Tobacco industry ; Federal Reserve District, 5th

Betty Joyce Nash

English

Research Papers in Economics

K
ent Hudson has bumped along
tobacco road for 35 years,
jumping at opportunity here
and there. 
“It’s like rolling logs on a river: You
got to be steady on your feet and be
ready to change directions,” he says.
Hudson gave up growing tobacco in
1993 on his farm in the Piedmont near
Buffalo Junction, Va., about a mile
from the North Carolina line, midway
between the mountains and the sea.
He’s sold harvesters, planters, and
tobacco barns. More recently, he’s 
been loading up 10- by 30-foot metal
tobacco barns and hauling them from
the Piedmont into the coastal plains of
the Carolinas. That’s because tobacco
production is headed east for big, 
flat plains where efficiency rules.
Competition is coming to tobacco
fields as growers try the free market.
The federal tobacco price support and
quota program ended last fall by con-
gressional legislation. Hudson’s new
moving business bears out economists’
predictions that tobacco farming will
migrate, for efficiency’s sake, to fields
where topography enhances instead of
hinders production. “Those that are
quitting are selling the barns, and the
people expanding are buying them,” he
says.  That pretty much sums it up.
Under the legislation, tobacco grow-
ers and quota owners will receive $9.6
billion over 10 years, an effort to pay
them for an asset — the right to grow
tobacco — created more than 70 years
ago by the federal tobacco program
during the New Deal. (Another $500
million will go toward disposition of
tobacco held by grower associations.)
The new law lifts restrictions on
location, size, and amount of tobacco
production, leaving the market to
decide who grows tobacco best.
Tobacco in the Fifth District
Tobacco has been a cash crop since
1612, with flue-cured the most com-
mon type produced in the Carolinas
and Virginia. Flue refers to the curing
process, which uses forced air heat that
was once circulated through a flue in
the barn. 
The biggest chunk of the nation’s
$1.75 billion 2004 tobacco receipts
went to North Carolina: $652 million.
Kentucky ranked second, Virginia was
third with $127 million, and South
Carolina, fourth with almost $110 mil-
lion. Even Maryland, which bought out
all but about 150 growers five years ago,
raked in some $3 million in 2004
tobacco cash, as did West Virginia. But
antismoking sentiment and declining
demand, falling exports, and competi-
tion from imported leaf had led to
severe quota cuts over the past few
years. Without price supports, the
market might have sorted itself out
years ago.
“Tobacco has been the backbone 
of agriculture in Southside Virginia 
for many, many years,” says tobacco 
specialist Stan Duffer of the Virginia
Department of Agriculture and
Consumer Services. “People knew
how to grow tobacco. Now, we’re in a
different time. Here in Southside
Ed Young’s family has raised tobacco in South Carolina
since the 1800s. Young oversees planting of the first crop
grown since the 1930s without price supports.
The invisible hand plants first crop
BY BETTY JOYCE NASH Buyout T T T To o o o b b b b a a a a c c c c c c c c o o o o
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Summer 2005 • Region Focus 19
RF Summer 2005 FINAL.ps - 7/12/2005 13:52 PMyou’ll see some increase in livestock,
beef cattle. It’ll go back to supply and
demand, I can assure you.”
Controlling supply was the corner-
stone of the federal tobacco program.
“The idea in economic terms is to
restrict aggregate supply and hope you
raise the price some,” says Blake Brown,
an economist at North Carolina State
University who studies tobacco. The
restrictions on many crops didn’t
endure like those on tobacco because of
international competition. “But with
tobacco, the international competition
didn’t become intense until the late
1980s and early 1990s.” And when com-
petition intensified, the price support
program hamstrung tobacco farmers’
ability to compete.
In the 1930s, farmers got quotas
based on growing history. Tobacco
quota became an asset. To expand,
farmers either bought land with quota,
rented land with quota attached, or
bought quota and attached it to land.
The buyout pays quota owners $7 a
pound over 10 years based on 2002
basic quota. Meanwhile, producers who
raised tobacco in 2002, 2003, or 2004
will be paid $3 per pound over 10 years
if they grew tobacco all three years.
Those who grew tobacco only one or
two of those years will receive propor-
tionately smaller payments. About
416,000 growers or quota owners are
out there. The Environmental Working
Group, a nonprofit that investigates
farm subsidies, reports the average pay-
ment will be around $4,396. But about
462 people, estates, or corporations will
average about $1.6 million apiece,
according to the group’s calculations. 
Buyout money will be paid in 
10 equal annual installments — for
instance, for 500 pounds, a quota
owner would get $350 annually — or
farmers may choose other payment
options through financial institutions.
(This bigger pot of money replaces 
the rest of the Phase II funds, about
$2.5 billion of the original $6 billion,
scheduled for growers and quota 
owners under the Master Settlement
