Tobacco Quota Buyout Proposals in the 108th Congress

CRS Report for Congress
Tobacco Quota Buyout Proposals
th
in the 108 Congress
Updated November 12, 2004
Jasper Womach
Agriculture Policy Specialist
Resources, Science, and Industry Division


Congressional Research Service ˜ The Library of Congress

Tobacco Quota Buyout Proposals in the 108 Congress
Summary
On October 22, 2004, the tobacco quota buyout was signed into law. Title VI
of P.L. 108-357 is known as the Fair and Equitable Tobacco Reform Act of 2004.
This legislation eliminated the tobacco quota program and compensated active
producers and absentee quota owners for the lost value. The concept of a quota
buyout was not new, but it gained political momentum after being endorsed in the
final report of a presidential commission on tobacco, Tobacco at a Crossroads, A
Call for Action (May 14, 2001), and by the leading U.S. cigarette manufacturer,th
Philip Morris. Several quota bills were introduced in the 107 Congress without
subsequent legislative action. Supporters of a buyout and legislative sponsors againth
put the proposal on the legislative agenda of the 108 Congress by introducing
several differing bills.
Eventually, H.R. 4033 (Jenkins; March 25, 2004) and S. 1490 (McConnell; July

30, 2003) were attached to unrelated tax legislation (H.R. 4520 in the House and S.


1637 in the Senate), which was taken up by conferees on October 5, 2004. These
bills proposed to eliminate tobacco quotas and the price support loan program. As
compensation, quota owners (including absentee owners) and active producers would
receive lump sum payments. Active producers were to receive $7 per pound in the
House version or $8 per pound in the Senate version for the quota they owned in
2002, plus $3 per pound in the House version or $4 per pound in the Senate version
for the quantity of tobacco they were allowed to produce. Most producers grow more
than the quota they own because they lease quota from other landlords. The absentee
landlords also were be paid for the quota they owned in 2002.
The estimated cost of the House and Senate bills was, respectively, $9.6 billion
and $12 billion. The source of funding for the two bills differed, coming from the
federal treasury in the House bill and from tobacco product manufacturers and
importers in the Senate bill.
Many public health advocates and Philip Morris strongly supported a tobacco
quota buyout accompanied by new legal authority for the Food and Drug
Administration (FDA) to regulate tobacco products. The proposed FDA authority
was included in identical bills in the House and Senate (H.R. 4433, Davis-Waxman;
and S. 2461, DeWine-Kennedy). The FDA authority also was included in the Senate
version of the tax bill, but not in the House version, where there was strong
opposition.
The Chairman’s mark for the conference committee on H.R. 4520 included a
tobacco title (Title VI) that closely matched the House version, H.R. 4033, with quota
buyout payments of $7 per pound and active producer payments of $3 per pound.
Under the conference agreement, funding would come from assessments on tobacco
product manufacturers and importers (as proposed in S. 1490). FDA regulatory
authority over tobacco products, however, was not included.
This report is intended to serve as a history and evolution of the tobacco buyout.
It will not be updated.



Contents
Design and Impact of Marketing Quotas................................2
Why a Quota Buyout...............................................5
Make Tobacco Production Profitable for Active Producers.............5
Make U.S. Tobacco Price Competitive.............................6
Paying for a Quota Buyout...........................................7
For More Information.............................................19
CRS Products................................................19
Other Resources..............................................19
List of Figures
Figure 1. U.S. Share of world Tobacco Exports..........................3
Figure 2. Share of U.S. Tobacco in U.S. Cigarettes.......................3
Figure 3. Flue-Cured and Burley Basic Quota...........................5
List of Tables
Table 1. National Quota Levels and Actual Marketings of Flue-Cured and
Burley Tobacco, 1990-2004.....................................10
Table 2. Comparison of Tobacco Quota Buyout Proposals Sent to
Conference in the 108th Congress................................11
Table 3. Tobacco Quota Holder and Producer Transition Payment Estimates,
by State.....................................................16
Table 4. Summary of the Tobacco Quota Buyout Law....................17



Tobacco Quota Buyout Proposals in the
th
108 Congress
Several bills were introduced in the 108th Congress that proposed to eliminate
tobacco marketing quotas and compensate the owners for the loss of asset value
associated with quotas.1 The bills also proposed to make “transition payments” to
active producers. This report describes the various legislative proposals and presents
a side-by-side comparison of the conference committee agreement with the House
and Senate versions that went into conference. The conference agreement was
enacted as P.L. 108-357, Title VI, the Fair and Equitable Tobacco Reform Act of

2004.


One basis for comparing proposals is the total amount of money paid to farmers
and the source of funds. However, the quota buyout involved more than the transfer
of money. The design of future tobacco production and marketing policy in each bill
had important consequences for farmers, communities, and the nation. Some
proposals would have eliminated quotas. Others would have replaced quotas with
production licenses or permits for only active producers, thereby eliminating quota
rents. Also, there was the question of whether some level of domestic tobacco price
support would be continued or eliminated.
To compare the bills in the context of public policy, it is helpful to examine
them against a set of objectives framed around the question: What should a quota
buyout program seek to accomplish? As the policy debate unfolded, general
agreement did not exist on this question. Different interest groups seeking legislation
had different objectives.
Quota owners argued that they should be compensated for federal policies that
discourage consumption of tobacco products and diminish farmers’ ability to earn a
livelihood. Producers leasing a large amount of quota from absentee owners wanted
to see their costs of production decline by granting them sole production rights and
prohibiting absentee quota ownership. Farmers who did not have quota argued that
they should not be prohibited, as under existing law, from growing tobacco. Also,
there were some public health advocates that saw the quota program as a desirable
constraint on U.S. tobacco production. The cost of these proposals was important,
especially to the manufacturers if they were the ones who would pay for a buyout.
Finally, most involved parties anticipated or were working toward the goal of linking
quota buyout authority with new authority for the Food and Drug Administration


