Tobacco buyout raises new crop of questions

October 17, 2004|BOBBIE CURD

After years of talk and false starts, the tobacco quota buyout was finally enacted by Congress on Monday.

Government support of tobacco prices has officially ended and farmers will begin receiving buyout payments in the 2005 fiscal year and continue getting checks through 2014.

This means farmers will be paid in 10 equal installments once a year, over the next 10 years. The buyout does include provisions that allow lump sum or accelerated payments which will be handled through a financial institution, though details have not yet been completely outlined.

"Waiting? It means nothing to me. Buyout or not, we're still going to continue to farm, those that want to, that is," said Gary Shell of Shell Farms in Garrard County. "The only question we have now is if the next year will bring in the money we need to feed our families and put everyone through school. I think it will."


Shell and his father, G.B., own a 110-acre farm and have raised tobacco all of their lives.

The uncertainty about next year's income that Shell is referring to is another big change the act will bring about. Farmers may still continue to grow tobacco but will have to contract directly through the tobacco companies and can no longer count on the government sponsored price support system.

"I think that we will be able to continue," said Shell. "Philip Morris has indicated that they want to continue buying their tobacco in Kentucky. But there are a lot of older farmers out there who are holding out to retire until the buyouts happen, or others who have another way to make a living on the side that they will turn to after this. I think there will be a mass exodus of farmers after this all goes through. There's just too much uncertainty."

There is no way to misunderstand Shell's confidence in his continuing to grow tobacco by the tone of his voice and the words he chooses. At the same time, his demeanor does reflect the overall curiosity that most farmers must be feeling about what this new era in tobacco farming will bring.

"Me? I want to continue to raise tobacco. I'm good at it, and it's been in my family for years and years. But I only want to do it if I can make a living at it," Shell said.

"I mean, this isn't the 1800s - we can work other jobs. I can work a public job if I have to, which is better than farming tobacco for nothing. But I don't want to do that. I want to continue raising tobacco."

What about the Phase II money?

Mike Carter, Garrard County extension agent for agriculture, seems to second the notion that there are still many unanswered questions, including the fate of the Phase II money that farmers are slated to receive this year.

"The 2004 payments will likely be smaller than they would have been had the buyout not been approved," Carter said. "Some of us suspect that the tobacco companies may well ask for a waiver of the 2004 payment obligation as well."

"Second, farmer reaction seems to be all over the board," he continued. "Some are elated while others are deflated. For the most part, they realize that this, the buyout effort, was a salvage operation that has now resulted in them being in line to receive only a small portion of what their asset/quota was once worth. However, given the likelihood that quotas were soon to be nearly worthless, the money they will now receive will beat the heck out of getting nothing."

"Many recipients of buyout payments will opt for lump-sum or accelerated payments that financial institutions are sure to offer given the provisions of the new law."

Will Snell, agriculture economist at the University of Kentucky, explained the immediate implications.

"The $10.14 billion (from the buyout) will send around $2.5 billion to Kentucky tobacco owners and growers. At first, prices will fall to reflect the absence of quota rents and price supports, but it remains unclear what types of price incentives and other contract terms the companies will offer to encourage enough growers to remain in business.

"Lower prices will improve the U.S. price competitiveness. Demand could eventually increase above 400 million pounds vs. the current 300-325 million pound level, depending on how responsive domestic cigarette manufacturers are in replacing imports," Snell continued.

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