Tobacco Buyout Shows Shift to Giant Farms

Source from:  The News & Observer  10/20/2004

Monday was the day that thousands of North Carolina tobacco farmers had been awaiting for years: Congress voted to give them billions of dollars and to end federal price supports. Talmage Layton knew he was supposed to be happy. He would get $362,000 over the next decade. But Layton looked around at the Durham County farm where he has grown tobacco most of his life, and he worried about losing it. "I don't know what'll happen to guys like me," said Layton, 56. "I'm afraid we're not going to be able to grow tobacco and make any kind of profit at all. And I've got 10 years left until Social Security. Maybe the buyout will get me there." Once President Bush signs the tobacco buyout bill, the quota and price support system will end. Since the 1930s, the government has tried to prop up the price of tobacco by controlling the supply through a system of allotments, or quotas. The allotments were issued to a specific farm, but could be bought, sold, rented, or inherited; the buyouts are intended as compensation for those allotments. With the buyout, North Carolina -- a state that built its economy on small farms -- lost the program that kept many small farms in business. The buyout means that the price support system, which limited the amount of tobacco grown in the United States, is gone. Anyone is now free to grow tobacco and sell it for the best price he can get. But Layton knows the economic reality: In a post-buyout world, he and other small farmers might not be able to make a profit on the golden leaf. Those who remain in the business will have little choice but to grow under contracts with corporations that make cigarettes and export tobacco. Without the safety of federally supported auction houses to fall back on, farmers must meet the demands of the companies, grow at the prices they set or be replaced by farmers who can. "Agriculture is not immune from the trends of other businesses," said Larry Wooten, president of the N.C. Farm Bureau. "We can talk about the Wal-Marts and the small businesses going under." Most farming experts say the tobacco program was one of the most successful subsidy programs in history. In the late 1930s, with the country in the throes of the Depression, the quota system handed North Carolina an unrivaled economic boost. Tobacco money helped build many of North Carolina's most important institutions, N.C. State University and Duke University among them. But in the late 1990s, cigarette makers started spurning pricey U.S. tobacco and going to countries such as Brazil and China for cheaper leaf. The export market declined. And, as a result, the amount of tobacco that farmers could grow under the quota system was halved since 1997. The buyout, which ended the program, was heralded as the only way to save the American tobacco industry. And it probably will be -- for farm operations efficient enough to grow at reduced prices. Blake Brown, a tobacco economist at N.C. State, predicts that the average price of a pound of tobacco will fall by nearly a quarter, to about $1.45, over the next three years. This year, with price support, tobacco sold for an average of $1.85 a pound, and most farmers harvest about 2,000 pounds from every acre. U.S. tobacco will still be more expensive than foreign tobacco, but the domestic leaf is high quality. To make money at the new price, most farmers must have large operations that benefit from economies of scale, Brown said. The buyout will be good for many in Eastern North Carolina, where the flat topography allows large fields and the rich soil yields more tobacco per acre than any other area of the state. But for Piedmont farmers such as Layton -- who grew 30 acres of tobacco this year -- it might mean forced retirement. Brown argues that small farmers got the best deal possible from the buyout. Everyone who farmed tobacco in 2002 will get a check, based on the amount they grew, every year for the next 10 years. The buyout payments nationwide total $10.1 billion, and about $3.8 billion of that will go to North Carolina farmers and quota holders. "What would have been sad is if folks had to make this transition with no financial help," Brown said. "Change was inevitable, whether we got a buyout or not." Layton doesn't disagree. He supported the buyout, knowing that he would probably be driven out of business either way. "Yeah, I'll get some money," Layton said. "But what I'd like to do is be able to make a living farming." Layton's future is determined by one factor: whether he can get a good contract with a tobacco company. If the company offers him a good enough price, he'll grow. If not, his farming days are probably over. Tobacco -- like chickens, hogs and many more of North Carolina's major commodities -- is now grown almost exclusively on contract to the companies that process and sell it. About 80 percent of North Carolina's tobacco was sold on contract this year. Philip Morris, the Richmond, Va.-based maker of Marlboro cigarettes, is the largest buyer of North Carolina tobacco. Company officials say they will continue to buy all of their leaf on contract, as they have done for the past few years. Spokesman Bill Phelps said contracts help the company monitor agricultural practices on farms where its tobacco is grown and ensure higher-quality tobacco. He said contracts are convenient for farmers, because they can sell all of their tobacco at once and get paid immediately. Under the federal price support system, farmers without a contract could take their tobacco to a warehouse and be guaranteed that it would sell at a high price. Next year, the Flue-Cured Tobacco Cooperative Stabilization Corp. might not run any auctions. If it does, there will be no guarantee of a buyer. Many tobacco farmers say contracts will be the only way to sell tobacco next year. Some say that puts them in a vulnerable situation -- especially because contracts don't require the company to buy a farmer's tobacco. If the leaf doesn't meet the company's standards, it can refuse the entire crop. "We're just going to be at their mercy, pretty much," said Keith Parrish, a Harnett County farmer and head of the National Tobacco Growers Association. "We'll be dealing with multibillion-dollar, multinational companies on a one-on-one basis." Laura Klauke, with the nonprofit Rural Advancement Foundation International USA in Pittsboro, says that once contracting takes over an industry, farmers become targets for abuse. Companies begin to insist on expensive new equipment that forces farmers into debt, Klauke said. The companies can judge the quality of a farmer's product, which determines his pay, without oversight. If farmers complain, they risk losing their contracts and being driven into bankruptcy. "Theoretically, if you have two equal bargaining powers, then you can have a fair contract," Klauke said. "What is happening in agriculture is, you have one partner that is purely dominant over the other." Last week, the Brightleaf Riverside tobacco auction warehouse in Smithfield had its last price-supported auction. As the auctioneer walked between piles of golden tobacco for the last time, most farmers said they weren't sure whether they would farm another year. Nearly all said they wanted to. Herman Jackson, 76, grew just 4 acres of tobacco this year. He knows he probably won't have a place to sell his little bit of leaf next year. He said he would gladly return his buyout check for a return to the days when farmers like him could keep working the land. "I'd rather have it the way it was," said Jackson, of Bentonville. "I just like to tend tobacco." Enditem