1 The idea of a quota buyout is not new. Two differing buyout proposals were contained
in S. 1415 in the 106th Congress. The bill, largely related to regulation of tobacco products,
was debated on the Senate floor but never reached a vote. Also, the 2002 farm bill (P.L.
107-171, Sec. 1309) included peanut quota buyout provisions as part of the redesign of
support for that commodity.

(FDA) to regulate tobacco products. The linkage was seen as political necessity to
broaden support for both efforts, and disagreement on this issue almost blocked
passage of the legislation.
Design and Impact of Marketing Quotas
The federal tobacco support program has worked through a combination of
commodity price support loans and marketing quotas. Price support loans guaranteed
farmers minimum set prices for tobacco (the 2004 loan prices for the two principal
types, flue-cured and burley, are $1.69 and $1.873/lb. respectively). These prices2
were mandated by a formula in the law. Marketing quotas, which specified the
maximum quantity of tobacco that could be sold, were assigned by the U.S.
Department of Agriculture (USDA) each year to farms that had a history of tobacco
production. The purpose of quotas was to limit supplies in order to force buyers to
pay the loan prices or more (the 2004 national basic quotas for flue-cured and burley
were 471.3 million pounds and 302.1 million pounds respectively). Together, the
combination of guaranteed minimum prices and managed supply was designed to
create a stable market for farmers and tobacco product manufacturers. Also, the
pattern of assigning quotas to farmland with a history of quotas confined production
to the traditional growing regions and farms. This system of support had operated
since the 1930s and was authorized in permanent law (7 U.S.C. 1311 et seq.). (See
CRS Report 95-129, Tobacco Price Support: An Overview of the Program.)
The economic stability that was desired and expected from the tobacco support
program was not achieved. First, the support prices for U.S. tobacco, as mandated
by law, were higher than prices for competing tobacco in world markets. As a
consequence, U.S. farmers steadily lost both export and domestic markets to foreign
producers. The declines are pictured in Figures 1 and 2 (based on USDA data).
Second, tobacco support prices were higher than the costs of production. This
created economic profits that were capitalized into the marketing quota lease rates
and land prices. So, marketing quotas became an asset that added substantial value
to farmland, and became a source of rental income for owners choosing not to grow
tobacco themselves. Conversely, rent on quotas became a sizable expense for active
producers renting quota in an attempt to expand or even maintain output in the face
of shrinking markets.


2 The law (7 U.S.C. 1445) specifies that each year’s support price be based on the five-year
moving average of auction prices and the change in the annual index of tobacco producer
costs of production.

Figure 1. U.S. Share of world Tobacco Exports
Figure 2. Share of U.S. Tobacco in U.S. Cigarettes



As with other crops, the number of active tobacco producers has declined over
time and production has become concentrated onto fewer but larger farms. In 1982
there were about 180,000 farms producing tobacco. By 2002, just 20 years later, the
number of active producers was about 57,000, a 68% decline.3 Most of these active
tobacco farmers owned some marketing quota themselves and also rented quota from
about 359,000 other absentee quota owners.4 In the mid-1990s, burley producers
owned about 44% of their effective quota and leased the remaining 56% at an
average cost of $0.33/lb. Lease and transfer of quota had been prohibited for flue-
cured tobacco since 1986. Instead, active flue-cured producers rent farmland that had
quota attached to it, thereby obtaining the tobacco production rights. In the mid-
1990s, flue-cured producers owned about 33% of their effective quota and rented the
remaining 67% at an average cost of $0.37/lb.5 Newer USDA cost of production data
put the average rental cost of quota in 2003 at $0.63/lb. for flue-cured and $0.57/lb.
for burley.6
One reason for increased consolidation and higher quota rental fees was the
sharp decline in quota levels after 1997, as shown in Figure 3 and Table 1. The
decline was due to the reversal of previously rapidly growing export markets for
U.S.-manufactured cigarettes. The basic quotas for flue-cured and burley tobacco
declined 52% and 57% respectively after 1997. Farmers needed to market enough
tobacco to maintain their revenue and to economically utilize their barns, equipment,
and labor. This required renting more quota. Along with these economic pressures
to consolidate, several sources of financial aid made it possible for farmers to pay
higher rental rates for quota.
First, in conjunction with Phase II of the 1998 Master Settlement Agreement,
cigarette manufacturers agreed to distribute $5.15 billion to tobacco producers and
quota owners over a 12-year period.7 Second, to help offset decreases in marketing
quotas, Congress acted to provide assistance. Four separate emergency assistance
laws (P.L. 106-78, P.L. 106-224, P.L. 107-25, P.L. 108-7) included what the industry
called direct “tobacco loss payments (TLPs)” totaling $860 million. Third, Congress
directed the Commodity Credit Corporation (CCC) to take ownership of all 1999
tobacco pledged as price support loan collateral and to assume all financial losses


