Summary and Comparison of the Major Agricultural Provisions of the Tobacco Settlement Policy Proposals

Summary and Comparison of the Major Agricultural Provisions of the Tobacco Settlement Policy Proposals

97-1042 ENR
Updated July 6, 1998
CRS Report for Congress
Received through the CRS Web
Summary and Comparison
of the Major Agricultural Provisions of the
Tobacco Settlement Policy Proposals
Jasper Womach
Agricultural Policy Specialist
Environment and Natural Resources Policy Division
Summary
The June 1997 proposed settlement between tobacco manufacturers and states’
attorneys general stimulated a range of legislative proposals intended primarily to reduce
smoking and other forms of tobacco use by teenagers. Over time, this should
substantially lower the consumption of cigarettes and consequently the utilization of
domestically grown leaf tobacco. Tobacco growers (of which there are about 124,000
in the nation, largely concentrated in six major producing states) anticipate a sizable
decline in income if Congress adopts a tobacco bill. Some of the proposals that have
been introduced in Congress include remedial assistance to address these concerns.
Since the 1930s, tobacco farms have grown and sold tobacco under a federal
program that limits production and guarantees a price that is substantially higher than
it would be otherwise. The production limiting feature of the program is the marketing
quota. A farm can market no more tobacco than its quota. The farm assistance
provisions in the tobacco bills use the tobacco quotas as the avenue for compensation.
The widely differing legislative proposals range from a buyout and termination of the
federal tobacco quotas to direct and offsetting payments for any future reduction in
quotas. Additionally, some of the bills include money for economic development efforts
in tobacco dependent communities.
Characteristics of Tobacco Farming 1
The United States is second to China as the largest producer of tobacco in the world.
North Carolina is the center of flue-cured production and Kentucky is the center of burley
production. These two states originate 65% of total U.S. tobacco production. While
some amount of tobacco is produced in another 14 states, Tennessee, Virginia, South
Carolina, and Georgia produce 26%. Around 124,000 U.S. farms harvested 795,000 acres
1 Data are from the U. S. Department of Agriculture and the 1992 Census of Agriculture.
Congressional Research Service ˜ The Library of Congress

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in 1997, yielding about 1.646 billion pounds. The farm value of the total 1997 U.S.
tobacco crop could be about $3.1 billion.
The high per acre cash receipts from tobacco sales (averaging nearly $3,900 in 1997)
makes tobacco critical to the income of the growers and important to the economies of the
major producing states. In recent years, tobacco has accounted for about 13% of the value
of all farm commodities (crops and livestock) in North Carolina, and 23% in Kentucky.
U.S. farms that produce tobacco are small compared to national averages for all
farms. According to the 1992 Census of Agriculture, they average 126 acres in total size,
with 35 acres of cropland, of which about 7 acres are tobacco. In that year, tobacco farms
averaged $23,000 in tobacco sales and $29,000 in total farm commodity sales.
The Federal Tobacco Program
The federal tobacco price support program, which began in the 1930s, is intended
to keep farm prices for tobacco higher and more stable than they would be otherwise.
This goal is accomplished through a combination of marketing quotas and nonrecourse
tobacco price support loans.
The national marketing quota is the amount of tobacco judged sufficient to meet
annual domestic and export demand, but at prices above the legally mandated 1998
support prices of $1.628/lb for flue-cured and $1.778/lb for burley. The effect is that the
production of tobacco is held below what it would be otherwise. By restricting
production, farm income is supported through artificially high market prices. Hence,
buyers of tobacco (and ultimately the consumers) bear the cost of the price support
program, rather than taxpayers. The farm value of tobacco in a pack of cigarettes is under
6 cents. In the absence of price support, the per pack cost of tobacco could drop about
a penny.
In conjunction with marketing quotas, minimum selling prices are guaranteed to
farmers through Commodity Credit Corporation (CCC) nonrecourse 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. If the bid is low, the farmer is paid the loan price
by a price stabilization cooperative, with money borrowed as a nonrecourse loan from the
CCC. The tobacco is consigned to the cooperative, which redrys, packs, and stores the
tobacco as collateral for the borrowed money. The cooperative later sells the tobacco,
with the proceeds going to repay CCC with interest. So, the loan program provides a
financing mechanism to store tobacco for long periods of time in order to balance near-
term supply with demand. Since 1982, the No-Net-Cost Tobacco Program Act has
required that any losses of principal and interest be recovered through assessments on
farmers and tobacco buyers.
The financial advantages of stable and high prices for tobacco have made tobacco
quotas a valuable asset for the owners of land to which the quotas are assigned. Survey
data from Kentucky put the past 5-year average lease rate at $0.42/lb. When farms were
sold, tobacco quotas brought the owners on average an additional $1.87/lb above the price
of land without any tobacco quota. (Compensating Farmers for the Tobacco Settlement,
CRS Report 98-133.)

