Tobacco growers mull contracting Did R. J. Reynolds come to you or did you have to go to them? How much of your crop did you contract? Is the contract good for just this year or longer? How much are they paying per pound?
The first few questions came slowly. It was obvious that tobacco farmers attending the Third Annual Cropping Systems Field Day at Clemson's Pee Dee Research and Education Center in Florence, S.C., wanted to know more about the ever increasing opportunities in non-auction tobacco sales. It was equally obvious that many in the audience are skeptical of some of the good things they have heard about contracting. They are concerned about the effects of contracting on the future of the tobacco program, the auction warehouse system, and their ability to continue to grow the crop that has long been their primary cash commodity.
Around five percent of this year's flue-cured crop is being sold non-auction, primarily through various contracts directly with tobacco companies. While that's not a high percentage, it is more than five times the amount contracted in 1999. And most tobacco growers believe the figure will soar in 2001.
Is contracting good for farmers and the tobacco industry, asks Russ Sutton, the Clemson agricultural economist who led the panel discussion. Are the tobacco contracts that look good today going to evolve into something more like the chicken and hog contracts we are all familiar with?
Export customers? If a high percentage of our flue-cured tobacco is contracted, how will we service our export customers? Can we maintain a warehouse auction system if more and more growers decide to contract?
Sutton was joined on the panel by two tobacco growers who have contracted for non-auction sale of a portion of their 2000 crop, Phil Phillips and Keith Allen, as well as Clemson Extension Tobacco Specialist Dewitt Gooden and Larry McKenzie from the South Carolina Farm Bureau.
Both growers contracted with R. J. Reynolds for a specific amount of tobacco. The company agreed to retrofit several barns with heat exchangers for each grower, and to purchase outside the auction system, the tobacco each grower cures in the retrofitted barns. The prices each will receive per grade and per pound are specified in the contracts.
"These are five-year contracts," says Philips, who farms in Sumter, S.C. "I've contracted to sell up to 20,000 pounds per barn. They don't want any tobacco that has not been cured in the retrofitted barns. The thing I like best about the contracts is I knew back in the spring what I was going to be paid for each grade of tobacco. We're getting a base price of $1.75 a pound, with a possibility of up to 15 cents a pound premiums. Plus I'm not having to pay the three percent warehouse charge. That's at least five cents a pound."
These growers must harvest their tobacco at least three times and keep the stalk positions separate for marketing. They must bale all their tobacco and deliver it to a warehouse where it is graded by one government grader.
"I make one trip to the warehouse, deliver the tobacco, get it graded and leave with a check," says Allen, who farms in Dillon, S.C. "Reynolds converted my barns for no cost to me. They say they want all the tobacco I can cure in these barns.
"The thing I like best is I don't have to worry about which buyers are on the market the day I take my tobacco to the warehouse. When I deliver my tobacco, I get the price for each grade the contract specifies. I can sell C tobacco when the buyers at the warehouse are only buying X tobacco. This year I sold X3L tobacco directly to Reynolds for $1.85 a pound when the same grade was bringing only $1.65 at the auction. Plus I didn't have to pay the auction fees."
All contracting growers are still obligated to pay grading fees and other assessments, just like growers who sell in an auction warehouse. The only fees they save are the warehouse charges.
South Carolina tobacco grower Cullen Bryant has not signed any tobacco sales contracts. He is selling all of his 2000 crop through the warehouse auction system. While he admits some of the provisions of the contracts he has heard about sound good, he questions how the contract provisions could change in the future.
"Are they dangling a carrot in front of us until most everyone gets locked in," he asks. "What will happen then, when we don't have anyplace left to sell our tobacco. Are they going to tighten up the contracts, tell us which varieties we can grow and how we can grow it? Is the price they are paying now going to hold up or not?"
Several growers in the audience pointed out that tobacco companies have consistently said that U.S. flue-cured tobacco is priced too high to compete in world markets, against significantly cheaper foreign tobacco. Yet, several companies are paying significantly above market average prices for contracted tobacco. Those mixed signals make growers wonder whether or not the companies will continue to pay premiums.
Who is getting the contracts? Larry McKenzie says it is obvious the tobacco companies have first contacted growers with reputations for consistently producing high quality tobacco. He says growers should be positioning themselves now to take advantage of contracts next year.
More activity "I think we're going to see more contracts next year. I don't think there's any doubt about that," he says. "Farmers need to get themselves into a position to contract. Convert your barns. Enhance your reputation as a quality tobacco producer. Be ready to bale your tobacco."
But McKenzie says he is concerned that some smaller growers might not be able to meet all the contracting requirements. He is also concerned about what will happen to tobacco that doesn't meet contract specifications.
"If a significant quantity of lesser quality tobacco winds up in Stabilization, it could overwhelm the system," he notes. "That could push up the no-net-cost fee higher than growers can stand. If the fees get too high, growers could vote the program out. Taking a lot of tobacco out of the auction system could put more warehouses out of business. Growers who contract will save that three percent commission, but they will lose the warehouseman as an additional buyer, and that could cost growers in the long run."
There has been at least one side benefit of having contracts this season. Dewitt Gooden says he has seen an improvement in growers' dedication to producing high quality tobacco.
"I feel like we have made some inroads with the buying companies. They can see that South Carolina growers are making real efforts to improve the quality of the tobacco they offer for sale. I think more growers this year decided to harvest at least three times. They watched nitrogen rates and how much MH they used. I don't know that they got any more for their tobacco at the warehouse, but taking care of those quality details could give them a better chance of getting a contract in the future if they decide that's what they want to do."
Gooden also says he believes that contracting and the quota system can co-exist.
Sutton urges all tobacco growers to carefully study the details of any tobacco sales contracts they might consider.