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.
