Tobacco Growers Looking for Answers

Source from:  BY FLORENCE GILKESON: Senior Writer 01/17/2005

Tobacco growers don't know exactly when their quota buyout checks will arrive, but they know for sure that much of the money will be paid back out as taxes. More than 100 growers and quota owners crowded into the Moore County Agriculture Center Thursday afternoon for a three-hour session devoted to the federal buyout of quotas. "Now that it's happened, don't just squander it," said Chuck Moore, a retired tax specialist from North Carolina State University. He advised farmers to "make your tax expert your best friend." Moore, called out of retirement to substitute for a tax specialist who is out of the country, was one of three NCSU professionals who addressed the gathering of tobacco farmers from Moore and surrounding counties. "This may be the most money you've ever had to invest at one time," Moore said. Regulations Unknown Under the buyout legislation signed by President Bush in October, the buyout checks are to arrive no later than September and may be dispatched in late summer. But before the checks are in the mail, growers and quota owners must follow the federal red tape trail and fill out application forms with their local Farm Service Agency. At this point, the regulations are not even known and have not been transmitted to FSA offices across the tobacco-growing Southeast. Blake Brown, professor of agricultural and resource economics at NCSU, said everyone is expecting the regulations to reach FSA offices in February. Brown opened the meeting with a review of the buyout legislation. The long-awaited bill provides that quota owners will be paid at the rate of $7 a pound, based on their basic quota in the 2002 crop year. Producers will be paid $3 a pound. Those who are both owners and producers will receive the full $10. Payments will be spread out annually over a 10-year period. "This is not an in and out thing. This is not a voluntary conversion," warned Moore, who wanted farmers to understand that they have no option except to give up quotas and accept the government checks. Farmers could continue to grow tobacco but without the built-in protections provided by the government price support system, in effect since the 1930s, along with the system of allotments and quotas. Shrinking Markets If quotas had been in place for the 2005 year, farmers were headed for a quota cut of 25 to 30 percent, Brown said. This is in keeping with the trend in recent years as the tobacco market has continued to narrow its dependence on American-grown leaf because of competition from overseas leaf and growing health concerns in the United States. Brown told the farmers that Brazil and Zimbabwe in Africa are the two other principal growers of tobacco in the world today. Flue-cured tobacco grown in eight Southeastern states is the preferred leaf for cigarette manufacturers. North Carolina is the largest flue-cured tobacco producer among those states. Burley tobacco is also grown in the western part of the state. The buyout applies to both types of tobacco. S. Gary Bullen, the third speaker, advised farmers on measures they can take to curtail operational expenses and make more profit from their crops. He estimated that on a typical farm it could cost almost $3,000 an acre or $1.25 a pound to raise tobacco. This estimate takes into consideration multiple expenses — from labor, machinery and chemicals to labor, rent and insurance. That's too much when one considers that the average price offered in the typical contract today may range from $1.35 to $1.50 a pound, depending on whether the grower decides not to market the eight lower-quality leaves on plants. Bullen called labor the predominant expense. He warned farmers to take all of these expenses into consideration when they sign contracts and make decisions about future plans. "It's taking money out of your hand and putting it in somebody else's," Bullen said. But it was Moore's presentation that took up the most time Thursday. In a presentation punctuated by humor and practical advice, Moore, the tax expert, said that no new taxes were created because of the buyout legislation. He said the same tax laws are in effect now that were applied in quota days. Treated as Capital Gains Moore said that for quota owners the buyout payments would be treated as capital gains and for growers they would be treated as ordinary income. He cited as an example a fictitious grower named Dusty Leif, whose total buyout payment of $30,000 would bring him a yearly check of $3,000 for the next 10 years. Moore estimated that Dusty would be paying almost half of this amount in federal, state and self-employment taxes. "Every day is palm Sunday for the IRS," Moore joked as he held out his hand palm forward. Moore called tobacco quotas "an interest in the land, which is real property, because it is assigned to farms and attached to the land." Gains are treated as capital gains, and losses are treated as ordinary losses. Because many farms lost quota in recent years, some owners may be able to claim losses in future income tax filings, Moore advised. In the past five years, quotas have been cut by more than 50 percent. Moore said farmers should begin immediately to assess their situations and gather all the facts possible before deciding how to use their buyout payments to greatest advantage. "The check is coming," Moore said. "Now is the time to start thinking about these things rather than waiting till the check reaches the mailbox." Moore said farmers have several options: exchange the money for another farm, or for timberland or buy beach rental property and other rental property. He reminded everyone that under the buyout farmers can use business property to buy business property but cannot exchange business property for personal property in order to qualify for the exchange provision in the law. Farmers can use the payments to reduce debt or phase out of tobacco altogether, can expand their farms by purchasing more land, can enter into new business activities, can make a gift to family or a charitable organization, can diversify the family income stream (through investment) or can opt for retirement. The remaining option, the one he didn't recommend, was "have fun." The three NCSU specialists advised farmers to begin collecting data in preparation for buyout applications as well as tax needs. Data will include such things as production history on the farm and information about quotas, specifically for the 2002 year. If this information is not readily available, it may be secured at the FSA office, otherwise they must make a "good faith" estimate. Complicated Bill The buyout bill is tricky. Moore said that people who owned quotas on Oct. 22, 2004, when the president signed the legislation, would receive payments, but the payments will be based on 2002 crop year poundage, regardless of whether they were owners at that time. The buyout bill, which is part of the American Jobs Creation Act of 2004, provides for $10.1 billion as compensation to growers and owners who must relinquish quotas. Of that total, almost $4 billion is expected to come to North Carolina producers and owners. Details of the bill cover just about every aspect of the quota system, including a provision for disposition of stocks held by grower associations and the Commodity Credit Corporation. Cigarette manufacturers and importers are to fund the buyout based on their share of the U.S. cigarette market. Moore gave several examples of farmers and/or owners who made wise or foolish decisions, such as failing to take into consideration all costs or such things as assets. His fictitious farmers went by the names of Dyrt Clodd, Heeza Holder and Dusty Furrow. Moore said he was substituting for Guido van der Hoeven, the Extension specialist on tax issues, who is taking a sabbatical in New Zealand. "That's about as far away from here as you can get," Moore quipped. Several farmers were asked informally if they had made up their minds about raising tobacco this year. They all shook their heads and said it's a decision they haven't made. Time is running out. Planting season is about two months away. Enditem