Comparing Quota Buyout Payments for Peanuts and Tobacco

CRS Report for Congress
Received through the CRS W eb
Comp aring Quota Buyout Payments for
Peanuts and Tobacco
Specialist i n Agricultural Policy
Resources, Science, and Industry Division
Legi slation i s pending in the 1 0 8 th C o n gress (S. 1490, H.R. 3160) to eliminate
tobacco quotas and c o m pensate quota o wner s (whether t hey are absentee owners or
active p roducers) at the rate o f $ 8 p er quota pound. Active p roducers would l ose p rice
support, but would receive a l ump s um transition p ayment of $4 per poun d o n t heir
product i o n h i s tory, i ncluding the quota t hey o wn as well as any quota t hey rent. A
precedent for quota buyouts was esta b l i s hed i n t he 2002 farm bill, which t erminated
peanut quotas and compensat ed the own ers with a $0.55 per pound payment. Active
peanut producers continue to receive price s upport. A compari s o n o f p eanut and
tobacco quota buyout rates s hows t hat t he two are substantially comparable (relative t o
past quota rental r a t e s ) . However, current USDA budget projections indicate t hat
continuing operation o f t he peanut subsidy program likely p rovides s ignificantly high er
b e n e fi t s than the propos ed t o b acco t r an s ition p ayment (relative t o t he costs o f p roduction
of each com m odi t y).
B o t h peanut s and t obacco have had a l ong hi st ory (dat i n g b ack t o t h e 1930s) of
federal p ri c e s upport achieved t hrough a combination o f m arketing quotas and
nonrecourse loans. The 2002 fa rm bill (P.L. 107-171, Sec. 1301-1310) ended p eanut
quotas with a buyout paym ent t o p eanut quota o wners, but continued a support p rogram
for p roducers. Legi slation i s p ending in the 108th Congress (S. 1490, McConnell; H.R.

3160, Fletcher) t hat likewise would p rovide tobacco quota o wners with a buyout paym ent.

However, unlike p eanuts, active t obacco producers would b e given a l ump s um transition
paym ent but no future support. Another important distinction i s t hat t obacco paym ents
would b e funded from assessments on tobacco product m anufacturers and importers. In
contrast, p eanut buyout paym ents and continuing support p rogram operations are funded
by the federal government.
The purpose of t his analysis i s t o provide a generally consistent comparison of the
benefits provided t o p eanut quota holders and p roducers and proposed benefits concerning
t obacco. It i s not t h e i nt ent i o n o f t hi s anal ysi s t o at t em p t t o d et erm i n e t he appropri at e si z e
of these buyout paym ents.

Congressional Research Service ˜ The Library of Congress

There were about 12,000 farms t hat h arvested an average o f 111 acres of peanuts i n
the United S tates i n 1997, according t o t he Census of Agriculture. In 2002, total p eanut
product i o n was 3.32 billion pounds harvested from 1.30 million acres. The leading
production s tates were Georgia ( 4 0%) and Tex as (26%), with the remaining 34% of
output coming from Alabama, North Carolina, Fl orida, Oklahoma, Virgi n ia, New
Mex i co, and South C arolina. W ith a s eason average p rice of $0.179 per pound, the v alue
of the 2002 crop was $594 million.1
Prior t o 2 0 02, federal s upport p rices for p eanuts were guaranteed through a two-
tiered nonrecourse loan program t hat d if f e r e ntiated b etween peanuts m arketed for
domestic edible consumption ($0.305 per pound loan rate in 2001) and p eanuts crushed
for o il and m eal or ex ported ($0.066 per pound loan rate in 2001). In o rder to minimize
the cost of t he nonrecourse loan program, marketing quotas were allocat ed am ong
producers t o limit the quantity of peanuts eligible for t he high er support given on
dom es t i c ed i ble production. In addition, import quotas allowed only a small, but
gradually increasing, quantity to enter t he U.S. market from overseas. In 2001, imports
amounted to about 6% of domestic use, according t o t he U.S . Department of Agriculture
The 2002 farm bill, which applies t o t he six crop years 2002 through 2007, replaced
the o ld framework of peanut support with a n ew framework identical to that adopted for
soyb eans, wheat, corn, cotton, and rice. Now, producers with a p ast p eanu t production
history are eligible for annual fix ed direct paym ents of $0.018 per pound on 85% of their
b a se production. USDA’s average budgeted co st for t hese direct paym ents t o p e a n u t
producers i s $65 million per year.
The s ame p roducers are eligible for counter-cyclical paym ents when the m arketing
year average farm p rice falls below a target price o f $0.2475 per p o und. USDA’s
paym ent rate o n 85% of base production was $0.086 per pound in 2002 and was estimated
to average $0.092 per pound in future years (for an average annual t otal of $175 million
per year). All farmers eligi b l e t o receive direct and counter-cyclical paym ents have
planting flex i bility privileges, and s o m ay produce p eanuts o r o ther eligible crops. 2
Farm s t h a t a ctually produce p eanuts, and t here is no restriction t o limit entry, are
el i gible for m arketing assistance loans or l oan deficiency payments on t heir total
production. The l oan rate for all p eanut s i s $0.1775 per pound. The v alue to producers
of marketing l oan gains and l oan d eficiency p ayments d epends on how low m arket p rices
drop bel o w t he loan rate each year. USDA’s budget estimate anticipates an average
annual p ayment of about $0.033 per pound of peanut production, for an average annual
total cost of almost $136 million.

