TOBACCO May 5, 1998 April 1998, TBS-238 Approved by the World Agricultural Outlook Board --------------------------------------------------------------------------- TOBACCO is published twice a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. This release contains only the text of the report -- tables and graphics are not included. Subscriptions to the printed version of this report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #TBS, $22/year. ERS-NASS accepts MasterCard and Visa. --------------------------------------------------------------------------- Summary Cigarette output fell 5 percent in 1997 to an estimated 719.6 billion pieces, about the level of 1992. Taxable removals slipped 3 percent to 471.4 billion. Exports dropped from last year's 243.9 billion pieces to 217 billion. U.S. smokers consumed an estimated 480 billion cigarettes in 1997, 1.5 percent less than a year earlier. Annual consumption per person 16 years and over declined 2.4 percent to 2,332 cigarettes. Higher prices are expected to result in a greater decline in 1998. Cigar consumption increased 19 percent to 3.6 billion cigars, and snuff also gained in 1997, while consumption of smoking and chewing tobacco fell. Use of cigars will increase in 1998, and snuff consumption is likely to rise also. Use of other tobacco products is expected to continue declining. As of March 1, U.S. tobacco growers indicated their intention to harvest 733,780 acres of tobacco, 8 percent less than 1997. Reacting to a 20-percent decrease in the effective quota, flue-cured growers indicated they will harvest 386,500 acres, 15 percent less than last season. Burley growers, with considerable carryover quota, are planning to harvest 305,100 acres, 2 percent more than in 1997. Harvesting intentions are about the same as in 1996. Tobacco growers generally plant the same acreage they intend to harvest. Total 1998 production, assuming average yields, would be 1.5 billion pounds, farm-sales weight, which is less than 1997. Lower production will dampen supply in the 1998/99 marketing year. Price supports for 1998 will rise 0.7 cent per pound for flue-cured and 1.8 cents for burley. Price supports for other types are up 3.4 to 5.8 cents per pound. Before the marketing season begins, the United States Department of Agriculture (USDA) sets grade loan rates for the various kinds of tobacco receiving support. Off-farm stocks of U.S.-grown leaf were down 0.1 percent on January 1, 1998, from a year earlier, while stocks of foreign-grown leaf were up 4.5 percent from a year earlier. With an anticipated increase in domestic use that more than offsets a small decline in leaf exports, total use of U.S.-grown tobacco in 1997/98 will likely be lower than a year earlier. Consequently, beginning 1998 carryover stocks of all U.S.-grown tobacco will probably decline. The value of U.S. leaf exports increased due to higher prices, while tobacco product exports fell in 1997 because of lower cigarette shipments. U.S. manufacturers moved some production overseas, causing the shift. The value of exports exceeded imports (arrivals) by $4.9 billion, $400 million less than last year's and $1 billion below 1996's record $5.9 billion. Cigarette exports declined 11 percent to 217 billion from last year's peak of 243.9 billion. Exports of unmanufactured leaf declined 3.1 percent to 484 million pounds. Export leaf volume should level off in 1998 due to lower U.S. production offset by lower world stocks (excluding China) and steady world consumption. Lower flue-cured production in 1998 will curtail shipments during the last half of the calendar year. In 1997, unmanufactured tobacco imports (arrivals) slipped 6 percent to 676 million pounds after advancing 64 percent in 1996. Steady cigarette production and abundant domestic leaf supplies contributed to lower imports. Imported leaf accounted for about 32 percent of total U.S. leaf stocks on January 1, 1998, 3 percent more than a year earlier. Total disappearance of U.S.-grown flue-cured tobacco in the current marketing year is forecast down from last year's 947 million pounds. Reduced domestic use and projected lower exports account for the decline. Disappearance in 1997/98 will likely be short of marketings, so carryover stocks at the beginning of 1998/99 will rise. Production in 1998 will likely fall from 1997's 1,007 million pounds. Disappearance of U.S.-grown burley tobacco in 1997/98 is also expected to decline from 1996/97's 631 million pounds, mostly due to lower domestic use. Exports are lower for the first 4 months of the marketing year. Burley sales in 1997/98 totaled 628.8 million, over 100 million pounds more than last season. Decreased use may cause U.S. burley carryover next October 1 to be larger than the previous year. USDA set this season's burley marketing quota at 637.8 million pounds, 67 million pounds below last season. The 1998 effective quota, which reflects last year's over- and under-marketings, totals about 860 million pounds, below last year's record. Mixed market prices in 1997 for other types had various impacts on 1998 allotments. The 1998 acreage allotments were unchanged for Kentucky-Tennessee fire-cured and raised 15 percent for Virginia fire-cured. Allotments for dark air-cured types gained 20 percent and Virginia sun-cured rose 15 percent over the previous season. Allotments for cigar filler and binder tobacco fell 20 percent. Unused farm acreage allotments in recent years were adjusted downward. Tobacco Products Domestic Cigarette Use Slips; Exports Decline U.S. cigarette consumption in 1997 is estimated at 480 billion pieces, compared with 487 billion the previous year. Price increases, higher State taxes, expanding regulation, and consumer awareness of links between smoking and disease combined to lower consumption. Per capita consumption continued to decline, sliding to 2,332 pieces per person (16 and over population), compared with 2,390 pieces for the same group in 1996. Premium brand cigarettes continued to gain market share as economy (discount) brands' share of the market fell from 28.5 percent in 1996 to 27.7 in 1997. Cigarette retail prices increased in 1997 and wholesale prices have increased 3 times since January 1997 for a total gain of 12.2 percent or $7.25 per 1,000 cigarettes. Calendar 1997 exports totaled 217 billion cigarettes, down from 244 billion in 1996 and about the same level as in 1993. Shipments to the European Union (EU-15) fell 20 percent because cigarette production by some manufacturers was shifted from the United States to Europe. Shipments to Japan, the second largest export market, were steady. After surging nearly four-fold in 1996, shipments to Russia declined 40 percent. Cigarette volume losses of 11 percent were only partially offset by slightly higher unit values, resulting in a lower total cigarette export value of $4,408 million compared with $4,735 million in 1997. The annual Economic Research Service (ERS) survey of manufacturers indicated that filter-tip cigarette production slipped to 97.7 percent of total output in 1997, from 98.2 percent in 1996. The loss was concentrated in the 100 millimeter filter-tip size, which made up about 33 percent of 1997 output (table 3). Cigarette Prices Increase Cigarette manufacturers raised wholesale prices for premium cigarettes 3 times since January 1997 for a total gain of $7.25 per 1,000 pieces compared with $4.00 per thousand the previous year. Current wholesale prices are still lower than the levels reached just prior to the August 1993 price cut. Wholesale cigarette prices were about this level in 1992. Cigar Smoking Increases; Smoking Tobacco Use Declines Use of large cigars (including cigarillos), continued its dramatic increase in 1997, gaining 19 percent, about the same as 1995-96. Consumption is at about the same level as 1983. Last year, U.S. smokers consumed about 3.6 billion large cigars. Production of small cigars (those using less than 3 pounds of tobacco per 1,000 cigars) is estimated at 1.5 billion pieces, 2 percent below 1996. Overall, cigar use should exceed 5.1 billion and is expected to continue ascending. Smoking tobacco consumption last year totaled about 14.5 million pounds, 14 percent below 1996. Sales (including imports) of pipe tobacco (the major category) and smoking tobacco for roll-your-own cigarettes both declined in 1997 (table 8). Smokeless Use Slips Output of firm, moist, twist and leaf chewing tobacco declined, while moist snuff advanced. Taxable removals of smokeless products mirrored output except that dry snuff taxable removals declined. Moist snuff taxable removals gained 2 percent, less than last year's, and chewing tobacco slipped 5 percent. Part of the rise in smokeless tobacco consumption probably results from substitution for cigarettes because of increased smoking restrictions. U.S. Exports