Commonly called the tobacco buyout, the Tobacco Transition Payment Program last payment is scheduled for January 2014.
What does this mean for rural economies and tobacco production?
The federal tobacco price support and quota program ended in 2004, deregulating U.S. tobacco production and providing compensation to quota owners and tobacco farmers over a 10-year period. As of 2012 $4.11 billion had been paid out by USDA directly to tobacco growers and $5.85 billion directly to former quota owners.
Blake Brown, policy and farm management economist with the North Carolina State University Extension, answers questions remaining about what’s next now that the tobacco payment program is ending:
How will the end of the TTPP payments affect tobacco production?
Brown: Concerns have been raised that some farmers have been using the TTPP to subsidize tobacco production and that as soon as the payments end there will be a large exodus of tobacco producers. There are probably some farmers who have done this and will exit production after 2014. But since the TTPP was not tied to any requirement to produce tobacco the only reason tobacco farmers had for continuing production was if they thought it would be profitable.
The decoupling of TTPP payments from tobacco production increased the probability that decisions to continue tobacco farming were based on expected profitability, not contingent on receipt of TTPP payments.
While there is little hard data to go on and this conclusion is based on anecdotal evidence and general behavior by businesses, the end of the TTPP is likely to have little effect on tobacco production. Other factors such as the emergence of e-cigarettes, increasing regulation of tobacco products, increases in excise taxes, competition from other tobacco producing countries, exchange rates, and whether or not robust demand from Asia for tobacco continues will be much more important in determining future U.S. tobacco production levels.
There are many factors, some of them quite ominous, that will have potentially large impacts on U.S. tobacco production, but the end of the TTPP is not likely one of them.
How will the end of the TTPP be felt in tobacco-producing states?
Brown: The TTPP brought unprecedented funds to a large number of citizens in rural tobacco producing communities. But even this situation should not be a crisis scenario. All involved in the tobacco buyout have known with certainty that the payments would end after 10 years.
Again in every situation where funds are received there are some who spend irresponsibly and others who make honest mistakes in investment and consumption decisions. However most have likely consumed, invested, or saved the payments with the end in mind. All will bemoan the end of the payments, but the end should not be a surprise.
Is the final TTPP payment subject to federal sequestration? What does this mean?
Brown: The Office of Management and Budget says the payment should be reduced by up to 7.2 percent. This decision was completely unexpected by all involved since the TTPP payments are backed and completely paid from a trust fund of assessments on the tobacco industry. All involved including the financial institutions buying payment streams viewed the TTPP payments with the certainty of Treasury Bills.
While the end of the TTPP payments should not be disruptive because the end was expected, an unexpected reduction in the last TTPP payment is disruptive. A reduction of 7.2 percent would be over $68 million dollars not flowing to quota owners, producers and financial institutions. Congressional offices involving in bringing resolution to this unexpected problem seemed confident that the reduction would be restored…stay tuned.