SPEAKERS CONTENTS INSERTS
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REVIEW OF THE FEDERAL TOBACCO PROGRAM
SUBCOMMITTEE ON RISK MANAGEMENT,
RESEARCH, AND SPECIALTY CROPS
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
MARCH 31, 2000, LEXINGTON, KY
Serial No. 10648
Printed for the use of the Committee on Agriculture?
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COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
BILL BARRETT, Nebraska,
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
HELEN CHENOWETH-HAGE, Idaho
JOHN N. HOSTETTLER, Indiana
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
KEN CALVERT, California
GIL GUTKNECHT, Minnesota
Page 3 PREV PAGE TOP OF DOCBOB RILEY, Alabama
GREG WALDEN, Oregon
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
Page 4 PREV PAGE TOP OF DOCLEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
JOE BACA, California
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
Subcommittee on Risk Management, Research, and Specialty Crops
THOMAS W. EWING, Illinois, Chairman
BILL BARRETT, Nebraska,
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JERRY MORAN, Kansas
Page 5 PREV PAGE TOP OF DOCJOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
GREG WALDEN, Oregon
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
GARY A. CONDIT, California,
Ranking Minority Member
CALVIN M. DOOLEY, California
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
SANFORD D. BISHOP, Jr., Georgia
JOHN ELIAS BALDACCI, Maine
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
LEONARD L. BOSWELL, Iowa
KEN LUCAS, Kentucky
MIKE THOMPSON, California
JOE BACA, California
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C O N T E N T S
Ewing, Hon. Thomas W., a Representative in Congress from the State of Illinois, opening statement
Fletcher, Hon. Ernie, a Representative in Congress from the State of Kentucky, opening statement
Masters, Marie, grower, Lexington, KY
McKinney, Danny, Burley Tobacco Growers Association, Inc., Lexington, KY
Mitchell, Donald T., grower, Midway, KY
Penn, Frank, Jr., grower, Lexington, KY
Rankin, Jerry, warehouseman, Danville, KY
Smith, Billy Ray, commissioner, Kentucky Department of Agriculture
Snell, Will, agricultural economics department, University of Kentucky
Wiseman, Shane, grower, Winchester, KY
Page 7 PREV PAGE TOP OF DOC REVIEW OF THE FEDERAL TOBACCO PROGRAM
FRIDAY, MARCH 31, 2000
House of Representatives,
Subcommittee on Risk Management,
Research, and Specialty Crops,
Committee on Agriculture,
The subcommittee met, pursuant to call, at 1:02 p.m., at the University of Kentucky, Lexington, KY, Hon. Thomas W. Ewing (chairman of the subcommittee) presiding.
Present: Representatives Moran, Thune, Jenkins, Riley and Fletcher.
Also present: Representative Lewis of Kentucky.
Mr. EWING. It is indeed a pleasure to be here and I would like to turn to my host, Ernie Fletcher, and ask him if he would like to say something before we start our hearing.
Mr. FLETCHER. I appreciate that, Mr. Chairman.
It is truly a pleasure to be here at the University of Kentucky and certainly we thank them for their hospitality in allowing us to come here today.
As you all know, we are facing quite a crisis on our farms here in tobacco country. So to me, it is extremely important and I certainly have to thank Chairman Ewing for coming here and holding this subcommittee hearing on tobacco here right in this district, because I think it is extremely important.
I would also like to thank the other Members that have come. We certainly we appreciate all of you for coming this morning and look forward to an excellent hearing.
Page 8 PREV PAGE TOP OF DOC Mr. EWING. Thank you, Ernie, and we will get started with our hearing. But before we do, I will introduce the members of the Agriculture Committee that have come here with us.
On my immediate left, Jerry Moran of Kansas; John Thune of South Dakota; Bill Jenkins of Tennessee. And of course on my right, you all know Ernie Fletcher; next to him is Bob Riley of Alabama and next to him is another good Kentuckian, Ron Lewis. Ron, thanks for being here today.
OPENING STATEMENT OF HON. THOMAS W. EWING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. EWING. We appreciate all of you taking time to be with us for a couple of hours today and discuss some of the problems that we have in agriculture here in Kentucky. Before I move on to talk about why we are in Kentucky though, I want to thank Ernie Fletcher and his staff for doing the work to set this hearing up. It does not just happen, it takes a lot of ground work, a lot of effort by somebody's staff; and thank you, Ernie, for that.
I know that tobacco is very important to the members here today. We want to hear what is on your mind in regard to that crop.
I would also like to note that our ranking Democratic member, Gary Condit, wanted to be here and he expresses his regret at not being able to be here, but he did have to be in California today.
The purpose of this hearing today is to listen to you, those of you in agriculture, those of you who are producers, on your thoughts on the Tobacco Programwhat challenges lie ahead and what can be done to help the growers.
The subcommittee has worked hard over the last few years to successfully defeat repeated attempts, normally during the appropriation process, to add amendments to appropriation bills which would limit or end the Federal Tobacco Program. As most of you know, there are many in Washington, DC and around the country that have no tolerance for tobacco products and would do most anything to put tobacco companies and tobacco farmers out of business.
Page 9 PREV PAGE TOP OF DOC As a corn and soybean producer, I know that you probably just want a fair price. I also recognize that you must also contend with issues such as taxes, increased input costs, high cost of insurance. Hopefully, we will have time to get into some of these issues along with other things concerning the tobacco industry.
There are challenges facing the Tobacco Program today, and your industry. In fact, they seem to be endless. The Master Tobacco Settlement will give $206 billion in phase I money back to individual States over the next 25 years. Each State can determine how much of its share will also be passed on to tobacco producers. I understand from Mr. Smith that the legislature is grappling with that problem as we talk here today. Tobacco-producing States will also split $5.1 billion in phase II money that goes directly to quota owners and producers.
