95-129 ENR
Updated March 22, 2000
CRS Report for Congress
Received through the CRS Web
Tobacco Price Support:
An Overview of the Program
Jasper Womach
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Summary
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 67% of the total U.S. tobacco crop. The federal
tobacco price support program is designed to support and stabilize prices for farmers.
It operates through a combination of mandatory marketing quotas and nonrecourse
loans. Marketing quotas limit the amount of tobacco each farmer can sell, which
indirectly raises market prices. The loan program establishes guaranteed minimum
prices. The law requires 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
are intended to assure that all loan principal plus interest will be recovered.1
Industry Profile
World production of tobacco is estimated at about 14 billion pounds (dry weight) for
1999. Production data are collected for over 100 countries. However, nearly 70% of
world tobacco is produced in the following six countries: China (4,647 mil. lbs.), United
States (1,267 mil. lbs.), India (1,295 mil. lbs.), Brazil (1,099 mil. lbs.), Turkey (475 mil.
lbs.), Indonesia (408 mil. lbs.).
Some 90,000 U.S. farms harvested about 1.267 billion pounds of tobacco on about
644,000 acres in 1999. The estimated farm value of the 1999 crop is $2.3 billion. Major
U.S. tobaccos are flue-cured (produced primarily in North Carolina) and burley (produced
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 Report, published by the Economic Research Service.
Congressional Research Service ˜ The Library of Congress

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primarily in Kentucky), which are both cigarette tobaccos. Other types of tobacco are
used for cigars, chewing, and snuff.
Tobacco is grown in 16 states; North Carolina and Kentucky originate 67% of total
production. Four other states (Tennessee, Virginia, South Carolina, and Georgia) produce
another 26%. The high per acre value of tobacco sales (averaging about $3,600 in 1999)
makes it critical to the income of the growers and important to the economies of the major
producing states. For North Carolina in 1998, tobacco constituted 14% of the value of
all farm commodities (crops and livestock); for Kentucky, tobacco accounted for 24% of
the value of all commodities.
The United States is the world’s largest exporter of manufactured tobacco products
(cigarettes) and is the third leading exporter behind Brazil and Zimbabwe of
unmanufactured tobacco leaf. During 1999, the United States exported 418 million
pounds (declared weight) of leaf tobacco, valued at $1.294 billion. Major U.S. leaf
markets were the European Union and Japan. The value of U.S. manufactured tobacco
product exports was $3.882 billion. The largest export cigarette destinations were Japan,
European Union, Saudi Arabia, Israel, Lebanon, Cyprus, and Hong Kong.
In 1999, U.S. manufacturers produced an estimated 635 billion cigarettes (about 24%
were exported). 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 25% in the United States since 1981,
from 640 billion to an estimated 435 billion in 1999. However, spending for tobacco
products has increased as a result of price and tax increases. In 1998, consumers spent
about $57 billion on tobacco products (93% for cigarettes).
Tobacco products are subject to federal excise taxes. In addition, all states and some
local governments impose excise taxes. Nationally, in 1997/98, cigarette excise taxes
averaged about 58.5¢ a pack, with 24¢ being federal. Excise tax collections were an
estimated $13.778 billion (federal, $5.607 billion; state, $7.975 billion; local, $196 million).
On January 1, 2000, federal excise taxes increased by 10¢ per pack, to 34¢.
The Price Support Program
Small changes in the supply of tobacco can cause disproportionally large changes in
wholesale prices (because consumption is relatively insensitive to price). Cyclical swings
in tobacco prices, and the associated farm income crises, led to grower efforts to
voluntarily control production in the early part of this century. In some cases, violence
was used against uncooperative growers. But the nongovernmental efforts failed. During
the Great Depression of the 1930s, the federal government adopted farm income and
commodity price support policies that included mandatory supply controls for several
major crops, including tobacco.
The tobacco price support program exists only for the economic benefit of farmers.
It was created for the purpose of supporting the income and stabilizing the price of

