What is in this article?:
- Kentucky tobacco farmers provide model for deregulation
- Captured economies of scale
• Over the 10-year period of the study, the number of farms declined from just over 40,000 farms to just over 8,500 farms — but productivity increased by 44 percent.
If someone agreed to buy your home as is a year from now, you'd likely cancel the kitchen remodel.
According to a study at the University of Illinois, Kentucky tobacco farmers adopted that same logic when the tobacco companies announced the buyout — also known as the Tobacco Transition Act of 2004 — that ended a 66-year-old federal farm program.
However, the immediate drop in productivity was followed by startling changes. Over the 10-year period of the study, the number of farms declined from just over 40,000 farms to just over 8,500 farms — but productivity increased by 44 percent.
"The quota system limited the amount of tobacco that could be grown," U of I agricultural economist Barrett Kirwan said. "By reducing the supply, farmers were guaranteed their price, but it also guaranteed that less productive farms would keep producing because they'd see a price that was higher than what they should have been getting.
“As soon as that was removed, the less productive farms couldn't survive. There was a massive reallocation and massive shift of production to more productive farms. Those farms weren't realizing their full production potential."
After the buyout, the total tobacco acreage in Kentucky declined, but the remaining acres became more productive. They began producing more tobacco per acre on fewer acres. The acreage also relocated to the western part of the state where the soil is more suitable.
"The farmers who stayed began growing specialty tobacco used for cigars or chewing tobacco," Kirwan said. "The niche markets for tobacco haven't been hit as hard as the main cigarette market so without the quota system, restrictions were lifted.
“Farmers no longer had to grow only burley tobacco; they could diversify in chewing tobacco or cigar tobacco, which are specialty, higher-value tobaccos."
The study found that the most productive farmers were also the most diversified with crops other than just tobacco.
"They didn't have a decline in productivity leading up to the buyout," Kirwan said. "Their tobacco production did not decline, and after the buyout their tobacco productivity rose dramatically and so did their acreage. Their acreage more than doubled."