Quota cuts have been extremely troublesome to growers. Flue-cured tobacco quota was cut by nearly 20 percent this year, and you, the Burley growers here in Kentucky and other Burley-producing States are looking at a 45 percent quota cut. Many of you here today have discussed in your testimony the idea of putting quotas back into the actual producers' hands. We need to know how to best accomplish that goal in a way that is fair and equitable.
Contract marketing was only being discussed in the past few years. Now it has become a reality. We need to know everyone's thoughts and perceptions. We have just recently received a sample copy of the contracts that are going to be offered to producers. How will this affect the program? We need your input.
Another major tobacco development was the March 21 Supreme Court ruling that the FDA cannot regulate cigarettes as a medical device. However, I would guess that many of you have seen statements made by tobacco companies that they may be open to new laws or appropriate regulatory measures. Congress is not exactly sure what the companies mean, but we will be working with industry to keep cigarettes out of the hands of children. However, many of us simply do not believe the FDA needs to expand its authority beyond its congressional mandate.
Page 10 PREV PAGE TOP OF DOC Also, there is a class action lawsuit currently pending against the tobacco companies in Florida that could award the plaintiffs tens of billions of dollars in punitive damages. Will the companies be able to continue to make payments required under the Master Settlement Agreement if they lose cases such as this one? I am certainly not sure.
Finally, I would like to mention another court decision for those of you who may not have already heard it, though it is on the front page of your paper here today. Yesterday, the U.S. District Court of Eastern Kentucky found that cross-county leasing and transfer of Burley tobacco should not be allowed. Judge Foster believes that in the referendum to decide whether or not cross-county leasing and transfer should be allowed, USDA needed to have a majority of eligible voters agree to the leasing. The referendum only provided that a majority of those voting in the referendum wanted to allow cross-county leasing or transfer. USDA will have to decide whether or not to appeal the decision. This matter will have to be decided by Secretary Glickman, but as of today, it now appears cross-county leasing and transfer will not be allowed this year.
Last year though, through the hard work of your Congressman Ernie Fletcher and others, there were $328 million in congressional assistance included for tobacco growers. This was equivalent to about $1 per pound of quota lost. Let me assure you that we will be working hard to include tobacco growers in any disaster or supplemental assistance this year, but it will be difficult again this year, as tobacco is not often smiled upon in Washington.
While the Flue-cured growing areas discounted and sold some of their pool tobacco, here in Burley country, the pool stocks have not been reduced, due in part to natural disasters and lower demand for tobacco. We are working with all tobacco-growing areas to see how and if we can support some form of Government assistance.
I would like to recognize Ernie again and ask him if he has an opening statement before we move ahead to our first panel. Ernie.
Page 11 PREV PAGE TOP OF DOCOPENING STATEMENT OF HON. ERNIE FLETCHER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KENTUCKY
Mr. FLETCHER. Thank you again, Mr. Chairman, and members of the committee for traveling long distances, some of you, to come and join us today.
Certainly we are here to discuss the crisis facing our family tobacco farms and our panel of witnesses before us today is a cross-section of folks whose life and work revolve around our tobacco farmers. I thank each of you and appreciate all of you for taking the time out of your busy schedules and appearing before us this afternoon.
First, the Honorable Billy Ray Smith, Kentucky commissioner of agriculture, we thank you. Marie Masters, a grower and certainly could come here and bring a woman's perspective to this issue and we thank you for being here with us. Danny McKinney, CEO of the Burley Tobacco Growers Cooperative Association; thank you, Danny. Donald Mitchell, a grower from Midway, who has had a lot of experience and work certainly there in the Farm Bureau; we thank you, Donald. Frank Penn, also another grower from here in Fayette County; thank you for being here, we certainly look forward to hearing your perspective. Jerry Rankin, who is from Danville, Boyle County, also is a warehouseman and I believe a grower as well. Dr. Will Snell, certainly we appreciate you being here from the Agriculture Economics Department of UK, and bringing your expertise to us. And Shane Wiseman, we wanted to make sure we get some, as well as Mr. Mitchell, Mr. Wiseman, some of the younger folks that are coming into farming and what they see the future will hold. So we thank you, Shane, for coming here also.
For the last 67 years, the Tobacco Program has been successful at controlling supply and keeping the price of tobacco at a profitable level while incurring very little cost to taxpayers. The Tobacco Program is not a Government subsidy, it is a farmer-funded program that prevents over-production and provides price supports. Only minimal administrative costs are paid by the Government.
Page 12 PREV PAGE TOP OF DOC The Tobacco Program is now at a critical junction. Last year, drought devastated the tobacco-growing regions of the country. Secretary Glickman declared most of these regions and all of Kentucky disaster areas. With the industry passing by over 40 percent of the tobacco crop and over 400 million pounds of tobacco under loan in the cooperative pool stocks, Kentucky's tobacco growers are being hit with an expected 45 percent quota reduction. Combined with last year's cut, that amounts to over 65 percent in reduction of quota. I do not think many people could conceive of having their income cut by 65 percent. Our farmers are facing tough times and certainly need our help.
In addition to the quota cut, Philip Morris started their direct contracting program. I am concerned that small farmers may be left behind and that eventually the Tobacco Program will cease to exist, leaving the farmers at the mercy of the industry. We would like to hear from you on your concerns regarding that.
There is no doubt that our family farmers are facing a real crisis and I am sure the witnesses before us will elaborate and make suggestions that we can take back to Washington to help.
I want to take a moment and point out that this Congress has had some success at helping and defending our tobacco farmers. Last year, as the chairman mentioned, we included a $328 million assistance for tobacco farmers in the 1999 Federal disaster relief legislation. That amounts to $125 million that came back directly to this State. This money will soon reach the farmers' mailboxes. I want to continue to work with Congress on passing legislation, particularly my legislation, the Tobacco Farmers Relief Act, that will exempt phase I and phase II money from Federal taxation.