and Imports U.S. Tobacco Trade Balance Falls The tobacco balance of trade-the value of manufactured and unmanufactured exports less imports--declined for the second year in 1997 due to lower manufactured product exports--mostly cigarettes, and increases in leaf and manufactured imports. The value of U.S. leaf imports remained above $1 billion, and import value surged due to cigar imports, nearly reaching $500 million. U.S. exports of unmanufactured tobacco and tobacco products were down slightly at $6.5 billion in calendar 1997. The total tobacco balance of trade surplus declined from $5.3 billion to $4.9 billion. Net leaf trade recovered after last year's sharp decline but is still below average levels. Both leaf and product export quantities declined. Tobacco leaf export value increased 12 percent compared with the previous year. Cigarette export value fell due to lower volume despite slightly higher unit values. Cigarette exports to Canada and Europe fell, while shipments to other regions were steady. A shift in production overseas by U.S. manufacturers reduced overall cigarette exports. The Bureau of the Census recorded 132 countries as destinations for U.S. leaf and product exports in 1997. General imports (arrivals) of unmanufactured leaf advanced 7 percent in value to $1,129 million, and tobacco product imports gained 78 percent to reach $497 million, the biggest shift in the trade picture. With little change in export value, the trade surplus fell to $4.9 billion from the previous year's $5.3 billion and record high of $5.9 billion in 1995 (table 10). Leaf Tobacco Export Volume Nearly Unchanged in 1997 U.S. exports of unmanufactured tobacco in 1997 fell less than 1 percent compared with a year earlier to 484 million pounds declared weight (219,493 metric tons) (table 11). Exports to Europe and Oceania declined; and shipments to Canada increased. On a farm-sales weight basis, total leaf exports were 634 million pounds. Exports of all types except unstemmed flue-cured and Virginia fire and sun- cured advanced. European markets, which typically buy more than half of U.S. leaf exports, purchased 58 percent of total U.S. exports. Japan purchased 17 percent of U.S. leaf shipments. Adequate supplies tempered by high prices resulted in a 3-percent gain in calendar 1997 flue-cured exports. Burley export volume gained 9 percent, to 125 million pounds. Unit values for both flue-cured and burley shipments were up for the calendar year. Maryland exports increased for the second year, advancing 15 percent in volume to reach 5.3 million pounds. Kentucky-Tennessee fire-cured exports also continued an upward trend, reaching 15 million pounds. Virginia fire- and sun-cured volume declined. Blackfat volume nearly doubled, reaching 1.7 million pounds. Cigar wrapper exports gained. Shipments of stems and refuse, and other leaf declined. Exports of stems were 55 million pounds, down 27 percent, and other tobacco declined 12 percent to reach 22.3 million pounds. Imports Decline Total duty-paid imports of tobacco for consumption (duty paid) slipped 3 percent in 1997 after gaining 59 percent in 1996 but are still at relatively high levels. Import volume totaled 649 million pounds, compared with 667 million pounds the previous year. In 1997, the United States imported slightly more cigarette leaf and stems and 23 million pounds more cigar leaf. Cigarette scrap imports were nil, and cigar scrap imports rose slightly. Cigarette leaf import volume (consumption) advanced 2 percent, with no major shifts in the relative components. General import volume of unmanufactured tobacco (direct entry plus placements in bonded warehouses for later factory use) slipped 6 percent. Stemmed flue-cured and cigar types advanced, but stems declined. U.S. stocks of imported cigarette tobacco were up 10 percent on January 1, 1998, compared with a year earlier (table 15). Imported flue-cured stocks rose 9 percent, and burley stocks rose 19 percent. Oriental stocks gained 4 percent. Imported cigar leaf stocks rose 23 percent. Tariff-Rate Quota Activity President Clinton proclaimed a tariff-rate quota (TRQ) effective September 13, 1995, for certain types of imported tobacco, primarily flue-cured and burley. The proclamation also eliminated duties on Oriental and cigar wrapper, binder, and filler tobacco. The total quantity allowed under the tariff-rate quota is 333 million pounds, declared weight, for September 13, 1997, through September 12, 1998. Through April 13, 34.7 percent of the total quota allocation had been imported. The TRQ is designed to impact U.S. cigarette leaf tobacco imports, particularly flue-cured and burley type tobaccos, which are imported for the purpose of manufacturing cigarettes in the United States. Imports of cigarette leaf tobaccos (excluding Oriental) which exceed predetermined quota are now subject to an import duty of 350 percent ad valorem, although a draw-back provision allows most of the duty to be refunded if the imported leaf is re-exported as leaf or manufactured tobacco such as cigarettes. U.S. Tobacco Leaf Situation and Outlook 1/ ---------- All quantities in this section are in farm sales weight unless otherwise noted. Years refer to marketing years; July-June for flue-cured and cigar wrapper (type 61) and October-September for all other types, unless otherwise noted. ---------- Domestic Supplies Increase in 1997/98 With marketings in 1997 up 9 percent from 1996, a smaller carryover left the supply of domestic leaf up less than 100 million pounds for 1997/98 (July-June for flue-cured and October-September for burley and other kinds) at 3.7 billion pounds. On January 1, 1998, domestic leaf stocks were up 1 percent above a year earlier. However, by the end of the current marketing year, stocks are expected to be higher than the 2.1 billion pound carryover on July 1, 1997 (October 1 for burley and other kinds). With average yields, 1998 U.S. tobacco production could total 1.5 billion pounds, 12 percent lower than last year. Auction marketings of flue-cured gained 13 percent (table 25) in 1997/98 over 1996/97. Burley marketings advanced about 22 percent. Sales of Maryland are down sharply, and fire-cured and dark air-cured are likely up. Cigar tobacco production is expected to gain over 1.5 millon pounds. All tobacco types other than Maryland, Pennsylvania filler, Connecticut binder, shade-grown wrapper, and Perique are under quotas. Except for farms on which producers in recent years have planted or received planted credit of less than 75 percent of the farm's acreage allotment, 1998 tobacco allotments are increased 15 percent for Virginia sun-cured and Virginia fire-cured, 20 percent for dark air-cured, and unchanged for Kentucky-Tennessee fire-cured tobacco. Cigar filler and binder tobacco fell 20 percent. Acreage allotments unused in recent years were adjusted downward. USDA's Prospective Plantings report indicated that growers plan to harvest 733,780 acres of tobacco in 1998, 8 percent less than was harvested in 1997. In 1997, intentions were 2 percent more than the final harvested acreage and, in 1996, they were 2 percent less. Costs Expected To Rise Production and marketing costs of flue-cured tobacco will probably increase in 1998 as costs of most inputs likely will rise. Total costs per acre (excluding land, quota, and the no-net-cost and marketing assessments) are expected to decrease 2 to 4 percent from a year ago. Similar increases are expected for variable costs. Burley costs are also expected to increase by 2 to 4 percent. Quota rental rates in 1998/99 may decline. Since lease and transfer of flue-cured quotas were eliminated in 1988 (except when a farm experiences a natural disaster), growers have used other options to obtain quotas. These options include: (1) cash or share renting the quota and growing the tobacco on the farm to which the quota is established; (2) purchasing quota; and (3) combining more than one farm into a single farming unit. To combine farms, the operator must have complete control over the entire farm operation. Also, the same accounting system and management must be used on all tracts. Furthermore, the rental agreement must last more than 1 year and include a rotation of one or more program, allotment, or other crops among tracts. Since 1991, burley growers can both lease and transfer and purchase quota within counties throughout the belt. Furthermore, since 1991, Tennessee growers can lease and transfer burley quota across county lines within the State. Price Supports and Assessments in 1998 Price supports are available to eligible growers through government loans to producer associations. To be eligible, producers must pay assessments to the no-net-cost account established by the associations. For flue-cured and burley tobaccos, producers and buyers share these assessments. Growers of