3 U.S. Census of Agriculture, 2002.
4 President’s Commission on Improving Economic Opportunity in Communities Dependent
on Tobacco Production While Protecting Public Health, Tobacco at a Crossroads, A Call
for Action, May 14, 2001.
5 Data are from Linda F. Foreman, Tobacco Farmers’ Ownership and Rental of Tobacco
Quota, in Tobacco Situation and Outlook Report, Economic Research Service, U.S.
Department of Agriculture, September 2001.
6 Economic Research Service, U.S. Department of Agriculture, “Tobacco production costs
and returns per planted acre and per hundredweight, 2002-2003.”
7 In 1998, cigarette manufacturers agreed to pay states $206 billion over 25 years to settle
a lawsuit brought by a number of states’ attorney generals. This Master Settlement
Agreement included no monies specifically dedicated to farmers. Subsequently and
separately, manufacturers agreed on payments to tobacco-producing states specifically for
farmers, called Phase II payments.

(P.L. 106-387, as amended). CCC finally completed disposal of this inventory in
December 2003 by burying it in landfills. According to CCC data, the total cost of
acquisition, interest on principal, storage, and disposal was about $625 million.
These three sources of financial assistance, rather than income from the sale of
tobacco, are the primary reason active producers were able to pay higher rental rates
to absentee quota owners as they bid against each other for their share of a declining
national tobacco quota. (See CRS Report RS20802, Tobacco Farmer Assistance.)
Figure 3. Flue-Cured and Burley Basic Quota
1000
800
600
400
200
F lue - cur e d
Bu r l ey
0
1990 1994 1998 2002
Why a Quota Buyout
Make Tobacco Production Profitable
for Active Producers
Active tobacco producers were being hurt financially both by declining
marketing quotas, which reduced their sales revenue, and higher quota rental rates,
which raised their production costs. Farmers felt there was little they could do to
increase the demand for tobacco, especially since it was federal policy to discourage
consumption of tobacco products. However, the elimination of quota rents, through
a buyout of marketing quotas, could reduce the costs of production substantially for
farmers leasing substantial amounts of quota. At the same time, active producers
might continue to receive the price benefit of a continuing support program.
Advocates of this policy approach (H.R. 245, Fletcher; H.R. 986, Goode)
proposed to give marketing licenses (or permits specifying quantity limits) to active
producers, just as with marketing quotas. However, the licenses would be issued
only to active producers and all forms of rent would be prohibited. This restriction



would prevent the licenses from acquiring any exchangeable value. The initial
recipients of the licenses would be current tobacco producers wanting to continue as
active growers.
Active producers, not just absentee landlords, also would have received quota
buyout payments under all of the legislative proposals that were offered. This
provided the farmers who wanted to quit growing tobacco with sizable benefits. The
farmers who remained active producers under the license scheme would receive a
windfall from their buyout payment since they would have suffered no losses (they
would continue to get the extra income created by licenses and price support).
This framework for a quota buyout, of licensed future production and continued
price support, was developed by the President’s Commission on Improving
Economic Opportunity in Communities Dependent on Tobacco Production While
Protecting Public Health.8 This commission included advocates for tobacco farmers,
anti-smoking and health organizations, and rural community development
proponents. H.R. 245 and H.R. 986 largely were modeled on the Commission’s
recommendations.
Make U.S. Tobacco Price Competitive
There was little disagreement that U.S. tobacco could become substantially
more competitive in the domestic as well as export markets if prices declined by the
amount paid in quota rents. Such a price reduction would happen if tobacco support
program loan rates were reduced substantially or eliminated. The quota rent paid to
absentee landlords would vanish. The decline in revenue from lower tobacco prices
largely would be offset by the elimination of quota rent payments, leaving the
producer in about the same net revenue situation. In fact, a North Carolina
agricultural economist once estimated that in the absence of the price support
program, U.S. tobacco production could increase by possibly 50%.9
At the same time, the economic analysis noted there would be substantial
adjustment costs associated with dropping support prices to free market levels or
eliminating the program. Most immediately, the value in quotas would be wiped out.
This would eliminate the rental income of absentee quota owners. Furthermore, all
of the farmland with quota, whether owned by absentee landlords or active producers,
would drop in value. However, the economic adjustments associated with a
reduction in tobacco prices could be minimized, if not eliminated, by compensating
quota owners for lost asset values.
This “free market” policy approach (H.R. 140, McIntyre; H.R. 4033, Jenkins)
was most appealing to active producers who wanted to see an expansion of their
tobacco enterprises. These producers likely had a sizable investment in barns and


8 The Commission’s final report was Tobacco at a Crossroads: A Call for Action, May

2001.


9 A. Blake Brown, Implications of Elimination of the US Flue-Cured Tobacco Program,
Department of Agricultural and Resource Economics, North Carolina State University,
September 18, 1997.

