Teaching/Communication/Extension/Profession,

Rudd, Robert W.

English

Research Papers in Economics

EVALUATION  OF AGRICULTURAL  PROGRAMS
IN  TERMS  OF  ECONOMIC  GROWTH,  FOREIGN
TRADE,  AND  POLITICAL  FEASIBILITY
Tobacco
Robert W. Rudd
Professor  of Agricultural Economics
University of  Kentucky
To many people the tobacco program has represented the epitome
of  workable  farm  programs  during  the  last  three  decades.  It  has
achieved relative price stability and improved incomes for producers.
Understandably,  it  has  been  quite  favorably  received  by  tobacco
growers.  It has  generated  little,  if any, complaint from processors  or
consumers  about  the  favorable  prices  created  under  the  program.
It  has  been  relatively  inexpensive  for  the  taxpayers  as  farm  pro-
grams  go.
Some  of these  attributes  however,  are  associated  more  directly
with  peculiarities  of  tobacco  production  and  use  than  with  clever-
ness  in the  design  of the program.  Tobacco  is  a product  which  has
no  close  substitute.  It  requires  only  a  very  small  land  area  for
production  and  makes  extensive  use  of  farm  labor  in  areas  which
have  chronic  agricultural  underemployment.  Traditionally,  it  is not
stored  on  farms  from  season  to  season.  Almost  all  tobacco  is  sold
through  a  single  channel,  the  auction  warehouse.  It  is  inspected
closely  after  sale  by  the  federal  government  because  of  the  heavy
excise  taxes  on  tobacco.  Further,  over  the  long  trend,  per  capita
consumption  of  tobacco  has  moved  upward  in  contrast  to  the per
capita consumption  picture for  the  food and  fiber complex.  Add  to
these  features  the  fact  that  tobacco  increases  in  value  in  storage
up to five  years,  and you have some  important  reasons  for program
workability.  Grower  satisfaction  with the program,  too,  is  enhanced
by  the  countervailing  power  it  affords  to  over  one-half  million
producers  in  dealing  with  the  handful  of  large-scale  processors
whose purchases  are  the very  heart  of the market.
My  comments  relate  mainly  to  the  cigarette  tobaccos  which
represent  about  90  percent  of  the domestic  production  of  tobacco.
I will largely ignore the cigar types,  dark tobaccos,  and  exotic types.
My  comments  will apply  largely  to the major  cigarette  types-flue-
cured  and  burley-with  lesser  reference  to  Maryland  tobacco.  In
the  latter  type  intermittent  program  participation  by  growers  has
88resulted  in  market  differences  in  experience.'  The  health  issues
surrounding  tobacco  usage  will  receive  only  limited  consideration.
ECONOMIC  GROWTH
Prices  of tobacco  have  increased  markedly  since the beginnings
of  the  tobacco  program  in  1933.  Under  the  program,  prices  have
been  well  above  free-market  equilibrium  levels  [2]  [3].  The  con-
tinuing loan-storage  activity for  the major  types  supports  this  view.
For all tobacco,  market prices rose  from 13 cents  per pound in  1933
to 59  cents  per pound  last year,  an  increase  of  about  450  percent.
When this  is  compared  with  the  563 percent  increase  in per  capita
consumer  incomes  during  the  same  period,  it  is  evident  that  the
real  price  of  tobacco  at the  farm  level has  declined.  This  makes  a
modest  contribution  to  economic  growth.  However,  the  consumer
benefited  substantially  more  from the  decline  in real prices  in  agri-
culture  as a whole,  for which price  gains averaged  only 345 percent
between  1933  and  1962.
The  expected  farm  income  effects  from  the  favorable  prices
generated  under  the  program  have  been  somewhat  modified  by
the  influx  of  new  producers,  geographical  expansion  of  production
of the major cigarette types into areas far from their points of origin,
and decreasing average  size of allotments. Furthermore,  a significant
share of the price benefits  of the program have been capitalized into
higher  land  values  for  the  allotment,  with  accompanying  windfall
gains  to  initial  producers  under  the  program  and  added  costs  of
entry  to  those  who  follow.
In  tobacco,  the  benefits  of  mechanization,  are  relatively  un-
