What's a tobacco farmer to do while waiting on a buyout to play itself out in Congress? “Farm as if there were going to be no buyout and if one happens, then it will be a pleasant surprise,” Blake Brown, North Carolina State University Extension ag economist, told the annual meeting of Tobacco Associates in Raleigh recently.
At this point, it's essentially up to Congress whether or not a buyout passes. Over the past 10 years, more than 13 buyouts have been introduced, Brown says. New proposals are expected this year.
The battle for a buyout is being waged in the larger context of the war over increased regulation of cigarettes. In fact, Brown says, the buyout and Food and Drug Administration regulation haven't been separate since talks of a buyout began in 1997. Earlier, in 1996, the FDA attempted to regulate cigarettes as a drug delivery device. The first buyout proposal came from Richard Lugar, R-Ind., in 1997. The Master Settlement Agreement between states and tobacco companies was signed in 1998.
In the present discussion, even the major tobacco companies disagree over FDA regulation. Philip Morris is for “meaningful” FDA regulation of cigarettes while RJR and B&W, who merged last year, as well as smaller tobacco firms are opposed to the effort.
FDA regulation would include youth smoking, disclosure of ingredients, reduced risk cigarettes and good manufacturing practices. Tobacco firms against the proposal believe FDA regulation would lock in market share already established.
At the background or the center of the market share argument is the MSA, Brown says.
From 1997-2002, retail prices for cigarettes have gone up $1.75 a pack. Federal excise taxes have increased 15 cents, while state taxes are up 24 cents a pack. The MSA added 38 cents a pack to cigarettes.
“The MSA was successful in improving the operating profits until 2003,” Brown says. “The real price of cigarettes has fallen dramatically in 2003 because of discounts and coupons.”
In effect, the MSA has been responsible for a decrease in the market share of major cigarette manufacturers at the same time shares for regional manufacturers are on the rise.
In 1997, Philip Morris, RJR, B&W and Lorillard had a combined market share of 97.1 percent. In 2002, that number was 86.2 percent. Smaller, regional cigarette makers now make up 13.8 percent of the market, Brown says.
Regional manufacturers were limited under the MSA on the amount they had to put into escrow based on market share. “There are a number of loopholes in the MSA,” Brown says.
Brown sees a “continued escalation in market share” for the regional manufacturers, pointing to how things change over time in the tobacco industry. In the 1950s, Philip Morris had only a 2 percent share of the market in the United States.
The United States used to produce the lion's share of flue-cured tobacco. Now it produces some 6 percent of the world's supply.