg. yield about 2300 kg/ha
• After the buyout– Yield needs to be at least 2600 kg/ha for long term
viability.
Timely Production
• Seeding so that plants will be ready to set on time– Watch weather reports to reduce gas
expense
• Controlling environment to minimize temperature & disease related damage
• Disease prevention– To reduce delays– To improve transplant quality
Transplant on time• Can improve yield • Reduce disease incidence
– Blue mold– Virus complex
• Some curing concerns
What’s the difference between a good farmer and a poor farmer?
Screened Varieties Must be Used• In 2007 “LC” varieties may be required• To reduce TSNAs• Some older varieties will not be screened
– Grower choices may be limited
Fertilization not currently specified on most contracts
• Companies have “suggested” growers might want to use less nitrogen fertilizer.
• They have required lower nitrogen rates for growers in other countries like Brazil.
• Will this be required for US growers ?– More efficient fertilizer use
Disease Management• Crop Rotation• Prevention• Conservation Tillage
– Utilization of disease free land
Pesticide Concerns
• Illegal pesticides– Could void contract
• Indiscriminant use of labeled pesticides– Endosulfan (Golden Leaf)– MH
US Burley export price vs price for imported burley
0123456789
$/kg
pro
cess
ed le
af
2002 2003 2004 2005
ExportImport
U. S. Burley Disappearance
0100200300400500600700800
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Mill
ions
of p
ound
s
Domestic Export
Factors Impacting the Future for Tobacco in Kentucky ??
• Demand for high quality burley tobacco– Domestic consumption will continue to decrease– Developing countries – Rising popularity of the “American” blend
• Can we be price competitive?– Not directly
• Internal issues– Labor availability or improved mechanization
• Immigration policy– Farm population is aging – Social pressure against tobacco
Conclusion• Tobacco will continue to be a major contributor to
Kentucky’s farm economy over the next 5 to 10 years.
• Fewer people are directly tied to tobacco, so the industry will not carry the political power of times past.
• Growers with good management skills will be able to take advantage of the contracting system and will be successful in the long term.
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