Tobacco's Had its ups, Downs

Source from:  10/24/05 By James Mayse Messenger-Inquirer  10/25/2005

On the first day of Owensboro's burley tobacco sales in November 1965, price records were shattered as farmers sold more than 1 million pounds of leaf for just over $700,000. It was a grand time for tobacco locally, and one that would continue -- despite some ups and downs -- for several more years. But huge changes have taken place -- all within the last decade. Evidence of that change can be seen by taking a quick drive down West Ninth Street, where once-vibrant tobacco warehouses are now empty husks. Other warehouses across town stand idle or have been bulldozed. The city's only remaining warehouse does not hold burley auctions and only receives leaf for a major tobacco company. "Tobacco through the years has had its ups and downs ... but tobacco has kept the farmers on the farm and put a lot of kids through school," said Sylvester Fischer, who was supervisor of sales for the Owensboro Tobacco Board of Trade -- until the board ceased to exist last year. The numbers help tell part of the story of tobacco's decline. When burley sales opened last November, the Owensboro market sold just 430,000 pounds -- a decline of more than 570,000 pounds from the record-breaking opening day in 1965 -- and the state as a whole sold only 2.244 million pounds. While county farmers grew about the same amount of tobacco this year as they grew in 2004, the way they will sell their tobacco will be vastly different from previous years. Tobacco had its down periods before: During the 1985-86 market season, growers took a 30 cent reduction in price after cigarette companies complained prices were too high. The companies showed a willingness to back up their complaints: In 1983, about 50 percent of the Owensboro area's tobacco was not purchased by companies. Will Snell, a tobacco expert with the University of Kentucky, said burley tobacco sales peaked in Kentucky in 1998. During that year, $920 million in burley was sold to tobacco companies such as R.J. Reynolds and Philip Morris. But 1998 was also the last really good year for tobacco growers across the Burley Belt. About that time, a combination of factors began to crimp the burley tobacco market. Part of the decline in tobacco sales was attributed to declining smoking rates, Snell said. But other factors were involved. "It was (somewhat) due to a decline in cigarette consumption but more due to foreign competition," Snell said. The Owensboro market sold 24 million pounds of tobacco in 1997, Fischer said. During the 2004-05 auction season, only 4 million pounds were sold. "In 2000 is when we got our big cut," Fischer said. "That's when we got a big reduction in our allotments. I think we took a 60 percent reduction in two year's time in our allotments." As demand for U.S. grown tobacco declined, tobacco companies began to move away from the traditional auction and price support system. Since the 1930s, the federal government had tightly controlled the amount of tobacco farmers could produce through quotas and had set a minimum price on leaf. Tobacco companies launched a system where farmers sold their tobacco directly to the company. The initial lure was that tobacco companies were willing to pay more to "contract growers" than they would pay for leaf at tobacco auctions. In just a matter of years, more burley tobacco was being sold through contracting than at auction. Faced with declining quotas and an irreversible move from auctions to contracting, quota owners worried their quotas would eventually be worth nothing. For decades, a quota was a valuable commodity that could be leased, sold or passed from one generation to the next. In late 2004 -- after years of wrangling -- Congress passed legislation for a 10-year multibillion-dollar tobacco quota buyout. The plan will pay those who owned quotas and grew tobacco: In exchange, farmers gave up the federal price support and production control system. Whether the buyout was a good idea or not largely depends on the farmer or quota owner's individual situation, Snell said. "If you're a 70 year-old quota owner who wanted out of the business and didn't care (what happened) after, you're probably pretty pleased with the buyout," Snell said. "We could have ended up with no quota and no buyout." Tobacco sales affected more than just the growers themselves, Fischer said. "To show you what the tobacco industry meant as far as labor, at one time we had 11 warehouses selling tobacco," he said. The area also had several plants that packed tobacco and shipped it to cigarette companies. "Last year, we only sold burley at three warehouses," Fischer said. Although some small amounts of tobacco will be sold at specialized auctions, most will be sold directly to cigarette makers. Without price and production controls, only the best tobacco growers will manage to be successful. "Management is going to be key," Snell said. " ... There are some producers who will be able to survive and do quite well. "It comes down to if you're a low-cost, quality producer," Snell said. Fischer said tobacco growers today face the same situation growers experienced before the quota and price support system was created. "Now that the auction system is over, we're going back in time," Fischer said. "We're taking a 50 percent price reduction." Tobacco production should have a place in the farm community for a while longer, Fischer said. "We'll see production go down as demand goes down," he said. "It's kind of a supply-and-demand situation." Enditem