attainable  due to the small size of acreage  allotments.  In burley, for
example,  the  average  size  of  allotment  is  just  over  one  acre  and
almost 60 percent  of all the allotments  are  less  than seven-tenths  of
an acre.  Flue-cured  averages somewhat  larger with about  three and
one-half  acres  per  allotment.  Limited  transferability  by  lease  of  a
maximum of five acres for types other than burley offers very modest
opportunities  for mechanization.
As  a consequence,  labor  requirements  for  tobacco  remain  quite
high. Flue-cured  tobacco,  for example,  requires  almost five  hundred
man-hours  per  acre  to  produce  the  crop.  The  total  tobacco  crop
of  1961  required  about  the  same  total  number  of  man-hours  of
labor as  the  1934  crop  and  also produced  about  the  same  propor-
tionate  share  of  total  cash  receipts  from  farm  marketings.  In  con-
trast,  the  food  grains  and  the  feed  grains  each  now  contribute  a
'For  a  discussion of the program  in Maryland  tobacco,  see  [1].
89substantially  larger  share  to  total  cash  receipts  from  farm  market-
ings  than  in 1934,  and  each  requires  less  than  a  third of  the total
amount  of labor  used to produce  the  1934 crop.  However,  in much
of  the area  in  which tobacco  is  a  major  cash  crop,  the  surplus  re-
source  is farm labor, which  has sharply  limited  alternatives.
The  costs  of  agricultural  programs  can  significantly  affect
economic  growth.  In tobacco,  the  picture  has been  in  marked con-
trast with  most price-supported  crops.  Through  mid-1960,  the  gov-
ernment  has been  able  to dispose  of tobacco  taken  under  loan  and
to  recover  dollar  for  dollar  on  its  investment  with  no  losses  other
than  the administrative  costs  of the program.  A  part of  this  success
has  been  due  to  the  effectiveness  of  the  acreage  control  program
in  regulating  volume  of  production.  The  upward  trend  in  total
utilization  of cigarette  tobaccos  which  provided  a  safety  valve  for
increased yields resulting from the program  and the increasing value
of  tobacco  in  storage  at  least  equalling  its  carrying  and  storage
charges  has helped  significantly.  The upward trend  of tobacco  price
supports  has  also  helped  to  assure  relative  ease  in  disposal  of
tobaccos  taken  under  loan.
However,  tobacco with characteristics  not desirable  to the  trade
has accumulated  under loan  and led to some losses, not all of which
show up in the  accounting  procedures  used  by  the federal  govern-
ment.'  As  of  the  last  of  May  of  this  year,  realized  losses  for  the
price-support  program reached  15 million  dollars,  which still leaves
it  among  the  least  expensive  of  the  price-supported  commodities.
As  with other  price-supported  commodities,  taxpayer  losses  in  pro-
gram  operation  act  as  a net deterrent  to economic  growth.
FOREIGN  TRADE
Two government programs have had significant effects on foreign
trade  in  tobacco.  They  are  Public  Law  480  and  the  acreage  allot-
ment  and  price-support  programs.  Government  export  programs
have accounted for  about  13 percent  of  U.  S. tobacco  exports  since
the enactment of  Public Law  480  in 1954.  This  is  substantially  less
than the proportion  for all farm product  exports.  Of the 323 million
dollars in export program sales since  1954,  over 70  percent has been
Title  I  (local  currency)  sales  with  the  remainder  going  in  barter
deals.
2In  March  of  this  year  during  hearings  of  a  subcommittee  of  the  Committee  on
Appropriatons  of  the  House  on  U.  S.  Department  of  Agriculture  appropriations  for
fiscal year  1964,  Assistant Secretary  of Agriculture  Duncan admitted  a  loss  of about  25
cents per pound  on the bargain price  disposal  of government  accumulation  of  1955-56
flue-cured  tobacco  recently,  amounting  to  a  total  of  about  80  million  dollars  when  all
costs are included.
90Local currency  sales  have been mainly  in flue-cured,  with  lesser
amounts  of  burley,  fire-cured,  and  Maryland.  Important  recipient
countries  have been the  United Kingdom,  Egypt,  Spain,  Indonesia,
