For Immediate Release
September 21, 2000
Contact:            Rusty Cheuvront 502/564-2611
                        John-Mark Hack 502/564-4627 

Governor Details Proposed Buyout Plan for Tobacco Farm Families

Frankfort, Ky. - Governor Paul Patton today outlined a detailed proposal for a tobacco quota buyout.

Governor Patton said the focus of his proposal is on the tobacco farm family, equating them to the family of an industrial worker who loses his job as a result of a change in federal government policy.

“The federal government has clearly been a partner in developing the farmers’ dependence on tobacco through the federal tobacco program, and it’s only appropriate that the federal government develop a program to compensate our farmers for their lost asset,” the Governor said.

The governor’s proposal would compensate farmers for the tobacco quota at a rate of $20 a pound for 2000 quota levels.  Using Senator Wendell Ford’s 1998 LEAF (Long-term Economic Assistance to Farmers) Act as a baseline, the Governor suggests using $16 billion to purchase quotas over a 20-year period.

The Governor suggested that all farms that own quota should have to participate in the buyout, and that the cash compensation should be designated to quota owners. He went on to say that the leasing of tobacco quotas should be eliminated, and that quotas should be moved into the hands of active tobacco producers.

Governor Patton strongly backs a federal tobacco program that would regulate tobacco production and keep supply in line with demand. He said that eliminating non-essential costs of production, such as the lease rates paid by active growers to non-growing quota owners, would naturally make American grown tobacco more competitive.

“Our plan is a relatively simple way of compensating quota owners, getting non-producing quota owners out of the tobacco business, eliminating leasing, and getting quota into the hands of the people who want to grow it. Doing so will make our burley, already known as the best in the world, more price-competitive with burley tobacco produced in other countries,” Governor Patton stated.

The Governor’s plan is a result of a series of meetings between Governor Patton, his staff, Vice-President Gore and representatives of the Clinton-Gore administration.  Patton said he looks forward to continuing to work with the Administration to craft a solution that makes a real difference in the lives of Kentucky tobacco farm families.

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THE TOBACCO PRICE SUPPORT PROGRAM AND A PLAN FOR A FEDERAL QUOTA BUYOUT

Changes in the cigarette industry have caused widespread and severe disruptions in the production of tobacco and corresponding anxiety in the tobacco-producing regions of the nation.

While the price-support program has made tobacco a more profitable product than most other farm products, the program is maintaining the price of U.S. tobacco above the world-market price. While U.S.-grown tobacco is a higher quality than any other tobacco and its prestige adds additional value, there is a limit to how much above the world-market price U.S. tobacco can command. 

Current market conditions indicate that the world market is beginning to reject U.S.-grown tobacco as too expensive and U.S. cigarettes companies are beginning to import more tobacco. The tobacco balance of trade - the value of manufactured and unmanufactured exports less imports - fell by 20% in 1999. Tobacco leaf export value fell 11% compared with the previous year.

The quota of 790,400,000 pounds for crop year 2000 is 53% lower than crop year 1997 and 48% lower than the 9-year (1989-97) average of 1.5128 billion pounds.  This drop in quota has already created major financial problems for thousands of tobacco farmers and has the entire tobacco farming community deathly concerned about its future.

The United States Government has been an integral partner in creating this condition where the U.S. tobacco-growing community has become very dependent on high tobacco prices and a level of production that cannot be sustained.  The government should help the industry transition to a market economy by easing the financial disruption. 

The government has created a displaced-worker assistance program for workers who lose their jobs because of federal policy on foreign trade.  The economic consequences of the government anti-smoking policy are just as real as the economic dislocation resulting from the government’s foreign trade policy.  The government has no less responsibility to dislocated farmers than it has to dislocated industrial workers.

This proposal provides for a smooth transition from the government-controlled price support system to a market-based price support system.  The result will be a reduction in the cost of U.S.-grown tobacco because the grower will not have to pay to lease quota and a competitive industry will result in lower production costs.  This lower price for U.S. tobacco will result in more sales in the domestic and export market, translating into more farm income.

The benchmark by which tobacco farmers measure a buy-out program is the L.E.A.F. Act proposed by Kentucky Senator Wendell Ford in 1997.  This proposal was to pay from $8 to $12 per pound of quota based on the 1994-1996 average basic quota.  This would have provided a maximum of $16 billion to farmers.  The current quota is 45% lower than the 1994-1996 average so to equate to the same general payout would require about $20 per pound (790,400,000 pounds x $20.00/pound = $15.80 billion). 

As a beginning point for a possible buy out of the existing tobacco price support system, which many farmers view as an entitlement, it is proposed that the floor price in the price-support program be reduced to a realistic market price where supply is equal to demand and the price is in line with the world market. 

The state of Maryland offered a $1 a year for 10 years buy out to its tobacco farmers and 82% opted to get out of the business.  This proposal would not require the farmer to get out of the business, but it would place the production in the hands of the most efficient farmers. 

The nominal value of the Phase II tobacco farmer assistance program is $4.49 billion over the 10 remaining years of the program.  The stability of the Phase II program is dependent on the viability of the cigarette companies, a condition that does not give the tobacco farmer a great deal of comfort.  This proposal would put almost four times more money in the farmer’s pocket and be backed by the U.S. government.

Financing a buyout should not be an insurmountable obstacle. The federal government has already in the current fiscal year spent $668 million to relieve dire economic conditions of tobacco farmers through the Tobacco Loss Assistance Program. A buyout of the total burley and flue-cured quota would cost $790,400,000 per year for a period of 20 years.

It is difficult to predict the attitude of the tobacco companies towards this proposal.  A big advantage to the cigarette companies will be the ability to control quality through price, quality control being a major problem of the industry. This proposal would have a substantial positive impact on the tobacco farmers of the major tobacco producing states of North Carolina, Kentucky, Virginia, Tennessee, Georgia, and South Carolina.

On the following pages, one approach to accomplishing a buyout is summarized. We hope the new Presidential Commission considers this approach as they delve into this complex and important issue.

A PLAN FOR A FEDERAL TOBACCO QUOTA BUYOUT

DESIRED ENDS:

MEANS: