Free to Grow: Some Big Farmers Say End of Regulation Would Help Them win Back Buyers

Source from:  By David Rice JOURNAL RALEIGH BUREAU 08/04/2004

When he was allowed to plant a 1-acre field this year with just half the tobacco he planted there in 1997, Earl Brooks got fed up and decided to let the world know. So he posted a sign in the field along U.S. 501 south of Roxboro that says: "Thanks to Big Tobacco Companys the Rest of This Field Is Planted in Brazil!" "This is all I need to plant the quota on this farm," Brooks said as he stood in the half-filled field. "I could've planted the whole thing in '97. [img border=0 hspace="4" vspace="4" align="left" src=http://www.tobaccochina.com/english/picture/Satellite.jpg] "All we're hearing is they're putting out incentives (in Brazil) to grow tobacco. They're bending over backwards to help the farmers grow the same kind we'd like to grow here," he said. "We're also hearing that they're trying to drive the price down in Brazil, so where does it end?" As smoking declines in the United States and cigarette companies increasingly turn to cheaper foreign leaf, it's clear to many growers that their growth markets - and their competition - are overseas. So farmers hope that a buyout of tobacco quotas will remove the price that many of them pay to rent quota from the price of U.S. leaf and allow them to be more competitive with growers in Brazil, Zimbabwe, China and Malawi. While U.S. farmers are growing about 500 million pounds of flue-cured tobacco this year and 300 million pounds of burley tobacco, growers in Brazil are expected to produce 1.4 billion pounds of flue-cured leaf alone. "Brazil has cleaned our clock in tobacco production, and we will never be able to compete with them under this current program," said Jimmy Hill, a farmer near Kinston who with his family partners grows 300 acres of tobacco in three Eastern North Carolina counties. "We are going to have to do a lot of changing," Hill said. "The big global market is where we would hope to see the biggest increase." Tobacco farmers in North Carolina rent two-thirds of the government-issued quota they need as a license to grow leaf, paying 40 to 60 cents a pound in rent to quota owners who don't farm. That cost of renting quota, which is a factor in the government support price for tobacco, raises the price of U.S. leaf to about $1.85 a pound. Though exchange rates and a different cost structure make comparisons difficult, Brazilian leaf sells for $1 a pound or less. "That's the reason we've lost the international business - strictly price," said Dale Bone, a Nash County farmer who is growing more than a half-million pounds of tobacco this year. "We can get the international business back, but it's going to be slow, because all these tobacco companies and leaf dealers have such investments (overseas)," Bone said. "We're in a worldwide market in everything. My main competition in the cucumber business is India." Industry leader Philip Morris USA is regarded as a dependable buyer of U.S.-grown leaf. Though Philip Morris accounts for 49 percent of the domestic cigarette market, "they buy at least 60 percent of U.S. leaf," said Blake Brown, an agricultural economist at N.C. State University. So, rightly or wrongly, many growers have accused R.J. Reynolds Tobacco Co. of leading the move to use more foreign-grown leaf in U.S. cigarettes. In a court filing this year in response to a lawsuit filed by tobacco growers, officials at Reynolds acknowledged that the company shifted a sizable portion of its leaf purchases overseas in the 1990s. Reynolds faced financial pressures after a leveraged buyout burdened the company with debt, it sold its international division, and it began to lose its share of the cigarette market, the company said. "Reynolds responded to those economic pressures, in part, by purchasing a higher percentage of foreign-grown tobacco than any other manufacturer," the company said in a court filing. Though Reynolds had about a 20 percent share of the domestic cigarette market, "RJR's purchases at auction averaged less than 6 percent and never exceeded 9 percent of the total offerings in each market," the company said. In response to congressional inquiries and pressure from state legislators when Reynolds won $126 million in state incentives last year to help its merger with Brown & Williamson Tobacco Corp., the company says today that half the leaf it uses is U.S.-grown. "Of the flue-cured and burley tobacco we use, over 50 percent of it is domestic," said Tommy Payne, an executive vice president at Reynolds. A model that Brown uses at N.C. State projects that with the removal of the quota system, though, prices for U.S. leaf should fall from $1.85 a pound to about $1.50 a pound for one to three years. But then the price could fall to $1.40 a pound or lower. "I don't think $1.25 in the long run is out of the question," Brown said. Growers and leaf dealers hope that with prices lowered they could sell more U.S.-grown leaf to both domestic cigarette makers and to foreign companies that might use more U.S. leaf in their cigarette blends. "The primary strategy is to try to get more U.S. leaf used in blends," said Tommy Bunn, the executive vice president of the Leaf Tobacco Exporters Association, a trade association in Raleigh. Officials at Reynolds say they are not sure how much more domestic leaf - if any - the company might buy at prices of $1.25 to $1.40 a pound. "We don't know. No price has been set," said David Howard, a spokesman for Reynolds. "Certainly common sense would lead anyone to think that the quantity of U.S. leaf purchased would increase." Insiders in the world of leaf dealers say that the number of foreign cigarette makers that buy U.S. leaf now can be counted on one hand. Many pin their hopes on Reynolds, now that it has merged with Brown & Williamson, and such major international players as British American Tobacco PLC. They say that foreign tobacco companies are closely watching developments in Washington on proposals for a quota buyout. Some single out Reemtsma, a German cigarette company now owned by Imperial Tobacco Group, which once bought 20-30 million pounds of U.S. flue-cured tobacco a year but stopped two years ago. Reemtsma now buys flue-cured leaf in Brazil and Africa. "They're watching it. We know it," said one industry insider. "They've exited this market. Can we get them back? There are some people who say, 'Yes, but it will take some time.' There are others who say, 'It's too late.'" Growers, meanwhile, say that the amount of additional leaf they will grow will depend on their contracts with U.S. cigarette makers and international leaf dealers. "You know how much tobacco I want to grow? The amount that I have contracted before I seed it in my greenhouse," said Hill, the grower in Kinston. "It's going to be whatever contracts we can come up with - either what the leaf dealers or the domestic manufacturers can come up with," he said. "We would hope that our leaf dealers would be able to sell more." At N.C. State, Brown cautions that the transition won't happen immediately after a quota buyout. Leaf dealers and cigarette makers have investments and contracts to retire in Brazil and other countries. But those companies also don't want to become overly dependent on Brazilian growers. "They need to diversify some of their risk out of Brazil, is the bottom line," Brown said. "It is probably a gradual process. It won't happen overnight. But when you look at the world picture, Zimbabwe is falling apart (politically) and the leaf dealers have tried to make up for that in Brazil," he said. "If they have a disease problem or a weather problem, they've jeopardized the entire supply of premium-style flue-cured tobacco," he said. "They've got so many eggs in one basket that they'd like to spread the risk." U.S. production of flue-cured tobacco probably wouldn't overtake Brazil's, Brown said, but he does expect it to rise from current levels of less than 500 million pounds a year. "I think we could get back to 600-700 million pounds pretty quickly. And then, over time, we could get back toward 800 million pounds," Brown said. Enditem