other kinds pay the full amount. In addition, since 1991, growers and purchasers of tobacco under the price support program are required to pay a marketing assessment. Grower and buyer contributions equal to 1 percent of the loan rate are divided equally. Growers must also certify that any pesticides applied to the tobacco crop were EPA-approved and used according to label directions. To obtain price support for flue-cured tobacco, USDA requires growers to designate a warehouse where they intend to sell the tobacco. Growers of flue-cured tobacco approved marketing quotas for the 1998, 1999, and 2000 marketing years in a referendum held January 12-15, 1998. In a referendum held February 23 through 27, burley growers voted to continue marketing quotas on a poundage basis for the 1998, 1999, and 2000 marketing years. Growers of Maryland, Pennsylvania filler, and Connecticut binder (types 51-52) have no price supports because they turned down marketing quotas in referenda this year. Growers of Virginia fire-cured, Kentucky-Tennessee fire-cured, and Kentucky-Tennessee dark air-cured voted to accept marketing quotas for the 1997-99 marketing years in two referenda held on March 24-27, 1997. Growers of Wisconsin and Ohio filler and binder voted in March 1996 to accept quotas for the next three crops (1996, 1997, and 1998). Growers of Virginia sun-cured (type 37) voted on March 23-26, 1998 to approve quotas for the 1998, 1999, and 2000 crop years. Under the Omnibus Budget Reconciliation Act of 1990, the 1998 marketing assessment has been set at 1.628 cents per pound for flue-cured and 1.778 cents for burley (divided equally for growers and purchasers). For other tobaccos, the marketing assessment ranges from 1.212 cents per pound for Wisconsin binder to 1.681 cents for Kentucky-Tennessee dark fire-cured tobacco (table 20). The 1998 flue-cured no-net-cost assessment is 0.372 cent per pound; 0.186 cent per pound for producers and 0.186 cent per pound for purchasers. The no-net-cost assessment for burley tobacco has not been set at this time. The Agricultural Act of 1949, as amended in 1986, requires that producers and purchasers share equally in no-net-cost assessments, to the extent possible, in maintaining the no-net-cost account for 1985 and subsequent crops of flue-cured and burley tobacco. No-net-cost assessments for the other kinds of tobacco will be announced later. USDA has set the 1998 flue-cured support level at $1.628 per pound, 0.7 cent above 1997, and the burley support at $1.778, 1.8 cents above 1997. The price supports for flue-cured and burley are calculated using the level of the preceding year, adjusted by changes in the 5-year moving average of market prices, excluding the highest and lowest (two-thirds weight) and changes in a cost-of-production index (one-third weight). For other types, maximum support rates continue to be based on changes in the average of the parity index during the 3 previous years compared with 1959. But loan associations can request reduced support if warranted by market conditions. Supports for other kinds of tobacco are up 3.4 to 5.8 cents per pound or 2.5 to 3.7 percent in 1998. Tobacco Tested for Pesticides Pesticide use has been restricted on U.S. tobacco for many years. The Food Security Act of 1985 extended the adherence standards. It requires USDA to inspect U.S.-produced flue-cured and burley tobacco for improper use of pesticides. Flue-Cured Disappearance in 1997/98 Likely To Fall Total disappearance of U.S.-grown flue-cured tobacco (types 11-14) will slide about 4 percent from last year's 947 million pounds to about 905 million pounds in 1997/98 (table 25). During the first half of the marketing year (July-December 1997), domestic disappearance advanced compared with the same period last season while exports fell 15 percent. Domestic use may slide during the second half of the marketing year (January-June 1997) if imports rise. Domestic use for the marketing year may decline slightly from last season. During the first 6 months of this marketing season, flue-cured exports to European countries declined while Asian countries took more. July-December exports were 158 million pounds (farm sales weight). January 1998 flue-cured exports slid 19 percent from the previous January, bringing the July-January total to 189 million pounds, 16 percent lower than the same period last year. Carryover May Rise Estimated disappearance in 1997/98 is less than marketings. Consequently, the flue-cured carryover on July 1, 1998, is projected to increase about 100 million pounds from the 1,116 million pounds of July 1, 1997. Crop Projected To Shrink in 1998 The national marketing quota for 1998 crop flue-cured tobacco is 807.6 million pounds, 17 percent below the 1997 quota of 973.8 million pounds. The basic quota fell due to lower cigarette manufacturer purchase intentions. Overmarketings in 1997 resulted in a 20-percent decline in the effective quota, which is 813 million pounds. The effective quota is obtained by adjusting the basic quota by the Secretary's discretion (plus or minus 3 percent) and adding net undermarketings. Based on the effective quota, marketings should fall in 1998. According to the March planting intentions report, 386,500 acres will be grown, 7 percent below last year's harvested acres. On this acreage, a normal yield would produce about 870 million pounds, or nearing 107 percent of the effective quota. Only 103 percent of the effective quota can be marketed without penalty so marketings are limited to 837 million pounds. In 1997, growers marketed nearly 100 percent of the effective quota. The level is likely to be higher this year. In 1996, growers marketed 95 percent of the effective quota. In 1995 and 1994, growers marketed 101 percent of poundage quota compared with 100 percent in 1992 and 1993. The projected flue-cured marketings, plus anticipated carryover, indicates that the 1998/99 supply is expected to gain about 3 percent from the 2.1 billion pounds available in the current marketing year. This represents about 2.3 years' use, about the traditional benchmark level. Foreign Situation As of March 22, the volume of flue-cured tobacco sold through the Ontario Flue-cured Growers Board during the 1997/98 season totaled 137.5 million pounds. The average price was Can$1.73 (US$1.22) per pound, compared with Can$1.86 (US$1.36) per pound for the season last year. Zimbabwe's flue-cured production in 1997 was about 407 million pounds, down 8 percent from 1996. Zimbabwe's flue-cured auction closed September 24, 1997. Prices averaged US$1.06 per pound, 27 cents below a year earlier. World oversupply and a thin-leafed crop were major factors in reducing prices received by growers. Indications are that 1998 production may increase to around 485 million pounds (farm sales weight). Brazil's output of flue-cured tobacco in 1998 will be about 837 million pounds (farm sales weight), down from last year's 945.7 million pounds. The El Nino phenomenon coupled with a 5-percent price decrease in international prices are the cause of the decline. Exports are expected to drop due to lower leaf availability. Burley Effective Quota Near Last Year's Record The 1998 basic quota for burley totals 637.8 million pounds, 9 percent above 1997. Marketings in 1997/98 totaled 629 million pounds, 22 percent above 1996. Allowing for overquota and underquota marketings last season, the 1998 effective quota totals around 860 million pounds, 20 million below a year earlier. Manufacturer's purchase intentions for the 1998 crop are 421 million pounds, compared with 473.5 million pounds in 1997. In 1996, actual purchases were 402 million pounds. This year's price support has been set at $1.778 per pound, 11 cents below the 1997/98 average market price. Around March 1, farmers said they intended to set 305,100 acres, about 2 percent more acreage than was harvested last year. Preliminary data indicate that in 1997/98, growers marketed 71 percent of their effective quota. In 1996/97, growers marketed 73 percent of their effective quota, until this year, the lowest percentage since 1989. They marketed 83 percent in 1995/96, 84 percent in 1994/95, and 87 percent in 1993/94. Of the two major growing States, undermarketings were somewhat greater in Tennessee than in Kentucky. With normal yields, 1998 production will reach 640 million pounds, up 2 percent from 1997 net marketings. Quota should be sufficient to market tobacco produced in 1998. Supply Falls in 1996/97 The 1997/98 domestic supply was 1.381 billion pounds on October 1, 2 percent below a year earlier (table 25). The supply equals about 2.4 times the estimated disappearance, about the traditional benchmark level and in line with recent years. By last October 1, the total stocks fell 13 percent. Unlike the previous two seasons, the two grower loan associations