Tobacco-Related Programs and Activities of the U.S. Department of Agriculture: Operation and Cost

CRS Report for Congress
Tobacco-Related Programs and Activities
of the U.S. Department of Agriculture:
Operation and Cost
Jasper Womach
Agricultural Policy Specialist
Resources, Science, and Industry Division
The U.S. Department of Agriculture (USDA) has long operated programs that
directly assist farmers and others with the production and marketing of numerous crops,
including tobacco. In most cases, the crops themselves have not been controversial.
However, where tobacco is involved, the use of federal funds has been called into
question. Taken together, all of the directly tobacco-related activities of the USDA
generated net expenditures of an estimated $30.8 million in FY2006, and the budget
anticipates net expenditures of $29.5 million for FY2007. Over 90% of this spending
is related to crop insurance.
The federally financed tobacco price support program, once the major form of
tobacco farmer assistance and in some years a costly program, was terminated at the end
of crop year 2004. The USDA is prohibited by language in the annual appropriations
law from spending funds to help promote tobacco exports and to conduct research
relating to production, processing, or marketing of tobacco and tobacco products. Other
tobacco-related activities have been subjected to congressional scrutiny. The USDA
does operate numerous programs that are not tobacco-specific, but are available to
farmers that produce tobacco and other crops. These are not examined in this report.
Price Support Program
From the late 1930s through the 2004 crop, the USDA operated the tobacco price
support program. It was designed to raise and stabilize farm tobacco prices at higher
levels than they otherwise would have reached. This was accomplished through a
combination of farm marketing quotas and federal nonrecourse commodity loans.
Administration was done through the county offices of the Farm Service Agency (FSA),1
and loan program funding was provided through the Commodity Credit Corporation

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Congressional Research Service ˜ The Library of Congress

(CCC). In 1982, legislation was adopted that applied an assessment on all tobacco
marketings to be used to offset price support losses and make the loan operations function
at no net cost to taxpayers. On two occasions legislation relieved the program of its
obligations on large inventories. These actions cost about $1 billion. In addition,
Congress made so-called tobacco loss payments of $852 million during FY2000-FY2003
to offset a sharp decline in farm sales to domestic and foreign buyers. Overall, from
FY1982 through FY2005, tobacco support net expenditures totaled about $1.57 billion,
for an annual average cost of $71 million.
After Congress enacted the Fair and Equitable Tobacco Reform Act of 2004 (P.L.
108-357), the tobacco support program came to an end. Tobacco quota owners and farm
operators were compensated for the diminished value of their farms and the loss of future
support with a payment of $9.6 billion over 10 years, funded by an assessment on tobacco
manufacturers and importers. Because of this tobacco buyout, CCC support program
expenditures have been eliminated, and it is not anticipated there will be any future ad hoc
assistance to tobacco farmers. FSA administrative expenditures associated with the
buyout are estimated to be $1.827 million in FY2006, and the budget for FY2007 is zero.
(For additional information, see CRS Report RS20802, Tobacco Farmer Assistance,
and CRS Report RS22046, Tobacco Quota Buyout.).
Federal Crop Insurance
The federal crop insurance program, administered by USDA’s Risk Management
Agency,2 provides farmers with subsidized multi-peril insurance on tobacco and other
crops. The insurance covers unavoidable production losses due to adverse weather, insect
infestations, plant diseases, and other natural calamities. It does not cover avoidable
losses caused by neglect or poor farming practices. Sales and servicing of policies are
done by private companies with some federal reimbursement, and most of the net
indemnity losses fall upon the government. Additionally, the premiums have been
subsidized since 1980 in order to encourage participation and avoid enactment of ad hoc
disaster assistance programs. Experimental Crop Revenue Coverage, available for wheat,
corn, and soybeans, is not available for tobacco.
Total net federal expenditures for tobacco crop insurance coverage include outlays
for crop loss indemnity payments, plus the premium subsidies, plus sales administrative
expenses, less the farmer-paid premiums. Net federal outlays are estimated to be $27.9
million in FY2006, and are budgeted at $28.7 million for FY2007.
Tobacco Inspection and Grading
The USDA’s Agricultural Marketing Service (AMS)3 carries out voluntary
inspection and grading services at tobacco auction markets and import terminals. The
establishment of uniform standards of quality, with grading by unbiased experts, helps
assure that auction markets perform efficiently and fairly. Historically, federal grading