Finland,  and  Italy.  The  mixture  of  "have"  and  "have  not"  nations
in  the  list  requires  some  comment.  Sales  of  Title  I  tobacco  to
developed  nations  such  as  Britain  and  Italy  were  not  usual  and
came  at  earlier  periods  in  Public  Law  480  when  either  financial
problems  or dollar exchange  difficulties  in these nations  made them
temporarily  eligible.
Sales  of  tobacco  for  local  currency  in  less  developed  countries
are  net  additions  to  the  volume  of  our  tobacco  exported.  Their
major significance  lies  in the development  of  market  preferences  in
receiving countries.  We hope  economic development  will eventually
lead  to  increased  trade  in which  the  United  States  can  share.  We
need  to recognize,  at the same  time,  that these export  additions  to
tobacco  are many years  away  [4].
Quasi-free  shipments  of  a  luxury  good  such  as  tobacco  cannot
validly  be  regarded  as  a  contribution  to economic  development  of
underdeveloped  areas,  as  can  program  shipments  of  surplus  food
and  fiber.  Tobacco  processing  and  trade  is  often  a  government
monopoly  operation  in  Title  I  recipient  nations.  Interest  in  ship-
ments  of near-free  U. S. tobacco  may be colored  by thoughts  of the
added tax revenue which its importation and use typically affords.
The  effects  of  acreage  allotments and price  supports  on  tobacco
exports  have  come  mainly  through  effects  upon  quality  and  price.
Flue-cured,  the  largest  export  type,  illustrates  these  effects.
Limited  acreage  and  favorable  prices  have  encouraged  the  de-
velopment of higher yielding tobacco  varieties,  which have  in some
instances  been much  less  desirable  to the trade (both  domestic  and
export).  A  program  of support-price  discounts  has been  introduced
to discriminate  against these  varieties  by  supporting  their prices  at
only  half  the  usual  rate.  However,  the  market  has  received  sub-
stantial  quantities  of  this  slick,  heavy,  less  desirable  leaf  in  recent
years.  The  reaction  of the export market  to these  quality  shifts  can
be  illustrated  by  the  1956  flue-cured  crop.  Britain,  a  leading  im-
porter,  cut  its  purchases  37  percent.  West  Germany,  Australia,
Belgium,  and  Ireland  reduced  their  buying  of  U.  S. flue-cured  by
15  to  30  percent.  In  the  following  year,  flue-cured  varieties  139,
140, and 244 were  given support prices of one-half the regular rates.
Excessive  fertilization  and  the  use  of  growth  inhibitors  for
sucker control have been  declared by both domestic  processors  and
export  buyers  to be  damaging  to tobacco  quality.  The program  has
91encouraged  these  practices  by  offering  a  "free  ride"  to  some  pro-
ducers from increased yields when only acreage is controlled.  While
the proportion  of these  effects  which can be charged to the program
is indeterminate,  the  contributory  role  of  the program  in  the rapid
and widespread  adoption  of  these practices  is clear.
The volume of tobacco exports  has also  been affected  by widen-
ing price  differences  during the  last  decade  between  United  States
leaf  and  comparable  types  of  leaf  from  other  nations  moving  in
international  trade.  Spreads  between  United  States  and  Rhodesian
flue-cured  tobaccos  in  export  averaged  5  cents  per  pound  during
1950-54.  By  1961,  Rhodesian  flue-cured  was  selling  in international
trade  at prices  more  than 20  cents  per  pound below  United  States
leaf.  Clearly,  not all of  the increase  in price  spread  can be  charged
to  the  price-support  program.  Between  1950  and  1961  average
export prices of U. S. flue-cured  tobacco rose 48 percent while price-
support  averages  were  up  25  percent  and  domestic  market  prices
climbed  only  18  percent.  How  much  of  this  rise  in  average  prices
of  exports  represents  shifts  among  quality  grades  by  buyers  as  a
result  of  declining  crop  quality,  too,  is  indeterminate,  but  this
shifting appears  to have had some influence  on price.
Declining  quality and widening  price  spreads have  reduced  the
U.  S. share of Free World  exports  of tobacco  from an average  of 42