Agreement of 1998.)
Wachovia Corp. won a contract
from the U.S. Department of Agri-
culture to mount a public information
campaign to make sure tobacco farm-
ers and quota owners know the ins and
outs of the deal. The anticipated 
buyout money has uncorked a stream
of financial planning seminars and
charitable giving suggestions.
That’s because payments, including
those to Fifth District states, will be
substantial: Growers and quota owners
in North Carolina will receive about
$3.9 billion; South Carolina, $724 mil-
lion; and in Virginia, they will get
almost $667 million. Manufacturers
and importers will foot the bill based
on market share. (The three largest
tobacco firms are in the Fifth District
and include Philip Morris USA of
Richmond, Va.; R.J. Reynolds Tobacco
of Winston-Salem, N.C.; and Lorillard
Tobacco Co. of Greensboro, N.C.)
It was essential to compensate
quota owners, Brown notes. “You’ve
created an asset with value whether
you intended to or not,” he says,
adding that the original laws created
the expectation that quota would con-
tinue to be valuable. 
The buyout money will allow 
farmers with inefficient farms or 
without successors to retire, Brown
says. (The average age of tobacco farm-
ers is about 55.) Others will use the
money to pay off debt. Some may
develop businesses or retrain. Whether
buyout money will stay local and work
for these rural communities when
farmers abandon tobacco, though, is
unclear. “What you would hope is that
quota owners who had been using
quota rent as an income source will
invest and if they make wise invest-
ments, the income will come back into
these local communities to replace
quota money,” Brown says.
Out of Kent Hudson’s five nearby
neighbors, four quit. One will expand
his road construction business, anoth-
er bought a dump truck, another will
add to his cattle herd, and another will
work for the neighbor who is in the
construction business. The loss of the
tobacco crop will have an “effect on
the car dealer, the pickup truck dealer,
the fertilizer people, and the equip-
ment people,” Hudson says.
Tobacco Tradition
Heading east on U.S. 176, just off
Interstate 95 in Florence, S.C., there’s
an elegant white-columned home that
dates from 1877. It’s Ed Young’s farm
and he’s the third generation to work
that land. He still sleeps in the same
bedroom where he was born. Young is
84 and aptly named because he climbs
in and out of his big cab pickup truck
easily in spite of a recent hip replace-
ment. On a windy day in late April,
Young stands in a field of about 32
acres. Acarousel planter, named for its
rotating part that deposits tobacco
seedlings, crawls along. There are typi-
cally 6,000 plants to the acre on these
South Carolina fields of sandy loam.
Young should know, as his family has
grown tobacco here since the late
1800s. Young’s uncle met with
Franklin D. Roosevelt before the pres-
ident created the tobacco program. 
This year, Young planted the same
amount of acreage in tobacco under
these new market conditions as he did
last year under the old quota system,
65 acres compared to the 100 or so he
planted three years ago. He is waiting
to see what changes the market brings.
“I’m gonna take a chance,” he says.
“We have a contract with Reynolds.”
R.J. Reynolds Tobacco Co. is the
nation’s second largest tobacco com-
pany, with about one-third of the
domestic cigarette market, behind
Philip Morris USA, with about half
the domestic market. 
This year, tobacco growers without
contracts with manufacturers or leaf
merchants aren’t likely to plant. The
contract system replaced the outdated
auction warehouses several years ago.
The Reynolds contract instructs Young
and other growers in his area to ditch
the bottom (less valued) eight tobacco
leaves of the tobacco plant’s 19 leaves,
which will cut the yield by 20 percent,
Young says. Some farmers chose not to
plant because they didn’t think they
could make money. Dewitt Gooden,
tobacco specialist with Clemson
University, reckons that this year
there’ll be about 25 percent less tobac-
co planted in this region compared to
last year. 
20 Region Focus • Summer 2005
RF Summer 2005 FINAL.ps - 7/12/2005 13:52 PMYoung would like to expand, if the
market warrants. His children, grown
and far-flung, are unlikely to carry 
on farming. Raw land near his farm
sells for $20,000 an acre, and substan-
tial subdivisions are plopped down
adjacent to fields. “It’s hard to farm
land worth $20,000 an acre,” he says.
Tobacco contract prices, says Blake
Brown of N.C. State, have fallen by
the amount of the quota rent — about
40 cents to 50 cents a pound. The
farmers with the most competitive
yields will make money; others will
not. Field size, fixed costs, equipment
costs, labor costs, and good manage-
ment will determine profitability, like
any other business, says Brown. But
the single biggest factor to success is
the productivity of the land itself. 
Oversupply from last year’s crop
kept contract amounts low this year,
says Jim Starkey, senior vice president
of Universal Corp., based in
Richmond, one of the biggest leaf mer-
chants in the world. Without
production limits, the better farmers
will grow more under contract, Starkey