As we all know, anti-tobacco sentiments have intensified in Washington. Last year, President Clinton proposed a 55 cents per pack increase in tobacco excise taxes. Congress made sure that this misguided proposal did not see the light of day. Once again, we will fight the President's proposed 25-cent tax increase for the fiscal year 2001. Not only has the President tried to fund his new spending on the backs of our tobacco farmers, he has initiated a Federal lawsuit against tobacco. I supported legislation that ensured that this lawsuit was not funded.
Page 13 PREV PAGE TOP OF DOC Tobacco farmers finally received a piece of good news with the Supreme Court's decision that the FDA does not have power to regulate our tobacco and tobacco farmers. We are keeping Government off our family farms.
I look forward to hearing from you, from the witnesses today, so that we can work together and develop short-term and long-term solutions to the problem facing our family tobacco farmers.
Also in closing, I certainly wanted to recognize and thank Kevin Atkins with Senator McConnell's office, who is here today with us; and Bill Fandrick with Senator McConnell's office is also with us here today. Thank you all very much.
Mr. EWING. Thank you, Ernie, and thank you for introducing our panel.
We have been doing a lot of talking up here and we keep telling you we came to listen to you. So I am going to ask any other members that have statements, if they will just submit them for the record and we are going to go to our witnesses and ask for their testimony.
We usually like to, since you have submitted written testimony, keep your summary of that to about 5 minutes.
After this panel and after we have had a question and answer period, time permitting, we hope to hear from others in the audience from the mics that we have set up out there.
So we will get started and we will start with you, Mr. Smith, thank you for being here.
STATEMENT OF BILLY RAY SMITH, COMMISSIONER, KENTUCKY DEPARTMENT OF AGRICULTURE
Page 14 PREV PAGE TOP OF DOC Mr. SMITH. Thank you very much, Chairman Ewing and Congressman Fletcher, Congressman Lewis, the Kentucky Congressmen, and distinguished members of the panel. On behalf of the Commonwealth of Kentucky and particularly the Kentucky Department of Agriculture, we do welcome you here. Thanks for taking the time and the interest to come to our State and to hear testimony and hear messages from Kentucky farmers and agricultural leaders in our State.
A bit of background on the Commissioner of Kentucky, I am a 55-year old 4th generation farmer, tobacco and livestock farmer. I would tell you that tobaccoI went to a small regional university in Kentucky with a major in agriculture on the strength of raising 8 acres of tobacco and a very, very small scholarship, I might add. Tobacco put running water in our house. Tobacco put the first TV in our house and the first air conditioner, first carpet on our floor. So I could tell you all day, if I did not tell you anything else in my testimony, about the strength of the family farms' dependence upon Burley tobacco over many, many years. That has been a few years ago, Mr. Chairman. [Laughter.]
Perhaps no legal crop has ever been more of a divider of people than tobacco. The Kentucky tobacco farmers who provide for their families through the cultivation and production of this crop feel a deep historic kinship to earlier generations who have similarly toiled in the heat of a tobacco patch. It is to these people that tobacco farming has become more than merely a means of making a living or making ends meet, it is an historical link to an ancient and proud heritage, one that is received from a previous generation and given to the next.
Tobacco farmers have never been shy about protecting their crop and their heritage from those who wish to make such farming less profitable. The early 1900's were an era of violence throughout the tobacco belt and particularly in Kentucky, precipitated by unfair prices offered by the Duke family tobacco monopoly. Dozens of lives and millions of dollars in property damage were lost when the battle between farmers and the monopoly turned violent. The tobacco farmers were aided by their government; first, with the dismantling of the Duke trust by trust-busting President Theodore Roosevelt; and second, with the institution of the Federal Price Support Program by the next President Roosevelt in the 1930's.
Page 15 PREV PAGE TOP OF DOC This program gives growers some control over their destiny and creates a degree of stability for the industry in Kentucky. The program stabilizes farm income by limiting production and supporting the economic and social well-being of the rural community.
Our farmers have suffered low commodity prices, a drought, and severe quota cuts, as has been pointed out here today. And now there is discussion of removing the safety net, the Program. Our tobacco growers in Kentucky understand the importance of this program. That is why they gave it 97 percent approval rating by the referendum votes last time we had the opportunity to cast our wishes.
Without the Tobacco Program, rural Kentucky will be a different place. There will be far fewer tobacco farms, big growers will get bigger and the smaller ones will be forced out.
The tobacco dollars will be consolidated in the big growers' hands. Remember the average Kentucky tobacco farmer raises 5.7 acres on his 130-acre farm and this is the very farmer that needs the protection offered by this program. This Burley farmer is on the lower end of the production chain and receives only 2 cents of the cost of a package of cigarettes. This is the very person that needs to receive a price increase so that our growers can participate in the prosperity that the rest of the Nation is experiencing.
When Secretary Glickman was in the Bluegrass State a few years ago, he made the comment that the reason the agricultural economy was stable in Kentucky was due to the Federal Tobacco Program. Clearly, in terms of financial stability, the Tobacco Price Support Program has achieved a level of success that few other Federal initiatives can claim.
Farmers value a rural way of life, and the sense of community that comes from it is more important that what is in the bank. The hard strenuous work they do is in no way commensurate with the income they receive, but our farmers want to farm and they keep the land green for future generations. It is a way of life. It is our culture. Farmers treasure the freedom, the challenge and the tradition that they have long known and enjoyed, along with the satisfaction that comes from growing and marketing a good crop. Let us not take that dream away from them by removing their safety net, the program.