1 Unless otherwise documented, the data characterizing peanut and t obacco farms, production,
and prices are from t he USDA, National Agr icultural Statistics Servi ce.
2 Here, a nd throughout this analys is, budget data are from t he USDA, Co mmo d i t y Credit
Corporation, Commodity Estimates Book, FY 2004 President’s Budget, February 3. 2003.

The combined average estimated budgeted co st of direct paym ents, counter-cyclical
paym ents, and marketing l oan benefits is about $0.091 pe r pound of act ual project ed
peanut production, or $376 million p er year.
Peanut quota o wners were given direct paym ents to compensate for l ost quota v alues.
This quota buyout paym ent was equal t o $0.55 per pound on 2001 quota l evels. Quota
owners had t he option o f a lump sum p ayment or five equal annual i nstallments o f $0.11
per pound. Nationally, quota buyout paym ents were estimated b y USDA t o cost a total
of $1.475 billion.
T h ere w ere 90,000 farms t hat h arvested an average o f 9.3 acres of tobacco i n t h e
United S tates i n 1997, according t o t he Census of Agriculture.3 In 2002, total t obacco
production was 881 million pounds harvested from 429,000 acres . The leading s tates
were North C arolina (40%) and Kentucky (25%), with an additional 30% of production
coming from Tennessee, Virginia, S outh C arolina, and Georgia (the remaining 5% cam e
from 1 0 o ther states). W ith a s eason average p rice of $1.907 per pound, the v alue of the

2002 crop was $1.726 billion.

The p rice of each kind of federally supported t obacco is now gu aranteed through
nonrecourse loans. The t wo major k inds of tobacco, which both receive price s upport and
together constitute nearly 95% of U.S. tobacco production, are flue-cured and burley. The

2003 loan rate for fl ue-cured is $1.663 per pound, and for burley i s $1.849 p er pound.

The l oan rat es are s et each year by US DA usi n g a form ul a m andat ed b y l aw.
The l oan p rogram, under a legal m andate enacted in 1982, is supposed to operate at
no net cost t o t ax payers. If t obacco is put under l oan b y p roducers a n d l a t e r i s s o l d for
l e s s t h a n t h e l oan p rincipal plus intere st, l osses are supposed to be covered from
assessments on growers and buyers o f t obacco. From FY1983 through FY2002, tobacco
operations have resulted i n a cumulative n et federal ex p enditure of nearly $1.4 billion (an
annual average of $69 million). The reason for t he net ex p enditure largely i s due to the
congressionally mandated assumption of l osses o n l arge loan inventories t hat d eveloped
i n 1983 and 1999, as well as direct paym ents in FY2000 and FY2001 to offs et recen t
reductions in quota. (See CRS Report R S20802, Tobacco Farmer Assistance .)
Similar bills in the S enat e (S. 1490) and House (H.R. 3160) would m ake buyout
paym en t s t o quota owners and transition assistance paym ents to active p roducers.
Tobacco quota o wners (including an estimated 335,000 that are not actively p roducing
the crop and 81,000 that are active p roducers) would b e p aid $ 8 p er pound of basic quota
that they were assign ed in past years. The 81,000 a c t i v e p roducers would receive a
separate paym ent o f $ 4 p er pound on their effective quota i n p ast years as t ransition
assistance to a m arket environment absent federal support.

