Order Code 97-417 ENR
Updated June 7, 2004
CRS Report for Congress
Received through the CRS Web
Tobacco-Related Programs and Activities
of the U.S. Department of Agriculture:
Operation and Cost
Agricultural Policy Specialist
Resources, Science, and Industry Division
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. Taken together, all of the directly tobacco-related activities of the
USDA generated net expenditures of an estimated $85.8 million in FY2004, and the
budget anticipates net revenues of $32.6 million for FY2005.
The federally financed tobacco price support program is the major form of tobacco
farmer assistance, which recently has been supplemented with quota loss payments and
the acquisition of surplus tobacco inventories. The USDA is prohibited by language in
the annual appropriations law from spending funds to help promote tobacco exports and
to conduct research relating to production, processing, or marketing of tobacco and
tobacco products. Other tobacco-related activities have been subjected to congressional
scrutiny. The USDA does operate numerous 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
combination of two program features, marketing quotas and nonrecourse commodity
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
Congressional Research Service ˜ The Library of Congress
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 FY2005, tobacco price
support loan activities are anticipated to result in net revenues of about $100 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 prices 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 off-budget 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
FY2005 budget, the sizable net revenue of nearly $100 million is expected to result from
the previously large loan outlays being repaid ($207.1 million), compared to a modest
level of new loan outlays being made ($107.1 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.
However, in 1986 and again in 2000, when accumulated loan inventories threatened
the financial solvency of the no-net-cost fund, Congress transferred ownership of the
tobacco to the CCC and forgave the no-net-cost requirement. Disposal of these tobacco
stocks cost CCC about $376 million and $625 million respectively.
The tobacco price support program is administered by USDA’s Farm Service Agency
(FSA). Annual administrative costs are budgeted at about $25 million in FY2005 for
tobacco price support operations. This cost covers primarily salaries for the 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
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.
Quota 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. $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 was paid as compensation for
flood-damaged tobacco on auction warehouse floors. Subsequently, Congress approved
additional direct payments to tobacco growers of $350 million and $129 million in
FY2001 (with a small amount of the payments carrying into FY2002), and $51 million
in FY2003. No similar quota loss payments were made in FY2004 or are anticipated in
the FY2005 budget. (Detailed information is in CRS Report RS20802, Tobacco Farmer
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 are
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 $39.9
million in FY2004, and are budgeted at $41 million for FY2005.
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
$0.90 per 100 pounds for domestic tobacco and $0.45 per 100 pounds for imported
tobacco). These fees are 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 FY2005 is budgeted at $719,000. 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 taxpayerfunded market news service, the information might be collected and sold by commercial
enterprises, but questions of bias could arise.
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, Education, and Extension Service (CSREES). Annual research spending
by the USDA averaged about $6.6 million until it was terminated under the FY1995
agricultural appropriations law and subsequent laws. The restriction does not apply to
research on medical, biotechnological, food, and industrial uses of tobacco. A special
research grant of $320,000 was approved for FY2004 to investigate alternative uses of
tobacco plant material. No similar spending is anticipated in FY2005.
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 researchers, continuously trains the county agents and designs and prepares materials
for use by the county agents. In FY1997, CSREES spent $680,000 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.
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 FY2005
is budgeted at $120,000.
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 $190,000
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 $233,000 in FY2005.
Table 1. USDA Tobacco-Related Net Budgetary Expenditures,
Estimated FY2004 & Budgeted FY2005
Activity or program
Commodity Credit Corporation/Farm Service Agency
Administrative expenses of price support — salaries and
office expenses of county offices.
Tobacco price support loan and related operations —
price support program loan outlays, less repayments.
Direct payments to support tobacco farms.
Risk Management Agency
Crop insurance — tobacco crop loss indemnity payments
and administrative expenses, less grower premiums.
Agricultural Marketing Service
Market news reporting — collection and dissemination of
auction market prices and sales volume data.
Cooperative State Research, Education, and Extension Service
Special research grant on alternative uses of tobacco.
Economic Research Service
Economic analysis and projections — supply, demand, &
trade analysis, and projections related to tobacco
Foreign Agricultural Service
World market analysis — collection and analysis of
foreign country economic data on tobacco production and
National Agricultural Statistics Service
Agricultural statistics collection — data collection on
U.S. tobacco acreage, crop condition, yield, and
Total USDA net expenditures for tobacco-related activities
Source: Data are from the USDA’s Office of Budget and Program Analysis, Program-By-Program
Summary, Estimated Costs Related to Tobacco Activities, May 11, 2004.
Note: Numbers in parentheses are net revenues (i.e., negative net expenditures).