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tobacco received by farmers. By law, the choice of whether or not federal support will be
provided is determined by growers in a referendum held every three years.
When producers approve federal price support for tobacco, they become subject to
marketing quotas. Marketing quotas are a supply control mechanism that indirectly
increases market prices. At the same time, the federal government is 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, remains
very much the same today. The current legal authority and requirements for the federal
tobacco program are contained in 7 U.S.C. 1311-1316 and 7 U.S.C. 1445.
Administering Agency
Program administrative operations are carried out by the U.S. Department of
Agriculture’s (USDA) Farm Service Agency (FSA). Annual administrative costs are
estimated at about $15 million in FY2001 for tobacco price support operations. This cost
covers primarily salaries for some headquarters personnel and staff time devoted to the
tobacco program in about 600 county offices. Price support operations (nonrecourse
loans) are financed by USDA’s Commodity Credit Corporation (CCC). The CCC obtains
needed money by borrowing from the U.S. Treasury.
Program Operation
The federal tobacco price support program limits and stabilizes the quantity of
tobacco produced and marketed by farmers. This is achieved through marketing quotas.
In addition, minimum market prices are guaranteed to farmers through CCC nonrecourse
loans.2
Marketing Quotas. When farmers vote in favor of price supports, they are at the
same time agreeing to accept government restrictions on the amount of tobacco they can
market. The national marketing quota is the amount judged sufficient to meet domestic
and export demand, but at a price above the government support price. Each farm’s quota
is assigned to the land. So, the right to produce and market a specified quantity of tobacco
resides with the owner of the land. A farmer can only begin to grow tobacco by
purchasing or renting land that has a quota. By limiting the supply of tobacco, the market
price is increased. Total farm revenue is raised because consumption does not decline
enough to offset the price increase. In this way, farm income is supposed to be supported
through artificially high market prices, rather than through direct government payments.
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.

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This differs from other commodity support programs that utilize direct payments, rather
than marketing quotas, as the principal subsidy mechanism.
Loans. Marketing quotas are not always totally effective at supporting market
prices, given the numerous variables that affect tobacco supply and demand.
Consequently, federal support prices are guaranteed through the mechanism of
nonrecourse loans available on each farmer’s marketed crop. The loan price for each type
of tobacco is announced each year by the USDA, using the formula specified in the law
to calculate loan levels. The national loan price on 2000 crop flue-cured tobacco is $1.640
per pound; the burley loan price is $1.805.
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 cases, the farmer is paid the loan
price by a cooperative, with money borrowed from the CCC. The tobacco is consigned
to the cooperative (known as a price stabilization cooperative), which redries, packs, and
stores the tobacco as collateral for CCC. The cooperative, acting as an agent for the CCC,
later sells the tobacco, with the proceeds going to repay the loan plus interest.
No-Net-Cost and Marketing Assessments. Under the threat of 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 imposes an assessment on every
pound of tobacco marketed. The no-net-cost assessment on 2000 crop flue-cured is 5¢
cents per pound; the burley assessment is 6¢. Growers and buyers each pay half of the no-
net-cost assessment. Beginning in 1994, imported tobacco also became subject to the no-
net-cost assessment. The no-net-cost assessment funds are deposited in an escrow
account that is held to reimburse the government for any financial losses resulting from
tobacco loan operations. Losses occur when a cooperative sells 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, Congress authorized market loss payments to producers of grains, cotton,
oilseeds, tobacco, dairy, and peanuts during FY2000. Out of $6.514 billion in total market
loss payments, $328 million was specified for tobacco growers. The funds were
distributed as direct payments from CCC to tobacco producers in proportion to the
amount each grower quota was reduced in 1999 from the previous year. The resulting
payment was about $1 per pound of diminished quota. The market loss payments are not
constrained by the no-net-cost provisions of the tobacco loan program. Additionally, $2.8
million was approved for flood damaged tobacco on warehouse auction floors.
Experience
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 has 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.

