Tobacco Price Support: An Overview of the Program

CRS Report for Congress
Tobacco Price Support:
An Overview of the Program
Jasper Womach
Agricultural Policy Specialist
Resources, Science, and Industry Division
About 94% of U.S. tobacco production is flue-cured and burley (both being
cigarette tobacco types). These crops are particularly important to the agriculture of
North Carolina (where flue-cured is grown) and Kentucky (where burley is grown).
Together, these two states produce 66% of the total U.S. tobacco crop. The federal
tobacco price support program was designed to support and stabilize prices for farmers.
It operated through a combination of mandatory marketing quotas and nonrecourse
loans. Marketing quotas limit the amount of tobacco each farmer could sell, which
indirectly raised market prices. The loan program established guaranteed minimum
prices. The law required that the loan program operate at no net cost to the federal
government. Apart from year-to-year budget impacts, no-net-cost provisions of the law
were intended to assure that all loan principal plus interest would be recovered.1 The
2004 tobacco crop was the last crop eligible for federal support, as the program was
terminated by P.L. 108-357, Title VI, the Fair and Equitable Tobacco Reform Act of

2004. This report will be not be updated.

Industry Profile
World production of tobacco was estimated at about 12.662 billion pounds (dry
weight) for 2004. Production data are collected in more than 100 countries. However,
nearly 75% of world tobacco is produced in the following seven countries: China (4,439
mil. lbs.), Brazil (1,669 mil. lbs.), India (1,318 mil. lbs.), United States (788 mil. lbs.),
Indonesia (317 mil. lbs.), Malawi (304 mil. lbs.), and Turkey (281 mil. lbs.).

1 Data in this report, unless otherwise specified, are U.S. Department of Agriculture data from
recent issues of Tobacco: World Markets and Trade, published by the Foreign Agriculture
Service, and Tobacco Situation and Outlook Reports, published by the Economic Research
Congressional Research Service ˜ The Library of Congress

Fewer than 57,000 U.S. farms marketed about 848 million pounds (farm weight) of
tobacco from 408,000 acres in 2004. The estimated farm value of the 2004 crop was
about $1.685 billion ($1.987/lb.). Major U.S. tobaccos are flue-cured (produced primarily
in North Carolina) and burley (produced primarily in Kentucky), which are both cigarette
tobaccos. Other types of tobacco are used for cigars, chewing, and snuff.
Even though tobacco is grown in 21 states, North Carolina and Kentucky originate
about 65% of total production and four other states (Tennessee, Virginia, South Carolina,
and Georgia) produce another 25%. The high per acre value of tobacco sales (averaging
about $4,130 in 2004) makes it critical to the income of the growers and important to the
economies of the major producing states. For North Carolina in 2004, tobacco constituted
7.9% of the value of all farm commodities (crops and livestock); for Kentucky, tobacco
accounted for 11.7% of the value of all commodities.
The United States is the world’s largest exporter of manufactured tobacco products
(cigarettes) and is the second leading exporter, behind Brazil, of unmanufactured tobacco
leaf. During 2004, the United States exported 361 million pounds (dry weight) of leaf
tobacco, valued at $1.044 billion (mostly to the European Union, Japan, and Russia).
U.S. manufactured tobacco product exports could amount to about $1.566 billion (mostly
to Japan, Saudi Arabia, Israel, Iran, Lebanon, Hong Kong, Kuwait, United Arab Emirates,
and Taiwan).
In 2005, U.S. manufacturers produced an estimated 482 billion cigarettes (exporting
about 23%). American blend cigarettes are a combination of flue-cured, burley, and
oriental tobaccos. All of the oriental tobacco is imported (from primarily Turkey).
Consumption of cigarettes has declined nearly 41% in the United States since 1981, from
640 billion to an estimated 378 billion in 2005. However, spending for tobacco products
has increased as a result of price and tax increases. In 2004, according to the Bureau of
Economic Analysis) consumers spent about $87.6 billion on tobacco products (94% for
Tobacco products are subject to federal excise taxes. In addition, all states and some
municipal governments impose excise taxes. Collections in July 2003-June 2004 were
an estimated $20.111 billion (federal, $7.779 billion; state, $11.877 billion; municipal,
$456 million). The federal cigarette excise tax was 39¢ per pack and the weighted
average state-municipal tax was 62.55¢ per pack. In 2003/2004, federal taxes were
collected on 19.945 billion packs.
The Price Support Program
The tobacco price support program (first created in the 1930s along with other
commodity support programs) existed only for the economic benefit of farmers. It was
created for the purpose of supporting the income and stabilizing the price of tobacco
received by farmers. By law, the choice of whether or not federal support would be
provided was determined by growers in a referendum held every three years.
When producers approved federal price support for tobacco, they became subject to
marketing quotas. A marketing quota was a supply control mechanism that indirectly