took about 19.8 percent, or 124.5 million pounds, of the 1997 crop. Demand fell because of anticipated declines in cigarette production and lower exports. About 54.7 million pounds of the 1994 crop and 232 million pounds of the 1993 crop were placed under loan. Despite higher marketings, domestic burley use is not expected to increase. The poor-quality crop has hurt burley exports; 1997/98 shipments through January are down by half last year's level. Japan and Germany are the leading importers. World burley production rose in 1997 as higher output in the United States, China, Malawi, Brazil, Thailand, and Argentina more than offset declines in Mexico, Greece, and the Philippines. Crop Volume and Value Up The value of 1997/98 marketings advanced on higher volume although the price was down 3 cents per pound. Quality was lower due to weather conditions and widespread blue-mold. The proportion designated as fair and low quality constituted 76 percent, slightly more than last year. Tan and reddish tan tobacco made up 90 percent of sales, more than last year. More tobacco was separated into groups this season, as less mixed-stripped tobacco was offered for auction. Markets opened on November 24, 1997, and the season ended on April 9, 1998, after 53 days. Last year, the markets closed on February 27, 1997, after 45 sales days. The closing date was extended due to poor curing conditions. Southern Maryland Prices Fall Sharply Maryland auctions for the 1997 (sold in 1998) crop of Southern Maryland (type 32) opened March 17, 1998, and closed April 9, after being open for 15 sales days. Quantity marketed was 12.0 million pounds, 27 percent above 1996. Prices averaged $1.716 per pound, down 20 cents per pound compared with last year. Nevertheless, prices were the fourth highest in the history of the Maryland market. The 1997 Maryland crop suffered from poor weather during growing and harvesting. There was very little thin leaf this season. For the 1996 crop (marketed mostly in 1997), growers received $1.92 a pound at the Maryland auction. Since quotas do not apply, Maryland tobacco does not receive price support. In a 1982 referendum, growers rejected USDA grading and its required fee. Supply Increases Although acreage continued declining in 1997, better yields resulted in a 17.7- million-pound crop, about 600,000 pounds larger than the previous season. Yields increased to more than 1,600 pounds per acre. In 1997, about 32 percent of total Maryland production was in Pennsylvania. Therefore, production declined in Maryland and increased in Pennsylvania. Sales of the Pennsylvania crop have been slow, with very little of the crop purchased, leaving perhaps 2-5 million pounds unsold. Some Pennsylvania leaf may be sold at the Maryland auctions and some may be purchased by dealers after the Maryland auctions close. The Agriculture and Food Act of 1981 mandated penalties for growing and marketing Maryland tobacco in quota areas. However, quotas do not apply to Pennsylvania seedleaf tobacco and since seedleaf prices are lower, seedleaf growers have switched to producing Maryland tobacco. The supply for marketing year 1997/98 is larger than that of 1996/97. Use is expected to advance about 1 million pounds (table 28). Farmers' March harvest intentions indicate an 800-acre decline in 1998, and production will likely decrease proportionately as yields are already quite high. Supplies should therefore decline a little in 1998/99. Fire-Cured Prices Fall Slightly Kentucky-Tennessee fire-cured (type 22-23) auction prices slipped from last season. Although loan receipts increased, demand was fairly good. Auction volume was down slightly as only 48 percent of total volume was sold through warehouses. Country sales are expected to be about 20 million pounds. Quality for the 1997 crop was similar to last season. Demand has remained relatively strong because of the increasing demand for moist snuff. Loan associations took more tobacco this year. Auction prices for types 22-23 averaged $2.109 compared with $2.1101 per pound in 1996. Including barn door sales, prices for types 22-23 averaged $2.245 per pound in 1996. Farm sales prices are not available for 1997 yet. About 1.9 percent of the type 22-23 crop sold at auction (370,000 pounds) was placed under loan. Auctions for Kentucky-Tennessee (types 22-23) began January 20 and ended on April 2. This season's auction prices were mixed, ranging from $3.20 per pound for the best wrapper and heavy leaf grades to $1.31 a pound for lugs. Auction volume increased, along with much higher average prices, resulting in a gain in value for Virginia type 21 fire-cured leaf, and demand was good. However loan receipts were nil, compared with 1.5 percent last season. When sales ended on January 12 after 13 days, volume had gained 16 percent from 1997 and value gained 38 percent. Prices rose 34 cents per pound to $2.13. Output of snuff, which constitutes the principal domestic use of fire-cured tobacco, rose during the past year, and should continue rising in 1998. So far this season, leaf export volume has gained 26 percent over the previous year. For the 1997/98 season, total use should increase about 100,000 pounds. Farm Acreage Allotments Allotments were unchanged for Kentucky-Tennessee fire-cured and raised 15 percent for Virginia fire-cured. This year's U.S. total farm allotment is 16,818 acres for Kentucky-Tennessee fire-cured and 1,710 acres for Virginia fire-cured. About 93 percent of all allotments of Kentucky-Tennessee fire-cured were produced in 1997. For Virginia fire-cured, acreage harvested as a share of allotments in 1997 totaled 80 percent, compared with 84 percent in 1996. When compared with effective allotments (allows for productivity adjustments on leased-in acres) the percentages are somewhat higher. In 1998, acreage is projected to decrease by 200 acres in Kentucky and Tennessee and 100 acres in Virginia, for a 2-percent decline for the three States. Dark Air-Cured Demand Strong, Prices Higher Very good demand resulted in substantially higher prices for One Sucker (type 35) leaf at auction this year. At $1.91 per pound, the average price was 6 cents above last season, setting new records. Sales reached 3.2 million pounds, compared with 3.5 million pounds last season. About 38 percent of the One-Sucker crop was sold in the country (at the farm). Marketings were not quite as desirable as last year, with more fair quality and green tobacco moving across the floors. Loan takings were 13,972 pounds. Sales began December 1, 1997, and continued through February 13, 1998. Less desirable marketings did not prevent Green River (type 36) marketings from surpassing last year's record high prices. Sales ran from December 3, 1997, to February 19, 1998, during which 2.7 million pounds were auctioned. The average price was $2.03 per pound, 5.5 cents higher than last year. Good or better leaf accounted for 45 percent of sales; no tobacco was placed under loan. Demand for Virginia sun-cured (type 37) was also strong in 1997, with volume up 9.2 percent and value up 17 percent from last season. Prices averaged $1.91 per pound, 13 cents over last season, and no leaf went under loan. Quality was slightly better than the 1996 crop, with fair or good tobacco making up 53 percent of sales. Sales lasted 3 days. This season's supply of dark air- and sun-cured tobacco totals 30 million pounds, about 4 million less than last season (table 30). Most dark air-cured tobacco goes into plug and twist chewing. Output of both plug and twist chewing fell in 1997. Disappearance of dark air-cured tobacco is likely to be higher than the size of the 1997 crop, and carryover will decrease from last year. National Acreage Allotments Gain Despite higher 1997 production, lower carryin stocks will reduce 1997/98 supply from the 34.1 million pounds of 1996/97. Acreage allotments for growers of dark air-cured will increase from a year earlier. Total allotments for 1998 of types 35-36 are 4,882 acres, 14 percent above last year. Based on harvesting intentions, production in 1998 should rise 15 percent given normal yields. Virginia sun-cured acreage allotments, at 118 acres, are up slightly from last season. Harvesting intentions are unchanged. Cigar Tobacco Demand Varies Between Types Most cigar tobacco producers received slightly higher prices for their 1997 crop than a year earlier (prices are no longer reported for wrapper tobacco). Most cigar leaf had been sold by early March, although Wisconsin binder markets are open through April 10. Wisconsin binder tobacco loan takings through early April were nil. Type 54-55 production gained about 700,000 pounds. Prices averaged $1.50 per pound for Wisconsin binder (types 54-55). Quality binders--about 9 percent of the type 54 crop--brought $1.85 and 10 percent was damaged by wind or hail and