Page 16 PREV PAGE TOP OF DOC Eliminating the program would cause a flood of cheap tobacco, which would produce a windfall of record profits for cigarette makers, while bankrupting the average Kentucky tobacco farmer.
The true greatness of this program is not in what it does for the economy or that it keeps cheap tobacco from the cigarette companies. The greatness of this price support program is that it is a program designed for the working man. It is a program that benefits people who work hard and value living a lifestyle as their family has done for generations. It is not a handout, nor is it a Government charity or subsidy.
Why are we seeing grim faces in our tobacco communities? It could be that they are just recovering from a big quota loss in 1999 of 28.8 percent, while foreign tobacco imported into the United States increased some 28 percent. To make matters worse, in 2000, the tobacco farmer received another quota cut of 45.3 percent, as has already been pointed out by our leaders today, and the foreign imports are still on the increase.
Right on the heels of these cuts, Philip Morris, a major manufacturer, announced it will conduct direct marketing with the growers. Then cross-county leasing was voted on earlier without the knowledge of the quota cut to come. And it has been announced today the result of that decision.
All of these things have wreaked havoc on the tobacco farmer, and he is still not clear with what is to happen days before the planting season is to take place. The growers and tenants will suffer the most from the 45 percent tobacco cut. They cannot just go out and lease more tobacco because there is only so much out there to lease and it will only spread so far. They have also incurred substantial debt due to purchasing new equipment and now have considerably less use for that equipment. I was at a recent auction last weeka personal experience. It started at 8:00 in the morning and went to nearly 8:00 that night with two auctioning chains all day, and I can tell you that most of the tobacco equipment that was sold was going for pennies on the dollar of its original purchase price.
Page 17 PREV PAGE TOP OF DOC The young farmer will have to learn some new skills to bring in the income he was receiving from his former tobacco crop.
The effects of the quota cut will not be felt in its entirety until November and December of this current year in the marketing season. Then it will not be just the farmers who will feel the cut. It will be the bankers and the feed stores and the new car and truck dealers, the equipment dealers, the carpet salesmen, the hardware stores and the appliance sales people.
The Kentucky Department of Agriculture has put a great emphasis on diversification of our crops. We have employed marketing specialists in livestock, horticulture, organic farming, vegetable production and wood products. Some farmers have experimented with growing grapes for wine, cucumbers, shrimp, peppers, ostrichesall with mixed results.
Tobacco growers clear about $1,500 to $2,000 an acre, which makes it hard to compete with other crops. And on a small farm, every acre has to count economically.
Various crops and diversification are helping in Kentucky, but we would plead with you, the members of this committeethank you, first of all, for the additional income that you have sent our way in Kentucky, as a result of the disaster emergency funds. But we would ask you to continue your support for the Tobacco Program. We have a diversified agriculture in Kentucky, but on a good year, the cash farm gate sales of Kentucky agriculture are about $4 billion and in former years, Burley tobacco has accounted for nearly one-third of that farm gate income.
So thank you for the opportunity to express some of these feelings toward our number 1 cash crop and the future of this industry in Kentucky. We think the agriculture community will survive, but it is going to take the cooperation of both Federal leaders and State leaders and all commodity leaders in agriculture to assure potential increase for our farmers in the 21st century.
Page 18 PREV PAGE TOP OF DOC Thank you very much.
[The prepared statement of Mr. Smith appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Smith, we appreciate you taking time at this busy time in your legislative year to be here.
STATEMENT OF MARIE MASTERS, GROWER, LEXINGTON, KY
Ms. MASTERS. Good afternoon, Mr. Chairman, Congressman Fletcher and distinguished members of the committee. Thank you for coming to Kentucky and allowing me the opportunity to speak on a topic that means a great deal to me. As a tobacco farmer, this is a critical time for me and all tobacco farmers, and I sincerely thank you all, especially Congressman Fletcher, for thinking of me and the many tobacco farmers during this difficult time.
My name is Marie Masters and I live in Fayette County. I have lived on a farm for 40 years and have been responsible for raising a tobacco crop on this farm for the last 10 years following the death of my husband and my farm manager.
From my standpoint, the single most important thing that we must do is to maintain the current Federal Tobacco Program. For many years, it has provided support to young and old farmers to provide for their families, to pay mortgages, to put children through college and countless other items. I believe that it is critical that we keep our young people on the family farm. To that end, the following are some of the things that I believe would help young and older farmers do what they do bestand that is to raise tobacco.
Put tobacco in the hands of the actual grower; more affordable crop insurance; continue the safety net monies paid directly to farmers in the disaster years.
Page 19 PREV PAGE TOP OF DOC These monies will be invaluable to us as costs for fuel, equipment, fertilizer, new technology, labor and so forth have increased for the farmer while the price for our product has not increased. In addition, high taxes, including the capital gains and estate taxes have made it increasingly difficult and in many cases to pass the family farm on to the future generations for many families.
As a farmer, I know the importance of clean air and water, I am a steward of my own land; however, I do not need and cannot afford additional rules and regulations from the Government that restricts my ability to produce my crops. I should not have to worry about whether my tractor kills an endangered species such as the snail darter.
The decision by the U.S. Supreme Court last week refusing to allow the FDA the authority to regulate tobacco was one bit of good news that we in the agriculture community have heard recently. As Congress has the sole authority make this decision, I urge each of you to keep the FDA off the farm and allow me to continue to produce a legal crop. I want to emphasize that I do not support kids smoking and agree that this is an adult decision and does not need the over-reaching arm of the FDA.
The issue of trade, especially the import and export situation regarding tobacco, has been devastating to the U.S. farmer. We grow the best Burley in the world and we want it bought and used in the world market. To the extent possible, I ask each of you to help create an environment that will encourage the U.S. tobacco companies to purchase more domestic leaf. Also, as you are probably aware, the gray market cigarette issue has adversely affected our markets and pocketbooks, especially as it concerns the Master Settlement monies which only add to the problems we face as producers.
