Order Code RS20802
Updated March 5, 2004
CRS Report for Congress
Received through the CRS Web
Tobacco Farmer Assistance
Jasper Womach
Agriculture Policy Specialist
Resources, Science, and Industry Division
Summary
Efforts to reduce tobacco consumption in the United States, stimulated by the 1998
Master Settlement Agreement, have contributed to a sharp decline in the demand for
U.S.-grown tobacco. The other major contributor to the long term decline in domestic
as well as foreign demand is the federal price support program, which limits supply and
raises the price of U.S. tobacco above competitive market levels. Consequently,
foreign-grown tobacco is displacing U.S. tobacco in both domestic and world markets.
Because of the drop in demand, farmers have asked for and received compensation and
assistance from cigarette manufacturers and the federal government. Manufacturers
pledged $5.15 billion in payments to farmers to be distributed over 12 years. Also,
Congress has approved $328 million in tobacco loss payments to farmers for FY2000,
$340 million for FY2001, another $129 million for FY2001, and $53 million for
FY2003. In addition, losses on 1999-crop price support loan stocks, amounting to $625
million, were shifted to taxpayers.
This report will be updated as legislative events warrant.
The tobacco price guarantee provided by the federal support program is supposed to
support and stabilize the income of growers. However, farmers have seen an especially
sharp drop in sales volume the last two years. In response, they have cut back production
51% since 1997. Like other farmers suffering economic hardship, tobacco growers have
asked for and received assistance.
U.S. Tobacco Production and Markets
Based on the 1997 Census of Agriculture, about 90,000 farms in the United States
produce tobacco. They primarily are located in Kentucky, North Carolina, and
neighboring states. According to U.S. Department of Agriculture (USDA) data, crop year
2003 production was about 831.2 million pounds from 416,210 acres (4.6 acres per farm),
Congressional Research Service ˜ The Library of Congress

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for a yield of 1,997 pounds per acre. The average price is estimated at about $1.967 per
pound, for a total crop value of about $1.635 billion.1
The utilization of U.S. tobacco leaf by domestic cigarette manufacturers and export
sales have been declining. Economists argue that the decline in sales and the loss of
market share is due to the high price and tight supply of U.S. tobacco caused by the
U.S. Leaf Domestic Use
U.S. Leaf Exports
federal price support program. Other countries have increased tobacco production and
are selling to traditional U.S. markets, including to U.S. manufacturers. U.S.-
manufactured cigarettes contain a growing proportion (about 55%) of cheaper imported
tobacco. Additionally, U.S. leaf exports have shown a declining trend for at least the past
20 years (down to about 7.7% of world exports). The disadvantage of U.S. tobacco is
illustrated by its average price during 2003 of $3.49 per pound (declared weight) leaving
U.S. ports compared to $1.19 for foreign tobacco entering those same ports.2 The higher
quality of U.S. tobacco helps offset some of its price disadvantage, but not enough to
prevent the loss of market share.
Adding to the difficulties of tobacco farmers is the declining per capita consumption
of cigarettes for at least the past 30 years. It is anticipated U.S. cigarette consumption will
continue to decline in future years if the anti-smoking elements of the 1998 Master
Settlement Agreement are effective.
Tobacco Price Support
Since the 1930s, tobacco farmers have benefitted from a federal price support and
stabilization program (see Tobacco Price Support: An Overview of the Program, CRS
Report 95-129). Federal law specifies a guaranteed minimum price for leaf tobacco. The
price guarantee is achieved by controlling supply. Each tobacco farm is assigned a
marketing quota that balances national production with domestic and export demand.
1 Data on tobacco economics are published by the Economic Research Service in Tobacco
Situation and Outlook Reports available at the Tobacco Briefing Room.
2 Calculated from export and import value data in USDA, Foreign Agriculture Service, Tobacco:
World Markets and Trade, January 2004.