machinery, and probably rented a large proportion of their annual effective marketing
quota. This option was equally appealing to farmers intending to exit from tobacco
production. The farmers most disadvantaged would have been small to medium
sized operations and those that were inefficient because of high costs or low yields
who wanted to continue growing tobacco.
As compared to a system of licensed producers, this “free market” option would
result in fewer but larger farms because of economies of size. Also, production likely
would move within each of the tobacco states to the geographic locations with the
most suitable soils and climate for economical production. The very fact that
production could increase substantially made the “free market” option unappealing
to some anti-smoking and health advocates.
Somewhere between the Commission concept of production licenses with
continued price support and the free market proposal, S. 1490 (McConnell) proposed
to eliminate quotas and price support but allocate a national crop acreage base among
active producers. Should supplies become excessive, an acreage limitation program
would require reductions in planting. This acreage reduction concept was used in
conjunction with the support programs for grains and cotton before being eliminated
by the 1996 farm bill.
H.R. 3160 was introduced as a bipartisan consensus proposal by Fletcher,
McIntyre, and Goode. This bill was similar to the McConnell bill in most respects.
One major variation was a different basis for calculating the amount of money paid
to quota owners and active producers. Under S. 1490, payments would have totaled
about $11 billion, compared to about $15 billion under H.R. 3160. However, S. 1490
included some community development assistance that was not present in H.R. 3160.
Paying for a Quota Buyout
The value of tobacco marketing quota depended on several factors, including
expectations about the future. Quota owners knew exactly how much rent they
earned from active producers. What they did not know was how long the tobacco
program would continue to operate, or the size of national marketing quotas in future
years.
Survey data from Kentucky revealed that the average sale price of marketing
quotas was $2.58/lb. in 2001 (when lease rates averaged $0.62/lb.), and $2.08/lb. in
2000 (when lease rates averaged $0.58/lb.), and $1.75 in 1999 (when lease rates
averaged $0.40/lb.).10 One would expect to get much higher sale prices with annual
rents of these magnitudes. These sale prices compared to lease rates implied a time
horizon of about five years, based upon a 5% interest rate. In other words, buyers
were discounting the purchase price of quota relative to annual rent in anticipation
of future quota reductions or elimination of the program.


10 Will Snell, Burley Quota Lease and Sales Survey Results, University of Kentucky,
August 2001.

Most quota buyout bills proposed to pay owners $8/lb. This payment was equal
to the present value of annual rental income of $0.40/lb. in perpetuity at an interest
rate of 5%. The buyout price of $8/lb. was a much higher price than sellers of quota
were getting in the marketplace. Also, the buyout offered to pay active producers an
additional $4/lb. for all production on the farm. The payment to producers typically
was described as a “transition payment.”
A buyout program that payed $8/lb. to quota owners plus $4/lb. to active
producers would pay $12/lb. for each pound of quota that qualifies for the program.
Depending on the crop years used to calculate payments and some assumptions about
participation levels, a rough and unofficial estimate of the buyout and transition
payments ranged from about $11 to $19 billion. How much would a typical tobacco
farmer receive?
!The average North Carolina tobacco farmer harvested about 21 acres
in 2002, producing about 45,000 pounds. Buying out this average
North Carolina producer, who owned 33% of the quota and rented
67%, would cost $298,800 ($118,800 in quota payments and
$180,000 in transition payments).
!In South Carolina, the average tobacco farmer harvested 35 acres in
2002, bringing in about 66,000 pounds. Buying out this average
South Carolina producer, who owned 33% of the quota and rented
67%, would cost $438,240 ($174,240 in quota payments and
$264,000 in transition payments).
!Kentucky tobacco farms averaged 4 acres, producing about 7,500
pounds in 2002. Buying out this average Kentucky producer, who
owned 44% of the quota and rents 56%, would cost $56,400
($26,400 in quota payments and $30,000 in transition payments).
The President’s Commission recommended that federal excise taxes on
cigarettes and other tobacco products serve as the source of revenue for the proposed
buyout (estimated at $0.17 per pack on cigarettes for five years). However, all of the
legislative proposals described in this report included an assessment on
manufacturers and importers of tobacco products, or the use of U.S. Treasury funds,
rather than an increase in excise taxes on cigarettes.
Certainly, manufacturers could benefit from a buyout if the support price for
tobacco were reduced. One tobacco manufacturer, Philip Morris, stated its
willingness to help pay for a tobacco buyout program. If U.S. manufacturers could
save $0.60/lb. on their 2004 purchase intentions of about 450 million pounds, the
savings would amount to $270 million. Additional savings would accrue if a drop
in the price of U.S. tobacco pushed down the price of foreign supplies. Additionally,
overseas operations also would save on the lower prices for both US. leaf and foreign
leaf. One tobacco analyst estimated it would take about 14 years for manufacturers
to recover the cost of a $15 billion quota buyout program.11 Philip Morris 12 had


11 USDA economist Bob Tarczy offered this estimate in his presentation on “Potential
Financial Impact of a Buyout” at the 41st Tobacco Workers’ Conference, January 22, 2004,
(continued...)