For small, medium and large tobacco farmers, it has become increasingly difficult to find help to get a tobacco crop from the field into the barn and to the warehouse. I thank Senator Mitch McConnell and others for their work on simplifying the H2a migrant worker program and hope that continued progress can be made to reduce the paperwork and bureaucracy involved with this important program. The farm labor problem has been a significant obstacle for many years for a number of farmers and especially now, during this time of uncertainty. We ask you for your help in making this as simple as possible to implement.
Page 20 PREV PAGE TOP OF DOC As the costs of producing tobacco crops have increased, I am concerned with the statements made by some who wish to impose additional taxes and fees on tobacco products. To further add insult to injury, I am distressed to know that the Justice Department has indicated that they plan to file suit against the tobacco companies. In no uncertain terms, I ask you to oppose any additional taxes on tobacco products and to oppose the aforementioned lawsuit by the Justice Department. Adding additional costs to the product I produce will not help me stay on the farm. Additionally, filing lawsuits against the tobacco companies will only tend to drive them away from the U.S. market and further damage my prospects to produce a legal product that has a high worldwide demand.
Having said this, on the issue of contracting tobacco, I do not plan to contract my tobacco and wish to sell only through the Federal Tobacco Program. The program has proven over time to have been one of the most successful agriculture programs and I support the continuation of it.
In closing, I thank each of you for coming to Kentucky to hear from some of our producers. I know many of you have traveled a great distance to be here and listen to our concerns. For your support, I say thank you very much. I have always thought that decisions are best made when legislators hear firsthand about a problem from the individual involved in the problem in their local communities. For your support, you are to be commended. I trust that you will continue to support us and do your best to help agriculture, which is the real backbone of America.
Thank you again for your help at this critical time.
[The prepared statement of Ms. Masters appears at the conclusion of the hearing.]
Mr. EWING. Thank you very much, Marie. And now Mr. McKinney, the Burley Tobacco Growers Cooperative Association.
Page 21 PREV PAGE TOP OF DOCSTATEMENT OF DANNY MCKINNEY, BURLEY TOBACCO GROWERS COOPERATIVE ASSOCIATION, INC., LEXINGTON, KY
Mr. MCKINNEY. Thank you, Mr. Chairman and members of the committee for being here today. Congressmen Fletcher and Lewis, I would say to you I am a little concerned. Ordinarily when we bring someone from out of State and bring them to the UK campus, we take them either to the Commonwealth Stadium or down to Rupp Arena. Those folks from Tennessee that have come here today, you might wonderthey brought you to a barn. [Laughter.]
So I do not know what is in store for you here.
Mr. JENKINS. I would much rather be in a barn than in the stadium with some of the thrashings we have gotten there in the past. But it has been pretty good lately, Mr. McKinney.
Mr. MCKINNEY. Well, we appreciate you being here today.
As CEO of the Burley co-op and administrator of the price support program, I should speak to that today, but I think Ms. Masters and I know Mr. Mitchell and others will speak to that, as Commissioner Smith has in singing the virtues of that price support program.
I want to talk about a couple of other things. A few months ago, the tobacco companies gave us some money. And if you want to cause problems, just throw some money out on the table and watch us all go after it. We will durn near kill each other.
Well, in Frankfort, over the past 2 or 3 months, the legislature has been meeting and been fighting over the Master Settlement money. The phase II money has been sent out to the farmers and I can tell you it came to those farmers at a good time, back in January. So those monies are here and they are helping our farmers.
More importantly, I think, the disaster money that the Congress and the Senators have sent to us is going to be a big help and it is going to come to our farmers at a time that is very crucial, operating money time. So again, that money is going to be very important to our farmers this year and we appreciate the fact that you all recognize the disastrous situation that tobacco farmers were in this past year and worked to get us that money.
Page 22 PREV PAGE TOP OF DOC Our program is in trouble. It is in trouble partly because of too much imports and not enough exports. We have got too much inventory. Why have we got too much inventory? Too many imports, not enough exports. So that is where a lot of our problems are today.
When we look at our situation in trying to sell the companies more and more tobacco, we look up and see that it seems that they are trying to undermine us again with contracting. And we think in the Burley co-op and I personally think it is a big threat to our program.
We have been working on some legislation in our State capitol the past 2 months or so, not to stop contracting but to try to set up some guidelines for the farmers out here. We want a model contract designed so that a farmer could look at a contract and know that it had been looked over and negotiated with the tobacco companies and that he was getting a fair deal. Most farmers would be like myself, if you hand us a contract that is 45 pages long, we would have to go hire four Philadelphia lawyers to get us to interpret that. If we can have some type of legislation in Kentucky to let that farmer know that that contract has been gone over, that will help him.
The other thing we are trying to get done is make sure that these manufacturers deal with all size farmers. To look at the demographics of growing tobacco, how much of our tobacco is grown by people with less than an acre of 5,000 pounds or so? And let us make sure that those companies have to deal with those people the same as they would with the large ones. The quote in yesterday's paper from the Philip Morris employee said that this legislation would force them to deal with the quarter-acre guy just like it would with the 100-acre guy. That is what we have been concerned about, we know that is what is going to happen. We want to do something so that that company does not walk into that farmer's house and throw the contract on his breakfast table and say take it or leave it.
Page 23 PREV PAGE TOP OF DOC The first couple of years, the contracts will look pretty good. But after that, I am afraid we had better be concerned. Congresswoman Marcy Kaptur from Ohio has some legislation that I would encourage you all to look at that I think would not only help tobacco farmers, but a lot of farmers.
