U.S. Tobacco Farming is Bigger Than Ever

Source from:  CNBC June 11, 2008 06/12/2008

Overseas demand offsets end of price supports, fewer domestic smokers. Tobacco barns were packed solid with the golden leaf this past season. Farmers in the United States raised more than 350,000 acres. The crop, which many predicted would be extinguished along with cigarettes, has defied expectations. Tobacco is what you might call "smoking hot." Rod Keugel, a fourth-generation Kentucky grower, says this is the most profitable time in his entire life to be a tobacco farmer. Beginning in the 1930s, the federal government supported farmers like Keugel by artificially propping up tobacco prices. They imposed quotas that put a cap on how much tobacco each farmer could grow, which kept supply low and prices high. In 2004 the government got out of the tobacco business, and since then everything has changed. Gone are the price supports that kept the cost of American tobacco artificially high. And with the quota system gone, farmers can raise as much as they'd like wherever they'd like. To many, tobacco has become the poster child of how free global markets are supposed to work. "We're seeing that an agricultural sector can prosper and function well without those government mechanisms," said David Orden, an economics professor at Virginia Tech and a researcher on agricultural policy. Orden said the theory was that taking away the quota system would allow more production to take place at lower prices, and that would stimulate demand. Which is exactly what has happened. Tobacco acreage has increased 20 percent in the last two years. Instead of bringing ruin, the government's exit has brought rebirth for many growers like Keugel. "It's allowed us to do a lot of things that we couldn't do before," Keugel said. "We were raising about 40 acres and we're raising 100 now." Numbers like that convinced TJ Vaughn, his father, Randy, and neighbor Martin Barbre from Carmi, Ill., to get into the business. They are farmers who never dreamed of raising tobacco before in states that hadn't seen tobacco farming for a century. If someone had asked him 20 years ago if he'd be raising tobacco? "If you'd asked me before the turn of the century, I'd have said you're crazy," Vaughn said. Longtime corn and wheat farmers, the Vaughns and Barbre are part of a trend of new growers being lured into tobacco by the cigarette manufacturers. In 2006, PhilipMorris International invited them to the local café for a sales pitch. "I wanted to do it right after the first meeting," Vaughn said. "Sounded interesting. Sounded like there was a good chance for profitability." He's not kidding. A reasonable profit for an acre of corn is about $100. For tobacco, he said, it's $1,000 to $1,500. The farmers raise burley tobacco, which is used in premium cigarettes like Marlboro. Burley is an extremely labor-intensive crop. Farmers can harvest wheat and corn from an air-conditioned combine. But harvesting Burley is back-breaking work often done in horrendous heat. In many ways it's a throwback to an earlier era. "You know, here we were, we needed a plow," Randy Vaughn said. "TJ had never hardly even seen a plow." "Boys don't know how to plow," Barbre said. "I do now," TJ Vaughn said, laughing. Once harvested and cured, every leaf is stripped from the stalk and sorted according to the position on the stem. This year, farmers are expected to sell more than 700 million pounds of leaf. "We believe it's a very exciting time to be in the business," said David Sutton, spokesman for PhilipMorris USA, maker of Marlboro, the top-selling cigarette in the country. He says it's exciting even though demand is shrinking in the U.S. Enditem