Farmers Express Relief at Buyout

Source from:  BY JOHN REID BLACKWELL AND PETER HARDIN TIMES-DISPATCH STAFF WRITERS  10/11/2004

Legislation would end 70-year-old tobacco limits and price props In the heart of Virginia's tobacco country, farmers applauded the $10.1 billion quota buyout soon to be sealed and signed in Washington. Yet their clapping - for a package that could alter rural lives and communities - was muted. Farmers voiced relief, and they wondered aloud what it will mean to end a federal price-support program launched in the 1930s. "We had hoped for a little more, but it beats the heck out of nothing," said Buddy Mayhew, a Pittsylvania County farmer and chairman of the grower-advocacy group Concerned Friends for Tobacco. "It really has come in the nick of time to save a lot of people." Andrew Shepherd of Lunenburg County made many trips to Washington to help shape a policy. The buyout "is going to prevent some farm families from losing their farm. In one aspect it's a godsend," he said, while questioning why it omitted important provisions to protect public health. Shepherd sits on the board of directors of the farmers cooperative that administers the existing tobacco program. On Friday, that board's meeting was "glad and sad," he said. "It was like you were burying a good friend. And when you look to the future, it was [a picture of] real uncertainty for those coming behind us." In the end, the emerging buyout of tobacco quota isn't what farmers had hoped for, but they find it better than nothing. Quota is a license dictating how much leaf a farmer may grow. It has come to represent an asset to its owners over the years - many lease their quotas to active farmers - and the buyout, passed by the House and pending in the Senate, would provide cash compensation for the loss of quota rights. Instead of a $15 billion buyout over a few years, Congress appears poised to pass a $10.1 billion buyout spread out over 10 years. Instead of keeping some of the safety net that farmers have counted on for several generations, Congress eliminated it entirely. Once the Senate passes and President Bush signs the underlying legislation, the buyout will put an end to a nearly 70-year-old federal program that limits the amount of tobacco grown in the United States and props up prices for the crop. It returns tobacco production to a fully free-market system for the first time since the 1930s. In return for giving up their government license to grow the crop, tobacco-quota holders will get $7 per pound. Farmers who grew tobacco from 2002 to 2004 will get $3 per pound. The payments would be spread out over a 10-year period. Farm groups say it is clear that some farmers will take the money and retire, but it is unclear how many farmers in Virginia are likely to quit, and how many will continue growing the crop. Some economists have said as many as two-thirds of tobacco farmers would quit the business in the event of a buyout. Mayhew, 61, has farmed tobacco all his life. He is considering hanging it up after the buyout. "I think the younger group [of farmers] that have an investment in farming are going to want to continue, and I think the older crowd that are in the mid- to late-50s and beyond are going to be willing to step aside," he said. Bobby Wilkerson, 63, of Pittsylvania County produced his best crop ever this year, but high fuel and labor costs have cut into his profit. Whether he continues to farm tobacco depends on the kind of contracts that companies offer. "I would still love to grow tobacco if I can grow it profitably, but if I can't I'll just have to quit," Wilkerson said. Growers hope the buyout will help lift demand for U.S.-grown tobacco out of a severe, seven-year decline by making prices for American leaf more competitive in the world market. Lower prices could bring back some foreign buyers that have shunned American-grown tobacco in recent years in favor of cheaper leaf from countries such as Brazil, which has overtaken the United States as the world's largest tobacco producer. The price of U.S. tobacco is expected to drop after the buyout, but no one knows exactly how much. One frequently cited study by a North Carolina State University economist predicts that the price will drop to about $1.40 per pound soon after the buyout, and eventually to $1.25 per pound, a price that some farmers have said will make it extremely difficult to turn a profit on small farms. In comparison, tobacco sold at competitive auctions in Virginia this season has averaged about $1.77 per pound, and tobacco sold directly to companies under contracts has averaged about $1.85 per pound. As the price falls, small farms are likely to go out of business, and big farms are likely to become bigger. "You will still have some people that will continue to produce, and you may see some consolidation of farms," said Dixie Reaves, an associate professor and extension economist at Virginia Tech. More troubling for Virginia growers, though, is that the buyout would end geographic restrictions on tobacco production, raising the possibility that production could shift substantially out of Virginia. Farmers had hoped to keep tobacco production in traditional areas. Under a free-market system with no geographic restrictions, "the tendency will be for it to move into areas where it is more cost-effective" to grow the crop, said Al Glass, director of commodity marketing for the Virginia Farm Bureau Federation. Production could shift out of central Virginia to eastern North Carolina, where tobacco farms are already larger and more capable of mechanized harvesting. Ending the traditional program will also give buyers - cigarette companies and tobacco-leaf merchants - more control over who grows leaf and where. "With no program, indications are we will move into a full contracting mode, and at that point, whoever is letting out contracts can determine where it is going to be grown and for how much," Glass said. Tobacco companies are paying for the buyout, but in the long run it will help them by bringing down the price of U.S. leaf. Among those that will benefit are leaf merchants such as Richmond-based Universal Corp., which purchases tobacco from farmers, processes it, and sells it to domestic and foreign cigarette companies. "There is no question that eliminating the tobacco price-support program and the quota is a good thing for the U.S. market," said Todd Haymore, a spokesman for Universal. "We believe it will go a long way toward making U.S. leaf more competitive in the world market, and hopefully our global customers will recognize that this high-quality leaf is going to be available at a more competitive price." J.T. Davis, a crop insurance salesman and board member of Concerned Friends, called the farmers' fight for relief from Congress "a long, long, arduous journey." He was restrained in describing the outcome. "The way I look at it, it is an opportunity for the quota holders and producers to obtain some compensation for a lost asset." Enditem