Farmers Rediscover Allure of Tobacco

Source from:  LAUREN ETTER Wall Street Journal 09/20/2007

No longer subsidized, crop gains acres in U.S. Tobacco is back in the American farm belt. Three years after the federal government stopped subsidizing it, the leafy crop is gaining new popularity among U.S. farmers. Cheaper U.S. tobacco has become competitive as an export, and China, Russia and Mexico, where cigarette sales continue to grow, are eager to buy. Since 2005, U.S. tobacco acreage has risen 20 percent. Fields are now filled with it in places like southern Illinois, which hasn't grown any substantial amounts since the end of World War I. For decades, Martin Ray Barbre, who farms the lush rolling hills here, was not eligible for federal price supports to grow tobacco under a program dating back to the Depression, making it economically infeasible for him to do so. The same was true for many farmers in 33 other states. Now the tarry plant is the most profitable crop Barbre grows on his 4,200-acre spread. "If somebody told me seven or eight years ago that I'd be growing tobacco today, I'd say they were crazy," said the gruff 52-year-old farmer, plucking a yellowing leaf from one of his plants and taking a deep smell of the raw, woody aroma. As laborers from Mexico and Honduras used axes to chop down 6-foot plants and hang them on wooden planks to dry in the sun, Barbre explained the attraction of the crop. Even factoring in higher labor and other costs, he's netting up to $1,800 an acre from his 150 acres of tobacco, compared with $250 an acre from his corn. He credits tobacco with boosting his annual income about 35 percent since he started planting the crop three years ago. Although corn is flirting with near-record prices at around $4 a bushel, "there's no way corn can get high enough" to compete with tobacco, says Barbre, shaking his head. "There's just too much money in tobacco." Barbre's profitable tobacco business adds a wrinkle to the debate over the farm bill Congress is preparing to take up. Many farmers say that without the system of subsidies for commodities like corn, cotton and soybeans, they'd be at risk of going under. But critics say the system fosters inefficiency, distorts international trade and supports mainly the wealthiest farmers. Now these critics can point to tobacco as evidence that subsidies are unnecessary. With tobacco, "we are finding that farming can be done without subsidies," says David Orden, a Virginia Tech professor and agricultural economist at the International Food Policy Research Institute. For more than 60 years, subsidies were as integral to tobacco farming as rich soil and a damp climate. In 1938, Congress passed the Agricultural Adjustment Act, a New Deal-era law crafted to support the thousands of small farmers of all sorts who had been financially devastated by the Depression. The law guaranteed tobacco farmers in many states a minimum price for their crops. It allotted quotas to farms that produced tobacco at the time the law was enacted, which dictated how many acres they could plant. Tobacco buyers were penalized for buying from growers without quotas. Growers who didn't own a quota had to buy or rent one from those who did. The system propped up prices and limited production to narrow areas and to plots of land rarely larger than 10 acres. The system was junked in 2004 through a $9.6 billion buyout of tobacco growers and farmers who owned quotas, with tobacco companies funding the payments. Thousands of tobacco farmers, many reaching retirement age, collected their checks and stopped growing the crop. Some farmers planted strawberries or tried to raise catfish in their farm ponds. In 2005, tobacco acreage dropped 27 percent from the year earlier, to 297,000 acres. With the government no longer supporting prices, those dropped too, to $1.64 per pound, from $1.98, according to the U.S. Agriculture Department. Cigarette makers worried that they wouldn't have enough supply. But predictions from some quarters that tobacco farming was headed for extinction in the U.S. proved incorrect. Today, farmers can grow as much tobacco as they want, wherever they want. Economies of scale have kicked in. Arnold O'Reilly, for one, figured it made sense to grow even more. Before the buyout, he says, the tobacco he grew on his Hardinsburg, Ky., farm was selling for about $1.98 a pound, but he paid up to 80 cents per pound to rent a quota, knocking down his effective price to as low as $1.18. These days, he says, his tobacco fetches about $1.60 a pound, and there's no quota payment. "Before the buyout I couldn't expand," he says. As a result, "we weren't competitive on the world market." Today he is growing 120 acres, double the 60 acres he grew just before the buyout. He has invested more than $300,000 in new farming equipment, barns and land. "I'm unlimited in my opportunities," says O'Reilly, 42. "I have nobody that can hold me back now." Will Snell, a tobacco economist at the University of Kentucky's Department of Agricultural Economics, says it's not uncommon now for tobacco farms to exceed 150 acres. Tobacco production, he says, has shifted to places with large tracts of land where the leaf can be grown more efficiently. Nationwide, the tobacco crop has been rebounding. Today there are 355,000 acres under cultivation -- still down from the 408,000 acres in 2004, but on the rise. Some farmers reinvested their buyout cash in their tobacco operations. In big tobacco-producing states such as Kentucky, and in smaller ones like Wisconsin and Pennsylvania, many tobacco farmers are enjoying renewed prosperity. Tobacco production in Pennsylvania has more than doubled since 2004. In Illinois, production has gone from practically none to at least 1,000 acres. Tobacco companies are recruiting new farmers and offering financial assistance to farmers who invest in new curing barns, drying racks, greenhouses and machinery. "U.S. tobacco is really the backbone of our blends," says Henry Long, a vice president at Philip Morris USA, a unit of Altria Group Inc. "Our job is to ensure we have a stable supply of U.S. tobacco to meet current and future needs." N.C. Farmers Add to Tobacco Acreage N.C. tobacco production is rebounding since a federal quota and price-support program ended in 2004. Farmers in one of the nation's largest tobacco-producing states this year plowed 164,000 acres for flue-cured tobacco, up from the historic low of 123,000 acres in 2005. Acreage had dropped as some farmers took buyouts, funded through a federal settlement with tobacco companies. Tobacco production of nearly 361,000 pounds this year was the highest since 2001, according to the N.C. Department of Agriculture and Consumer Services. Production would have been more were it not for drought and heat, said department spokesman Brian Long. "We're concerned about that, obviously," he said. The government used to set the annual minimum price for tobacco. In addition, a quota system limited where and how much farmers could grow. Some landowners leased these quotas to growers, which influenced price. Tobacco fetched $1.50 a pound in 2006 in North Carolina, the last year for which statistics are available. Although the price was lower than in pre-regulatory years, farmers no longer have to factor in the cost for leasing quotas and can realize larger profits, said Scott Bissette, international marketing specialist with the state's agriculture department. "Prices are less," Bissette said, "Because that quota, that cost component, is no longer in there." South Carolina has not seen a similar tobacco renaissance. Tobacco acreage dropped since the 2004 buyout, and now hovers at about 23,000 acres, said Tre Coleman, director of the S.C. Tobacco Board. Farmers in that state typically planted about 60,000 acres, he said. Years Acres Pounds per acre Total pounds (millions) Price per pound 2000 163,000 2,421 394.66 1.79 2001 155,000 2,427 376.2 1.86 2002 162,000 2,089 338.5 1.82 2003 154,000 1,902 292.9 1.86 2004 151,400 2,272 343.98 1.85 2005 123,000 2,227 273.95 1.48 2006 155,000 2,090 323.95 1.50 2007 164,000 2,200 360.8 not available SOURCE: N.C. Department of Agriculture and Consumer Services Enditem