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Summary of Major Agriculture Provisions
The following bills contain provisions to compensate or assist tobacco farmers and
rural communities. The agricultural provisions are summarized, and selected bills are
presented for side-by-side comparison.
S. 1310 (Ford) would provide assistance for 25 years to tobacco farmers, displaced
industry workers, and tobacco-dependent communities in response to any adverse impacts
caused by the settlement. For future reductions in tobacco quota from the 1994-96
average (the baseline), quota owners would be paid $4/lb per year, subject to a lifetime
limit of $8/lb on the total quota base. Quota lessees would be paid $2/lb, subject to a
lifetime limit of $4/lb on the quota base. Economic development block grants would be
made to tobacco states, displaced tobacco industry workers would be eligible for special
assistance, and higher education assistance would be targeted toward tobacco farm
families.
S. 1313 (Lugar) would terminate the federal tobacco quota program in 1999 and
phase out, over 3 years, the price-support loan program. In the absence of quotas, there
would be no constraints on who could grow tobacco, where it could be grown, or how
much could be marketed. As compensation for the loss of quota value, quota owners
would be offered $8/lb, and quota lessees would be offered $1.20/lb. Tobacco-growing
states would be given $300 million in block grant funds over 3 years for agricultural
diversification and rural economic development programs.
S. 1343 (Lautenberg/H.R. 2764 (Hansen) This bill would allocate 25% of the
proceeds of a cigarette excise tax increase of $1.50 per pack to protect the financial well-
being of tobacco farmers and communities.
S. 1415 (McCain) (as brought to the Senate floor on May 18, 1998). Going into
debate, the bill contained two competing farmer alternatives with a majority vote, which
did not happen, intended to determine the outcome. One alternative would be similar to
a combined S.1310 & S 1582. It would provide assistance for 25 years to tobacco
farmers, displaced industry workers, and tobacco-dependent communities. For
relinquishing all quota or for future reductions in quota from the 1995-97 average (the
base quota), quota owners would be paid $4/lb per year, subject to a lifetime limit of
$8/lb on the total base quota. Quota lessees also would be paid up to $4/lb. The burley
program would continue largely unchanged. Flue-cured marketing permits
(nontransferable) would replace quotas. Economic development block grants would be
made to tobacco states, displaced tobacco industry workers would be eligible for special
assistance, and higher education assistance would be targeted toward tobacco farm
families. Total cost is estimated by the sponsor to be $28.5 billion. The other alternative
(incorporating a modified version on S. 1313) would eliminate the quota program and
phase out price support loans, but compensate quota holders at $8 per pound and lessees
at $4.00. Another $1 billion would be distributed as community economic development
block grants. Total cost is estimated by the sponsor to be $18 billion.
S. 1492 (Kennedy)/H.R. 3028 (DeLauro). Title IV includes unique provisions to
assist farmers who would choose to stop growing tobacco, offering both owners and
lessees $4/lb in return for giving up their quota.. The current quota and price support loan
programs would continue unaltered for farmers who want to continue growing tobacco.

