End of tobacco program,
rising foreign competition,
Thrust burley co-op into new role

Turning Over a New Leaf

By Anne Todd
USDA Rural Development

he U.S. tobacco program was successful for more than 60 years in creating a stable market that returned untold millions of dollars from the golden-leaf cash crop to rural producers and communities. The tobacco program helped balance supply with demand each year under a system that involved growers owning or leasing “quota shares” to produce tobacco, much of which they sold at auction through cooperative-owned warehouses.

But the industry has been rocked by seismic changes in the past decade, during which domestic tobacco production has steadily declined as health-conscious consumers have increasingly turned away from cigarette smoking. In 1995, U.S. tobacco growers produced about 1.2 billion pounds of tobacco. By 2005, production was down to about 647 million pounds. At the same time, competition from foreign tobacco producers has become much stiffer. Today, the United States ranks fourth in production, behind China, Brazil and India.

The “tobacco buyout program” of 2004 ended the nation’s traditional tobacco program, creating even more changes. The dust has now begun to settle somewhat from that change in the industry’s foundation. Despite what some thought, the industry—while changed—appears likely to survive. Indeed, it even shows signs of rebounding in many areas, according to Burley Tobacco Growers Cooperative Association (BTGCA) President Roger Quarles, who says progress in developing new overseas markets—including China—offers much promise for U.S. producers.

Early burley co-op history
The original Burley Tobacco Growers Cooperative was formed in 1921 by a group of tobacco growers to address the problem of volatile and low prices. The co-op signed a five-year contract with more than 75 percent of the growers in a five-state area— Kentucky, Indiana, Ohio, West Virginia and Missouri—who agreed to deliver their tobacco to the co-op. It purchased or leased 124 out of 130 warehouses in the area, contracted and purchased redrying plants and built storage facilities.

The first few years for the co-op were successful, resulting in the handling of more than 940 million pounds of tobacco. But, at the same time, problems arose because of breaches of contract and because there was no limit on sales.

The first five-year contracts ended in 1926. At the time, membership was 106,000, but interest faded and no new contracts were signed. The existing coop members kept going, working on various issues and making efforts to reorganize their marketing arrangements, but none of their efforts were successful until the new agricultural policies of the 1930s began to emerge.

Onset of price supports
The Agricultural Adjustment Act of 1938 established the tobacco price-support system. The system allowed for a guaranteed price for the product in exchange for the control of supply. Before then, tobacco farmers faced difficult conditions. The price for tobacco was set by the tobacco companies and farmers were at their mercy; tobacco sold for only pennies per pound.

Civic leaders and others saw the plight of the tobacco farmer and did something about it. Around 1941, BTGCA was asked, and agreed, to help administer the federal price-support program. For unsold leaf tobaccos, the program relied on farmer-owned tobacco co-ops, like BTGCA, to manage “pools” of leaf tobacco passed over at auction.

At auctions, if the tobacco companies didn't bid for a pile of tobacco for at least one cent more than the price support, the farmer received an advance, non-recourse loan from the co-op or pool.

The financing for the purchase was obtained by borrowing funds from the Commodity Credit Corporation (CCC). The CCC, in turn, borrowed money from the U.S. Treasury. Since the 1930s, tobacco co-ops have borrowed and repaid with interest over $10 billion in CCC loans.

Foreign competition changes picture
Under the program, BTGCA would borrow money from USDA, process, store and sell tobacco. Subsequently, it would repay the loans.

This system was successful when the United Sates had the dominant share of the world market. But the system resulted in higher prices each year, which allowed foreign producers to steadily gain in production until the program was no longer effective. Congress determined that the solution was to eliminate the non-value-added cost of leasing and get production rights into the hands of growers.

In October 2004, the “American Jobs Creation Act of 2004,” which included provisions for “Fair and Equitable Tobacco Reform,” was signed into law by President Bush. The law marked the end of the federal tobacco marketing quota and price support loan programs. The legislation included a Tobacco Transition Payment Program (TTPP)—also known as the “Tobacco Buyout”—to make payments to tobacco quota holders and growers (beginning in 2005 and ending in 2014) to help them with the transition to the free market. It was felt that the buyout was the only solution that would accomplish the goals of eliminating the non-valueadded cost of leasing while also providing necessary compensation to both tobacco quota holders and growers.

Beginning with the 2005 tobacco crop season, there were no planting restrictions, no marketing cards and no price-support loans. The deadline for tobacco growers to sign up for the TTPP was June 17, 2005.

