A 9.5 percent cut in basic flue-cured tobacco quota underscores the fact that the tobacco program is in trouble and is likely to add fuel to the quota buyout fire.
“The basic problem is the intense competition from Brazil and the decrease in domestic consumption and production,” says Blake Brown, North Carolina State Extension economist.
Less market power in the U.S. means more “cheap” Brazilian tobacco coming into the country than in past years. Brazilian tobacco is a “very close substitution for our tobacco,” Brown says. For the first time last year, Brazil fulfilled its tariff rate quota of 80,000 metric tons. Decreasing demand certainly contributes to the problems, but the large amount of imported tobacco plays a bigger part, Brown says.
Across the country, cigarette excise taxes are on the rise. In New York, cigarette taxes hit $1.50 per pack last year.
“The cut in the quota shouldn't come as a major shock to anybody,” says Dan Stevens, USDA economist. “Our exports are trending down, our domestic consumption is trending down and the reserve-stock level dropped from 100 million to 60 million pounds.”
Add to that, decreased purchases by major cigarette manufacturers. In early December, cigarette manufacturers announced purchase intentions of 283.3 million pounds, a figure Brown calls “surprisingly low.”
Brown says cigarette manufacturers are using more tobacco than they purchase, still pulling inventories down. “I thought we might see purchase intentions come up,” Brown says. Cigarette manufacturers are relying on imported leaf, he says.
The story is much the same in burley country. Speaking at the Kentucky Farm Bureau convention, Will Snell, University of Kentucky Extension economist, said if the burley purchase intentions fall in line with flue-cured intentions, then burley producers could see a 3 to 5 percent cut in 2003 basic quota.
Purchase intentions and imports are shining the spotlight on the weakness of the tobacco program under current conditions.
“Essentially, in the past we restricted our supply to elevate prices,” Brown says. “It just doesn't work out the way it used to.”
It does add pressure to reform the tobacco program in the next Congress, several sources say.
“Most farmers are interested in talking about a buyout,” Brown says.
In the new year, Mitch Mconnell, R-Ky., is expected to lead the push for a buyout, following the retirement of Sen. Jesse Helms, R-N.C. “He will be the horse that pulls the plow,” Brown says. “He's the one who has the seniority and the authority to do something like that.
“Farmers will need to keep their eyes and ears open,” Brown says.