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With the End of Federal Tobacco Programs, Farmers Are Looking Farther Afield for Profitability

Posted on: Wednesday, 2 November 2005, 06:00 CST

By John Reid Blackwell; Any ideas? Staff writer John Reid Blackwell can be reached at (804) 775-8123 or jblackwell@timesdispatch.com

Michael Winn's farm in Mecklenburg County looks like a typical, active tobacco-growing operation.

A tractor and a tobacco-baling machine sit outside Winn's shop, where he spends his spare time rebuilding a hot rod. Across a dirt path stands a row of tobacco-curing barns. Rectangular and metallic, they dot the landscape of Southside Virginia.

The curing barns are empty this year, and Winn's baling machine has been idle. After 26 years of growing tobacco, Winn did not plant the anchor crop. Instead, he grew several hundred acres of soybeans.

"There's still some money to be made in tobacco, but I'm not sure it is worth the risk and the stress," said Winn, who has raised as much as 65 acres of bright leaf in the past.

His decision came late last year, when he saw the prices tobacco companies were offering for crops. After calculating his likely expenses, he figured that "there was not going to be a marginal profit" in tobacco. Now he's sitting tight to see whether prices improve.

Winn was not alone among Virginia tobacco farmers this year, and his story will likely become more common. Many farmers dropped out of the business in 2005, the first season after the federal government ended its tobacco price-support and supply-control program, throwing U.S. tobacco farms into an entirely free market for the first time since the 1930s.

Tobacco production in Virginia has dropped to about 17,000 acres this year from last year's harvest of nearly 30,000 acres, according to the state's Farm Service Agency. As recently as 1997, Virginia farmers grew more than 50,000 acres of leaf, which is still the state's largest single cash crop despite a sharp drop in demand since the late 1990s due to an exodus of buyers to cheaper foreign markets, such as Brazil.

Virginia grew as much as 242,000 acres of tobacco in the 1920s, when per-acre yields were lower than today. U.S. tobacco acreage is down about 23 percent this year.

The termination of the federal tobacco program means that tobacco companies can choose which farmers will grow leaf for them. Government-mandated minimum prices were eliminated, too. The USDA is no longer tracking sales of tobacco crops, but farmers and industry observers said prices have dropped to about $1.30 to $1.50 per pound this year, down from an average of about $1.85 per pound in 2004.

Farmers haven't been entirely left in the cold. A $10 billion buyout of the tobacco-quota system, financed mostly by U.S. cigarette companies, will provide them a 10-year stream of income. The first $900 million in payments have been sent, including about $59 million to Virginia farmers and quota owners, the USDA said this month.

The quota system was established by the government during the Great Depression to stabilize a fluctuating U.S. tobacco market. Farmers were given a quota, or poundage allotment, for how much tobacco they could grow, and the USDA adjusted the amount up or down each year depending on demand. Tobacco quota could be leased, sold or inherited, so quotas developed asset value.

The drop in tobacco prices is partly due to the buyout's elimination of one major expense for farmers: the cost of leasing tobacco poundage from absentee quota owners. The best contracts this year offered prices that were about equivalent to last year's prices minus the cost of renting poundage. But some prices have been well below that, said Blake Brown, an agricultural economist at N.C. State University.

With fuel and labor costs increasing, production is likely to continue falling, said Stan Duffer, a regional market manager for the Virginia Department of Agriculture. "A number of people are telling me unless there is a big change, they don't plan on raising [tobacco] another year."

Many farmers grow other crops -- corn, wheat, vegetables and hay - - or raise cattle. But, historically, tobacco has been the most profitable per-acre crop for farmers in the Piedmont.

Under the new system, Winn said successful farmers will be those who farm enough acreage to cover the smaller profit margins.

"I think the 100-acre man will turn a profit because he has spread out his fixed costs," he said.

Some industry observers have said half of U.S. tobacco farmers will use the buyout money to quit the business, while some farmers stand to see their production grow in the free market.

At Opie Farms Inc., between Chase City and South Hill, the Callahan brothers saw their acreage increase this year under a contract with a cigarette company. Brothers Eddie, Jimmy and Louis manage the farm with part-time help from another brother, Jeff. The farm belonged to their father and grandfather before them.

"If it hadn't been for our father, we wouldn't have been able to farm," Eddie Callahan said of their father, Pete, who died in July. "[Farming] has been good to us, but I don't know what the future holds."

The Callahans said they will use the buyout money to pay off debts, and they hope to continue growing tobacco. They employ a team of migrant workers and, unlike many Southside Virginia farms, they have a tobacco-harvesting machine, which helps reduce high labor costs.

A bigger problem this year has been rising fuel prices, which affects everything from the cost of running tractors and curing tobacco to the price of fertilizer.

"Everything is derived from petroleum," Callahan said. "The way the economy has gone -- that has been the worst hand dealt to us."

Fuel prices will take a large chunk out of profit this year, especially for farmers of flue-cured tobacco, the main type of leaf grown in Southside Virginia, said Brown, the economist.

"That will certainly affect the number of farmers who decide to stay with it," he said.

Farmers who were selling tobacco at cigarette maker Philip Morris USA's tobacco-receiving station in Danville last month said gas prices were a serious concern.

Henry County farmer Jesse Shelton said he might not have planted his 13-acre crop if he had known that fuel would be so high this summer.

"If it keeps going up, this may be my last one," Shelton said. The quota buyout will help, he said, but "I believe the government is going to come out as good as the grower on the buyout, by the time you pay the taxes."

The free-market system means the federal government no longer dictates how much leaf a farmer can grow, but raising a crop without having a contract with a cigarette company or a leaf dealer is a gamble, and some flue-cured tobacco farmers simply haven't been able to get contracts.

Those growers have one other option: They can sell their tobacco through the Flue-Cured Tobacco Cooperative Corp., a farmers cooperative based in Raleigh, N.C., that formerly administered the federal support program.

The cooperative is continuing to operate as a private entity, although some farmers wanted it to liquidate and disburse its cash reserves to member farmers. In addition to starting its own cigarette plant, the co-op operated several tobacco auction markets this year, including two in Virginia.

At a sale in Chase City in early October, James Brown, a Halifax County farmer who has been growing tobacco since he was 10, said he tried to get contracts with cigarette companies, "but they never called me back."

Brown said he grew 8 acres this year, down from more than 40 acres last year. "I really haven't decided what I'm going to do next year," he said. "A lot of people I've talked to this year said they won't farm next year. They're easing out of it."

Another grower, Cecil Shell, said he decided to stick with the cooperative to support the organization, which is trying to keep an alternative sales market open for farmers. "I hope it will grow and expand," he said. "I thought about what happened years ago, when the cooperative helped the farmers when they needed help."

The U.S. tobacco market might rebound in a few years, said Buddy Mayhew, a Pittsylvania County farmer who has a contract to grow tobacco.

"It's going to depend on competition and a lot of factors we can't control," said Mayhew, who estimated that he will take about a 10-cent cut this year in per-pound revenue, after factoring in the elimination in lease costs.

Farmers who want to stay in the business don't have much incentive to invest in their operations, he said.

"I'm hoping that the companies will realize that if they want our tobacco, they are going to have to pay a price that affords a farmer an opportunity to make a decent profit," he said.

WHY QUOTAS?

The quota system was established during the Great Depression to stabilize a fluctuating U.S. tobacco market. Farmers were given a quota, or poundage allotment, for how much tobacco they could grow, an the USDA adjusted the amount up or down each depending on demand. Tobacco quota could be leased, sold or inherited, so quotas developed asset value.

TimesDispatch.com

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Source: Richmond Times - Dispatch

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