Burley Co-op in post-buyout arena
Today, BTGCA continues to represent tobacco growers in the same fivestate region. Membership is offered to anyone who is sharing the risk of producing burley tobacco in the five states and who certifies to BTGCA that they are producing at least 500 pounds of burley during the current crop year. Additionally, producers eligible under the association’s 2002-2004 bylaws, and whose name appears on USDA lists of burley growers for the 2002-2004 crop years, are also eligible for membership.

According to BTGCA President Roger Quarles, when the tobacco buyout was authorized, many growers used the opportunity to exit production (they were paid for their tobacco quota), but the reforms allowed other growers to expand production. BTGCA records show that, on average, in the postprice-support era, the trend is toward fewer, larger farms. However, thousands of small family-sized farms remain, where tobacco best suits the limited tillable land available to them.

Many farms with less than 10 acres of tobacco production are staying in the business, using family labor. But midsized tobacco farms (10-50 acres) are becoming less prevalent. Due to the large amount of labor required to harvest tobacco, most farms are staying small enough to use family labor or getting large enough to hire a significant number of migrant workers to support production.

In 2005, more than 90 percent of U.S. burley tobacco was purchased from farmers through direct contracts with four tobacco companies (significant consolidation of the tobacco companies has occurred in recent years). However, 15 tobacco auction warehouses in the “burley-belt” still hosted auction sales last year.

BTGCA participated in those 2005 auction sales and purchased tobacco for export customers.

“The presence of an alternative market offers growers something to fall back on, and the BTGCA’s involvement as a buyer adds competition to the marketplace,” says Quarles. “While this alternative market is a small part of the total market, having one more purchaser of burley tobacco is good for all growers.”

In 2005, about 6.1 million pounds of burley tobacco were sold at auction. About 3.9 million pounds were sold for an average of $157.06 per hundredweight (CWT) in markets in which BTGCA participated.

Sales in the other markets averaged $153.98 per CWT.

BTGCA also purchased 2005 cropyear tobacco in an effort to provide a reserve of burley to use in promotion and expansion of export markets. BTGCA has worked to develop new export opportunities for burley growers for many years.

Production and labor concerns
According to Quarles, many tobacco growers are looking to expand production, but are constrained by a farmlabor shortage facing much of U.S. agriculture. There are simply not enough U.S. workers willing to do the hard work needed on a tobacco farm, he says.

An average tobacco farmer must hire 150 hours of labor to produce one acre. “Since it is impossible for tobacco growers to find sufficient local labor to meet their needs, most of this work must be done by migrant workers,” Quarles says.

BTGCA believes that, unless the labor situation is corrected soon, many tobacco growers will not be able to continue production.

Because of BTGCA’s concerns about labor, the co-op started a new program to help burley tobacco producers acquire H-2A workers. Under the program, BTGCA producer-members will have discounted H-2A labor services provided to them through an affiliate, Commodity Growers Cooperative. Additional information about the H-2A guest worker program and the BTGCA discount-labor program is at: http://www.commoditygrowers.com.

Outlook for the future
"The goal of BTGCA is to improve profitability and stability for its producer-members while increasing production market share,” says Quarles. “BTGCA’s goal is to increase members' market share of worldwide burley production. The tobacco industry has become increasingly dependent on exports as U.S. manufacturers have shifted production overseas and U.S. consumption declines.”

BTGCA hopes to sustain a market where producers have a second marketing option for tobacco that is not accepted under contract. Additionally, the co-op hopes to develop new export markets where U.S. burley growers are not currently selling tobacco. BTGCA has focused much of its attention in recent years on China, which consumes 32.5 percent of the world’s cigarettes, but uses practically no burley tobacco.

China produces about 1.7 trillion cigarettes annually—three times more than the U.S. production this year. Rising incomes for many people in China mean that Chinese manufacturers are looking for higher quality tobacco to meet the demand. Even a very small share of the Chinese market could amount to a sizeable increase in exports of U.S. burley tobacco.

In 2002, BTGCA successfully sold the first U.S. burley to China. BTGCA has been a leader in exporting U.S. burley to China, with exports exceeding 4 million pounds over the past couple of years. According to Quarles, Chinese customers prefer to purchase tobacco from BTGCA because it allows them to work directly with growers. While sales have been small so far, BTGCA sees tremendous potential to expand its market in China.

BTGCA is retaining a small inventory—5 to 10 million pounds of burley—to use in developing new markets. The co-op is also exploring opportunities to market value-added products, as well as any other marketing opportunities that will provide new income opportunities for members.