The contracting will show our predicament here in the next year or so through the grading service. When you take away the grading service's budget, if we contract 100200 million pounds out here, it is that much less that is going through the auction system, that much less that the grading service will be collecting their fees on and so there is no way that that grading service, the agricultural marketing service can continue to survive if their budget is cut in half or so. So we have got to do something about making sure all tobacco sold pays the grading fee, if we want the grading there for everybody.
I would say to you today, keep our Tobacco Program, the same as what these other people have said. That is the most important thing for us, to keep our program.
[The prepared statement of Mr. McKinney appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. McKinney. Now Mr. Mitchell, a producer from Midway, Kentucky. Midway is between where?
Mr. MITCHELL. Lexington and Frankfort.
Mr. EWING. All right.
STATEMENT OF DONALD T. MITCHELL, GROWER, MIDWAY, KY
Mr. MITCHELL. I too would like to thank Chairman Ewing and Congressman Fletcher and other distinguished members of the committee for being here today.
Page 24 PREV PAGE TOP OF DOC For the record my name is Donald Mitchell, I am 37 years old and have been a full time farmer for 20 years. I farm with my brothers in Woodford County, Kentucky. In a typical year, tobacco usually comprises over two-thirds of our net farm income. I live in an area that is dependent on tobacco. Fellow growers and I have experimented with other enterprises to help supplement our income, but tobacco has been and still remains the bread and butter of central Kentucky's agriculture community.
At this point in time, there is no alternative crop to replace tobacco income, even though most growers remain open to new ideas and suggestions. We want to stay on the farm, and tobacco is our way to accomplish that.
Every year, tobacco farmers face many challenges. Some of these you have already heard. But today, we have a whole new list of challenges. Some of these include the quota cuts that we have talked about and the effects will be felt in our communities this fall when we market this record low quota. We hear reports of increasing imports of foreign tobacco by cigarette manufacturers. Pool stocks are bulging at 417 million pounds, and according to cigarette manufacturers, much of this tobacco in the pool is undesirable due to abnormally dry curing conditions last fall. In addition, we are being introduced to contract production which is a major threat to our Tobacco Price Support Program. Farmers are facing exorbitant lease prices of 60 to 70 cents plus a pound. Our manufacturers are faced with increased taxation and litigation expenses and a lawsuit in Florida that may very well bankrupt a legal industry in this country. This list of challenges grows almost daily and makes our job as tobacco growers even more difficult, given all the uncertainty.
While growers are facing a severe financial strain, the manufacturers are amazingly still maintaining and expanding their profit levels. Trial lawyers are raking in an enormous amount of money from tobacco, with one attorney reportedly receiving a payment of $400 million from the tobacco settlement. This is more than a whole county of tobacco growers could expect to earn in their entire lifetime.
Page 25 PREV PAGE TOP OF DOC Our Government also profits from tobacco. According to the National Center of Policy Analysis, tobacco tax revenue on just one pack of cigarettes currently nets the U.S. Government over 12 times the revenue growers receive. And by increasing its tax on a pack of cigarettes to $1. The State of New York now makes close to four times the revenue on that pack as compared to the manufacturer and 30 times which the growers receive from that same pack. It makes you wonder who really is addicted to tobacco. And maybe it is time to admit that U.S. tobacco is a revenue-generating gold mine that should not be litigated out of existence.
So as a grower, what do I think can be done? First, I think we have to change our attitude of merely hoping we can improve the situation to one where we are determined to improve the situation. With a steady to declining domestic demand for tobacco, most would agree that any future growth in our industry is in the export market. Within the past 2 years though, the current administration has banned any assistance from the Agricultural Export Enhancement Program for American tobacco exports. As a result, tobacco, unlike other legal commodities, does not receive assistance that would help growers find markets for their products in other countries. Now these same foreign markets will continue to purchase tobacco. If not from us, then from some other source. Ironically, USDA figures show that for a 10-year period ending in 1988, tobacco imports into this country increased 74 percent, but just in the past year, imports rose an additional 50 percent, getting close to 300 million pounds. One manufacturer last year had a 23 percent share of the domestic cigarette market but only purchased 1 percent of U.S. Burley.
We must work on reducing the tremendous amounts of pool stocks. And if this is not accomplished within the next 10 months, we could be looking at yet another large quota cut. Work should continue on the plausibility of possibly destroying some of the lower-valued drought damaged crops and the possibility of discounting pool stocks to offset imports pound-for-pound or securing an overseas market must continue to be examined. All these options would most likely require some financial assistance.
Page 26 PREV PAGE TOP OF DOC Our Tobacco Program has been arguably one of the most successful Federal farm programs for over 62 years. It is currently being put under tremendous strain. Changes are needed, such as getting tobacco quota in the hands of the ones that actually take the risk, the grower. We must work to guarantee that we will never again have the oversupply of pool stocks that currently exists now. But regardless of the changes, I feel that the program must be the cornerstone for the future of Kentucky's agricultural industry.
I have a precious 3-year old son that loves to put on his work boots and go to the farm with his daddy. I am very concerned that as he gets older, the experiences of growing up on a farm and the way of live that my family has known for four generations may not be available to him. Times are complex, uncertain and frightening.
In conclusion, Kentucky tobacco farmers are proud, independent and resilient people who produce a high-quality legal product that is still in demand worldwide. We are a group who, when faced with all the adversity and uncertainty of today are still willing to lace up our boots every morning and make an effort to retain our livelihood. Please work with us through and beyond our present circumstances for a brighter future for our families, communities and the agricultural industry. Thank you.
[The prepared statement of Mr. Mitchell appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Donald. Mr. Penn, Council for Burley Tobacco.
STATEMENT OF FRANK PENN, JR., GROWER, LEXINGTON, KY
Mr. PENN. Thank you. I have to say I am speaking for farmer Frank Penn, not the Council. I am a proud member of that Council, but I was asked to speak on behalf of tobacco farmers.
