Work on legislation to end the federal tobacco program and compensate quota owners and growers has been an ongoing process for a number of years and finally came to fruition in the fall of 2004. In June, 2004 the U.S. House of Representatives passed corporate tax legislation (H.R. 4520) that included $9.6 billion in compensation to quota owners and growers and an end to the tobacco program. Then in July the U.S. Senate passed their version of the corporate tax legislation. The Senate version also ended the current tobacco program and included $11 billion in compensation. It also included legislation that would allow FDA to regulate tobacco products.

The two versions of the corporate tax legislation then went to a conference committee for resolution of differences. Despite the differences in the Senate and House versions, the conference committee was able to resolve the differences and release a report for H.R. 4520 that contained a tobacco buyout. The conference report for HR4520, issued Wednesday, October 6 and containing provisions for a tobacco buyout, passed the House on October 7 and the Senate on October 11. The President signed the bill into law on October 22.

The buyout is funded at $10.1 billion. Funding of $9.6 billion is to be paid to growers and quota owners over 10 years. The remaining $500 million is for use in disposition of stocks of tobacco held by the grower associations and the Commodity Credit Corporation. Tobacco product manufacturers and importers will fund the buyout based on their share of the U.S. tobacco products market. The bill ended the federal program regulating tobacco production and sales.

The key provisions of the buyout are:

• $7 for each pound of quota owned based on the 2002 level of basic quota. The quota owner as of the date of enactment of the legislation (October 22, 2004) receives the payments. Payment is made over 10 years in 10 equal annual payments; i.e. $0.70 per pound per year.
• $3 in contract payments per pound of quota grown paid to growers who grew tobacco in 2002, 2003, or 2004. The amount of payment is based on the 2002 effective marketing quota. Producers of a quota in all three years, 2002, 2003, and 2004, receive payment of the full $3 based on the 2002 effective quota level for a particular quota. If a grower grew a quota for 2 out of the 3 years, then the grower receives 2/3 of the payment. If a grower grew a quota for 1 out of the 3 years then the grower receives 1/3 of the payment. Payments to growers are allocated based on the producer's share of risk in growing the crop. The payments are spread over 10 years in equal annual payments. For example, if a grower receives the full $3 per pound of quota grown, then the grower receives $0.30 per year for 10 years.
• The legislation eliminates the federal tobacco program. Beginning with the 2005 crop year there are no federal restrictions on the production of tobacco. The 2005 crop year begins July 1, 2005 for flue-cured tobacco. There are no geographical restrictions on where tobacco can be produced after the program ends. Price supports and quotas no longer exist.
• The buyout is funded by the Commodity Credit Corporation (CCC). To offset expenses on the buyout CCC collects quarterly assessments on tobacco product manufacturers and importers based on their product's share of sales in the U.S. market.
• USDA allows growers and quota owners to sell the 2006 through 2014 payments to a financial institution through a successor-in-interest contract. Growers and quota owners were not allowed to complete a successor-in-interest payment for the 2005 payment. Some financial institutions are offering growers and quota owners an up-front lump-sum payment in exchange for the stream of buyout payments. Growers and quota owners need to carefully weigh the cost of this option since the financial institutions will retain a portion of the stream of payments in return for making a lump-sum payment. There are a number of reputable financial institutions offering this option. Growers and quota owners should shop around before making a final decision.
• The Farm Service Agency of USDA is charged with implementing the buyout. The 2005 payment has been sent to growers and quota owners. Growers and quota owners must have signed up by June 17 in order to receive the first payment. However they can still sign up for remaining payments. Rules for implementation of the buyout can be found at www.fsa.usda.gov/tobacco/ or by contacting the county Farm Service Agency of USDA.

The end of the federal tobacco program will bring substantial change to rural tobacco producing communities. The price of tobacco has declined from an average of $1.85 to $2.00 per pound to between $1.30 and $1.50 per pound. As a result of lower prices international leaf merchants and cigarette manufacturers are expected to shift some tobacco production from foreign producers to US producers. US production of flue-cured tobacco may initially decline but is expected to increase from around 400 million pounds to over 700 million pounds after an adjustment period. Many farms will exit tobacco production with the remaining farms expanding to meet demand for increased production.

Quota owners will use the government payments to replace income from rent of quota or from selling tobacco at the higher prices under the former tobacco program. Growers must use their producer payments to transition to a new era of tobacco production, out of tobacco production to other agricultural enterprises, or out of tobacco production to a non-farming occupation.

Information and rules for implementation of the buyout will be posted at this site: USDA Farm Service Agency: www.fsa.usda.gov/tobacco/

Other helpful sites:
University of Tennessee: http://apacweb.ag.utk.edu/tobacco.html
University of Kentucky: www.uky.edu/Ag/TobaccoEcon/
USDA Economic Research Service: www.ers.usda.gov/Briefing/Tobacco/

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