increased market prices. At the same time, the federal government was required to
guarantee prices at least as high as the level specified in the law.
Legislative Authority
The first commodity price support legislation was the Agricultural Adjustment Act
of 1933. Various problems with this and subsequent legislation ultimately led to adoption
of the Agricultural Adjustment Act of 1938 (P.L. 75-430). This permanent law
established a supply control and price support program for tobacco that, even as amended,
remained much the same. The legal authority and requirements for the federal tobacco
program were contained in 7 U.S.C. 1311-1316 and 7 U.S.C. 1445.
Administering Agency
Program administrative operations were carried out by the U.S. Department of
Agriculture’s (USDA) Farm Service Agency (FSA). Annual administrative costs were
estimated at about $24 million in FY2004 for tobacco price support operations. This cost
covered primarily salaries for some headquarters personnel and staff time devoted to the
tobacco program in about 600 county offices. Price support operations (nonrecourse
loans) were financed by USDA’s Commodity Credit Corporation (CCC). The CCC
obtained needed money by borrowing from the U.S. Treasury (which had to be repaid
with interest).
Program Operation
The federal tobacco price support program limited and stabilized the quantity of
tobacco produced and marketed by farmers. This was achieved through marketing quotas.
In addition, minimum market prices were guaranteed to farmers through CCC2
nonrecourse loans.
Marketing Quotas. When tobacco quota owners voted in favor of price supports,
they were at the same time agreeing to accept government restrictions on the amount of
tobacco they could market. The national marketing quota was the amount judged
sufficient to meet domestic and export demand, but at a price above the government
support price. Each farm’s quota was assigned to the land. So, the right to produce and
market a specified quantity of tobacco resided with the owner of the land. A farmer could
only begin to grow tobacco by purchasing or renting land that had a quota. By limiting
the supply of tobacco, the market price was increased. Total farm revenue was raised
because consumption did not decline enough to offset the price increase. In this way,
farm income was supposed to be supported through artificially high market prices, rather
than through direct government payments. This differed from other commodity support
programs that utilized direct payments, rather than marketing quotas, as the principal
subsidy mechanism.

2 The term nonrecourse means that in cases of default no additional recourse is taken against
borrowers beyond taking ownership of the collateral. The collateral is accepted as full settlement
of the debt.

Loans. Marketing quotas were not always totally effective at supporting market
prices, given the numerous variables that affect tobacco supply and demand.
Consequently, federal support prices were guaranteed through the mechanism of
nonrecourse loans available on each farmer’s marketed crop. The loan price for each type
of tobacco was announced each year by the USDA, using the formula specified in the law
to calculate loan levels. The national loan price on 2004 crops flue-cured tobacco was
$1.69 per pound; the burley loan price was $1.873.
At the auction sale barn, each lot of tobacco went to the highest bidder, unless that
bid did not exceed the government’s loan price. In such cases, the farmer was paid the
loan price by a cooperative, with money borrowed from the CCC. The tobacco was
consigned to the cooperative (known as a price stabilization cooperative), which redried,
packed, and stored the tobacco as collateral for CCC. The cooperative, acting as an agent
for the CCC, later sold the tobacco, with the proceeds going to repay the loan plus
interest. By 2004, about 80% of tobacco was sold under contract, but leaf that did not
meet specifications could be taken to auction, where it might go into the loan program.
No-Net-Cost and Marketing Assessments. Under the threat of a legislative
dissolution of the program by its opponents, Congress passed the No-Net-Cost Tobacco
Program Act in 1982 (P.L. 97-218). This legislation imposed an assessment on every
pound of tobacco marketed (including imported tobacco since 1994). The no-net-cost
assessment on 2004 crop flue-cured was 10¢ per pound; the burley assessment was 2¢.
Growers and buyers each paid half of the no-net-cost assessment. The no-net-cost
assessment funds were deposited in an escrow account that was held to reimburse the
government for any financial losses resulting from tobacco loan operations. Losses
occurred when a cooperative sold loan collateral tobacco at a price insufficient to cover
the loan principal plus interest. Until its legal authority expired, a budget deficit reduction
assessment (called a marketing assessment) of 1% of the support price was collected on
every pound of tobacco marketed from 1990 through 1997.
Market Loss Payments and Disaster Assistance. In response to low
commodity prices in 1999, 2000, and 2001, Congress authorized market loss payments
to producers of grains, cotton, oilseeds, tobacco, dairy, and several other crops (P.L. 106-
78, P.L. 106-224, and P.L. 107-25). Tobacco growers were paid about $1 per pound for
diminished quotas, receiving direct payments of $328 in FY2000, and $340 million plus
and $129 million in FY2001. Agricultural disaster assistance legislation in 2003 (P.L.
108-7) provided another $51 million to tobacco producers. These payments were not
constrained by the no-net-cost provisions of the tobacco loan program. Additionally, $2.8
million was approved for tobacco on warehouse auction floors damaged by flooding from
hurricane Floyd in 1999.
Passage of the No-Net-Cost Tobacco Program Act made a significant change in
federal price support policy. Shifting the financial burden for tobacco program losses
from the federal government to growers encouraged a reduction in support prices (which
was done by legislation in 1985). Initially, this stopped the decline in U.S. tobacco leaf
exports. However, the growing competitiveness of foreign tobacco continued to erode the
U.S. share of export markets. Foreign tobacco had captured 45% of the domestic cigarette
manufacturing market when Congress enacted a domestic content requirement. This