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This domestic content requirement took effect in 1994 and limited foreign tobacco to 25%
of the U.S. market. Under new international trading rules, the domestic content
requirement was replaced in September 1995 with a tariff-rate quota, which is less
restrictive than the previous domestic content requirement. In 1998, imported tobacco
constituted 36% of U.S.-manufactured cigarettes.
The no-net-cost rule has muted much of the criticism that taxpayers are subsidizing
tobacco farmers. The 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 recoveries from the
repayment of old loans. In FY2001, the expected net loan recovery of $34 million is the
result of larger old loan repayments compared to new loan outlays. Since tobacco is
typically stored for extended periods, it can be several years before the loan inventory is
sold. In all cases, the law requires that any losses of loan principal and interest be repaid
from the no-net-cost account, which is funded from assessments on growers and buyers
of leaf tobacco.
Table 1. Tobacco Loan Program Outlays and Recoveries, FY1997-FY2001
Million $
Loan Program Operation
FY98
FY99
FY00
FY01
Actual
Actual
Estimate
Estimate
Loan outlays(+)
619
277
391
52
Loan recoveries(-)
-212
-147
-425
-366
Net loan outlays(+) or recoveries(-)
407
130
-34
-313
Market loss payments & disaster assistance(+)
0
0
331
0
Miscellaneous receipts & marketing assessments(-)
-30
-17
0
0
Total net budgetary expenditures(+) or receipts(-)
376
113
297
314
Source: Data are compiled from U.S. Department of Agriculture, Commodity Credit Corporation.
Commodity Estimates Book, FY 2001 President’s Budget. Washington, DC February 7, 2000. p. 158.
There are other critics of the tobacco program. Free market advocates point to the
competitive disadvantages caused by the program. Economists believe 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 say the federal government should
not be supporting tobacco farm income and should get out of the tobacco business.
However, elimination of the program would free producers from the production
constraints of marketing quotas and result in more and lower-priced tobacco.
Elimination of the tobacco program would likely cause consolidation into fewer but
larger, more mechanized tobacco farms, with reduced costs of production. Many of the
smaller, higher cost farms would likely stop producing tobacco, but they would have very
few alternative crops capable of such high per-acre revenues as tobacco. Economists

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predict that there would be a substantial adjustment cost from elimination of the program,
and it would not fall solely upon those farmers, workers, and communities that would
benefit from the free market efficiency gains.
Other USDA Tobacco-Related Activities
In addition to the tobacco price support program, the USDA administers several
other programs designed to assist tobacco farmers, facilitate marketing, and provide
information to federal program managers and policy makers. It administers subsidized
multi-peril crop insurance for tobacco (as well as for other crops), which is budgeted to
cost about $39 million in FY2001. Also, as with other crops, the Department collects,
analyzes, and disseminates data on tobacco production, utilization, and prices, costing
about $1.408 billion in FY2001. The USDA, using its own discretion, has discontinued
all federal extension program expenditures on education and pest management related to
tobacco. The Department is specifically prohibited from spending research funds on the
production, processing or marketing of tobacco, and from promoting the sale or export
of tobacco or tobacco products. These prohibitions are contained in the annual USDA
appropriation law.
For More Information
! FSA each year issues Commodity Fact Sheets on the tobacco price support
programs (as well as other commodity programs), which include eligibility
information, program details, and historical data. Call the FSA Legislative Liaison
Staff at 202-720-3865.
! The Tobacco Situation and Outlook Report, published by USDA’s Economic
Research Service, is a periodic compendium of production, trade, demand, and
other current and historical data, plus special analytical articles. Call the Tobacco
Situation Coordinator at 202-694-5311, or see the electronic Tobacco Briefing
Room for an array of information.
! A survey and budget summary is available in Tobacco Related Programs and
Activities of the U.S. Department of Agriculture: Operation and Cost, CRS Report
97-417. Comprehensive coverage of tobacco-related issues is available from the
C R S E l e c t r o n i c T o b a c c o B r i e f i n g B o o k
http://www.congress.gov/brbk/html/ebtobtop.html).
! This report will be updated and revised as new data become available and
legislative events transpire.

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