97-417 ENR
Updated March 22, 2000
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
Resources, Science, and Industry 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 $357 million in FY2000, and are budgeted at $311
million in net revenues for FY2001. The net revenues result from price support loan
repayments exceeding loan outlays and all other expenditure items. 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

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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 some years, loan repayments exceed new loan
requests, resulting in revenues in excess outlays for the CCC. For FY2001, the loan
activities are budgeted to result in net revenues of $314 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
FY2001 budget, the sizable net revenue of nearly $314 million is expected to result from
the previously large loan outlays being repaid ($366 million) compared to a modest level
of new loan outlays being made ($52 million). 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.

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For the 1990-97 marketing seasons, tobacco was 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 was
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)
generated about $22 million in FY1999. No deficit reduction assessments will be collected
in FY2001 or future years.
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 FY2001 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.
A more detailed explanation of the tobacco price support program is found in
Tobacco Price Support: An Overview of the Program, CRS Report 95-129. The Farm
Service Agency provides detailed Program Fact Sheets for flue-cured, burley and other
types of tobacco.
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 in 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's quota was reduced in 1999 from the previous year. An additional $2.8 million
is being paid as compensation for flood-damaged tobacco on auction warehouse floors.
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 $44
million in FY2000, and are budgeted at $39 million for FY2001.

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Tobacco Inspection and Grading
The USDA’s Agricultural Marketing Service (AMS) carries out 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. 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¢
per 100 pounds for domestic tobacco and 45¢ per 100 pounds for imported tobacco). In
FY2001, the tobacco inspection and grading fees are budgeted to bring in about $19
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 FY2001 is budgeted at $915,000. 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).1 Annual research spending by the USDA averaged about $6.6
million until it was terminated under the FY1995 agricultural appropriations law and
subsequent laws.
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, seminars,
and direct consultation. The state extension staff, given their close proximity to
1In 1994 USDA reorganization, CSRS and ARS were combined, along with the Extension Service,
into the Cooperative State Research, Education & Extension Service (CSREES).

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researchers, continuously train the county agents and design and prepare materials for use
by the county agents. In FY1997, the Cooperative State Research, Education, and
Extension Service (CSREES) spent $680 thousand 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) 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 FY2001
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 will be $154,000
in FY2001.
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 $241,000 in FY2001.
Comprehensive coverage of tobacco-related issues is available from the CRS
Electronic Tobacco Briefing Book (http://www.congress.gov/brbk/html/ebtobtop.html).
This report will be updated and revised and new data become available and legislative
events transpire.

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Table 1. USDA Tobacco-Related Net Budgetary Expenditures,
Estimated FY2000 & Budgeted FY2001
USDA Agency
FY2000
FY2001
<
Activity or program
Estimate
Budget
$000
$000
Commodity Credit Corp/Farm Service Agency
<
Administrative expenses of price support—salaries and
14,429
15,057
office expenses of USDA tobacco program administrators.
<
Tobacco price support loan operations—price support
program loan outlays less repayments.
(33,979)
(314,247)
<
Market loss payments–direct farm payments to
compensate for quota reductions in 1999.
328,000
0
<
Disaster payments–direct payments to warehouses.
2,800
0
Risk Management Agency
<
Crop insurance—tobacco crop loss indemnity payments
44,220
38,571
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
915
915
auction market prices and sales volume data.
Cooperative State Research, Education, and Extension Service
<
Extension activities—extension education and technical
assistance.
0
0
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 foreign
148
154
country economic data on tobacco production and trade
National Agricultural Statistics Service
<
Agricultural statistics collection—data collection on U.S.
241
241
tobacco acreage, crop condition, yield, and production.
Total USDA net expenditures for tobacco-related activities
357,062
(259,021)
Source: Data are from the USDA’s Office of Budget and Program Analysis, Program-By-Program
Summary, Estimated Costs Related to Tobacco Activities, March 6, 2000.
Note: Numbers in parentheses are net revenues (i.e., negative net expenditures).

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