97-417 ENR
Updated July 6, 1998
CRS Report for Congress
Received through the CRS Web
Tobacco-Related Programs and Activities
of the U.S. Department of Agriculture:
Operation and Cost
Jasper Womach
Specialist in Agricultural Policy
Environment and Natural Resources Policy Division
Summary
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 programs themselves are not controversial.
Increasingly, however, where tobacco is involved, the use of federal funds is being
called into question.
Since 1982, the tobacco price support program has been under a statutory mandate
to operate at no net cost to the federal government. More recently, Congress has
prohibited the USDA from spending funds to help promote tobacco exports and to
conduct research relating to production, processing, or marketing of tobacco and tobacco
products. Subsequent appropriations laws have sustained these prohibitions. Other
tobacco-related activities have been subjected to congressional scrutiny.
Taken together, all of the directly tobacco-related activities of the USDA generated
net expenditures of an estimated $343 million in FY1998, and are budgeted at $8
million in FY1999. The net expenditures result from price support loan outlays
exceeding repayments and deficit reduction assessments. The USDA does operate other
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
Marketing Quotas and Loans
The tobacco price support program is designed to raise and stabilize farm tobacco
prices at a higher level than they would be otherwise. This is accomplished through a
Congressional Research Service ˜ The Library of Congress

---

CRS-2
combination of two program features, marketing quotas and nonrecourse commodity loans.
The national marketing quota is the amount of tobacco judged sufficient to meet
annual domestic and export demand, but at a price at least as high as the legally mandated
support price. In other words, the production of tobacco is held below what it would
otherwise be. By restricting production, farm income is supported through artificially
higher market prices, causing buyers of tobacco (and ultimately the consumers) to bear
the cost of the price support program.
In conjunction with marketing quotas, minimum selling prices are guaranteed to
farmers through Commodity Credit Corporation (CCC) nonrecourse tobacco loans. At
the auction sale barn, each lot of tobacco goes to the highest bidder, unless that bid does
not exceed the government’s loan price. In such a case, the farmer is paid the loan price
by a price stabilization cooperative, with money borrowed from the CCC. The tobacco
is consigned to the cooperative, which redries, packs, and stores the tobacco as collateral
for the money borrowed from the CCC. The cooperative later sells the tobacco, with the
proceeds going to repay the CCC—with interest.
Thus, the loan program provides a financing mechanism to store tobacco for long
periods of time in order to balance supply with demand. In any given year, the budgetary
impact of the loan program is the difference between loan outlays (new loans made) and
loan recoveries (old loans repaid). In recent years, loan repayments have exceeded new
loan requests, resulting in revenues in excess outlays for the CCC. However, for FY1999,
the loan activities are budgeted to result in net expenditures of $317 million.
No-Net-Cost and Marketing Assessments
Congress passed the No-Net-Cost Tobacco Program Act in 1982 (P.L. 97-218). This
law mandates that the tobacco program be carried out at no net cost to taxpayers (other
than administrative expenses common to all commodity support programs).
Costs arise when tobacco put under loan is later sold at a price insufficient to cover
the loan principal plus accumulated interest. To cover all such loses, the law mandates
an assessment on sellers and buyers at the wholesale level on every pound of leaf tobacco
marketed. The assessment rate is administratively determined and the revenue is
deposited in an account that is held to reimburse the CCC for any financial losses
resulting from tobacco loan operations.
The no-net-cost rule has muted much of the criticism that taxpayers are subsidizing
tobacco farmers. However, there is confusion over the appearance of tobacco spending
in the budget. The annual budgetary impact of the tobacco loan program is determined
primarily by loan outlays (new loans made) and loan recoveries (repayment of old loans).
In any given year, new loan outlays may be more or less than old loan repayments. In the
FY1999 budget, the sizable net revenue of nearly $129 million is expected to result from
the previously large loan outlays being repaid compared to a modest level of new loan
outlays being made. Since tobacco is typically stored for extended periods, it can be
several years before the loan inventory is sold and debts are settled. In all cases, the law
requires that any losses of loan principal and interest be reimbursed from no-net-cost
assessments.

---

CRS-3
The tobacco program, like most other commodity price support programs, is subject
to deficit reduction requirements authorized by the Omnibus Budget Reconciliation Acts
of 1990 (P.L. 101-508) and 1993 (P.L. 103-66). A marketing assessment of 1% of the
support price is collected on every pound of leaf tobacco marketed. This deficit reduction
assessment (with the revenue going toward general deficit reduction and not the tobacco
program) is budgeted to generate about $32 million in FY1999.
Administrative Operations
The tobacco price support program is administered by USDA’s Farm Service Agency
(FSA). Annual administrative costs are budgeted at about $15 million in FY1999 for
tobacco price support operations. This cost covers primarily salaries for a few
headquarters personnel and substantial staff time devoted to the tobacco program in about
600 county offices. Critics point out that this administrative cost falls upon taxpayers,
thus undermining the no-net-cost claims of program supporters. Countering this
contention, program supporters point out that the deficit reduction assessment brings in
about $32 million, about 2.0 times as much as the administrative costs. Program
supporters have, in the past, introduced legislation to earmark sufficient deficit reduction
assessment monies for administrative costs, but thus far the proposal has not been
enacted.
Federal Crop Insurance
The federal crop insurance program, administered by USDA’s Risk Management
Agency, 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 is 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 $38
million in FY1998, and are budgeted at $39 million for FY1999.
During congressional consideration of the FY1998 agriculture appropriations bills
(H.R. 2160, S. 1033), an attempt was made to incorporate language in the proposed law
to prohibit federal funds from being used for crop insurance related to tobacco production
and marketing. Proponents of the amendment stressed the unhealthful nature of tobacco
and the need to eliminate federal activities that assist in its production. Opponents
pointed to the remote link between programs that assist farmers and consumers’ choice
to smoke, and the need for tobacco farmers to receive assistance in sound management
related to natural risks (as typically offered for other crops). Contentious floor debates
ended with the defeat of the amendment in the Senate on July 23 and in the House on July
24, 1997.

