Congress sent a $10.1 billion tobacco buyout bill to the president on Oct. 11 who signed it into law on Oct. 22. The buyout will amount to $9.6 billion for quota holders and growers. The remaining $500 million will go toward disposing of stocks held by grower associations and the Commodity Credit Corporation.

Cigarette manufacturers and importers will pay an assessment based on their market share to fund the buyout. The provision does not contain FDA regulation of cigarettes.

Larry Wooten, North Carolina Farm Bureau president, called its passage “historic.” He said the legislation will pump $3.9 billion into rural North Carolina and “provide the foundation from which to rebuild an important segment of North Carolina's rural economy. The buyout has insured that tobacco will remain a critical part of our state's economy and that farm families have a future.”

The key provisions include $7 per pound for quota holders and $3 for growers, says Blake Brown, North Carolina State University Extension ag economist.

The details:

  • $7 for each pound of quota based on the 2002 level of basic quota. The quota owner as of the date of the legislation's enactment will get the payments. Payment will be over 10 years in 10 equal payments; i.e. 70 cents per pound per year.

  • $3 in contract payments per pound of quota grown paid to growers who grew tobacco in 2002, 2003 or 2004. The amount of payment will be based on the 2002 effective marketing quota. Producers of a quota in all three years, 2002, 2003, and 2004, are eligible for the payment of the full $3 based on the 2002 effective quota level for a particular quota. If a grower grew a quota for two of the three years, then the grower is eligible for two-thirds of the payment. If a grower grew a quota for one out of the three years, then the grower is eligible for one-third of the payment. The payments will be spread out over 10 years in equal annual payments.

Growers and quota owners are allowed to assign their payments to a financial institution. The significance of this provision is that some financial institutions have indicated an interest in providing growers and quota owners an up-front, lump-sum payment in exchange for the stream of the buyout payments. Growers and quota owners will need to carefully weigh the cost of this option since the financial institutions will retain a portion of the stream of payments in return for making a lump-sum payment.

The legislation eliminates the federal tobacco program. Beginning in 2005, there will be no federal restrictions on the production of tobacco. It does not contain any geographical restrictions on where tobacco can be produced after the program ends. Price supports and quotas will no longer exist.

The buyout will be funded by quarterly assessments on tobacco product manufacturers and importers based on their product's share of the U.S. market.

Since the buyout is funded by tobacco product manufacturers, Phase II payments will cease after enactment of the buyout. Assuming this year's Phase II payment is made, there would be a total of about $2.6 billion in the six remaining scheduled payments. Since these scheduled payments would be adjusted downward due to declining U.S. cigarette consumption, the actual payments would have been less than $2.6 billion. The projected total of the actual payments is around $2 billion.

On its Web site, the North Carolina State University Extension Agricultural and Resource Economics department has information about the buyout and related subjects. The Web site is at http://www.ces.ncsu.edu/depts/agecon/tobacco_econ/Buyout.html.

e-mail: cyancy@primediabusiness.com