coupled its offer to participate in a buyout with a proposal for FDA regulation of
tobacco products. Health groups also advocated FDA regulation.13 Philip Morris
was the only major manufacturer known to support FDA regulation or a quota
buyout. (See identical bills H.R. 4433 and S. 2461).
Doubts about whether strong divisions in Congress over proposed FDA
regulatory authority could be overcome encouraged sponsors of H.R. 4033 (Jenkins;
March 25, 2004) to seek about $9.6 billion in funding out of the U.S. Treasury, rather
than from assessments on manufacturers. The bill was cosponsored by most
supporters of the so-called House consensus bill. This bill provided $1/lb. lower
quota buyout and transition payment rates ($7/lb. and $3/lb. respectively). In contrast
to other proposals, Phase II payments to growers would continue and provide an
additional benefit of about $2.6 billion. The Jenkins bill also was included as Title
VII in the House-passed H.R. 4520, a tax bill called the American Jobs Creation Act
of 2004.
Following the lead of the House in using the tax bill as the legislative vehicle
for the tobacco quota buyout, the Senate retrieved its previously adopted S. 1637, the
Jumpstart Our Business Strength (JOBS) Act, and amended it by attaching the
slightly modified McConnell buyout bill (S. 1490) and the DeWine-Kennedy FDA
tobacco product regulation authority (S. 2461).
Conferees took up the tax legislation (the differing House and Senate versions
of H.R. 4520) on October 5, 2004. The Chairman’s mark for the conference
committee included tobacco quota buyout provisions (Title VI). The tobacco
provisions largely reflected the House version, but funded the buyout with an
assessment on manufacturers and importers of tobacco products rather than from the
U.S. Treasury. Like the House version of H.R. 4520, the Chairman’s mark contained
no authority for FDA regulation of tobacco products.
The Chairman’s mark, like both the House and Senate proposals, eliminated
tobacco marketing quotas, acreage allotments, and nonrecourse loan price support
authority. It contained no provisions to control how much tobacco might be grown
in the future, who could produce it, or where it could be produced. As compensation,
the roughly 416,000 current quota owners would be paid $7 per pound (in 10 equal
annual installments) on their 2002 basic marketing quotas (totaling about $6.7
billion). Similarly, the roughly 57,000 active producers would be paid $3 per pound
on their 2002 effective marketing quotas (totaling about $2.9 billion). Nearly all of
the active producers also were quota owners, and they would get both payments on
that portion of the effective quota they also owned.


11 (...continued)
Nashville, TN.
12 PM USA’s Fundamental Principles of a Tobacco Quota Buyout and FDA & Tobacco are
posted on the Internet at [http://www.philipmorrisusa.com/home.asp].
13 The summary of the joint views of several health groups is available at [http://
www.t obaccof r eeki ds.or g/ r e sear ch/ f act s heet s/ pdf / 0181.pdf ] .

Total expenditures were limited to a maximum of $10.140 billion. The
expenditures would be made over a 10-year period from FY2005 through FY2014.
If domestic cigarette consumption remained at the current level of about 19.75 billion
packs, the cost to manufactures would be about 5¢ per pack each year for 10 years.
Remaining Phase II payments of about $2.6 billion from manufacturers to farmers
(adopted in conjunction with the Master Settlement Agreement between major
manufacturers and states) would terminate.
Table 1. National Quota Levels and Actual Marketings
of Flue-Cured and Burley Tobacco, 1990-2004
Flue-cured, types 11-14Burley, type 31Flue-cured and Burley
Cr op Ba s i c Effective Ac t u a l Ba s i c Effective Ac t u a l Ba s i c Effective Ac t u a l
Year Quota Quota Mktings Quota Quota Mktings Quota Quota Mktings
Million Pounds
1990 877.7 936.1 920.2 601.3 741.2 592.2 1,479.0 1,677.3 1,512.4
1991 877.6 891.5 882.5 724.1 846.1 657.0 1601.7 1737.6 1,539.5
1992 891.8 899.0 901.0 668.5 835.6 699.8 1560.3 1734.6 1,600.8
1993 892.0 889.6 891.7 601.9 717.9 626.6 1493.9 1607.5 1,518.3
1994 802.6 798.5 806.8 536.3 605.9 568.0 1338.9 1404.4 1,374.8
1995 934.6 924.9 854.2 546.5 577.9 480.4 1481.1 1502.8 1,334.6
1996 873.6 943.6 896.7 631.3 719.8 516.3 1504.9 1663.4 1,413.0
1997 973.8 1,019.8 1,013.5 704.5 879.8 628.8 1678.3 1899.6 1,642.3
1998 814.3 819.6 815.2 635.4 867.5 588.7 1449.7 1687.1 1,403.9
1999 667.7 671.5 645.0 452.6 690.1 551.2 1120.3 1361.6 1,196.2
2000 543.0 553.0 564.1 247.0 361.9 307.4 790 914.9 871.5
2001 548.4 545.3 544.4 332.0 368.8 335.8 880.4 914.1 880.2
2002 582.0 545.3 564.8 324.2 349.3 298.8 906.2 894.6 863.6
2003 526.3 536.2 507.7 287.8 330.0 271.7 814.1 866.2 798.0
2004 471.3 500.0 na 302.1 331.0 na 773.4 831 na
Source: Data are from Economic Research Service, Tobacco Outlook, Sep. 2004, and the Farm Service
Agency.



Table 2. Comparison of Tobacco Quota Buyout Proposals
Sent to Conference in the 108th Congress
Senate-passed H.R. 4520 House-passed H.R. 4520 Conference Committee
(Grassley, Jumpstart Our(Thomas, American JobsAgreement on H.R. 4520, P.L.
Business Strength (JOBS) Act,Creation Act of 2004, adopted108-357
adopted July 15, 2004, withJune 17, 2004)(American Jobs Creation Act of
S.Amdt. 3562, substituting the2004, adopted by conferees
language of S. 1637 for theOctober 6, 2004, signed into law
House language. S. 1637 wasOctober 22, 2004)
approved by the Senate on May

11, 2004)