says. Taking the quota price out of the
equation removes a nonproductive
cost from the system, he notes. 
“What a grower actually receives
will depend on what he actually pro-
duces in a given year,” Starkey says. “If
he has a good year and produces a 
higher quality tobacco, his income will
go up.”
Even though production of flue-
cured tobacco will increase in the
coastal plains, there will be some tobac-
co grown in the Piedmont, Brown says.
That’s because buyers like to spread
risks and avoid weather extremes or
other possible production problems.
Jim Starkey says Universal has contracts
in all five flue-cured producing states.
Some flue-cured tobacco farmers will
try growing burley tobacco now that
there are no restrictions on where cer-
tain tobaccos can be grown. Burley was
traditionally raised on the fringes of the
Appalachians. Burley is labor-intensive
and grown in a slightly cooler climate
than flue-cured. The entire stalk is cut,
hung, and air-cured. Starkey says
humidity prevents burley production in
the tropics, the source of most interna-
tional tobacco competition. 
“In the case of burley, I think the
core will still be in Kentucky and
Tennessee, but since so many growers
will be getting out of the burley pro-
duction area, I think we’ll start to see
that production move to new areas and
the Piedmont is one,” Starkey says.
Most mountain burley growers will
quit tobacco because the steep terrain
and small plots curtail efficiency.
Without the guaranteed tobacco price,
they won’t make money. Some growers
in the Piedmont are planting burley,
but, of course, it’s untried and risky.
Ed Young watched his father turn
to dairy after the boll weevil wiped
out cotton. He’s lived to see cotton
revive and dairy production move on
to greener pastures. He plans to invest
in equipment and perhaps in another
farm. Other farmers in his neighbor-
hood are putting land in timber or
trying new agricultural enterprises. 
As for the rest, the money greases the
way out. RF
Brown, A. Blake. “U.S. Flue-Cured Tobacco Outlook and
Situation.” Department of Agricultural and Resource Economics,
North Carolina State University, Dec. 8, 2004.
Brown, A. Blake, and Laura L. Martin. “Price versus Quota
Reductions: U.S. Flue-Cured Tobacco Policy.” Journal of Agricultural
and Applied Economics, December 1996, vol. 28, no. 2, pp. 445-452.
Johnson, Paul R. The Economics of the Tobacco Industry. New York:
Praeger Publishers, 1984.
Visit www.richmondfed.org for links to relevant sites and 
supplemental information.
R EADINGS
M
ost of Maryland’s tobacco farmers agreed to
a buyout in 1999, when the state pledged to
use money from the Master Settlement
Agreement’s Phase II to compensate them for get-
ting out of tobacco. But those payments ended
when the tobacco buyout legislation was passed
last fall, leaving Maryland farmers in the lurch. 
Maryland farmers opted out of the federal
price support system in the 1960s; none will
receive money from the current federal buyout
program. Pennsylvania tobacco farmers are 
in the same boat, since they also did not 
participate in the federal tobacco program.
“We had roughly 1,000 individuals receiving
payments from the trust whose payments 
are now in jeopardy,” says Patrick McMillan, 
an assistant secretary of the Maryland
Department of Agriculture. Maryland farmers had
seven payments remaining, worth a total 
of about $12 million.
Farmers covered by the Master Settlement
Agreement have not received money for 2004
because tobacco companies say they’re not
obliged to make that payment now that 
the buyout has replaced the Phase II schedule. 
The matter is now with the North Carolina
Supreme Court. Original trust papers gave the
North Carolina courts jurisdiction in tobacco set-
tlement matters. “[Growers] are losing this
stream of revenue they anticipated when they
made their decision,” McMillan says. “It’s very
unfair to them.” 
Farmers participating in the Maryland pro-
gram are paid $1 per pound annually over 
10 years, based on the average amount of tobac-
co produced between 1996 and 1998. In
exchange, farmers agreed to quit growing tobac-
co and use the land to grow other crops for at
least 10 years. By 2005, 86 percent of producers
were taking the buyout. 
Maryland tobacco farmers have always been
a different breed: They grew the unique Type 32,
known for slow and even burning.
The tobacco was sought after in the European
market and prices over the years were strong.
And domestic firms bought the grades the
Europeans didn’t want. That’s probably one of the
biggest reasons why Maryland farmers decided
to get out of the federal program, says David
Conrad, regional tobacco specialist with the
University of Maryland’s cooperative extension
service. “When you put those prices [domestic
and European] together, there was no need for
price supports,” he says. —B ETTY JOYCE NASH
Maryland Tobacco Settlement Payments in Limbo
Summer 2005 • Region Focus 21
RF Summer 2005 FINAL.ps - 7/12/2005 13:52 PM

Tobacco buyout : the invisible hand plants first crop

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Tobacco buyout : the invisible hand plants first crop

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