percent in 1947-51  to 30 percent in  1961.  This is in spite of the addi-
tion  of  Public  Law  480 provisions  for  expediting  tobacco  exports.
The increasing competition in tobacco exports from Rhodesia and its
implications  if  and  when  Britain  enters  the  European  Economic
Community may  call for  a  careful  reappraisal  of  price-support  ob-
jectives  for  United  States  tobaccos  entering  the  export  market.
POLITICAL  FEASIBILITY
History  suggests  a  traditionally  strong  persuasiveness  among
tobacco  producers  in getting custom-tailored federal  programs.  Evi-
dence  of  this  strength  is provided  by  the  unique  features  incor-
porated in tobacco programs over the years. These range all the way
from  the  exceptional  mandatory  90  percent  of  parity  to  partially
transferable  allotments  and  minimum  allotments,  to  mention  only
a few. The mandatory  90 percent of parity feature  has been modified
indirectly  by changes  in the base period and by removal  of tobacco
from the modernized  parity  escalator.
An  important  contributing  factor  in  continuing  political  feasi-
bility  of  tobacco  programs  has  been  the  ability  of  growers  of  the
different  types  of tobacco  to  compromise  their  internal  differences
and present a  united front  in requests  to legislators.  This  solidarity
92has  provided  the  tobacco  programs  with  firm  support  from  each
of the major  farm organizations,  despite internal  conflicts  in philos-
ophy  in  some  instances.
While we  generally think of legislation  when we speak of politi-
cal feasibility of programs, historically  administrative decisions  have
had  an  important  bearing  on  tobacco  program  operation  as  it
affects  the grower,  warehouseman,  and processor.  The  tobacco  pro-
gram  has  been  and  will  continue  to  be  politically  vulnerable  to
pressures  for  particular  administrative  decisions  regardless  of  the
party  in  power.  These  decisions  have  ranged  from  determination
of total allotment size through stringency  or laxity in applying quota
formulas  to  selection  of  price-support  levels  for  tobaccos  treated
with  growth  inhibitors.
At  present  the  health  issue  probably  constitutes  the  principal
potential  threat  to  the  tobacco  program.  If  this  issue  is  resolved
finally  and  irreparably  against  tobacco,  the  program  will  be  ex-
tremely  vulnerable  from  the  political  point  of  view.  Vulnerability
of the tobacco programs  to unfriendly  political pressures,  too, could
be increased  if losses  are  sustained  from price-support  programs  in
anything like  the proportions  suffered  in wheat,  cotton,  and corn  in
recent  years.  Urban  taxpayers  and  their  legislators  appear  to  be
increasingly  sensitive  to such losses.  The  3 billion dollars  in annual
revenue to federal and state  government from excise  taxes levied on
tobacco  is not  likely  to  be  an  adequate  defense  as  this  sensitivity
mounts.
REFERENCES
1.  G.  M.  Beal  and  Keith  C.  Park,  Maryland Tobacco  Marketing Quota and
Acreage  Allotment  Programs, Maryland  Agr.  Expt.  Sta.  Misc.  Pub.  480,
May  1963.
2.  Glenn  Johnson,  Burley  Tobacco Control Programs, Their  Over-All  Effect
on Production  and Prices, 1933-50, Kentucky  Agr. Expt.  Sta.  Bul. 580,  1950.
3.  Paul R.  Johnson  and Robert W. Rudd,  Efects of the Price-Support,  Acreage
Adjustment and Surplus Removal Programs in Dark Tobacco on Kentucky's
Agriculture, Kentucky  Agr.  Expt.  Sta.  Bul.  678,  1962.
4.  A.  J.  Brown  and D.  Upton Livermore,  "The Market  Potential  for American
Tobaccos  in  Egypt  (U.A.R.)."  Unpublished  report  of  the  Kentucky  Agr.
Expt.  Sta.,  1962.
5.  L.  M.  Hartman  and  G.  S.  Tolley,  Efects  of  Better Acreage Controls  on
Costs and Techniques of  Producing Flue-Cured Tobacco,  North  Carolina
Agr.  Expt.  Sta.  Tech.  Bul.  146,  June  1961.
93

Burley Tobacco Control Programs, Their Over-All Effect on Production and Prices, 1933-50,

EVALUATION OF AGRICULTURAL PROGRAMS IN TERMS OF ECONOMIC GROWTH, FOREIGN TRADE, AND POLITICAL FEASIBILITY: TOBACCO

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Research Papers in Economics