U.S. Tobacco Quota Buyout Program Ends

According to Dongfang Tobacco Network, after ten years of support for tobacco farmers, the U.S. tobacco quota buyout program has completed its final verification.

Most industry insiders believe that the U.S. Tobacco Transition Payment Program (TTPP) has achieved its goals. Tobacco growers, manufacturers, and landowners have received much-needed funds to help them transition to other agricultural sectors or upgrade equipment. Now that the final payments have been made, tobacco farmers, economic developers, and the tobacco industry are waiting to see what impact the termination of the Tobacco Transition Payment Program will have on agricultural areas, especially on U.S. tobacco production.

With the termination of the U.S. tobacco support program in 2004, the Tobacco Transition Payment Program was initiated as a federal initiative to help tobacco quota holders and producers transition to a free market. This program, also known as the tobacco quota buyout program, has provided transition payments for ten years. All quota holders could receive $7 in compensation for each pound (1 pound is approximately 0.45 kilograms) of tobacco leaves. The funding for this program comes from domestic tobacco manufacturers and exporters, assessed quarterly based on each company's evaluation.

According to Blake Brown, an economics professor at North Carolina State University, from 2005 to 2014, nearly $9.6 billion in transition payments significantly impacted the agricultural economy of tobacco-growing states. However, some tobacco farmers' use of transition payments to subsidize tobacco production has raised concerns: once the payments stop, farmers may exit the tobacco industry. "The Tobacco Transition Payment Program does not meet all the requirements for tobacco leaf production; the only reason farmers continue to engage in tobacco production is that they find it profitable," Brown said.

According to information from the U.S. Department of Agriculture (USDA), many recipients of transition payments retired immediately after receiving the funds. In 2005, a large number of farmers abandoned their tobacco quotas. Census data showed that the number of tobacco farmers dropped from about 57,000 in 2002 to 16,234 in 2007. The 2012 census showed that the number of tobacco farms decreased to 9,626.

"The decrease in the number of tobacco farmers is partly attributed to the way tobacco producers were defined in the tobacco program," Brown said. "During the program's implementation, if quota holders who did not produce and growers using their quotas shared the same tobacco, those quota holders would also be classified as tobacco farmers."

The decrease in the number of tobacco farmers is also due to farmers who exited tobacco production to pursue non-agricultural jobs. "Some farmers only spend part of their time growing tobacco, especially Virginia flue-cured tobacco," Brown said.

David Davenport, a spokesperson for Davenport & Sons, said: "In tobacco production, people's decisions to grow tobacco will be based on expected returns, not transition payments." The Davenport family is a five-generation tobacco farming family from Greenville, North Carolina.

"I have never seen any tobacco farmer base their production decisions on transition payments," Davenport said. "Changing markets, labor challenges, increasing regulations, and record-keeping requirements all impact planting areas. Due to concerns about farmers leaving the tobacco industry en masse again, significant investments are now being made in specialized tobacco-growing equipment."

Brown believes that other variable factors will have a greater impact on future U.S. tobacco production. "Many factors will have a significant potential impact on U.S. tobacco production, but the termination of the transition payment program will not have a negative impact," Brown said. "Other factors, such as the emergence of e-cigarettes and the strength of Asian tobacco leaf demand, will have a more significant impact on future U.S. tobacco production."

Historical data shows that in 2012, the USDA directly paid tobacco growers $1.74 billion and distributed $4.11 billion to original quota holders. Quota holders are landowners of farms where tobacco quotas are allocated. To obtain equity rights for long-term payment funds, many quota holders and growers chose to deposit transition payments into financial institutions that provide lump-sum payments (i.e., securitizing transition payments). As a result, $1.79 billion in transition payments flowed to financial institutions.

In 2005, over $384,000 in transition payments were distributed to quota holders, while producers received about $182,600. According to USDA information, most producers also received transition payments distributed to quota holders. Before the tobacco quota buyout, there were over 38,000 individual flue-cured tobacco quotas and more than 24,000 Virginia tobacco quotas.