---

CRS-4
Tobacco Inspection and Grading
The USDA’s Agricultural Marketing Service (AMS) carries out inspection and
grading services at tobacco auction markets. The establishment of uniform standards of
quality, with grading by unbiased experts, helps assure that auction markets perform
efficiently and fairly. Federal grading also provides an assurance of quality for tobacco
held as collateral for CCC price support loans. Additionally, imported and domestic
tobacco is inspected to guard against illegal pesticide residues. Since 1981, the inspection
and grading services have been financed through user fees (now set at 83 cents per 100
pounds). In FY1999, the tobacco inspection and grading fees are budgeted to bring in
$17.4 million, which is sufficient to fully cover the costs of inspection activities as well
as the cost of developing and maintaining the standards applied by the inspectors.
Market News Services
The Agricultural Marketing Service 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 FY1999 is budgeted at $994,000. 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)
scientists and some was done by university scientists funded through the Cooperative
State Research Service (CSRS). Annual resear
1
ch spending by the USDA averaged about
$6.6 million until it was terminated under the FY1995 agricultural appropriations law and
subsequent laws. University scientists, using about $1.7 million in USDA funds, continue
to do basic plant research utilizing the tobacco plant as a model, but it is used only as an
instrument for broader plant research and is not considered relevant to the tobacco
industry.
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
1 In 1994 USDA reorganization, CSRS and ARS were combined, along with the Extension
Service, into the Cooperative State Research, Education & Extension Service (CSREES).

---

CRS-5
of researchers into the community. At the county level, extension agents distribute
information and expert advice to farmers and others through published materials,
seminars, and direct consultation. The federal and state extension staff, given their close
proximity to researchers, continuously train the county agents and design and prepare
materials for use by the county agents. In FY1999, the Cooperative State Research,
Education, and Extension Service (CSREES) is budgeted to use $646 thousand on
tobacco-related extension activities.
On June 12, 1996, a House floor vote was taken on the FY1997 agriculture
appropriations bill (H.R. 3603, P.L. 104-180), to prohibit federal funds from being used
for extension activities (and crop insurance) related to tobacco. The amendment was
defeated by two votes. There was no such vote in the FY1998 agriculture appropriations
bill.
Economic Analysis
The Economic Research Service (ERS) is responsible for economic analysis and
forecasting 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 FY1999 is budgeted at $98,000.
International Data Collection and Analysis
The Foreign Agriculture Service (FAS), 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 is budgeted to
be $142,000 in FY1999.
Domestic Crop Data Collection
The National Agricultural Statistics Service (NASS) 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 USDA budgeted the cost of this effort for
tobacco at $249,000 in FY1999.

---

CRS-6
Table 1. USDA Tobacco-Related Net Budgetary Expenditures,
Estimated FY1998 & Budgeted FY1999
USDA Agency
FY1998
FY1999
<
Activity or program
Estimate
Budget
$000
$000
Commodity Credit Corp/Farm Service Agency
<
Administrative expenses of price support—salaries and
16,206
15,407
office expenses of USDA tobacco program
administrators.
<
Deficit reduction assessment—assessment on all tobacco
(30,455)
(30,747)
marketings for purposes of federal deficit reduction.
<
Tobacco price support loan operations—price support
316,758
(18,076)
program loan outlays less repayments.
Risk Management Agency
<
Crop insurance—tobacco crop loss indemnity payments
38,271
38,995
and administrative expenses, less grower premiums.
Agricultural Marketing Service
<
Inspection & grading—inspection and grading for quality
0
0
characteristics and pesticide residues provided on a fee-
for-service basis.
<
Market news reporting—collection and dissemination of
965
994
auction market prices and sales volume data.
Cooperative State Research, Education, and Extension Service
<
Extension activities—extension education and technical
assistance.
680
646
Economic Research Service
<
Economic analysis and projections—supply, demand, &
98
98
trade analysis, and projections related to tobacco
Foreign Agricultural Service
<
World market analysis—collection and analysis of
138
142
foreign country economic data on tobacco production and
trade
National Agricultural Statistics Service
<
Agricultural statistics collection—data collection on U.S.
248
249
tobacco acreage, crop condition, yield, and production.
Total USDA net expenditures for tobacco-related activities
342,909
7,708
Source: Data are from the USDA’s Office of Budget and Program Analysis, Program-By-Program
Summary, Estimated Costs Related to Tobacco Activities, February 26, 1998; and the Commodity Credit
Corporation, Commodity Estimates Book, FY 1999 Mid-Session Review, May 20, 1998.
Note: Numbers in parentheses are net revenues (i.e., negative net expenditures).

---