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provided an assurance of quality for tobacco held as collateral for CCC price support
loans. Additionally, imported and domestic tobacco is inspected voluntarily to guard
against illegal pesticide residues. Since 1981, the grading and inspection services have
been financed through user fees (now set at $0.62 per 100 pounds for grading and $0.85
per 100 pounds for pesticide testing). These fees are sufficient to fully cover the costs of
inspection activities as well as the cost of developing and maintaining the standards
applied by the inspectors. This has dramatically reduced the use of AMS inspectors.
AMS inspection work now is done on imported tobacco, as nearly all of the domestic crop
is contracted for sale rather than auctioned.
Market News Services
The Agricultural Marketing Service4 provides a market news service for sellers and
buyers of tobacco. Daily reports of grades, prices, and sales volume at the auction
markets are distributed throughout the tobacco industry. The cost of the tobacco news
service in FY2006 is an estimated $190,000, and the budget for FY2007 is $194,000.
Similar market news services are provided for all major agricultural commodities. Market
news services are designed to provide farmers, and others in the marketing chain, with
timely, accurate, and unbiased information on market conditions, to help them make
better decisions on where and when to sell and buy commodities. According to
economists, such information is necessary for a market economy to function efficiently
and effectively. In the absence of a taxpayer-funded market news service, the information
might be collected and sold by commercial enterprises, but questions of bias could arise.
Tobacco Research
In the past, USDA-funded research related to tobacco production, processing, and
marketing. Some of the research was carried out by Agriculture Research Service (ARS)5
scientists and some was done by university scientists funded through the Cooperative
State Research, Education, and Extension Service (CSREES).6 Annual research spending
by the USDA averaged about $6.6 million until it was terminated under the FY1995
agricultural appropriations law and subsequent laws. The restriction does not apply to
research on medical, biotechnological, food, and industrial uses of tobacco. A special
research grant of $329,000 was approved for FY2006 to investigate alternative uses of
tobacco plant material. No similar spending is anticipated in FY2007.
Extension Education
The jointly funded federal-state-county extension education and technical assistance
program is designed to serve as a link between the nation’s agricultural research
institutions and farmers. The term extension conveys the concept of extending the work
of researchers into the community. At the county level, extension agents distribute
information and expert advice to farmers and others through published materials,

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seminars, and direct consultation. The state extension staff, given their close proximity
to researchers, continuously trains the county agents and designs and prepares materials
for use by the county agents. In FY1997, CSREES spent $680,000 on tobacco-related
extension activities. Federal funding was eliminated in FY1998 by the Administration
and remains at zero. All state and county extension activity related to tobacco is funded
by the states.
Economic Analysis
The Economic Research Service (ERS)7 is responsible for assembling and analyzing
economic data and forecasting market data within the USDA. As with the other major
commodities, ERS assembles and analyzes supply and demand data on tobacco. ERS
periodically publishes analytical findings in a Tobacco Situation and Outlook Report.
Economists also conduct studies on related topics, such as the structural characteristics
of tobacco farming, the role of tobacco in local economies, and the likely impact of
program changes and policy options. ERS spending on tobacco analysis during FY2006
is estimated at $123,000, and the budget for FY2007 is $125,000.
International Data Collection and Analysis
The Foreign Agriculture Service (FAS),8 through its network of agricultural
counselors and attaches, collects economic intelligence throughout the world. This
intelligence is used by trade negotiators, economists, policymakers, and the business
community. Tobacco is one in a long list of commodities on which the FAS staff collects
information. The USDA estimates that the cost of this effort for tobacco will be $200,000
in FY2006, and the budget for FY2007 is $205,000.
Domestic Crop Data Collection
The National Agricultural Statistics Service (NASS)9 collects field-level data on
planting intentions, crop conditions, harvesting progress, yield, and production. This
information helps the business community, including farmers develop marketing plans.
Also, it serves to alert policy officials of likely shortages or surpluses, thereby facilitating
plans for any government action that might be taken. The information that NASS
compiles and distributes is considered by economists to be critical to an efficiently
functioning market economy. It is argued that the absence of NASS data would most
severely disadvantage farmers and government officials, who are least able to obtain
information through alternative sources. Tobacco is one in a long list of commodities on
which NASS staff collects information. The estimated cost of this effort for tobacco is
$231,000 in FY2005, and the budget for FY2007 is $231,000.

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Table 1. USDA Tobacco-Related Net Budgetary Expenditures,
Estimated FY2006 and Budgeted FY2007
USDA AgencyFY2006 FY2007
— Activity or programEstimateBudget
Commodity Credit Corporation/Farm Service Agency
— Administrative expenses of tobacco buyout1,8270
— Tobacco price support operations00
— Direct income support payments tobacco farms00
Risk Management Agency
— Crop insurance (tobacco crop loss indemnity payments27,88328,702
and administrative expenses, less grower premiums)
Agricultural Marketing Service
— Market news reporting (collection and dissemination190194
of auction market prices and sales volume data)
Cooperative State Research, Education, and Extension Service
— Special research grant on alternative uses of tobacco3290
Economic Research Service
— Economic analysis and projections (supply, demand,123125
and trade analysis, and projections related to tobacco)
Foreign Agricultural Service
— World market analysis (collection and analysis of200205
foreign country economic data on tobacco production
and trade)
National Agricultural Statistics Service
— Agricultural statistics collection (data collection on231231
U.S. tobacco acreage, crop condition, yield, and
Total USDA net expenditures for tobacco-related activities30,78329,457
Source: Data are from the USDAs Office of Budget and Program Analysis, Program-By-Program
Summary, Estimated Costs Related to Tobacco Activities, 2006.