Most area Tobacco Farmers not Taking Lump Sum so Far

Source from:  By JIMMY SETTLE The Leaf-Chronicle  03/06/2006

Tobacco farmers who have been shifted out of the federal government's price control system had the option of taking a lump-sum buyout rather than having annual payments spread out over the 10 years of the buyout period. But one regional market watcher said this week that, so far, most of the producers and quota holders affected by the legislation in northern middle Tennessee and southern Kentucky are opting for the annual payments. "Generally speaking, maybe 25 percent of the tobacco contract holders in our area have taken their buyout in a lump sum. It varies a little by county, but not much," said John Bartee, Jr., financial services officer for Farm Credit Services in nearby Springfield. His Farm Credit office closely monitors activity in Robertson, Montgomery, Cheatham, Sumner, Dickson and Stewart counties in Tennessee, and Trigg, Christian and Todd counties in Kentucky. "Just for an example, out of a total of 4,260 tobacco contracts in Montgomery County, 3,360 contracts are left that haven't been converted over to lump-sum transactions," Bartee said. Contract holders include both growers and quota holders. In Robertson County — the leading tobacco-producing county in Tennessee, "there are still 6,480 contracts left, out of a total of 8,633 contracts, that people haven't done a lump sum on. "It's amazing to me, the similarities between all of these counties as far as the percentage of contracts that are left. To me, it shows that there is still a lot of uncertainty among our producers about the tax liabilities they face and cash flow concerns," Bartee said. Bartee said buyers seem to be looking at whether the lump-sum payments will sustain them over time. "Basically, these contract holders face the question, 'If I take all the buyout money now, then maybe it's gone too soon, whereas, if I wait and take it over a 10-year period, I'll have an annual payment coming in for the next decade.' "The biggest advantage of taking the lump sum is the ability it gives you to retire debt or expand farm operations without incurring a great deal of additional debt," he said. The biggest disadvantage to the lump-sum buyout? It rapidly increases a contract holder's tax liabilities. "All of the grower's portion of the buyout income is taxed as regular income, but the owned quota portion is taxed as capital gains, so a lot of producers are opting to take their quota portion out in the form of a lump sum, and are leaving their grower's income portion in annual payments to get around the loophole," he added. To some extent, the decision of whether to take all the money now also depends on how much an individual farmer or quota holder gets. Bartee said there are certain farmers in the region who are cashing in on as much as $1.5 million from this buyout based on the large tobacco operations they've historically had, while others with small allotments are getting as little as $750. In the latter case, he advised a client to take the lump sum, considering that annual installments would have amounted to $75 a year. The total amount of money involved in the buyout, Bartee said, is "mind-boggling" and shows the true economic impact of tobacco production in northern middle Tennessee and southern Kentucky. "Across the nine counties, the total amount of money left that's not been taken as a lump sum totals $251,517,348," he said. "Our office in Springfield has already handled a total of $32 million in lump-sum transactions, and while percentage-wise, we're handling most of these, there are other investment brokers and financial institutions that are involved with assisting these contract holders as well, so the dollar amounts involved in this across our region are just huge," he said. Montgomery County, alone, claims a total tobacco buyout value of $57.3 million, and in Robertson County, it's $96 million. Even in less-populated counties in the region, such as Stewart County, the buyout consideration reaches more than $15.3 million, he said. The buyout was authorized in October 2004 when President Bush signed legislation ending the Depression-era system of price and production controls for tobacco production. Since then, certain financial institutions have been working with farmers to turn the 10-year plan into a single, up-front payment if they so choose. Enditem