3 Since 1997, the number of f arms producing t obacco has decl i n e d a s p r oduction has been
consolidated, and the acreage harvested has declined due to the drop i n national quotas under t he
price s upport progr am. An updated c ount of farms will be forthcoming when t he 2002 Census
of Agriculture is published.

The t otal ex pected cost of each bill is about $15 billion, which would b e collected
from t obacco product m anufacturers and importers (about 9 8 % from cigarette
manufacturers). On a per p ack basis, using t he 2002 U.S. consumption rate of 21 billion
packs, $15 billio n i s e q u a l t o $0.714 per p ack. S pread over t he life o f t he buyout
paym ents, t he average annual cost t o m a nufacturers and importers would b e $0.10 to
$0.12 per p ack per year (if consumption remains constant). How m uch o f t his cost would
be passed o n t o consumers and how much w ould b e a b s orbed b y m anufacturers i s
Comparing P eanut and Tobacco Buyout Paym ent Rates
W h ile the p eanut quota buyout and farm s upport p rovisions of the 2002 farm bill are
not identical to the p roposed buyout program for tobacco, comparisons are possible. The
followi ng anal ys is is based on revenue and cost of production data for 2001, published
by USDA’s Economic Research Service. The analysis i s divided into two parts.
First, a comparison i s m ade o f quota buyout paym ent for peanuts and tobacco.
Owners o f quota m ay be non-producin g o r a b s entee o wners earning rent by leasing t he
quota t o active p roducers (farm operators). Absentee quota o wners g i v e u p all future
rental income when they accept a quota buyout . Quota o wners who are active p roducers
realize a d rop i n t he value o f t heir land when quotas are eliminated.
Second, a s eparate comparison i s m ade o f payments t o active p roducers. After t he
quota buyout, p eanut producers b ecame eligible for continuing annual s ubsidy p rogram
paym ents. In t he pending tobacco legi sla tion, active p roducers would receive a l ump s um
paym ent and there would b e n o future ongoing subsidy p rogram.
Quota Buyout Paym ents. The p roposed quota buyout paym ent o f $ 8 p er pound
for t obacco, and the actual q u o t a b u yo u t p aym ent o f $0.55 per pound for p eanuts, is
compensat i o n for forgone future rental or asset v alues. Using a discount rate of 5%, a
lump s u m payment of $0.55 is the equivalent of annual i ncome o f $0.028 each year in
perpetuity; a lump sum p ayment today o f $8 i s t he equivalent of rental income of $0.40
each year i n perpet ui t y. Usi ng t h ese cal cul at i ons as a s t andard for com pari son (see Table
1), the buyout paym ent t o p eanut quota o wners (amounting t o 7 4 % o f a v erage annual
rent) appears t o b e s omewhat l ess favorable than the p roposed paym ent for tobacco quota
owners (85% of average annual rent for flue-cured and 97% for burley).

Table 1. Quota R ental R ates for Peanuts and Tobacco
Peanuts Flue-cured Burley
1995 $0.042 $0.41 $0.59
1996 $0.036 $0.40 $0.38
1997 $0.039 $0.37 $0.26
1998 $0.035 $0.44 $0.28
1999 $0.037 $0.52 $0.35
2000 $0.040 $0.57 $0.50
2001 $0.032 $0.59 $0.52
7-Year Simple Average Rent $0.037 $0.47 $0.41
Quota Buyout Annual Rent Equiva lent $0.028 $0.40 $0.40
B uyout a s Share of Average Rent 74% 85% 97%
Source: P r imary d ata are fr om USDA, E cono mic Research Service, periodic cost o f p roductio n reports.
T he r ental r ates fo r flue-cured a nd burley tobacco includ e a small land fee while fo r p eanuts the rental rate
is fo r q uo ta o nly. Ano ther d a ta ser ies d e ve lo p e d b y D r . W ill Snell, Univer sity o f Kentuc ky, e stimates the
7 - ye a r a ve r a ge b ur l e y q uo t a r e nt a t $ 0 . 4 4 p e r p o und , whi c h wo ul d p ut t he b uyo ut a t 9 2 % o f t he a ve r a g e
burley rent.
Producer Assistance Payments. The quota buyout proposal for t obacco
includes a $4 per pound paym ent for active p roducers t o s erve as transition assistance to
a n ew economic environment without federal p rice support. In contrast, p eanut producers
have continuing federal s upport i n t he form of annual fix ed d i rect paym ents, counter-
cycl i cal paym ent s , and m arket i n g l oan b enefi t s .
The $ 4 p er pound paym ent for active t obacco producers i s equivalent to an annual
subsidy of $0.20 per pound in perpetuity on base production (using a discount rate of 5%).
P eanut producers are ex pected to receive an average o f $0.091 per pound on es timated
actual p roduction (USDA budget estimate). As displayed i n Table 2, t he $0.091 yearly
peanut paym ent i s 57% of 2001 cash ex p enses, while a $0.20 per pound yearly tobacco
paym ent i s 19% of 2001 flue-cured cash ex p enses and 25% of burley cash ex p enses.
The USDA estimate of $0.091 per pound as the average annual future cost of t he
peanut support p rovisions can be converted to a l ump s um pre s e n t v alue of $1.82 per
pound (using a p resent value formula with a d iscount rate of 5%). Fo r purposes of
comparison with the t obacco paym ent, a $1.82 per pound lump sum p ayment to peanut
producers would b e 11.4 times greater than cash ex p enses, while $4 per pound for t obacco
is 3.9 times great er than flue-cured cas h ex penses and 4.9 times great er than burley cas h
ex penses in 2001.