Page 27 PREV PAGE TOP OF DOC I am kind of like the guy that went to church. The pastor asked him afterwards, said how did you like the sermon; he said, ''well, I might not have got all I needed, but I got all I could stand.'' We do not want to give you more than you can stand here, but we want you to understand the complexity of this.
Good afternoon, Chairman Ewing and Congressman Fletcher and distinguished members of the committee. I want to thank you for taking time out of your schedule to come to the Bluegrass region of Kentucky.
My name is Frank Penn, Jr. and I have been a tobacco farmer for 35 years. Having been raised on a tobacco farm, I found out early that tobacco spells work. Having diversified my operation the last 20 years, we now raise 50 acres of tobacco and board 60 head of horses, most of them thoroughbreds. Three years ago I had a basic quota of 100,000 pounds, today it is 63 percent less.
We must realize there will always be cigarettes produced. The question is will we be a producer or will we be a historian. Will we raise tobacco or just talk about the good old days? The future of Kentucky agriculture depends on a common sense approach to what is left of a viable legal product. We are caught in the 60-year old mindsetcontrol production and uphold price. This has resulted in less American Burley being used in our products. With a high worldwide demand for tobacco, we should seek every opportunity to find markets for our domestic leaf.
I have been taught all my life the fundamental rule of agricultureif you cannot sell it, do not produce it. There are several questions which we as tobacco producers must face:
Can contracts and price support co-exist?
They can only co-exist if the companies and the farmers and the political leaders want it to happen.
Page 28 PREV PAGE TOP OF DOC Can U.S. Burley tobacco be attractive again?
I have the same answer; only if the companies, the producers and the politicians want it to happen.
Can Kentucky's 1998 $1 billion tobacco receipts be achieved again?
Same answer, but it looks doubtful.
Can Kentucky's tobacco farms survive?
Only if we break this 60-year old culture.
My answer to these questions is to let go of the fact that tobacco is an entitlement. Raise it, sell it or lose itI am talking about the tobacco quota. It is not a popular opinion, but one that must be faced. To elaborate, let me explain this more in detail. The cost of acquiring pounds of tobacco from people who do not want to produce it has become excessive. Thereby, the profit margin has narrowed to a level that is difficult to justify. At some point, the tobacco must be placed in the hands of the people that grow it on some type of a phased in basis.
I have mentioned some problems with tobacco issues, but in addition to that, we continue to have serious problems with the Tax Codespecifically the inheritance tax, or death tax as I like to refer to it. For many farm families, this means the difference between selling a treasured piece of our heritage to an unknown individual or having our heirs take out a dangerous level of debt to attempt to pay taxes and run the farm. In either case, the family farm is in serious jeopardy. I have paid taxes all my lifeincome, property, sales, capital gainsand now as the final insult, I will be taxed by the Federal Government upon my death for the value of my farm.
As land values have increased, the exemption level for farm value should be raised from the current $675,000 to $2 million effective 2001. The result of this will be to save many family farms for future generations of farm families. My brothers, sister and I spend $30,000 a year for insurance on our 87-year old mother so that we can pay $400,000 to the Federal Government in taxes to keep the land we already own. Something is wrong. To couple that with a 63 percent quota cut in our tobacco base in 3 years, we as tobacco producers have gone from production agriculture to subsistence agriculture.
Page 29 PREV PAGE TOP OF DOC I would like thank this committee and especially Congressman Fletcher for making this hearing possible. I realize that many of you may not have come from a farm background or know a great deal about Kentucky agriculture, but you certainly do know about people and how to address problems. As constituents, these are very precious characteristics to us. Until last year when this committee came to Lexington, I do not recall a congressional committee coming to this area to discuss tobacco issues. Your attendance here today shows your support for this issue and means more to the tobacco farmers of this State than we can express. For your commitment to the aforementioned points, I say thank you for a job well done. You see, tobacco is not just a commodity to us; it is a way of life, a heritage, if you will. With individuals such as yourselves working on these problems, we know that we will have a chance to continue that heritage.
I thank you for this time today.
[The prepared statement of Mr. Penn appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Penn. I will tell you that I think almost all of the members of this committee do come from agricultural areas with agricultural backgrounds. That is one reason that we are so interested in the problems around the country, but you are absolutely right.
Mr. Rankin, Danville, Kentucky. Is that close to Danville, Illinois?
Mr. RANKIN. Geographic center of Kentucky, Center College, going to host a vice presidential debate in October this year.
Mr. EWING. Can you tell us who that is going to be between? [Laughter.]
Mr. RANKIN. I have no idea. [Laughter.]
Page 30 PREV PAGE TOP OF DOCSTATEMENT OF JERRY RANKIN, WAREHOUSEMAN, DANVILLE, KY
Mr. RANKIN. I too would like to thank this committee for allowing me to testify today and Congressman Fletcher for hosting this event. I am a 3rd generation tobacco farmer. This past year I grew almost 130,000 pounds of Burley tobacco. My father and I own and operate a tobacco warehouse in Danville, Kentucky.
Growing and marketing tobacco has given me an opportunity for a better lifestyle. I know how important the Burley tobacco growers co-op and the marketing service are to me. As a farmer, I see it every day on the warehouse floor. The percents of tobacco placed under loan steadily climbed throughout the marketing season and at season's end, 230 million pounds of Burley tobacco across the eight-State Burley Belt, was placed under loan.
The last of my crop this past year, I sold on February 22, about 12,000 pounds that day. We had 254,000 pounds on the floor, of all farm tobacco. Only 4,700 pounds of tobacco was purchased by the companies. The last sale of the season on March 16, only 2 weeks ago, we had three buying companies present, they walked the entire sale with their hands at their side and never placed a bid. Every single pound went to the Burley co-op. Almost every single one of those farmers needed that money to come out, to pay their warehouse or pay their farm payment.