Tobacco Market TransitionFair and Equitable TobaccoFair and Equitable Tobacco
Act (TMTA) of 2004 Reform Act of 2004 Reform Act of 2004
Subtitle B, Title XI of H.R. 4520Title VII of H.R. 4520 (similar toTitle VI of P.L. 108-357
(Chapter 2 of S.Amdt. 3563, andH.R. 4033, Jenkins)
similar to S. 1490, (McConnell).
[Sec. 1140-1152]
FDA Regulation
Subtitle A, Title XI of H.R. 4520NoneNone
(Chapter 1 of S.Amdt. 3563, and
identical to S. 2461
(DeWine/Kennedy). Gives FDA
regulatory authority over the
content and marketing of tobacco
products. [Sec. 1101-1132]
Total Payments and Other
Spending
Total payments to quota ownersTotal payments to quota ownersTotal payments to quota owners
and producers are about $11.6and producers are about $9.6and producers, as well as costs
billion. Additional spending ofbillion. There is no additionalrelated to disposition of loan pool
about $0.4 billion. for communityspending for communitystocks, are limited to $10.14
assistance, research,assistance or other activities. billion. There is no additional
administration, and stability(CRS cost estimates).spending for community
programs, and settlement ofassistance or other activities.


outstanding loans under the
current program. (CRS cost
estimates).

Senate-passed H.R. 4520 House-passed H.R. 4520 Conference Committee
(Grassley, Jumpstart Our(Thomas, American JobsAgreement on H.R. 4520, P.L.
Business Strength (JOBS) Act,Creation Act of 2004, adopted108-357
adopted July 15, 2004, withJune 17, 2004)(American Jobs Creation Act of
S.Amdt. 3562, substituting the2004, adopted by conferees
language of S. 1637 for theOctober 6, 2004, signed into law
House language. S. 1637 wasOctober 22, 2004)
approved by the Senate on May

11, 2004)


Funding Sources
Payments to quota owners andFunds to make payments arePayments to quota owners and
active producers, and otherdrawn from the general fund ofactive producers, and other
expenses, are to be made from athe Treasury, but not to exceedexpenses, are from a Tobacco
Tobacco Trust Fund created inthe revenues coming into theTrust Fund created in the CCC.
the CCC. Money comes fromTreasury from excise taxes onMoney comes from quarterly
quarterly assessments on producttobacco products. [Sec. 725]assessments on tobacco product
manufacturers and importers. manufacturers and importers.
Cigarettes pay 99.409%. [Sec.The remaining $2.7 billion inCigarettes pay 96.331%. [Sec.
1151 (380S)] Remaining Phasemanufacturer Phase II payments625] Remaining Phase II
II payments of about $2.7 billionto farmers under the MSA wouldpayments of about $2.5 billion
for farmers by manufacturerscontinue.for farmers by manufacturers
under the MSA would stop.under the MSA would stop.
Payment Timing
Payments to quota owners andPayments to quota owners andPayments to quota owners and
producers are made in 10 equalproducers are made in 5 equalproducers are made in 10 equal
annual installments from 2004annual installments from FY2005annual installments from FY2005
through 2013. Advance paymentthrough FY2009. [Sec. 722(e)through FY2014. [Sec. 622(e)
options are available to ownersand 723(d)]and 623(d)] Advance payment
and producers. [Sec 1151 (380Boptions are available to owners
and 380C)]and producers through financial
institutions. [Sec. 624(e)]
Quota Owner Payments
Quota owners as of July 1, 2002,Quota owners as of July 1, 2004,Quota owners (numbering about
are to be paid $8/lb. on marketingare to be paid in proportion to416,000 (including about 57,000
year 2002 basic quota, dividedtheir 2002 basic quota. Totalactive producers and 359,000
into 10 equal payments of 80¢amount available for payments islandlords) as of the date of
per pound. [Sec. 1151 (380B)]$7/lb. times the total basic quotaenactment are to be paid $7/lb.
(Estimated cost = $7.6 billion)for the 2002 marketing year.on marketing year 2002 basic
[Sec. 721(3) and Sec. 722 (e)]quota, divided into 10 equal
(Estimated cost = $6.7 billion)payments of 70¢ per pound. [Sec.

622]


(Estimated cost = $6.7 billion)



Senate-passed H.R. 4520 House-passed H.R. 4520 Conference Committee
(Grassley, Jumpstart Our(Thomas, American JobsAgreement on H.R. 4520, P.L.
Business Strength (JOBS) Act,Creation Act of 2004, adopted108-357
adopted July 15, 2004, withJune 17, 2004)(American Jobs Creation Act of
S.Amdt. 3562, substituting the2004, adopted by conferees
language of S. 1637 for theOctober 6, 2004, signed into law
House language. S. 1637 wasOctober 22, 2004)
approved by the Senate on May

11, 2004)


Active Producer Payments
Traditional producers (numberingFarmers who share in the risk ofTraditional producers (numbering
about 60,000), who raisedproduction and are activelyabout 57,000), who raised
tobacco in 2000, 2001, or 2002,engaged in producing tobacco fortobacco in 2000, 2001, or 2002,
are paid $4/lb. on 2002 marketingthe 2004 crop year are paid inare paid $3/lb. on 2002 marketing
year effective quota, divided intoproportion to actual marketingsyear effective quota, divided into
10 annual installments of 40¢ peror quantity considered planted in10 annual installments of 30¢ per
pound. Payments are reduced bythe 2002 marketing year. Totalpound. Payments are reduced by
1/3 for each year tobacco was notamount available for payments is1/3 for each year tobacco was not
grown by the producer. [Sec.$3/lb. times the total marketingsgrown by the producer. [Sec.