Table 2. C omparison o f Peanut and Tobacco Producer Payments
(2001 Crop Year Data)
Peanuts Flue-Cured Burley
1 — M arke t Revenue $0.23 $1.86 $1.97
(Season Average Price)
2 — Less: Cash Expenses $0.16 $1.03 $0.81

3 — Equals: Net Cash Reve nue $0.08 $0.82 $1.16a

4 — Producer Lump Sum Payme nt $1.82 $4.00 $4.00a

5 — Annual Support Payme nt $0.091 $0.20 $0.20
6 — Lum p Sum P r oducer P aym ent a s
Multiple of 2001 Cash Expenses 11.4 3.9 4.9
(line 4 ÷ line 2)
7 — Annual P roducer P aym ent a s
Share of 2002 Cash Expenses 57% 19% 25%
(line 5 ÷ line 2)
Source: Data on 2001 market revenue and cash exp enses are fr om USDA, E cono mic Research Service.
Data on expected peanut support p ayments are fr om USDA, Farm Service Agency. Calculatio ns are b y the
a P eanut producers are eligible each year fo r marketing loan b enefits, d irect fixed p ayments, and counter-
cyclical payments fo r the 6-year life o f the 2002 farm bill. USDAs budget proj ects an average annua l c o s t
of $0.091 per pound fo r p ayments ( fr om 2002 through 2008). I f p roducers were to r eceive this benefit
ind e finitely into the futur e, the d isco unted p r esent value wo uld b e e q ual to $ 1 . 8 2 ( using a d isco unt r a te o f
5%). T he p roposed $4 per pound lump sum tobacco producer payment is equivalent to an a nnua l p a yme nt
of $0.20 per pound in perpetuity (using a d iscount rate of 5%).
The m ost obvious difference b etween tob acco and p eanuts i n t he above calculations
(in Table 2) i s t he com p arat i v el y h i gh b enefi t t o peanut producers fro m t h e c o n t i nui ng
support p rogram compared to the p roposed lump sum p ayment to tobacco prod ucers.
W h ether compari ng annual p ayments t o cash ex p enses, or comparing l ump s um paym ents
to cash ex p enses, flue-cured producer paym ents are 34% and burley p roducer paym ents
are 43% of pean u t producer paym ents. The quota buyout paym ents for p eanuts and
t obacco (i n Table 1) appear to be reasonably comparable, though t his i s a matter o f
The d at a i n t he t abl es are p resent ed for t he purposes of making generally consistent
comparisons across t otally different commodities with dram atically different unit prices
and costs of production, and t hus are potentially subject to misinterpretation. Despite this
admittedly i nex act comparison, the d ata d o app ear to indicate t hat t he continuing support
program p rovided t o p eanut producers likely will generate substantially more benefit t han
the p roposed $ 4 p e r pound lump sum t ransition p ayment for t obacco producers. The
financial adequacy to farmers o f either the p eanut p r o gram o r t he proposed tobacco
program i s not the s ubject of this analys is and i t s hould not be used for s uch purposes.