DeLoach, a Statesboro, Ga., producer, a member of the Flue-Cured Stabilization Board, and a vocal opponent of contracting, believes “farmers are not taking into consideration the repercussions” when they ink contracts with tobacco companies.
“When a farmer signs a contract with a tobacco company, he’s giving up the tobacco program and the price-support system that goes with it,” DeLoach says. “Why is he giving that up?”
The answer to that question has been lurking around the perimeters of tobacco warehouses like a couple of farmers sitting on a pile of tobacco drinking a Coca Cola in the heavy humidity of summer, watching it go from hot to hotter.
Change has come fast and furious to flue-cured tobacco in the past several years. First came baling; second came the mandated retrofitting of curing barns; and now, contracting.
The development of the reduced-nitrosamine issue forced wholesale change upon flue-cured growers in order for them to sell their crop. By 2002, some 30,000 to 35,000 flue-cured barns must be retrofitted to reduce tobacco-specific nitrosamines. Nitrosamines, which have been shown to be potent carcinogens, are caused in direct-fired systems that burn natural or LP gas to cure crops. One of the biggest factors that may have led to contracting, however, has been a cumulative 43 percent cut in quota over the past three seasons.
But few could have predicted the speed at which change occurred in January and February.
The nation’s largest cigarette maker, late last year, announced it would expand to flue-cured tobacco a very successful pilot-partnering program it operated in burley last year.
When Philip Morris USA (PM USA) announced details of its Tobacco Farmer Partnering Program in flue-cured tobacco Feb. 5, farmers flocked to sign contracts. Eleven businesses will serve as agents/receiving stations for the company. The program operates under the current federal tobacco program. PM USA will purchase the entire crop that a participating grower can sell without penalty under the Federal Tobacco Program. In addition to the contracting system, PM will also purchase a portion of its requirements through the auction system in 2001-2002.
Some growers see contracting as inevitable — they don’t want to be left out. For others, they have retrofitted their barns in order to be able to sell their crop. For most, it’s the chance to potentially make more money for their crop and to guarantee their income in turbulent economic times. For the tobacco companies, it means a more reliable way of getting the leaf they want for cigarettes.
While not actively promoting contracting, Harmony, N.C. flue-cured grower Richard Renegar offered valuable perspective in a recent Southeast Farm Press article.
“Five years ago, we decided not to get involved with contracts with hogs… You know where that puts us now? We are barely in the hog business today. I don’t intend on letting that happen with our tobacco.”
Lawton Matthews, a flue-cured grower and chairman of the Georgia Tobacco Commission, says growers may feel if they depend solely on the auction system, “they’re going to be penalized price wise.
“I think most flue-cured growers were opposed to contracting,” Matthews said the first weekend in March. “It didn’t look like it would gain ground, but it’s really taken over in the last two or three weeks.
“I think it’s going to be the demise of our price-support system and will put all the auction warehouses out of business,” Matthews says. “When that happens, we’ll have no second choice of where to market our tobacco and be solely relying on the companies.”
What had been a conversation regarding the dual existence of the century-old auction system and the newer contracting scenario late last year, turned into a discussion of just how the older system could hang on one more year. Some reports indicate that companies may contract as much as 80 percent of the flue-cured tobacco directly from farmers this season.
That news has prompted some warehousemen to close their doors for good. Some warehousemen saw three-quarters of their farmers who regularly bring tobacco to auction sign contracts. Some counties in North Carolina won’t have an auction for the first time 100 years. Reynolds will reportedly purchase all of its flue-cured needs directly from farmers this season for the second year in a row; other companies haven’t said how much leaf they will buy under contract.
It’s against this backdrop that DeLoach, a Georgia flue-cured tobacco farmer, paints a bleak picture. “What I see with contracting is that the small to medium-sized farmer will go away after the honeymoon period of a couple of years and be replaced by more efficient, larger farmers.
“Right now, the companies, I believe, prefer the small farmer because they get a better-quality tobacco from the small farmer,” Matthews says. “When the companies get enough people contracting to supply the domestic, and even export, needs, then I feel like the auction system might go by the wayside.
As a member of the Flue-Cured Stabilization Board, DeLoach says if a company has a government grader at the buying station and the tobacco does not measure up to the government grade, “Stabilization is not going to take that tobacco at that point. It will have to be re-designated and taken to the warehouse floor.”
There is a waiting period between the decision to re-designate, filling out the forms at the FSA office and the actual selling of the tobacco at the warehouse. The worst-case scenario is that it may take up to five and a half weeks between the decision to re-designate and the opportunity to sell tobacco that has been rejected by a company at the auction.