1151 (380C)]in the 2002 marketing year. [Sec.623]


(Estimated cost = $3.9 billion. 721(1) and 723(d)](Estimated cost = $2.9 billion.
Nearly all producers own some(Estimated cost = $2.9 billion)Nearly all producers own some
quota.)quota.)
Quotas and Licenses
Current marketing quotas andMarketing quotas and acreageMarketing quotas and acreage
acreage allotments areallotments are terminated. [Sec.allotments are terminated. [Sec.
terminated. [Sec. 1141] In future711]611 and 612] There are no
years, a national base acreage andrestrictions on who can produce
base poundage is established fortobacco in the future or where it
each kind of tobacco. Poundagecan be produced.
permits are divided among only
active producers. [Sec. 1151
(380I)]
Price Support
Price support loans and no netPrice support loans and no netPrice support loans and no net
cost assessments are terminated.cost assessments are terminated.cost assessments are terminated.
[Sec. 1142] Annual assessments[Sec. 712][Sec. 612]


of up to 5¢ per pound divided
equally between producers and
purchasers are used to finance a
Tobacco Market Stability
Program. [Sec. 1151 (380M)]

Senate-passed H.R. 4520 House-passed H.R. 4520 Conference Committee
(Grassley, Jumpstart Our(Thomas, American JobsAgreement on H.R. 4520, P.L.
Business Strength (JOBS) Act,Creation Act of 2004, adopted108-357
adopted July 15, 2004, withJune 17, 2004)(American Jobs Creation Act of
S.Amdt. 3562, substituting the2004, adopted by conferees
language of S. 1637 for theOctober 6, 2004, signed into law
House language. S. 1637 wasOctober 22, 2004)
approved by the Senate on May

11, 2004)


Production Controls and
Restrictions
An new Acreage / PoundageIn 2005 and subsequentIn 2005 and subsequent
Limitation Program (like themarketing years, there are nomarketing years, there are no
current quota system) allocatesacreage or quantity limits onacreage or quantity limits on
tobacco base acres and poundsproduction, no restrictions onproduction, no restrictions on
among only active producers andwho can produce tobacco, and nowho can produce tobacco, and no
requires reductions when neededrestrictions on the regionsrestrictions on the regions
in order to balance supply withallowed to produce tobacco.allowed to produce tobacco.
demand at reasonable prices.
Unlike the current quota
program, the new acreage and
poundage bases cannot be sold,
leased or transferred. [Sec.

1151(380M)]


Tobacco Board
Establishes a permanent TobaccoNoneNone
Quality Board in USDA to
examine domestic production and
imports and advise on matters of
quality and appropriate
production levels. Establishes a
permanent Production Board in
USDA for each kind of tobacco
to advise on the appropriate
acreage limitations. [Sec. 1151
(380G and 380H)]
Other Tobacco Programs
The Federal Crop InsuranceNoneNone


Corporation is authorized to fund
the research and development of
insurance for tobacco producers.
Funding from an assessment on
tobacco producers and purchasers
is authorized at a rate of up to 5¢
per pound. [Sec. 1152]

Senate-passed H.R. 4520 House-passed H.R. 4520 Conference Committee
(Grassley, Jumpstart Our(Thomas, American JobsAgreement on H.R. 4520, P.L.
Business Strength (JOBS) Act,Creation Act of 2004, adopted108-357
adopted July 15, 2004, withJune 17, 2004)(American Jobs Creation Act of
S.Amdt. 3562, substituting the2004, adopted by conferees
language of S. 1637 for theOctober 6, 2004, signed into law
House language. S. 1637 wasOctober 22, 2004)
approved by the Senate on May

11, 2004)


Community Assistance
Makes economic developmentNoneNone


grants to Maryland ($20 mil.),
Pennsylvania ($14 mil.), South
Carolina ($50 mil.), and North
Carolina ($50 mil). Grants are to
be made in equal annual
payments over five years. [Sec.

51 (380O)]


Makes grants to colleges and
universities for research on
agricultural (tobacco and
tobacco-related) enterprises,
technologies, and uses ($12
mil./year for five years = $60
mil.). [Sec. 1151 (380Q)]

Table 3. Tobacco Quota Holder and Producer Transition
Payment Estimates, by State
Quota HolderProducerTransition Total Quota
StatePaymentsPaymentsBuyout Payments
–Million $–
North Carolina$2,751.9$1,190.9$3,942.8
K e ntucky $1,735.9 $733.1 $2,469.0
T e nnessee $527.9 $239.6 $767.5
South Carolina$508.3$216.4$724.7
V i rginia $458.3 $208.4 $666.6
Georgi a $429.4 $182.9 $612.3
Florida $83.9 $35.7 $119.6
Ohio $74.1 $34.0 $108.1
Indiana $60.5 $27.0 $87.6
Wisconsin $44.3 $19.0 $63.2
Missouri $22.3 $9.7 $31.9
West Virginia$14.2$10.5$24.8
Alabama $3.3 $1.4 $4.6
T otal $6,714.1 $2,908.6 $9,622.7
Source: Based on basic and effective quota data from USDAs, Farm Service Agency.