"Many quota owners are not just one person, which may be why the amount of transition payments was so large in 2005," Brown said. According to USDA information, in January 2005, the transition payments provided to producers and quota holders were $287 million and $667 million, respectively. In 2005, over $2.1 billion in payments flowed into rural areas of tobacco-growing states.

Similarly, in 2005, according to USDA data, North Carolina distributed $392 million in payments to cigarette manufacturers and quota holders. In comparison, the next large-scale funding related to the tobacco industry came from the Master Settlement Agreement (MSA). Under this agreement, tobacco manufacturers paid $1.48 billion to the government in 2005. In Kentucky, the second-largest tobacco-producing state, tobacco manufacturers and quota holders received $221 million in payments in 2005. According to the Master Settlement Agreement, manufacturers paid $112 million to the Kentucky state government in 2005.

The transition payment program brought unprecedented funding to many residents in tobacco-growing areas. According to Joe King, executive director of the Florence County Economic Development Corporation, producers utilized transition funds or lump-sum payments in various ways, including reducing farmer debt, upgrading equipment, and diversifying production to retain tobacco farmers. Florence County Economic Development Corporation is located in the Pee Dee region of South Carolina, one of the largest tobacco-growing areas in the U.S. "In Pee Dee, growing tobacco has been the income source for many families, as it has been a 'crop for sale' for many years," King said. "With the current anti-tobacco sentiment, price subsidies, and the elimination of the quota system, as well as the transfer of the cigarette auction market, the economic impact of tobacco is not what it used to be."

As for the impact of the termination of the transition payment program on rural tobacco-growing areas, it is still too early to discuss. Brown, Davenport, and King all believe that the impact on the local economy will be minimal. "Some growers have already upgraded their equipment using transition funds, and some growers may use the last batch of payments to pursue other benefits," Davenport said. "However, I believe most non-farming quota holders received their lump-sum payments at the beginning. Therefore, the termination of this program will not affect the local economy."

King believes that in the face of declining cigarette sales and consumption, the transition payment program provided farmers with diversified options. "Some used the transition payments to pay off debts, some invested these funds, and some farmers upgraded their agricultural equipment," he said. "Traditionally, tobacco farmers mostly consumed locally. In the initial years of the transition payment program, the economic multiplier effect had a substantial impact locally."

The Davenport family company, which owned 300 acres of farmland in the 1960s (1 acre is approximately 6.07 mu), has now expanded to 3,600 acres, providing a variety of daily necessities, including cotton, wheat, soybeans, and peanuts. According to Davenport, in 2014, the farm planted 240 acres of Virginia flue-cured tobacco, up from 200 acres in 2013. He added, "Ten years ago, 200 acres was considered a medium-sized tobacco field; now, this scale is regarded as a small tobacco field."

"Over the past ten years, transition payment funds have been used for capital improvements on farms and businesses. In the first year of the program's implementation, we sold about 70% of our quotas, received notices of changes in quota ownership, and obtained all payments available to tobacco producers during the program's implementation," Davenport said.

In 2010, Davenport used part of the transition payment funds to create a modern facility that increased processing capacity and added storage for 250,000 bushels (1 bushel is approximately 27.2 kilograms) of soybeans. "This new facility can triple our storage capacity and can package up to 6,000-7,000 bushels of soybeans in a 10-hour work period," Davenport said.

Everyone involved in the quota buyout knows that the transition payment program would end in 2014 and should have made plans accordingly. Brown admitted, "In any case, after receiving the funds, some people will spend blindly, and some will make mistakes in investment and consumption claims. However, most people will ultimately consume, invest, or save rationally. Everyone will complain about the termination of the payment funds, but this result is not unexpected."

As one of the top economic developers in the U.S., King also believes that the termination of the transition payment program will not cause long-term negative impacts on tobacco-growing communities because recipients knew this program would eventually end.

Davenport stated that he has not felt any impact from the termination of the transition payment program on his business, calling the program "a huge victory for tobacco producers and landowners." He does not want to see the end of the transition payment program, believing that this program serves an important purpose for farmers to exit the shrinking tobacco industry. Davenport said, "Farmers will not survive in the free market if they do not open up to diversification and change."#p#分页标题#e#