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The bill includes community economic development block grant provisions that are very
similar to S. 1310 (Ford). However, there is no special provision for assistance to
displaced tobacco industry workers or higher education assistance to tobacco farm
families.
S. 1530 (Hatch) Title VIII includes assistance to tobacco farmers, industry
workers, and tobacco dependent communities. The farmer provisions are nearly identical
to S. 1313 (Lugar). Tobacco quota owners would be offered $8/lb and tobacco lessees
$1.20/lb as compensation for termination of the federal tobacco quota program and a
three-year phase out of the federal price support loan program. The bill also includes
assistance similar to S. 1310 (Ford), but at reduced levels of funding, to displaced tobacco
industry workers, economic development grants for tobacco dependent communities, and
higher education assistance for tobacco farm families.
S. 1582 (Robb) is an agricultural proposal that would replace the existing federally
administered price support quota and loan provisions with a privatized alternative.
Tobacco growers would receive annual nontransferable tobacco marketing licenses.
Making licenses nontransferable would eliminate any rental or asset value, thereby
lowering production costs (and the support price) an expected $0.40/lb. Current quota
owners would be compensated at a rate of $8/lb for lost equity. Over 5 years, annual
transition payments totaling $2.00/lb would be made to tobacco producers. The proposal
includes annual economic development block grants of $250 million.
S. 1638 (Conrad). Title IV would authorize the expenditure of $10 billion for
transition assistance to tobacco producers and tobacco-growing communities, including
economic development assistance, assistance through retraining of tobacco producers and
tobacco factory workers, or scholarships for tobacco producers. Details on how this
money would be distributed are not specified.
H.R. 3474 (Fazio) is a comprehensive tobacco proposal. Title IV would establish
a Tobacco Transition Trust Fund with $21 billion available over the first 10 years, and
then be phased out by the end of 25 years. Expenditures would provide farmer transition
payments, community economic development assistance, and training and educational
assistance. Cigarette manufacturers would be required in future years to purchase as
much domestic tobacco as their annual average purchases over the 1995-97 three-year
period.
S. 1889 (Harkin) is a comprehensive tobacco proposal. Over the initial 15 years,
Title V, according to the sponsor, would draw $13.5 billion from a Tobacco Farm Family
and Community Assistance Trust Fund to assist tobacco-dependent farm families,
workers, and communities. Specifically, the money would be used to: (A) compensate
and provide transition assistance to farm families; (B) provide economic and transition
assistance to workers and businesses (not including manufacturers); and (C) provide
economic development assistance to tobacco dependent communities.

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TOPIC
S. 1415 (McCain)
(As brought to the Senate floor May 18, 1998)
Short Title
Title X, Long-Term
Title XV, Tobacco
Economic Assistance for
Transition Act --
Farmers (LEAF) Act --
(Lugar/McConnell)
(Ford/Robb)
Funding
Tobacco Community
Tobacco Transition Account,
Revitalization Trust Fund of
within the National Tobacco
$28.5 billion. Monies come
Settlement Trust Fund,
from settlement funds
funding estimate is $18
collected from tobacco
billion. [Sec 1511, 1551]
manufacturers and importers.
[Sec 1011-1012]
Farmer compensation
Payments to quota owners
Quota owner buyout ($8/lb)
(up to $8/lb) and tenants (up
and tenant compensation
to $4/lb) for production
($4/lb) (totaling about $17
losses from base levels
billion with 100%
(totaling no more than about
participation). Mandatory
$16.5 billion). Burley quotas
end to quota program and 3-
continued. Flue-cured quotas
year phase out of price
replaced with nontransferable
support loan program. [Sec
permits. [Sec 1024]
1512-5, 1531-2, 1541]
Other USDA tobacco
All costs for extension
All costs for extension
activities
services, crop insurance, loan
services, crop insurance, loan
program administration, leaf
program administration, leaf
grading and inspection, and
grading and inspection, and
other activities associated
other activities associated
with tobacco production will
with tobacco production will
be paid from Trust Fund
be paid from marketing
(totaling about $2.5 billion).
assessments on purchasers.
[Sec 1022]
Community & Worker
•Annual economic
Annual community economic
Economic Assistance
development grants of $375-
development grants for 3
450 million for 25 years
years (totaling $1 billion).
(totaling $11.1 billion). [Sec
[Sec 1521]
1023]
•Assistance for displaced
industry workers (not more
than $625 million). [Sec
1031]
•Higher education grants for
tobacco farm families ($1.44
billion). [Sec 1032]
Liability Immunity
Farmers and warehouses
Farms and warehouses
immune to lack of
immune to lack of
manufacturer compliance.
manufacturer compliance.
[Sec 1041]
[Sec 1561]