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Any tobacco that does not bring at least the guaranteed price is purchased by a “price
stabilization cooperative” with money borrowed from the USDA’s Commodity Credit
Corporation (CCC).3 The 2004 crop year support price for flue-cured tobacco is $1.690
per pound, and for burley it is $1.873.
By law, the tobacco loan operations of the CCC are to function at no net cost to
taxpayers. Price stabilization cooperatives that borrow money from CCC earn revenue
from the sale of tobacco acquired from farmers and this money is used to make
repayments with interest. If the revenue from tobacco sales is insufficient to cover the
obligations to CCC, funds are withdrawn from a no-net-cost assessment pool. This pool
of money is generated from an assessment on every pound of leaf tobacco marketed. The
assessment on 2004-crop flue-cured is 10¢ per pound, and on burley it is 2¢.
Federal Purchase and Disposal of Surplus Tobacco
Additional assistance for burley, flue-cured, and cigar binder tobacco producers was
included in the FY2001 agriculture appropriations law (P.L. 106-387, Sec 844, as
amended). Tobacco stabilization cooperatives were authorized to transfer ownership of
1999 crop loan inventories to the CCC without the action being charged against the no-
net-cost program, and without the supplies being included in future quota calculations.
This means tobacco marketing quotas have been larger in subsequent years than they
would have been without the legislative action.
The law authorizing the CCC acquisition prohibited the sale of this tobacco for
domestic use. The tobacco was offered for export sale at what CCC determined to be its
fair market value, but no buyers responded.4 This left the CCC with little choice but to
bury the tobacco in landfills, which it completed in December 2003. The CCC acquired
and destroyed 221.4 million pounds of tobacco. Expenditures for this tobacco stocks
disposal program (including acquisition costs, interest on funds borrowed from the U.S.
Treasury, storage, and disposal) amounted to about $625 million.
The CCC takeover of 1999 loan stocks parallels action taken in 1986 when 1983-
crop burley loan stocks were acquired and disposed of without being charged against the
no-net-cost program. On that occasion, the cost to CCC was about $376 million. So,
while the tobacco program has lived up to its mandate of no net cost to taxpayers,
Congress has acted to prevent sizeable downward quota adjustments and shifted the
financial burden of surplus stocks onto taxpayers instead of producers.
Federal Compensation for Decreased Tobacco Marketing Quotas
Tobacco marketing quotas have declined as domestic and export demand has
dropped. In 1999 and 2000, the quota reductions were especially large and Congress
3 The CCC is a financial institution in the USDA that is authorized to borrow money from the
U.S. Treasury to carry out commodity support and other farm assistance programs.
4 The option of reducing the CCC list price was rejected for at least two reasons. First, the law
also prohibited the Foreign Agricultural Service from promoting the sale or export of tobacco in
overseas markets. Second, selling tobacco at reduced prices in export markets that is prohibited
in domestic markets raises questions of legality under international trade rules.

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approved additional federal assistance. The quota loss assistance amounted to about $1
for each pound of quota loss. The FY2000 appropriation for USDA (P.L. 106-78, Section
803(c)) provided $328 million to be distributed to tobacco farmers as “quota loss
payments.” The law directed that the funds be distributed in proportion to each farm’s
reduction in marketing quota from 1998 to 1999. The national burley quota had decreased
29% and the flue-cured quota had decreased 18%.
Again, in the Agriculture Risk Protection Act of 2000 (P.L. 106-224, Section 204
(b)), Congress directed that $340 million be distributed in FY2001 to tobacco farmers.
The state-by-state distribution of this money was based largely on quota decreases from
crop year 1999 to 2000. The national burley quota had decreased 45% and the flue-cured
quota had decreased 19%.
As directed by P.L. 107-25, another $129 million was distributed among tobacco
farmers (exactly as done under P.L. 106-224) before October 2001. The addition of this
money meant that the decline in flue-cured and burley quotas from 1997 to 2001 was
compensated at the rate of $1 per pound.
The consolidated appropriations act for FY2003 (P.L. 108-7) included a provision
in the emergency agricultural assistance portion of the law (Division N, Title II, Sec. 205)
directing the payment of 5.55¢ per pound of 2002 basic quota. These payments are
expected to total about $55 million.
Table 1. Distribution of “Tobacco Quota Payments,” by State
(Rounded to nearest $000)
State
P.L.
P.L.
P.L.
P.L.
State
P.L.
P.L.
P.L.
P.L.
106-78
106-224
107-25
108-7
106-78
106-224
107-25
108-7
KY
$123,241 $140,000
$53,118 $13,475
FL $3,556
$2,500
$949
$714
NC
$99,721 $100,000
$37,941
23,300
MO
$1,719
$2,000
$759
$200
TN
$33,794
$35,000
$13,279
4,100
WV
$1,155
$1,300
$493
$100
VA
$19,501
$19,000
$7,209
3,900
WI $1,919
$675
$256
$300
SC
$17,836
$15,000
$5,691
4,200
AL $130
$100
$38
$30
GA
$14,977
$13,000
$4,932
3,600
KS $20
$23
$9
$2
OH
$5,644
$6,000
$2,276
600
OK $1
$1
$0
$0
IN
$4,785
$5,400
$2,049
500
AR $1
$1
$0
$0
Total $328,000 $340,000 $129,000
$55,000
Manufacturer Compensation for Farmers
The 1998 Master Settlement Agreement between cigarette manufacturers and states’
attorneys general obligates the manufactures to pay states $246 billion over 25 years. In
addition, the Agreement restricts marketing activities and funds anti-tobacco advertising.
An explicit goal is to reduce cigarette consumption. However, any reduction in cigarette
consumption indirectly decreases use of U.S.-grown leaf tobacco, with associated adverse
impacts on the financial condition of farmers and their rural communities.
Some states designated a portion of their settlement funds for farm and rural
assistance. In addition and of their own accord, manufacturers committed a further $5.15
billion for distribution over 12 years to tobacco farmers under the National Tobacco
Grower Settlement Trust Agreement (also known as the Phase II settlement). The

