JPMorgan, UBS Get Snub as Carolina Farmers Take Tobacco Buyouts

Source from:  bloomberg.com Dec. 9 (Bloomberg)  12/12/2005

North Carolina farmer Ernest Green is snubbing JPMorgan Chase & Co., UBS AG and banks as far away as Tokyo. Green, 67, and other tobacco farmers across the U.S. are rebuffing big-city banks offering quick cash in return for $9.5 billion owed to the growers as part of a government buyout. The U.S. promised the money to farmers in installments through 2014 as it ended tobacco price supports instituted during the Great Depression. The banks are offering a lump sum, up front, for fees averaging 18 cents on the dollar. For most, the price is too high. Green, who retired last year, has a choice: $100,000 a year for 10 years from the government, or $820,000 now from banks. "I feel like I can invest that money as well as they can," said Green, of Browns Summit, North Carolina, as he watched "The Price is Right" game show on a 61-inch (1.5-meter) flat- screen television in his den. One in 10 eligible for government payments has signed up with the banks, according to a Dec. 2 estimate by North Carolina State University agricultural economist Guido van der Hoeven, short of the 40 percent he expected in September when banks began soliciting farmers. Those eligible include 564,000 current and former tobacco growers and others who hold so-called tobacco quotas. Starting in 1938, farmers received quotas allowing them to sell a certain amount of tobacco through government-sanctioned auctions. The quotas could be bought, sold and leased, providing income to retirees and other owners even after they quit growing the crop. In October 2004, President George W. Bush signed legislation that ended the quota program. North Carolina Benefit Dec. 2 was this year's deadline for banks to have signed up farmers before the January payment by the government. Almost $4 billion of the buyout money will wind up in North Carolina, the largest tobacco-growing state and the biggest beneficiary after price supports ended in 2004. Many of the beneficiaries are making the biggest financial decision of their lives because their families' wealth is tied to decades of growing tobacco. The end of price supports opened U.S. farmers to global competition and lower profit from the Golden Leaf, named for the prosperity it created from Florida to Kentucky. Green says he wants to supplement his retirement funds with the annual payments. Others will use the money to pay back farm debt or as capital to branch into new businesses. "It's a pressure-cooker decision because what they built their wealth on -- land and the production of crops -- is being converted to cash," van der Hoeven said. "We've got people who are getting sizable chunks of change, and some are saying, `What do we do with this?"' Not Impressed Most of the farmers who buy seed and fertilizer, boots and farm supplies at Lawrence Davenport's store outside of Greenville, North Carolina, aren't impressed by the banks' offers. Davenport says seven or eight of the 50 tobacco farmers who trade with him are taking a lump sum. "It's not going to be as big as the banks thought," Davenport said. "Farmers don't want to pay that discount rate." Davenport, due almost $1.6 million, is taking $750,000 as a lump sum and the remainder in annual payments. He says he plans to buy 700 acres of timberland for hunting deer and quail in a tax-deferred transaction arranged by Wachovia Corp. bankers including David Parker, a hunting buddy. Charlotte, North Carolina-based Wachovia, the fourth largest U.S. bank by assets, has 44,000 customers receiving tobacco payouts as it seeks to persuade farmers to take the lump sum and invest the proceeds. Interest Rates North Carolina banks face rising competition for buyout fees from a dozen institutions, including Citigroup Inc., the biggest U.S. financial services company, and the U.S. arm of Switzerland's UBS. Generally, the discount rate has widened as interest rates have gone up recently, meaning farmers taking lump sums are paying a bigger percentage up front. In some cases, banks are forming partnerships with firms that have sprung up overnight. Peachtree Settlement Funding of Boca Raton, Florida, which has been offering lump-sum buyouts to legal-settlement awardees and lottery winners since 1996, created Peachtree Tobacco Funding in September after being approached by Tokyo's Mizuho Bank Ltd., a unit of Mizuho Financial Group Inc., which put up the money. Postcards to Growers Peachtree officials attended a seminar on the economic implications of the buyout hosted by North Carolina State University in Raleigh, said Susan Cast, Peachtree's legal manager. They then sent postcards to farmers offering one-time payments. Cast declined to disclose the rates Peachtree offers, saying they vary. Farmers and quota holders received the first of 10 annual payments in September and are set to receive the second round of checks in January from the U.S. Department of Agriculture. Cigarette makers including New York-based Altria Group Inc.'s Philip Morris USA, the biggest producer, are funding the buyout. Van der Hoeven urged farmers to take lump-sum payments if they were confident they could invest at annual returns of 5 percent or greater. That's enough, he figured, to counter the upfront fees. `Want It Now' "A lot of the older farmers want it now, figuring they may not live another 10 years," said Grayson Whitt, a regional president in Eden, North Carolina, for FNB Southeast, a banking unit of FNB Financial Services Corp. Tom Pearman, 90, who retired from growing tobacco in Rockingham County, North Carolina, 40 years ago and retained his quota, took a lump-sum payment from FNB, based in Greensboro, North Carolina. He invested $65,000 in certificates of deposit with the bank. "I know the people in the bank, and that is worth something," said Pearman, who farmed with mules until he bought a tractor in the 1950s. "Everybody else, I told I wasn't interested." Enditem