sold for less. Overall quality was very good. Connecticut binder prices have risen in recent years because loan stocks have been liquidated, production has been down, and crops have been of good quality. Production in 1997 is expected to be up over 400,000 pounds because of higher yields. The Agricultural Statistics Board will release season-average prices and production data for the 1997 crop in May 1998. Overall, price support levels for this year's crop of cigar tobacco will rise 4.3 percent. Again this season, there are no price supports for Pennsylvania filler (type 41), Connecticut binder (types 51-52), or shade-grown tobacco (type 61). No-net-cost assessments for cigar binder types in 1998 will be announced shortly. High no-net-cost assessments for cigar filler types 42-44 has essentially eliminated production of these kinds. Growers of cigar filler and binder (types 42-44 and types 54-55) voted to accept quotas for the 1996-1998 crops at referenda held in March 1996. In separate referenda held March 1998, growers of Pennsylvania filler and Connecticut binder voted against marketing quotas for the 1998, 1999, and 2000 crop years. Supplies Decline Total supplies of U.S. cigar tobacco for this season are down 14 percent from the previous season. A slight gain in production did not offset much lower carryin. Carryin was lower for all types. Cigar filler supplies fell 16 percent, binder supplies fell 14 percent, and wrapper supplies fell 7 percent. Cigar leaf imports surged 37 percent, at 84 million pounds (declared weight) for calendar 1997. Cigar wrapper, binder, and scrap arrivals all gained. On January 1, 1998, foreign leaf stocks totaled 108.4 million pounds, up 21 million pounds from a year earlier. Domestic Use Steady Until last year, demand for domestically produced cigar filler and binder had declined as demand for loose-leaf chewing and cigars fell. Skyrocketing production of cigars since 1996 has increased use of some types. However, cigar leaf users continue to obtain most of their requirements from imports. Last year, over 75 percent of tobacco used to make cigars and loose-leaf chewing tobacco was foreign-grown. U.S. cigar leaf use will not change much in 1998. Use will probably exceed 1997 production, so carryin may fall from the 33 million pounds available at the beginning of 1997/98. Cigar Filler and Binder Acreage Lower in 1998 Cigar filler and binder (types 42-44 and 53-55) acreage allotments for 1998 were lowered 1,027 acres. Based on March harvesting intentions, growers estimated cigar filler and binder acreage should fall about 3 percent from last year. However, based on the large reduction in allotments in 1998, actual production may be lower. No-net-cost assessments have not been set for the 1998 Wisconsin crop, but they will likely be suspended again because all loan stocks have been sold. Pennsylvania filler acreage is expected to fall about 2 percent, and binder acreage is expected down 3 percent. Connecticut binder (types 51-52) acreage is expected to increase by nearly 200 acres, a little less than last year's gain, but Wisconsin binder (types 54-55) acreage is expected to fall by 350 acres, according to March intentions. Shade-grown wrapper acreage will likely increase by 200 acres due to strong demand for high-quality wrapper. Given average yields, cigar tobacco production in 1998/99 is expected to decline 4 percent from last year's crop. But, combined with smaller carryover, supplies likely will decrease. Economic Structure of Tobacco-Growing Regions by Fred Gale 1/ ----------- 1/ Agricultural economist, Food and Rural Economics Division, Economic Research Service, USDA. ----------- Abstract: Tobacco legislation now being considered could have important impacts on tobacco growers and their communities. This article describes the diversity among tobacco growers and provides a statistical profile of tobacco-growing counties. The tobacco-growing region has been reducing its dependence on tobacco for several decades, but some counties are still reliant on tobacco income and offer relatively few alternative economic opportunities. Keywords: tobacco farms, regional economics, tobacco settlement, employment statistics. Introduction Communities that depend upon tobacco dollars are uncertain and apprehensive about what the outcome of the current tobacco policy debate will mean for their livelihoods. Policymakers are considering higher excise taxes, further restrictions on advertising, and other measures aimed at reducing use of tobacco products. Congress is also considering several bills that would end the tobacco program, buy out tobacco farm quotas, and provide assistance to farmers, workers, and communities. President Clinton has asked Congress to include assistance for tobacco growers and their communities in any tobacco legislation sent to him. The news media have featured many anecdotal accounts of tobacco's importance to local economies in tobacco-growing areas of Kentucky, Virginia, Tennessee, the Carolinas, and other parts of the South, but relatively little statistical information has been available to evaluate tobacco's economic importance. 2/ --------- 2/ Previous studies include Gale (1994,1997), Knapp, Wise, and Reaves. --------- This article assembles a variety of data sources to produce a statistical portrait of tobacco-growing counties. It provides information about where tobacco is grown, the economic importance of tobacco in different regions, the economic structure of tobacco-growing areas, and other characteristics related to demographics and education. This article provides valuable background for the wide range of participants in tobacco policy formation and negotiation, including public health and legal professionals, Government personnel, journalists, and others involved in formulating opinions about making and implementing tobacco policy. Proposed Changes Many tobacco growers were incensed that they did not have a place at the table in the June 1997 tobacco settlement between State attorneys general and tobacco industry representatives. The proposed settlement called for higher cigarette prices and other measures to reduce tobacco use, payments from manufacturers to States, and, for tobacco manufacturers, limits on future liability for damage claims. No provision was made in the settlement proposal to compensate growers or communities that would be hurt by reduced demand for tobacco. The original settlement is not expected to be enacted in its original form, but Congress is considering a number of legislative proposals for tobacco legislation. In addition to raising excise taxes and payments from tobacco companies even higher than those in the June 1997 settlement, also on the table are proposals to end the 60-year-old tobacco program by eliminating tobacco price supports, buying out quotas, and eliminating acreage allotments that limit the supply of U.S. tobacco. Most current proposals also recognize the potential economic dislocation resulting from these proposals, and include provisions for tobacco farmers and communities based on Sen. Wendell Ford's "Long-Term Economic Assistance for Farmers Act" (LEAF), introduced in October 1997. LEAF provisions include compensation to quota owners for lost quota, assistance for economic and agricultural development in tobacco communities, and tobacco worker transition and retraining assistance. Large excise tax increases and elimination of the tobacco program would have considerable impact on tobacco growers and their communities. Higher excise taxes would reduce demand for tobacco as smoking declines. Blake Brown, North Carolina State University tobacco economist, predicts that a $1.50 increase in the per-pack tax on cigarettes would result in a long-term decline in tobacco sales of roughly 10-20 percent and a decline of over $500 million in annual farm revenues from tobacco if the current tobacco farm program is maintained. Brown also predicts that tobacco leaf prices would fall 20 to 30 percent in the long run if the price support system were eliminated in conjunction with a $1.50 excise tax increase. In this scenario, production of flue-cured tobacco would increase 40-50 percent with the removal of marketing quotas, while the change in burley production is uncertain. As U.S. tobacco becomes cheaper, manufacturers would substitute domestic for imported leaf (imports now account for about 40 percent of leaf used by manufacturers) and U.S. tobacco leaf exports would grow. Gross revenues or sales of flue-cured tobacco may increase slightly, as greater volume makes up for lower prices, while burley revenues would likely decline 20-30 percent (Brown). Owners of tobacco quota would lose the considerable income now derived from quotas. Growers who own quota can sell their tobacco at roughly 40-50 cents per pound above the variable