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Long-Lived Tobacco Program to End

In October 2004, Congress approved the Fair and Equitable Tobacco Reform, or Title VI of the American Jobs Creation Act of 2004 (P.L 108-357.) The law eliminates tobacco quota and price support programs at the end of the 2004 crop year. This is the most significant tobacco legislation in over 50 years. Both tobacco quota owners and producers will be compensated for the changes brought about by the termination of the program.

In place since 1938, the Federal tobacco program achieved its goals for many years—stabilizing the volume of leaf available for industry and maintaining grower incomes. In recent years, however, pressures on the program began to mount as demand for tobacco products fell. Under the program, declining demand caused reductions in quota, the quantity of tobacco that may be marketed. But the price support component of the program kept tobacco prices at high levels. Consequently, U.S.-produced tobacco lost market share in both domestic and foreign markets to cheaper foreign-produced leaf. In recent years, growers have been locked in a downward spiral as higher prices lowered demand, which then resulted in lower quotas.

After the termination of the program, quota holders will be compensated at a rate of $7 per pound for the quota they owned in 2002. Producers will receive $3 per pound for the effective quota (the amount of leaf they could market) they produced during 2002. About 437,000 quota owners and 57,000 producers will receive payments. Most producers are owners of quota, and as such, they will receive both payments ($7 plus $3.) The total cost of the compensation is estimated at $9.6 billion over 10 years. An additional $0.5 billion is available to compensate cooperatives on losses incurred in disposing of their stocks.

The quota buyout will be financed by assessments over 10 years on tobacco product manufacturers and importers. Each firm will be assessed according to its share of domestic sales. Assessments will be adjusted to reflect changes in market shares.

With the elimination of quota and price support in 2005, farmers will be free to grow tobacco wherever they please. Production is likely to move to regions amenable to mechanization and where adequate economies of scale can be achieved—Georgia, the Coastal Plain of North and South Carolina, and western Kentucky—and away from areas such as the Piedmont in North Carolina and eastern Kentucky.

Without price supports and the cost of obtaining quota, U.S. prices could fall 30-40 percent, more in line with world levels, thus enhancing the competitiveness of U.S. producers. Lower prices will revive demand for U.S. leaf, and, unfettered by the constraints imposed by the program, growers will be able to respond quickly to the increased demand.

This article is drawn from...

U.S. Tobacco Industry Responding to New Competitors, New Challenges, by Thomas Capehart, USDA, Economic Research Service, September 2003

Tobacco Outlook, USDA, Economic Research Service, 2007