domestic content requirement took effect in 1994 and limited cigarettes to 25% foreign
content. Under new international trading rules, the domestic content requirement was
replaced in September 1995 with a tariff-rate quota, which was less restrictive than the
previous domestic content requirement. In 2004, imported tobacco constituted 61.3% of
U.S.-manufactured cigarettes.
Tobacco-Related CCC Net Outlays, and FSA Administrative
Expenses, by Fiscal Year, 1980-2004
(in millions of dollars)
Fiscal CCC admini strative CCC admini strative
yearNet outlaysexpensesFiscal yearNet outlaysexpenses
1980 (87.8) 13.9 1993 235.4 15.3
1981 (51.2) 13.1 1994 692.7 14.7
1982 103.0 13.3 1995 (298.2) 15.3
1983 879.8 12.3 1996 (495.9) 14.3
1984 346.4 13.4 1997 (156.2) 14.8
1985 455.4 11.5 1998 376.5 16.1
1986 253.4 10.8 1999 112.7 12.8
1987 (346.0) 10.0 2000 657.1 14.1
1988 (453.3) 8.4 2001 385.8 17.6
1989 (367.0) 10.8 2002 (137.2) 18.1
1990 (307.3) 11.7 2003 179.3 21.4
1991 (143.4) 14.8 2004 18.5 24.1
199229.213.4Sum FY80-041,881.7356.0
Source: U.S. Department of Agriculture. Farm Service Agency. History of Budgetary Expenditures of
the Commodity Credit Corporation, annual issues. And, Office of Management and Finance, internal
document titled Program-by-Program Summary, Estimated Costs Related to Tobacco Activities, annual
issue s.
Note: Negative numbers indicate negative net outlays (i.e., gains or receipts). Included in the tabulations
are revenues generated by the deficit reduction fees assessed on all tobacco marketings from 1990 through
1998, averaging about $30 million per year. Also included are congressionally mandated farm assistance
payments of in FY2000, FY2001, FY2002, and FY2003 of respectively $328 million, $469 million, $6
million, and $51 million.
The no-net-cost rule muted much of the criticism that the tobacco loan program was
a taxpayer subsidy for tobacco farmers. The budgetary impact of the tobacco loan
program was determined primarily by loan outlays (new loans made) and loan recoveries
(repayment of old loans). In any given year, new loan outlays might be more or less than
recoveries from the repayment of old loans. Since tobacco is typically stored for extended
periods, it could be several years before the loan inventory was sold. The law required
that any losses of loan principal and interest be repaid from the no-net-cost account, which
was funded from assessments on growers and buyers of leaf tobacco. This requirement
did not apply to 1999 crop loan inventories that Congress authorized be transferred to the
CCC without the action being charged against the no-net-cost program (P.L. 106-387,

Sec. 844). This law cost the CCC $625 million, for acquisition, interest, storage, and
disposal. In the absence of this law, losses from the disposal of these inventories would
have been covered by the no-net-cost account with funds raised from assessments on
tobacco marketings. However, and in spite of no-net-cost legislation, the continuing net
CCC outlays brought criticism.
There were other critics of the tobacco program. Free market advocates pointed to
the competitive disadvantages caused by the program. Economists believed that without
marketing quotas and price support loans, farmers would produce more tobacco, which
would be sold at lower prices. The lower prices would lead to increased exports, and
more domestic production would be used in U.S.-manufactured cigarettes — displacing
some of the imported tobacco. Some health advocates said the federal government should
not be supporting tobacco farm income and should get out of the tobacco business.
The Fair and Equitable Tobacco Reform Act of 2004 (P.L. 108-357, Title VI) was
signed into law October 22, 2004. It eliminated the tobacco program after the 2004 crop.
This “quota buyout” bill paid quota owners $7/lb. on 2002 basic quota and active
producers $3/lb. on 2002 effective quota. The $9.6 billion cost of payments, plus another
$540 million for expected losses on CCC loan inventories is to be paid from assessments
on cigarette manufacturers and importers over a 10-year period (FY2005-2014).
Other USDA Tobacco-Related Activities
The USDA continues to administer several other programs designed to assist tobacco
farmers, facilitate marketing, and provide information to federal policy makers. It
administers subsidized multi-peril crop insurance for tobacco (as well as for other crops),
which was budgeted to cost about $41 million in FY2005. Also, as with other crops, the
Department collects, analyzes, and disseminates data on tobacco production, utilization,
and prices, costing about $1.262 million in FY2005. The USDA, using its own
discretion, has discontinued all federal extension program expenditures on education and
pest management related to tobacco. The Department was specifically prohibited from
spending research funds on the production, processing or marketing of tobacco, and from
promoting the export of tobacco or tobacco products. These prohibitions are contained
in the annual USDA appropriations law.
For More Information
!CRS Report RS22046, Tobacco Quota Buyout.
!CRS Report RL31790, Tobacco Quota Buyout Proposals in the 108th
!CRS Report 97-417, Tobacco Related Programs and Activities of the
U.S. Department of Agriculture: Operation and Cost.