costs (i.e. excluding land and quota costs), a much larger margin than would exist in an unregulated market. Many owners of quota do not grow tobacco but rent their quota to growers. This is an important source of income for many, including retired growers and their family members. Therefore, proposals for ending the tobacco program also include provisions for a buyout of tobacco quotas that would compensate quota owners for the loss of their asset. Removal of tobacco quotas and acreage allotments would result in dramatic regional shifts in tobacco production and a decline in the number of growers. The current system prohibits sale or lease of quota across county boundaries (except in Tennessee), thus preventing regional shifts and farm consolidation. With deregulation, production would become more concentrated on fewer larger farms in low-cost producing regions. Small operations, many of which consist of only a few acres, would no longer be viable with lower returns per acre. Producers who continue growing tobacco will seek to expand acreage to make up for lower per-acre returns and to spread the costs of mechanized equipment over larger units of output. Without the current tobacco program, many producers and knowledgeable observers anticipate a future tobacco industry where fewer, larger producers produce on contract for tobacco manufacturers. Brown anticipates that flue-cured production would decline in the piedmont of North Carolina and Virginia, but expand in the coastal plain of the Carolinas, south Georgia and North Florida. Burley production would decline in high-cost Appalachian counties and expand in central Kentucky and Tennessee, although the North Carolina-Virginia piedmont could gain some of that burley production (Brown). Areas outside the current tobacco-growing region could begin producing tobacco if quotas were eliminated. Adjustments by Tobacco Farmers Warnings of a bleak future for tobacco have been sounded since the 1960's. The number of tobacco farms has fallen from 330,000 in 1964 to 124,000 in 1992. The number of tobacco farms declined by more than 50,000 in the decade from 1982 to 1992. Tobacco farmers have been making adjustments to declining tobacco demand for a number of years. Adjustments in the 1990's and beyond will be a continuation of past trends, perhaps at a faster pace if there is an abrupt decline in tobacco demand or elimination of the tobacco program. A number of facts are important to keep in mind in order to understand the likely adjustments faced by tobacco farmers and their families: o For most tobacco farmers, tobacco is a part-time enterprise. The work is seasonal and most farms are small. Seventy-one percent of tobacco farms have gross sales under $20,000 per year. Hired labor is seasonal and is usually provided by casual or migrant workers. o For most operators, tobacco is not their sole source of earnings. Sixty-one percent work off-farm, and 42 percent work full-time off-farm. For most, tobacco earnings are an important supplement to their main income source that is used to pay property taxes or health insurance premiums, for example. o Many are older. In 1992, the average age of tobacco farmers was over 52, and 24 percent were over age 65. Retraining for a new career may not be feasible for most tobacco growers. Many owners of quota plan to rely on rentals as a source of retirement income. o Many owners of quota benefit from tobacco income but do not grow it. There are about 120,000 tobacco farms, but there are over 300,000 tobacco quotas. o Tobacco is much more profitable than available alternatives. Returns per acre for tobacco far exceed those of other major crops. Most other crops are not viable as primary enterprises on the small acreage available to most tobacco farms. Some specialty enterprises may provide competitive returns, but large scale adoption by tobacco farmers would push down prices and returns. Many farms that grow tobacco have other crop or livestock enterprises that are less profitable. Tobacco income keeps many of these farms financially viable. Tobacco farmers are a diverse group. Different farmers will respond in different ways. A "one size fits all" program will not address the needs of all tobacco farmers. Reaves and Purcell have outlined four types of responses by tobacco- producing families, and outline different policy responses appropriate for each type. (1) Remain in tobacco as a primary means of employment and income, (2) on-farm diversification through supplementary or alternative farm enterprises, (3) start a small business, (4) switch to off-farm employment. Based on Reaves and Purcell's analysis, we outline here five factors that may affect a farm family's response to declining tobacco production: o Farm size and efficiency. Those with large efficient farms are probably the most likely to remain in the tobacco business. These families may look to expand the scale of their tobacco operation (if price supports are eliminated many farmers will try to make up for lower returns per acre by expanding acreage) and look for new technologies and other practices that will increase efficiency. This factor is related to geographic location. Rural coastal plain locations are more conducive to larger mechanized operations and expansion of acreage than are locations in hilly piedmont locations and farms hemmed in by exurban development. O Availability of alternative farm enterprises. Those who are able to switch to another crop or livestock enterprise will be in a better position to cope with declining tobacco income, but other farm enterprises cannot provide income comparable with that produced by tobacco. "Value-added" activities often provide higher returns. Many farms have been able to increase per-acre returns by marketing produce directly to consumers through roadside stands or pick-your-own, starting on-farm recreation-based businesses, and "value-added" activities such as making jams and jellies. These direct marketing approaches are particularly appropriate for small farms that need high per-acre returns to remain viable. o Age and skills. Older farmers and those with less education and experience in nonfarm work will have less flexibility in making adjustments. In general, workers are less inclined to make job or career changes in the later years of their careers. However, older farmers may be eager to accept a tobacco quota buyout as a means of retiring from farming. 3/ ---------- 3/ A study of the Federal Government's buyout of dairy farmers in the 1980's found that advanced age and lack of a family successor were the strongest determinants of participation (Gale, 1990). --------- o Involvement in off-farm work. Those working off-farm may be in a better position to deal with declining income from tobacco. However, many tobacco growers already work full-time off-farm and rely on tobacco income as an important income supplement. o Local economic opportunity. Farmers located in rapidly growing areas will have greater opportunities for off-farm employment, small business start-ups, and direct marketing activities, since proximity to potential customers is important. Nearby residential or commercial development also pushes up the market value of farmland. The above discussion highlights the diversity among tobacco growers, which makes the design of appropriate tobacco policy complex. As an aid to policymakers, this report provides statistical information on characteristics of tobacco farms and tobacco-growing areas. Tobacco-growing areas vary considerably in the vibrancy of their local economies, which will be an important determinant of the local effects of tobacco policy. Tobacco Production Tobacco production is concentrated in the Southeastern United States. Counties with the largest tobacco sales are concentrated in the coastal plain of North and South Carolina and central Kentucky (fig. 1). Twelve eastern North Carolina counties forming a contiguous region encompassing the cities of Rocky Mount, Wilson, and Raleigh, account for an estimated $430 million in receipts annually. This is about 17 percent of all tobacco receipts. Nine counties in the Pee Dee- Lumber River region along the North Carolina-South Carolina border account for another 10 percent of receipts. Other important regions are the "Old Belt" area along the Virginia-North Carolina border, and counties along the Tennessee- Kentucky border. Most tobacco is grown in or near medium-size or small metropolitan areas. Four- hundred and twenty-four tobacco-growing counties were classified on the basis of their degree of urbanization using a set of Urban Influence Codes developed by the Economic Research Service (ERS). These codes classify counties based on whether they are in a large or small metropolitan area (large is defined as having a population of 1 million or more), adjacent