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individual states are responsible for designing the allocation among tobacco farm
operators and absentee quota owners.
Table 2. Planned Distribution of Phase II Trust Funds,
by State and Year
State Share
Total
Annual Payments, $000
%
Payments
1999-2010
1999
2000
2001
2002-08
2009-10
NC
38.0%
$1,954,425
$144,210
$106,260
$151,800
$189,750
$111,953
KY
29.7%
$1,527,490
$112,708
$83,048
$118,640
$148,300
$87,497
TN
7.6%
$389,855
$28,766
$21,196
$30,280
$37,850
$22,332
SC
6.9%
$357,410
$26,372
$19,432
$27,760
$34,700
$20,473
VA
6.6%
$338,870
$25,004
$18,424
$26,320
$32,900
$19,411
GA
5.9%
$301,275
$22,230
$16,380
$23,400
$29,250
$17,258
OH
1.4%
$70,040
$5,168
$3,808
$5,440
$6,800
$4,012
IN
1.2%
$59,740
$4,408
$3,248
$4,640
$5,800
$3,422
FL
1.1%
$58,195
$4,294
$3,164
$4,520
$5,650
$3,334
MD
0.6%
$31,930
$2,356
$1,736
$2,480
$3,100
$1,829
PA
0.4%
$22,145
$1,634
$1,204
$1,720
$2,150
$1,269
MO
0.4%
$21,630
$1,596
$1,176
$1,680
$2,100
$1,239
WV
0.3%
$14,420
$1,064
$784
$1,120
$1,400
$826
AL
0.1%
$2,575
$190
$140
$200
$250
$148
Total
100.0%
$5,150,000
$380,000
$280,000
$400,000
$500,000
$295,000
Policy Issues
When Congress attempts to address the economic problems of tobacco farmers, it
is faced with complexities compounded by apparent inconsistencies and contradictions.
In its report of January 26, 2001, the Commission on Improving Economic Opportunity
in Communities Dependent on Tobacco Production While Protecting Public Health
examines the issues in detail and surveys policy options.
It is the policy of the federal government to discourage consumption of cigarettes
(especially by young people) on the grounds that they are addictive and harmful to human
health. To the extent Americans reduce their consumption of tobacco products, tobacco
farmers are faced with a shrinking market. So, federal public health policy works to the
disadvantage of tobacco farmers.
Second, it has been federal policy for more than 60 years to balance U.S. tobacco
production with demand, but at a price that is substantially higher than the cost of
production, and also higher than the price of tobacco sold by foreign producers. To the
disadvantage of tobacco producers, the high price of U.S. tobacco has caused it to be
displaced by less expensive foreign-grown supplies in both this country and worldwide.
As the demand for high-priced U.S. tobacco has declined, marketing quotas and farm
tobacco revenues correspondingly have declined. Economic theory suggests that the
support price be reduced enough that U.S. tobacco would be competitive in global
markets. This option runs into two sources of opposition. Health advocates are one

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possible source of opposition and tobacco quota owners are the other source. Health
advocates are not in favor of lower leaf prices, which ultimately would translate into
lower costs for cigarette manufacturers.
Generally, quota owners oppose lower prices because the benefits of high-priced
tobacco have been capitalized into quota values, and these values would be eroded. The
estimated 260,000 absentee quota owners who earn rent on their quota rights are among
the strongest advocates for maintaining high quota values. There are fewer than 90,000
farmers growing tobacco and they themselves own quotas. For these farmers, quotas are
an asset that they do not want to lose. However, a significant number of the farmers rent
a large proportion of their annual marketing quota in order to make their operations
economically viable. These commercial farmer operators may favor changes that reduce
quota values if the changes would make U.S. tobacco globally competitive.
Historically, according to University of Kentucky researchers,5 the average rental rate
for burley quota has been about 40¢ per pound. However, rent in crop year 2001 was
inflated to about 62¢. The higher rent was attributed to federal quota loss payments and
the Phase II settlement payments. Rather than making U.S. tobacco more competitive in
the marketplace, the recent federal and manufacturer assistance has increased the cost of
production for farmers because it has been capitalized into higher quota rents.
Some policy makers have suggested that quota be eliminated and owners be
compensated for lost value through a quota buyout program. Elimination of marketing
quotas, combined with a reduction or elimination of price support could be expected to
result in increased tobacco production and sales. An unanswered question is how to pay
for a quota buyout. A suggestion is through increased taxes on cigarettes or an
assessment on manufacturers. While these options may avoid the political difficulties of
using general taxpayer funds, they could adversely impact cigarette smokers and further
erode the domestic demand for tobacco. The State of Maryland has implemented a
tobacco farmer buyout program paying $1 per pound each year for 10 years using State
funds from the Master Settlement Agreement.
Tobacco manufacturers would be the direct beneficiaries of any policy change
reducing the price of leaf tobacco. Some manufacturers are interested in financing a quota
buyout program that is accompanied by reduced leaf prices. However, the buyout
proposal is complicated by its political marriage to proposed legal authority for the Food
and Drug Administration (FDA) to regulate cigarettes. Anti-smoking and public health
advocates are keenly interested in new FDA authority, and it is uncertain that a consensus
can be reached on that issue. Congress has been refining various quota buyout options,
and several bills are summarized in CRS Report RL31790, Tobacco Quota Buyout
Proposals in the 108th Congress
.
5 Will Snell, What Is the Value of Burley Tobacco Quota?, March 2002.