Matthews says tobacco that is rejected by a company could end up in Stabilization, which could further hurt the tobacco program. “This is putting the squeeze on the whole program,” he says. “This is putting the burden on the grading service, who’s going to have to cut personnel.”
Others point out that in some instances, however, burley tobacco rejected by companies last year reportedly sold on the auction floor for a better price than was offered through the contract — and did not go into the pool. Some farmers had their burley tobacco partially rejected by companies last season and went to the auction.
DeLoach says the situation is a double-edged sword.
Farmers who do not sign contracts are, in effect, “propping up the program and the support system for the farmer who elects to take a contract,” he says. “Now, personally, I don’t think that’s fair.”
With tongue partially in cheek, DeLoach likens this scenario to a man who runs around on his wife, tells his wife he’s going to run around on her and then asks her to stay at home and take care of business. His parting words are, ‘“If things don’t work out, I’ll be back,’” DeLoach says.
“They’re saying, ‘We’re going to give up the auction system, and if things don’t work out, we’ll be back,’” DeLoach says. “The problem is, if the auction system collapses, there won’t be any place to come back to. I really don’t think farmers are considering the repercussions of what they’re doing when they’re signing contracts.”
DeLoach finds it ironic that a quota owner would allow a farmer who rents quota to sign a contract.
“A lot of my quota holders are afraid to give me power of attorney at the FSA office,” DeLoach says. “They want to make the decisions. But they will let a farmer sign a contract — which to me is the same situation.
“If I were a quota holder today, I would be livid that the farmer who’s leasing my tobacco signed a contract out of fear of the system collapsing and my quota being worthless,” he says. DeLoach says a farmer with a 100,000 pound quota will get roughly a $10,000 premium for signing a contract. “But in the long-term, if his quota is worth $5 to $8 a pound, he could face a net loss of $790,000 if the quota system collapses. Those numbers are pretty simple to me.”
The answer, DeLoach feels, is for farmers, leaf dealers, warehousemen and graders to work together so companies could pick and choose the tobacco they want.
For Philip Morris and other tobacco companies, contracting gives them greater efficiency in buying leaf, as well as more control over grades and styles, PM USA Vice President of Leaf Michael Farriss says.
In December, he was quoted in the Southeast Farm Press as saying,
“Our Tobacco Farmer Partnering Program will help participating growers with a reliable and steady source of income for the upcoming season. It will help them plan with confidence and use their assets more efficiently.”
In addition to Philip Morris and Reynolds, Star Scientific, Brown & Williamson, Santa Fe, Dimon, Universal and Standard Commercial are offering contracts. United Tobacco, a group of farmers in the Wilson, N.C., area, has been contracting tobacco for several years. Less than 10 percent of the total sales last season were contracted.
The bottom line, DeLoach says, is “Farmers are real scared of not being able to sell their tobacco if they don’t contract.” “But I think people have been jumping the gun.”
Based on the contracts he’s seen, DeLoach says the seller agrees to not lease out all or any of his crop without prior written agreement of the buyer. “What that says to me is that if a farmer has a 100,000 pounds of tobacco and has a bad crop year and only delivers 50,000 on his contract, he won’t be able to fall disaster lease that tobacco without the written consent of that contractor. That says to me that the company has first refusal of your tobacco, but also of your quota. It would be up to them what I could do.
“The answer to tobacco woes isn’t the free market,” DeLoach says. “When I look at contracting in other industries in agriculture, I don’t see the benefits. I don’t want to have to deal with a multi-billion dollar, multi-national company without a buffer between them and me.
“This thing has been thrust upon quota holders and farmers like, ‘The train is leaving the station and if you don’t have a contract now, you won’t get one,” later, DeLoach says. “Who cares if the train is leaving the station, if you still have a tobacco program?
“I think the train wreck will come in July and August, when the marketing season starts,” he says, painting out the worst-case scenario. “Say North Carolina has a severe drought and the tobacco doesn’t have an acceptable grade that the companies want and we don’t have enough graders designated to the warehouses still standing.
“Farmers return to the auction system in masses to try to sell the tobacco that the companies didn’t want,” DeLoach says. “Tobacco marketing goes on until December because we don’t have enough graders to accept the tobacco.”
Commenting at a Tobacco Day in Raleigh last year, Blake Brown, North Carolina State ag economist, says it’s possible that contracting will lead to the end of the tobacco program, but points out that contracting is prevalent in all of agriculture. “Contracting will cause some stress…but there is no reason the program cannot continue to function with widespread contracting.”