Thursday, April 02, 2009

Cigarette makers cut tobacco growers' contracts

Tobacco farmers who signed contracts with cigarette makers late last year have been surprised in the last month by the companies' unilateral reductions in the amount they will buy, and in some cases outright elimination of their contracts.

"In the last several months, the tobacco economy has changed dramatically," Kara Keeton reports for The Farmer's Pride, a Kentucky newspaper. "The global economic downturn, increasing foreign supplies of lower quality tobacco, tax increases, smoking restrictions, health issues, shifts to smokeless tobacco products, increasing availability of imports, movement of cigarette production overseas, and possibly anticipated FDA regulation are reducing domestic needs" for burley tobacco, Kentucky's main variety and the one used in cigarettes.

David Sutton, a spokesman for Philip Morris USA, the largest cigarette maker, said, “When you get into a challenging environment as we are in, we have to continually look at those forecasts and make adjustments on what we will have to buy from growers.” Keeton reports that Philip Morris has four levels of cuts -- none, 10 percent, 30 percent and 100 percent -- based on "quality of the leaf and delivery of contracted pounds" in prior years.

Companies began contracting with growers before the federal tobacco program of quotas and price supports was repealed in 2004, but the end of price supports eliminated most burley auctions and left growers at the mercy of the companies, as they were before the program began during the Great Depression. “We knew this was coming; we didn’t know when,” Kentucky grower Ray Tucker of Shelby County told The Farmer's Pride. (The paper does not post stories online, but Keeton's article is on the Institute for Rural Journalism and Community Issues site, here.)

The Burley Tobacco Growers Cooperative Association buys leaf, but is unable to offer contracts, and the auction market is pure risk without price supports, Keeton notes, quoting University of Kentucky tobacco economist Will Snell: “Unlike other crops that might have access to safety net measures of the Farm Bill or futures markets, tobacco farmers have no way to manage price risk other than through contractual agreements, primarily with multinational tobacco companies. At this time there is limited communication within the industry, no market news to report prices received, no federal grading, and minimal public data and analysis for growers.” For Snell's detailed advice to growers, click here.

Emery Dalesio of The Associated Press notes, "For generations, tobacco growers were a protected class, as lawmakers across the South defended the golden leaf as stridently as politicians from Michigan and New York do automakers and Wall Street. It remains a huge business: The tobacco crop in North Carolina alone, where farmers produce nearly half the value of the entire U.S. output, was worth $686 million last year. But lawmakers don't look out for Big Tobacco as they once did." (Read more) AP fails to explain the main reason: Since the program was repealed, there are many fewer tobacco farmers. Their individual crops are larger, but their small numbers give them little political clout. Kentucky, which once has more than 50,000 growers, now has about 5,000.

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