Table 4. Summary of the Tobacco Quota Buyout Law
Fair and Equitable Tobacco Reform Act of 2004
Title VI of H.R. 4520, American Jobs Creation Act of 2004
FDA Regulation of Tobacco Products
No provisions in this legislation grant the Food and Drug Administration regulatory
authority over tobacco products.
Total Payments and Other Spending
Total payments to quota holders (estimated at $6.714 billion) and active producers
(estimated at $2.909 billion), as well as costs related to disposition of loan pool stocks
(estimated at $517 million), are limited to $10.14 billion. There is no additional
spending authority for community assistance or other activities. Annual payments
will be about $1 billion beginning in 2005 and ending in 2014.
Funding Sources
Payments to quota owners and active producers, and expenses related to disposal of
existing price support loan stocks, are from a Tobacco Trust Fund created in the CCC.
Trust Fund revenues are from quarterly assessments on tobacco product manufacturers
and importers. The initial allocation by class for FY2005 is cigarettes, 96.331%;
cigars, 2.783%; snuff, 0.539%; roll-your-own tobacco, 0.171%; chewing tobacco,
0.111%; pipe tobacco, 0.066%. Each year the allocation will be changed to mirror
changes in market shares. Each manufacturer and importer’s pro rata share of the
domestic market becomes their contribution to the total collection. Assessments and
collections are done quarterly. The assessments are allocated according to the gross
domestic volume share of the market held by each class of tobacco product. [Sec. 625]
If domestic cigarette sales remain constant at the 2004 level of 19.75 billion packs, the
buyout program cost will amount to about 5¢ per pack. Cigarette manufacturer Phase
II producer payment obligations of about $2.6 billion for 2005-2010 end under
provisions of the Phase II agreement.
Payment Timing
Payments to quota owners and producers are made in 10 equal annual installments
from FY2005 through FY2014. [Sec. 622(e) and 623(d)] Advance payment options
likely will be available to owners and producers from financial institutions to which
they assign their contracts. [Sec. 624(e)]
Quota Owner Payments
Quota owners (numbering about 416,000 (including about 57,000 active producers
and 359,000 landlords) as of the date of enactment are to be paid $7/lb. on marketing
year 2002 basic quota, divided into 10 equal payments of 70¢ per pound. [Sec. 622]
(Estimated cost = $6.7 billion)
Active Producer Payments
Active producers (numbering about 57,000), who raised tobacco in 2000, 2001, or
2002, are paid $3/lb. on 2002 marketing year effective quota, divided into 10 annual
installments of 30¢ per pound. Payments are reduced by 1/3 for each year tobacco
was not grown by the producer. [Sec. 623]
(Estimated cost = $2.9 billion. Nearly all producers own some quota.)



Assignment of Payments
Holders of contracts to receive payments may have them assigned to financial
institutions. The CCC will then make annual payments to the financial institutions.
[Sec. 624(e)] This enables recipients to receive a lump sum distribution, instead of 10
equal annual payments, by discounting the contract with a financial institution.
Production Controls and Restrictions
Marketing quotas and acreage allotments are terminated. [Sec. 611 and 612] There
will be no restrictions on who can produce tobacco in 2005 and future years or where
it can be produced. Production likely will be consolidated onto fewer, larger farms in
the most economical regions. Total production is expected to increase, but in regions
already producing tobacco.
Price Support
Price support loans and no-net-cost assessments are terminated. [Sec. 612] Market
prices are expected to decline by 20-30%. Producers are expected to achieve price
and income stability through contract arrangements with manufacturers and export
buyers.
Disposal of Loan Pool Stocks
Loan pool stocks acquired under previous price support operations will be sold by
price stabilization cooperatives and the CCC. Losses in excess of no-net-cost account
funds are to be reimbursed from the Tobacco Trust Fund. [Sec. 641] An estimated
$517 million should be available for this purpose from the Trust Fund after
subtracting buyout expenditures from total funds.
Tobacco Inspection and Grading
Mandatory inspection and grading of imported tobacco is eliminated. [Sec. 611(b)]
USDA inspection and grading of tobacco on a user fee basis will continue only at
designated auction markets and only so long as 2/3 of the growers selling at the
market the previous year vote their approval. Over 80% of leaf tobacco is now
contracted for sale and the remainder is expected to quickly shift, implying a rapid end
to auction markets.



For More Information
CRS Products
CRS Report RS21642, Comparing Quota Buyout Payments for Peanuts and
Tobacco.
CRS Report RL32619, FDA Regulation of Tobacco Products: A Policy and Legal
Analysis.
CRS Report RS20802, Tobacco Farmer Assistance.
CRS Report 95-129, Tobacco Price Support: An Overview of the Program.
CRS Report RL31528, Tobacco Quota Buyout Proposals in the 107th Congress.
CRS Report RL30947, U.S. Tobacco Production, Consumption, and Export Trends.
Other Resources
Three university-based sites with a focus upon tobacco policy issues are as
follows:
NC State University, Tobacco Economics
[http://www.ces.ncsu.edu/depts/agecon/tobacco_econ/ ];
University of Kentucky, Tobacco Economics Online
[http://www.uky.edu/Agriculture/TobaccoEcon/ ];
University of Tennessee, Tobacco Policy and Economics
[http://www.agpolicy.org/tobacco.html ].
The Economic Research Service maintains a Tobacco Briefing Room
[ h ttp://www.ers.usda.gov/Briefing/Tobacco/] .
The National Agricultural Statistics Service (NASS) keeps track of production
and publishes data by commodity [ http://www.usda.gov/nass/pubs/estindx1.htm ].
Farm Service Agency (FSA) administers tobacco quota and price support loan
programs and publishes fact sheets describing program operations along with activity
details [http://www.fsa.usda.gov/pas/publications/facts/pubfacts.htm].
The Foreign Agriculture Service keeps track of tobacco exports and imports by
the United States and other countries [http://www.fas.usda.gov/currwmt.html].