to a large or small metro area, or not adjacent to any metro area. "Not adjacent" counties are the most rural, while those adjacent to a metro area may have access to greater economic opportunities in nearby cities and suburbs. Ninety-three tobacco counties are located in metro areas with populations under 1 million, and 147 are adjacent to small metro areas (fig. 2). Counties in or adjacent to small metro areas account for nearly three-fourths of estimated tobacco receipts. These small metro areas are attached to medium-size cities such as Richmond-Petersburg, Raleigh-Durham, Winston-Salem, Lexington, Louisville, and Knoxville. A number of smaller cities, such as Danville (VA), Rocky Mount, Greenville and Goldsboro (NC), Florence (SC), and Hopkinsville (KY) lie in the heart of tobacco-growing areas. A large number of tobacco counties (153) are not adjacent to any metro area, but they account for only about one- fifth of tobacco receipts. Thirty-one tobacco counties accounting for 4.8 percent of tobacco receipts lie in or adjacent to large metropolitan areas, including Cincinnati, Washington, and Kansas City. Tobacco's Importance in Local Economies Tobacco has an important historical role in many Southern communities. Today, however, tobacco plays a minor economic role in most local economies where it is grown. Income from tobacco farming has been stagnant for many years, while nonfarm income has grown. Annual gross receipts from tobacco have fluctuated between $2 billion and $3 billion since the mid-1970's. After adjusting for inflation, tobacco receipts fell during the mid-1970's and early 1980's, but have changed little since the late 1980's (fig. 3). Trends in farm earnings for the tobacco-growing region reflect trends in tobacco sales. Over the same time period, total personal income in the tobacco counties has more than doubled in real terms since 1970. Acreage has declined from over 1 million acres in 1975 to 663,000 in 1995. 4/ ---------- 4/ Acreage has risen again in recent years, approaching 800,000 acres in 1997. Acreage peaked in the late 1940's at about 1.8 million acres and declined gradually to 900,000 by 1970. ---------- The decline in acreage has been offset by rising prices to keep gross income roughly constant. Clearly, tobacco's share of the economy in these areas has declined considerably over the past two decades. Economic growth in tobacco-growing regions has been similar to national trends. The sectors accounting for the largest share of earnings growth are the services and manufacturing sectors. The share of income from all farming in tobacco counties fell steadily from about 5 percent in the early 1970's to less than 2 percent in the 1980's, where it has stayed until today (fig. 4). Growth rates by sector in tobacco counties also reflect national patterns. The fastest rate of earnings growth has been in services, while farm income growth lags other sectors. One notable difference, however, is that farm income in tobacco counties has grown faster than in other counties. This is probably due to the growth of poultry and hog operations in this region. Dependence on tobacco varies considerably among tobacco-growing counties. In some booming urban and suburban counties, tobacco farming is rapidly declining in importance. Many tobacco counties, however, have fewer tobacco alternatives and still rely more heavily on tobacco. It is difficult to measure precisely the economic importance of tobacco income because measures of net tobacco income are generally not available for counties. ERS classifies counties as "farm dependent" if farm earnings are 20 percent or more of total earnings in a county. Based on 1993-95 data, only 27 tobacco counties would be classified as "farm dependent." Farm earnings are less than 5 percent of total earnings in the majority of tobacco counties. Since tobacco is only a fraction of farm income in these counties, even fewer counties would be considered "tobacco dependent" if we could measure earnings from tobacco. Among "farm dependent" tobacco counties, one (Robertson, KY) derives 70 percent of farm receipts from tobacco, four derive 25-35 percent of receipts from tobacco, and the share is less than 20 percent in the remaining 22 counties. In most tobacco counties tobacco accounts for less than half of farm receipts. Overall, the 1992 Census of Agriculture indicates that about 20 percent of farm receipts in tobacco counties are derived from tobacco sales. Tobacco's share of farm receipts exceeds 70 percent in a number of counties along the North Carolina-Virginia border and in eastern Kentucky. Tobacco's share of farm earnings or net income would be higher than its share of gross receipts, since tobacco is much more profitable than other crops and livestock. Nevertheless, these numbers indicate that few counties are highly dependent on tobacco income. Lacking county-level data on net income from tobacco, ERS used the ratio of gross tobacco receipts to total earnings as an indicator of each county's reliance on tobacco income. Gross receipts overstates the amount of income received by farmers since a portion of those receipts must be used to pay expenses. For example, cost of production budgets estimate that variable costs (labor, fuel, fertilizer, chemicals, and other items) account for a little over half of cash receipts. Another 20 percent goes to replacement of capital, taxes, insurance, and farm overhead. Many of the physical inputs purchased with these expenditures (fertilizer, chemicals, fuel, vehicles, and machinery) are manufactured outside the tobacco-growing region, and consequently these expenditures have little economic impact locally, except for the margin earned by local equipment and farm supply dealers. However, inspection of cost of production budgets indicates that these are a relatively minor portion of total expenditures. An important share of many expenditures will stay within the local economy: payments to hired labor, repair shops, warehouse fees, interest paid to local banks, and rental payments to owners of land or quota. Admittedly, the local share of expenditures appears to be declining as retail and wholesale operations become geographically concentrated, banks consolidate, and use of migrant labor increases. Nevertheless, while gross receipts overstate the income received by farmers, they may be a better approximation of the amount of tobacco income circulating within a local economy. Figure 5 shows the ratio of tobacco gross receipts to total proprietor and labor income by place of work (TLPI). TLPI measures income actually earned in the county. It excludes transfer payments and dividends, interest, and rent, as well as income earned by residents who commute to jobs outside the county. 5/ ---------- 5/ This ratio will usually be higher than the ratio of tobacco receipts to total person income. ---------- Nearly half of tobacco counties (199) have a tobacco-to-personal income ratio of less than 1 percent. Another 137 counties have ratios between 1 and 5 percent, 55 have ratios of 5-10 percent, and 33 counties have a ratio exceeding 10 percent. This ratio indicates that tobacco accounts for a small share of the economy in most tobacco-growing counties. 6/ ---------- 6/ This ratio measures tobacco income as a share of earnings within the county. Using a personal income measure that includes income earned outside the county (i.e. commuting to a job in another county), transfer payments, dividends, and rent yields even lower ratios. ---------- In 1992, the most-dependent counties (tobacco-to-income ratios above 10 percent) contained only 20,700 of the 119,000 tobacco farms and accounted for only 11.8 percent of tobacco receipts. Most tobacco farms are in counties with low to moderate (1-9 percent) tobacco dependency. The biggest tobacco-growing areas are not the most reliant on tobacco income. Only a few of the leading tobacco counties in the coastal plain of the Carolinas and Southside, Virginia have high ratios of tobacco receipts to earnings. Of the 33 counties with tobacco-personal income ratios exceeding 10 percent, 26 are in Kentucky, and most had receipts under $10 million. Four counties with ratios over 10 percent are in North Carolina and Virginia; Tennessee and Indiana each have one. The degree of tobacco dependence appears to be determined by extent of nonfarm opportunities available rather than the level of tobacco production. Counties with the highest tobacco dependence have relatively few economic alternatives. Tobacco accounts for over half of farm receipts in the most tobacco- dependent counties, compared with only 13.6 percent in the least-dependent counties. While the local economy as a whole may not be highly dependent on tobacco even in counties with the highest tobacco-to-income ratios, farmers are highly dependent on tobacco