In 2006, around 2 million pounds of burley tobacco were sold at auction for an average of $1.62 per pound. Purchasers are paying higher prices at auction than under contract; however, due to warehouse fees, growers net less at auction.

While the 2006 marketing season for burley is still under-way, most producers are very pleased with the outcome, Quarles says. Most growers averaged at least 10 cents more per pound than in 2005.

“Overall, BTGCA believes that the general market outlook for U.S. burley is very promising,” Quarles says. World production of burley has remained at a stable level of around 1.7 billion pounds for the past several years. However, for several decades, U.S. growers have experienced a slide in production and market share. According to BTGCA, it now appears that that trend is reversing, and burley growers will see great opportunities for growth in the coming years.

To learn more about the Burley Tobacco Growers Cooperative Association and the opportunities the co-op provides for tobacco producers, visit their Web site at http://www.burleytobacco.com.

Rolling with the Punches

Flue-Cured Tobacco Growers Co-op developing own products

In 2002, with the Federal Tobacco Program soon to end, leaders of the Flue-Cured Tobacco Cooperative in Raleigh, N.C., knew that the co-op would have to radically shift gears to remain viable. For some time, direct contracts between the tobacco companies and growers had been threatening the traditional tobacco auction system which, in turn, was adversely affecting price supports.

The co-op would have to make the transition from its traditional role as a price-support program administrator and embark on a new role as a valueadded marketing and sales cooperative operating on the free market.

In anticipation of the end of the price-support and quota program, the co-op began exploring new business opportunities to help its members stay in production. One area investigated was the feasibility of manufacturing its own brand of cigarettes.

Co-op purchases state-of-the-art factory
In July 2004, just three months before legislation was passed that ended the Federal Tobacco Program, the Flue-Cured Tobacco Cooperative purchased Vector Tobacco, a processing and cigarette manufacturing facility in Timberlake, N.C. Next, the co-op created a new subsidiary organization to operate the facility: the U.S. Flue-Cured Tobacco Growers Inc., and also renamed the facility for the subsidiary.

The Timberlake plant is the first ever of its kind: the only grower-owned cigarette manufacturing facility in the United States. Located off U.S. Highway 501 about 20 miles north of Durham, the state-of-the-art, 350,000-square-foot plant threshes, expands stems, toasts burley, cuts tobacco and manufactures cigarettes, all in one location.

Tobacco products available through the Timberlake facility include cutrag blended and flavored tobacco products made to customers’ specifications. Annually, the facility can process up to 15,000 metric tons of tobacco strips and produce 10 billion cigarettes.

“We now have the facility to produce several value-added tobacco prod ucts, including consumer products,” Cooperative President Albert Johnson said. “That translates to more income opportunities for members in the future.” The ability to manufacture products has already created growth opportunities for the Flue-Cured Tobacco Cooperative. The co-op currently makes cigarettes and small cigars under contract with a number of companies.

The cooperative is also working on the product design that will lead to its own cigarette product, marketed under its own brand. The co-op has hired a marketing firm to help with product positioning, sales and distribution, and is testing a variety of blends through consumer focus groups to determine which one appeals most to consumers.

Serving growers for 60 years
For almost 60 years, the Flue-Cured Tobacco Cooperative has been providing consumers with premium U.S. flue-cured tobacco. Established in 1946 just after the end of World War II, the then-Flue-Cured Tobacco Cooperative Stabilization Corporation was started by tobacco farmers in Georgia, North Carolina, South Carolina and Virginia to administer the federal tobacco price-support program and sell members' tobacco to global buyers.

In 1967, the co-op purchased the Brown Tobacco Co. in Fuquay Varina, N.C., to provide re-drying and storage for growers. The facility and storage operation were subsequently renamed Tobacco Growers Services Inc.

In 2001, because of the threats to the auction and price support systems, the co-op started two marketing centers as a pilot program to see if these efforts would benefit their farmer-members. The pilot was so successful that, by the end of 2001, the program was expanded to include 14 marketing centers. For the 2006 crop year, there were 11 marketing centers.

After the federal program ended, the co-op revised its name and became the Flue-Cured Tobacco Cooperative. Today, the co-op has 3,500 active members and, as of late fall 2006, the processing facility was working 24 hours a day, 7 days a week to process the 2006 crop. Co-op members are celebrating the end of quotas limiting the tobacco acreage they can plant and looking forward to new markets and future opportunities for their crop.

To learn more about the Flue-Cured Tobacco Cooperative, visit http://www.fctcsc.com.

January/February Table of Contents