Tobacco Turmoil

Tradition, farm income at stake
in proposed tobacco program changes

Farmers debate pros, cons
of contracting vs. auction system

Ben Fronczek
Staff Writer

(January 2002) Like many Kentuckiana farmers this time of year, Ben Garland and his son, Roger, spend the latter days of fall working in the tobacco stripping room, pulling the brown leaves from the stalks, sorting them by grade and compacting them into large, square bales.

Tobacco Auction

These bales will eventually be hauled to market to be sold, completing a nearly year-long cycle of hard work and resulting in the biggest paycheck from any crop raised on the family farm.
But this year will end with a great deal of uncertainty for the Garlands and other area tobacco farmers. The question: What will next year bring for a tradition that has lasted over five family generations?
“We are looking at a family heritage possibly dying,” said Roger, 42. “Everyone blames that on changing times, but when you take away profit margins, there is nothing left to adapt to.”
Farmers cite many factors as the cause for their dying tradition and main income. Perhaps the biggest of late are the cutbacks in the amount of tobacco a farmer can sell annually and the recent rise of “contracting” crops in advance to major cigarette companies, such as Philip Morris and DIMON International Inc. By contracting a crop directly with the tobacco companies, farmers do not participate in the traditional tobacco auction, which ensures a support – or guaranteed minimum – price for a crop.
The higher-than-average contracting prices that tobacco companies have been offering farmers this year are luring them away from the auctions.
The increasing amount of foreign-grown tobacco coming into the global market system, meanwhile, has contributed to lower tobacco “bases,” or quota, awarded to U.S. farmers based on their acreage. Then there’s the rising cost of labor, another factor.
“The biggest thing that is hurting us is the inability to grow as much as we did,” said Roger Garland. “We raise just 1/3 now of what we used to grow.”
Traditionally, burley tobacco has been and still is the most profitable cash crop grown in southern Indiana and northern Kentucky. Until recently, tobacco allowed some farmers, like the Garlands, to rely on farming as their primary livelihood.
“It puts kids in school and pays the bills,” said Ben, 72, who has raised tobacco for 55 years. “I’ve seen it make or break a first car. Around here we look at tobacco in terms of Santa Claus.”
Given the tobacco program’s uncertain future, this “Santa Claus” may soon be selling his sled.
Auctioning vs. contracting
Many area warehouses are filled with bales of burley brought in and sold to the highest bidder. In the spacious, darkened caverns can be heard the quick-tongued auctioneer calling for bids from company representatives as they walk down the narrow aisles. Many farmers believe this method of selling their tobacco provides them with a choice of buyers. Through contracting, however, they would be limited to dealing with only one buyer offering one price, take it or leave it.
“The companies are going out and mandating what the farmer can do,” said Russell Young, 50, a Bedford, Ky., tobacco farmer. “I can bring it in here and sell it free enterprise. If I’m not satisfied with the price, I have another option.”
Despite the slightly higher prices being offered through contracting, many farmers say that method costs them more. They say the single buyer can afford to be more selective, thereby leaving it to chance that a farmer’s crop will be graded appropriately and therefore bring a fair price. To these farmers, this aspect alone makes contracting unattractive.
“We’re cutting our own throats,” said Bob Temple, 43, of Bedford, Ky. “If you’ve got no price to sell it but theirs, they can do whatever they want.”
If the auction houses disappear totally, no one may hurt more than the auction warehouse owners, themselves. Leon Taylor, owner of the 40-year-old Morrow Tobacco Warehouse in Madison, Ind., can attest to this.
“Our volume is about half of what it was four or five years ago,” said Taylor, 63. “We’ve had a good program for 60 years. It’s been the backbone of the area. All that seems to be going downhill.”
The controversial move to contracting has generated another hotly debated solution: a buyout. By this, a farmer would sell his base, perhaps over a period of several years, and discontinue producing tobacco.
The President’s Commission in May 2001 proposed a plan to replace the current quota system with production permits to actual growers. To do this, quota owners would be “bought out” for $8 for each pound they agree to stop producing, while growers would receive $4 per pound. Growers who continue to produce tobacco would receive $2 per pound to help offset the costs.
The proposal also includes measures to assist farmers in diversifying their crops, while creating cessation programs to reduce the use of tobacco products and improve public health.
The proposal, however, also recommends that a 75-cent excise tax be placed on the existing cigarette tax to help offset the move. Talk of a buyout proposal has been circulating since 1997, and Indiana Sen. Richard Lugar, U.S. Rep. Baron Hill and Kentucky politicians have been exploring it.
“I have mixed feelings about it,” said Chris Tuttle, 26, who grows 12 acres in Sanders, Ky. “It would be good for those people who want to get out of it, but bad in the long term because once the program is over, it is gone for good. Then the companies would control the price.”
Others believe there are fine points about dealing with the companies through contracting. Kenneth Burkhardt is a Trimble County, Ky., tobacco farmer who works as a contractor at Growers Warehouse in Carrollton, Ky. Growers contracts for DIMON.
“You know what you’re going to get,” said Burkhardt, 65. “I received more money, and that’s what I grow it for. Right now, there’s more money in the contracting than the auctions, about a 10- to 14-cent difference.”
Many contract supporters say they like not having to pay the auction floor fee, which takes away from their profits.
Others see the benefit but are still unsure of the future. Sam Fox, a lifelong tobacco farmer in Rising Sun, Ind., joined the contracting crowd because of recent market trends and the fact his fellow farmers are doing it. He said so far it is working to his advantage.
“It brings me a few more cents per pound and is roughly saving me 8 to 12 cents per pound because there are no warehouse costs,” said Fox, 42. “But no one really knows what to expect. Maybe the company owners do, but the farmers certainly don’t.”
The majority opinion around the areas seems to be to keep the auctions.
“If we do away with the auctions, we will lose the program and our safety net,” said Ben Garland. The “safety net” is made up of no-net fees that keep the tobacco program going so that the government and taxpayers do not have to support it. Most farmers are members of a cooperative group that contributes to a fund that serves as “the safety net.”
“With auctions, you have that added entity working for you,” said Garland.
Foreign vs. domestic
The increase in the amount of foreign-produced tobacco into the world market has had a definite impact on U.S. growers. Today, large quantities of tobacco is grown in places such as Argentina, Brazil, China, Malawi, Mexico and Zimbabwe, to name a few. Experts attribute this rise to the lower cost per pound than domestically grown tobacco.
“We have ideal weather to cure tobacco within this area,” said Morrow Warehouse’s Taylor. “A lot of countries don’t have that damp to dry climate.”
As a result, many farmers believe the quality and flavor of American-made tobacco stands above the rest.
“Tobacco grown of foreign soil has no pesticide or herbicide restrictions on what you can use on the crop,” said Young. “In my opinion, the government needs to impose tariffs on import tobacco.”
Young’s son, Brian, is a senior at the University of Kentucky where he is studying agriculture under professor Will Snell. Snell is the state’s foremost economic expert on tobacco.
Snell provides much of his research on the university’s Internet website at: www.uky.edu/ag/agecon/snell.html.
Snell believes the quality of foreign-grown tobacco is beginning to catch up with domestic. Most of it is occurring with flue-cured tobacco, but burley, too, is improving, Snell says.
Defending the quotas
At the root of these issues is the quota system, administered by the U.S. government to prevent overproduction. A landowner’s tobacco quota is determined by the previous year’s growth in pounds and the economic demand for the tobacco. Under a quota, owners may grow their own tobacco or lease it to someone else.
Officials use a three-prong formula for determining a quota: the amount of exported tobacco, the amount of tobacco the cooperative keeps in storage and the amount of tobacco the companies are buying, otherwise called the purchase intention. Out of these factors, most farmers say the export level and purchase intention are the main reasons for lower quotas.
“If we could export more and the companies say they could buy more, we could probably grow more,” said Taylor. “The companies are buying less because they are selling fewer cigarettes and buying more foreign imports. The imports are up and the exports are down.”
Yong said, “I wish a tariff would be levied because it would give American tobacco growers an opportunity to sell tobacco at an equitable price.”
Taylor said the cooperative is strong at this time and is not impacting quotas nearly as much.
The indirect impact
Farmers and warehouse owners aren’t the only ones affected by tobacco cutbacks. Small businesses are feeling the pinch because of farm families’ lack of spending money.
“You can sense a big decline,” said John Haskell, a sales consultant at Demaree Automotive Group in Madison, Ind., and a former Switzerland County tobacco farmer.
“I am used to seeing tobacco farmers coming in the latter part of November and early December. Now they are not even shopping. You used to see about 80 percent who were just looking. Now, it’s less than 30 percent.”
Haskell, himself, had to give up farming because it was not a profitable endeavor. “This is my first year since I was 15 years old that I didn’t raise tobacco,” he said. “But when you have a wife, kids and a house payment to make, you have to do what you have to do.”
Hurley Adams, owner of the Fabric Shop on Madison’s Main Street, said he usually sells up to 20 sewing machines each Christmas, mostly to families spending their tobacco money. Last year he sold only six. As of mid-December, he had sold none this year.
“I know it’s tobacco money because they tell me,” said Adams, who himself owns a farm and rents out his tobacco base to another farmer. Before he bought the Fabric Shop 13 years ago, he had turned from raising tobacco to raising cucumbers for the Paramount Pickle Co. as an alternative. He said other farmers will have to start looking for alternatives.
McNeal’s in Carrollton, Ky., specializes in everything from appliances to furniture to paint.
“We have seen a gradual downturn over the last couple of years,” said owner Brad McNeal. “They used to sell their tobacco at the warehouse, and then they would be right here in the store.”
McNeal admitted that the tobacco issue may only be a part of the slow times. He said the rest may be attributed to an overall downturn in the economy.
Some farmers have turned to alternative professions. Bill Cord grew up raising tobacco on the family farm in Switzerland County. An educator for most of his adult life, Cord now works as an agricultural specialist for the Small Business Development Center on the Madison hilltop.
He also administers the NxLevel “Ways to Grow” agricultural program. This is a 10-week program designed for “agricultural entrepreneurs” and involves a series of weekly speakers on various topics. Cord said several tobacco farmers have used the program to diversify in the wake of tobacco cutbacks. He sees a bleak future for the tobacco program, especially if the auction system is eliminated.
“If they do away with the government’s support pricing system and the big tobacco companies are able to dictate the terms to farmers, you’ll see fewer farmers growing tobacco,” said Cord. “Right now the tobacco companies are paying a little more to farmers than they are getting through the auction, but that will end once the companies get control of the market. Farmers will be at the mercy of whatever price the tobacco companies will pay.”
Indeed, times are tough and uncertainty is high, but America’s tobacco industry has certainly reached a crossroads, and the future is unknown. What is known is that tobacco has been a significant portion of people’s lives and livelihood throughout Kentuckiana.
“After all is said and done, it is the best thing going on the farm,” said Ben Garland. “There is nothing to compare it to, acre to acre.”

• Editor Don Ward contributed to this report.

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