In October 2004, Congress approved the Fair
and Equitable Tobacco Reform, or Title VI of the American Jobs
Creation Act of 2004 (P.L 108-357.) The law eliminates tobacco quota
and price support programs at the end of the 2004 crop year. This
is the most significant tobacco legislation in over 50 years. Both
tobacco quota owners and producers will be compensated for the changes
brought about by the termination of the program.
In place since 1938, the Federal tobacco program achieved
its goals for many years—stabilizing the volume of leaf available
for industry and maintaining grower incomes. In recent years, however,
pressures on the program began to mount as demand for tobacco products
fell. Under the program, declining demand caused reductions in quota,
the quantity of tobacco that may be marketed. But the price support
component of the program kept tobacco prices at high levels. Consequently,
U.S.-produced tobacco lost market share in both domestic and foreign
markets to cheaper foreign-produced leaf. In recent years, growers
have been locked in a downward spiral as higher prices lowered demand,
which then resulted in lower quotas.
After the termination of the program, quota holders
will be compensated at a rate of $7 per pound for the quota they
owned in 2002. Producers will receive $3 per pound for the effective
quota (the amount of leaf they could market) they produced during
2002. About 437,000 quota owners and 57,000 producers will receive
payments. Most producers are owners of quota, and as such, they
will receive both payments ($7 plus $3.) The total cost of the compensation
is estimated at $9.6 billion over 10 years. An additional $0.5 billion
is available to compensate cooperatives on losses incurred in disposing
of their stocks.
The quota buyout will be financed by assessments over
10 years on tobacco product manufacturers and importers. Each firm
will be assessed according to its share of domestic sales. Assessments
will be adjusted to reflect changes in market shares.
With the elimination of quota and price support in 2005,
farmers will be free to grow tobacco wherever they please. Production
is likely to move to regions amenable to mechanization and where
adequate economies of scale can be achieved—Georgia, the Coastal
Plain of North and South Carolina, and western Kentucky—and
away from areas such as the Piedmont in North Carolina and eastern
Kentucky.
Without price supports and the cost of obtaining quota,
U.S. prices could fall 30-40 percent, more in line with world levels,
thus enhancing the competitiveness of U.S. producers. Lower prices
will revive demand for U.S. leaf, and, unfettered by the constraints
imposed by the program, growers will be able to respond quickly
to the increased demand.
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