July 26, 2008

Virginia Tobacco Today: an Important but Diminishing Role

By Ken Lauterstein [email protected] 703-723-3973

The International Tobacco Growers Association describes tobacco as "the world's most widely cultivated non-food crop." While the total amount of tobacco farmed in Virginia continues to decrease (25,000 acres in 2005), it still is ranked No. 1 for cash receipts for a Virginia crop ($89,523,000).

The tobacco harvest is decreasing in Virginia partly because of health concerns and because manufacturers (cigarette companies) are importing cheaper tobaccos from Africa, China and South America. Brazil is now a leading producer of flue-cured tobacco.

The use of imported tobacco is not a new development in Virginia. The old Camel logo originated from the fact that Turkish tobaccos were used to add more intense flavor to Virginia-made cigarettes for almost 100 years.

In 1998 a landmark settlement between manufacturers and 14 state attorneys general led to a major increase in costs to consumers who still choose to smoke or chew, reducing demand for tobacco substantially.

The legal agreement requires the tobacco companies to pay $246 billion during the next 25 years. This settlement resolved numerous lawsuits over health-care costs associated with tobacco.

At the last minute, Virginia joined the lawsuit and was awarded more than 4 billion over the same 25-year period. The General Assembly, following former Gov. Jim Gilmore's recommendation, allocated 50 percent of that settlement to tobacco farmers. An additional 10 percent was allocated to anti-smoking efforts, and the other 40 percent was earmarked for roads, education and a variety of initiatives determined through a standard political process over the next few years (Phase I).

The state's new Tobacco Indemnification and Community Revitalization Commission will allocate $1.2 billion from the tobacco settlement to the individual tobacco growers, and spend the other $800,000 on economic redevelopment in tobacco-dependent communities in Southside and Southwest Virginia.

The Phase II trust fund is a separate agreement between the major tobacco manufacturers and attorneys general. It was established to circumvent anticipated losses experienced by growers and quota owners as a result of the reduced sales of tobacco products following the Phase I settlement (the losses to Virginia farmers are estimated at about $554 million to date). Phase II monies will be distributed over a 12-year period and will be split proportionately among the 14 states. Unlike Phase I monies, 100 percent of the Phase II funds are distributed directly to certified growers and quota owners.

Tobacco now can only be grown by farmers with authorization from the federal government as part of an agricultural program (commonly known as "market orders") dating back in part, to acreage devoted to tobacco crops during the Depression. There are about 17,500 tobacco growers with a tobacco allotment in Virginia. That averages out to $70,000 per Virginia farmer entitled to a portion of the tobacco settlement, mitigating the lost potential profits from future crops that will not be grown and sold over the next 25 years.

Maryland is using some of the $4 billion it is receiving from the tobacco settlement to pay farmers to convert to other crops and getting farmers out of the tobacco-growing business after more than 370 years. The state is paying $1 a pound for farmers to grow other crops such as vegetables. Tobacco sold for less than $2 a pound in 1999, but even with the state subsidy, it was still a challenge for farmers to make the same profit per acre on lower-valued crops. In Southside Virginia, some tobacco farmers are supplementing their income in innovative ways, such as shrimp farming.

Maryland's commitment of $1 a pound to farmers for 10 years will cost the state $15 million annually from the $4 billion settlement. Virginia will receive essentially the same settlement income, $4 billion, but the annual production of tobacco in Virginia is much higher. A "buyout" of Virginia tobacco farmers would have exceeded the funding available from the tobacco settlement, which is why Virginia did not adopt Maryland's buyout policy.

Current tobacco markets

None of Virginia's original "tobacco towns" on the Chesapeake Bay are still tobacco markets. Buyers go to the crops in the growing regions, then ship it by rail or truck to processing centers. Richmond is still a major manufacturing facility for cigarettes. That's because of a corporate decision by Phillip Morris to locate a factory just inside the city limits.

Virginia has six tobacco markets still active in selling flue- cured tobacco. Burley tobacco was sold in Abington, Gate City and Pennington. Sun tobacco was sold at Farmville, and fire-cured tobacco was sold at Blackstone and Farmville.

Today, warehouse marketing with auctioneers selling tobacco to the highest bidder has been almost completely replaced by direct sale contracts in advance of the harvest between tobacco companies and tobacco farmers. The quality of the tobacco is inspected on the farm, and the crop is baled there into square blocks that are shipped directly to the company's processing plant.

High energy costs also are impacting growers who may now choose to grow air-dried tobaccos, such as burley. Air-drying does not impose the costs associated with heating tobacco barns for days (using propane, oil or other expensive fuels) to flue cure other types of tobacco, such as yellow or "bright" tobacco.

Virginia farmers are adjusting to the elimination of the tobacco quota. The quota was established during the Depression in the 1930s, when farmers needed government-imposed price controls to make a living. Under the new system, the government estimated the demand for certain crops, then assigned a limit (quota) of how much each farmer could grow of that crop. Since the 1930s, many farmers have sold or leased their quotas to others, but the total ceiling on permitted crops was still determined by the U.S. Department of Agriculture.

Through the quota system, the government limited production and committed to purchasing whatever part of the crop cannot be sold at a minimum price. The 1996 Farm Bill theoretically provided the "freedom to farm," but the quota system still constrained tobacco production. Since demand for American-grown flue-cured tobacco was dropping, many Virginia farmers were assigned smaller and smaller quotas.

Tobacco quotas were finally eliminated by the Fair and Equitable Tobacco Reform Act of 2004. "Tobacco buyout" transition payments are easing the economic impact on the quota holders. Beginning with the 2005 tobacco crop, this means there are no planting restrictions, no marketing cards and no price-support loans.

Signing up for the Tobacco Transition Payment Program (TTPP) is the final and only opportunity to receive federal payments related to tobacco production. The program provides payments to tobacco quota holders and tobacco producers beginning in 2005 and ending in 2014. Virginia farmers are still growing tobacco, but acres planted in tobacco and pounds of tobacco harvested dropped by about two- thirds in the 15 years between 1990-2006.

Years ago, a U.S. president noted that Virginia's economy was no longer dependent upon the production or price of tobacco. That president noted that "tobacco cultivation was harsh on the soil ...exports could be interrupted ... and Virginia had to prepare for an alternative to its dependence upon one staple crop..."

Thomas Jefferson's remarks in 1780 were just another example of his noteworthy foresight.

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