in those counties. Data from the 1990 Census of Population give further indications about the extent of economic opportunities available in tobacco counties. In counties with tobacco-personal income ratios exceeding 10 percent, nearly half of employed residents commuted to jobs outside the county in 1990. The percentage of commuters is 25 percent in counties with a tobacco-personal income ratio under 1 percent. The high incidence of commuting out of the county suggests that relatively few jobs are available locally in counties with the highest tobacco dependence. A relatively high percentage of persons receiving social security income (32.4 percent) in the most-dependent tobacco counties indicates a relatively old population. The percentage of residents receiving public assistance (13.7 percent) in the most-dependent counties is nearly twice the percentage in the least-dependent counties (7 percent). Unemployment is lowest, and employment has grown the fastest in the least-dependent tobacco counties. Job growth has exceeded 9 percent even in the most-dependent tobacco counties, but a number of counties have lost jobs. A much lower percentage of high school graduates in the most-dependent counties suggests that residents may have relatively few skills to prepare them for nonfarm jobs. Economic conditions vary considerably across the tobacco-growing region. From 1994 to 1996, the national unemployment rate was generally in the range of 4-6 percent. Most tobacco counties had unemployment rates in this range or lower, including 145 counties with rates at 4 percent or lower. Unemployment is low in the growing urbanized areas of Raleigh-Durham-Chapel Hill (NC), Greensboro-Winston-Salem-High Point (NC), Lexington (KY), Nashville (TN), and Knoxville (TN). Approximately 70 percent of tobacco farms are located in counties where unemployment rates are 6 percent or lower. The tobacco-growing region has 142 counties with relatively high unemployment rates of 7 percent or more, including 43 counties with unemployment exceeding 10 percent. Unemployment remains high in eastern Kentucky and adjoining regions, in many Appalachian counties, most notably in southwest Virginia, Southside Virginia, northeastern and southeastern North Carolina, much of northeastern South Carolina, and parts of Georgia and Tennessee. These economically distressed regions are the most vulnerable to declining tobacco production since they offer fewer alternatives to tobacco. Relatively few farms are located in these counties. Based on the 1992 Census of Agriculture, about 24,000 tobacco farms are in counties with unemployment of 7-10 percent, and only 11,000 are in counties with unemployment above 10 percent. Finally, the relatively weak economic performance of the most-dependent tobacco counties is illustrated in figure 6. Counties with tobacco-personal income ratios less than 10 percent have experienced healthy growth in real personal income of 15-20 percent between 1991 and 1995. However, counties with tobacco- personal income ratios of 10 percent or higher have experienced very little growth in real personal income since 1992. Weak growth in these most dependent counties means that adjustments to loss of tobacco income will be particularly difficult in those regions. Conclusion Changes in tobacco policy will have important economic impacts that will be concentrated on a relatively few geographic areas of the South. However, the Southern economy has been adjusting to declining tobacco production for decades. Individuals will face painful adjustments to a restructured or deregulated tobacco industry, but most tobacco-growing areas are well-positioned to absorb the loss of tobacco income since most tobacco is produced in or near growing urban areas. A closer look reveals that some counties are more vulnerable than others. Counties with the heaviest reliance on tobacco income are creating the fewest economic opportunities. References Brown, A. Blake. "Farm Level Effects of an Increase in Federal Cigarette Taxes Under Two Scenarios: Keep vs. Eliminate the Tobacco Program." USDA Outlook Conference, Washington, DC. March 9, 1998. Gale, Fred. "Tobacco Dollars and Jobs." Tobacco Situation and Outlook TBS-239, September 1997, pp. 37-43. What Tobacco Farming Means to Local Economies. USDA/ERS AER 694. September 1994. "Econometric Analysis of Farmer Participation in the Dairy Termination Program in North Carolina and Virginia." Southern Journal of Agricultural Economics (July 1990):123-131. Knapp, John L. Tobacco in Virginia. Weldon Center for Public Service, University of Virginia. December 1995. Reaves, Dixie Watts, and Wayne D. Purcell. "Potential Change in the Tobacco Industry and the Impacts on Those Who Produce It: What Does the Future Hold?" Unpublished paper, Virginia Tech. 1997. Wise, William, and Dixie W. Reaves. Tobacco's Important Role in the Economy of Southside Virginia. Virginia Cooperative Extension Publication 448-228 / REAP R030. 1997. Structural and Financial Characteristics of Burley Tobacco Farms Dargan Glaze and Robert McElroy 1/ ---------- 1/ Glaze is an economist with USDA's Office of Civil Rights (formerly with ERS) and McElroy is leader of ERS' Cost of Production program. ---------- Abstract: USDA surveyed 235 burley tobacco growers in 1995 as part of its Agricultural Resource Management Study (ARMS). These farms statistically represented the nearly 57,000 growers in the two major producing States of Kentucky and Tennessee. Although burley tobacco made up only 3 percent of the average farm's acreage, it accounted for just over half of the total value of production. Livestock made up nearly one-third of cash income. Financially, burley growers were in a strong position, with positive farm incomes and very low debt-to-asset ratios. Keywords: Burley tobacco, costs of production, farm structure, farm income. During the winter of 1996, USDA surveyed burley tobacco growers in Kentucky and Tennessee. The expanded sample represents 56,929 farm operations and about 87 percent of total 1995 U.S. burley tobacco production. Sample observations from Kentucky and Tennessee were selected to provide statistically-reliable estimates. Sixty-three percent of the expanded number of farms were in Kentucky and 37 percent in Tennessee. Burley tobacco typically accounts for a minor percentage of the average farm?s acreage. Farmers reported an average of 4.6 burley tobacco acres planted out of an average 154 total acres. Burley tobacco acres ranged from 3.2 percent of total operated acres in Kentucky to 1.6 percent in Tennessee. However, on a value-of-production basis, burley tobacco made up over 73 percent of the farms? average total market value of crops and livestock. Farmers reported average 1995 yields of 1,827 pounds per acre, somewhat less than the 2,346 pounds they expected at the beginning of the season. Fifty-one percent of farms reported continuous burley tobacco production on acreage used to grow burley tobacco. The most common rotations with burley tobacco were with wheat or hay. Seventeen percent of farms surveyed reported wheat and 8 percent reported hay planted in the previous year. On average, about 60 percent of the burley tobacco acres were owned, while 35 percent were share rented and 4 percent cash rented. Farm Size Surveyed farms planted an average of 4.6 acres of burley tobacco. Around 77 percent of the farms averaged 5 acres or less of burley tobacco, but accounted for only 40 percent of production. About 10 percent of farms averaged 10 or more acres of burley tobacco, accounting for about 25 percent of production. Input Use All of the farmers surveyed applied fertilizers and chemicals to the 1995 burley tobacco crop. Farmers in Kentucky applied an average 263 pounds of nitrogen, 202 pounds of phosphorus, and 238 pounds of potassium per planted acre. Fertilizer application rates were higher in Tennessee. Production Costs Based on USDA's survey, cash costs of producing 1995 U.S. burley tobacco averaged $1,222 per planted acre, while longrun economic costs averaged $3,233. Fertilizer, hired labor, and marketing charges accounted for almost two-thirds of the variable cash costs. At the average harvest-month price of $1.845 per pound, more than 97 percent of burley tobacco growers were able to cover cash costs. Distribution of Costs Estimated 1995 variable costs of production were converted to a per-pound basis and ranked from lowest to highest to form a weighted cumulative distribution of farms and production. Twenty-five percent of farms had per-pound variable costs of 52 cents or less (low cost) and accounted for 24 percent of the total production. At the other end of the distribution, 25 percent of farms had variable costs of 95 cents or more per pound (high cost) and accounted for only 14 percent of the burley tobacco production. END_OF_FILE