Some days the tobacco companies will come on the floor and buy every pile offered that day. The next day, with the same style tobacco, they may buy half or a third or 20 percent or none at all. During those days when the companies are not bidding much, I try to help my farmers by bidding on the tobacco. The Danville market this year sold almost 22 million pounds of tobacco and the warehouses in that town bought over a million pounds.
My warehouse tries to help the farmers by providing some crop financing, locating crop insurance, furnishing hauling as needed to the warehouse, we furnish baling twine and all the labor from the time that the tobacco gets to the warehouse until the time it is shipped out sometimes many weeks later to the companies.
Page 31 PREV PAGE TOP OF DOC A few weeks ago, Philip Morris announced that they would be partnering with a limited number of farmers on a contract basis. This bombshell came just days after our Burley tobacco co-op board voted unanimously not to discount the tobacco in the co-op. Partnering reminds me of something one of the smartest men that I ever knew in the tobacco businesshe owned warehouses in North Carolina, Georgia, Kentucky and I have heard him say many times, ''If the tobacco companies ever get control of the farmer, may God have mercy on their poor soul.'' Partnering will ultimately destroy the price support system, the quota system, the Government grading and all these programs have served the farmer well.
We farmers are on our knees right now, some of us are weak from worry, some of us are praying, others are scared about how will we make our farm payments. And the worst thing of alltobacco partnering.
The system as it is offers buying companies a place to see and fairly bid on the crop. The warehousemen act as mediator between the buyings and the marketing service and the farmers. We have a stable supply of a quality product with checks and balances already built in, just like our Founding Fathers had in the Constitution.
Tobacco is the proud heritage and the financial backbone of farm families. It is not just a multi-national corporation.
[The prepared statement of Mr. Rankin appears at the conclusion of the hearing.]
Mr. EWING. Mr. Snell from the University of Kentucky.
STATEMENT OF WILL SNELL, AGRICULTURAL ECONOMICS DEPARTMENT, UNIVERSITY OF KENTUCKY
Mr. SNELL. Thank you, Mr. Chairman and members of the committee. My name is Will Snell, I am an agricultural economist here at the University of Kentucky, where I work closely with policymakers and farm groups on various tobacco policy-related issues. For the past 3 months, I have been participating in meetings across the State with tobacco quota owners, growers and local businesses regarding the current tobacco situation and outlook. It has been a very challenging and exhausting period as I have had very attentive audiences, desperately seeking any positive comments that I can deliver on the current outlook for their livelihood.
Page 32 PREV PAGE TOP OF DOC The previous decade can be characterized as one of considerable instability as the industry experienced record highs in terms of quota, cigarette production and exports, while closing out the decade with record imports, escalating pool stocks and dwindling quotas.
As I look to the future of this industry, I really feel that the potential exists for the international market to provide some growth for this industry, but we have to be realistic that the domestic demand for U.S. tobacco is going to continue to slide in response to legal, political, health and economic pressures as well as a decision by U.S. cigarette manufacturers to move production overseas. Consequently, U.S. cigarette production in this post-tobacco settlement period is moving toward 550 billion pieces, which is about 30 percent below the record level that was achieved back in 1996. I feel that this production level, coupled with anticipated leaf exports and recent import patterns, suggests a total demand for our leaf somewhere in the neighborhood of 400 million pounds, compared to the more traditional level of 600 million pounds.
While demand has declined to around 400 million pounds, the extremely large drop in the 2000 quota, along with the anticipated small carryforward into the 2001 season, I feel can potentially limit marketings below the potential demand level. In the short term, the companies will respond to this tightening supply situation by drawing down their inventories. But there is a limit to how long they can pursue this strategy.
The current tobacco formula was revised in the Tobacco Improvement Act of 1985 to yield a more market-oriented supply level. In theory, the quota formula seemed ideal. The companies would submit purchase intentions as a guide for domestic demand, we had a 3-year moving average to reflect export demand and there was an adjustment for pool stock levels.
If the quota would perform as designed by the 1985 act, the tobacco companies, amidst this tightening supply situation, would either boost future purchase intentions, buy from the pool or a combination of these two, which obviously would put some upward pressure on future quotas. However, a third option, which hinders the ability of the quota formula to moving towards a more stabilizing equilibrium position, would be for the tobacco companies to continue to utilize a greater percentage of imported tobacco.
Page 33 PREV PAGE TOP OF DOC Given the volatility in quota and pool stock levels, there are many questions being asked right now about how our quota formula is really working toward balancing supply with demand. In reality, previous actions such as inflating purchase intentions, quota cut limitations and abuses associated with a large volume of carryforward quota, have really hindered the effectiveness of the quota formula during the 1990's.
As some of you may be aware, the farm leadership has offered some potential policy options to deal with this problem and some of these options will help minimize quota instability over the long haul. But in reality, it is not going to go very far in minimizing quota instability in the short-term.
In fact, quota instability is inherent with the design of the Tobacco Program. When other agricultural commodities experience excess supply or demand conditions, we have prices adjusting rapidly and then we have quantity adjustments as well. But with tobacco, it is different. The Tobacco Program results in enormous price stability as witnessed by market prices staying relatively constant in recent years, despite a multitude of adverse factors. Consequently, almost 100 percent of the adjustment in an excess supply or demand situation for tobacco must occur on the quantity side of the ledger. If less volatility in quota is desired, the program must be revised to allow for more flexibility in price, which of course is a very controversial issue.
Outside of the legal and political uncertainties facing this industry, we have already heard today that rebounding of quotas in the future depends on two factors. We have got to move pool stocks, we have got to constrain the growth in imports. Despite the current outlook for tobacco, I am convinced that the companies need some of the existing pool stocks that we have on hand, but since the adoption of the No-Net Cost Act of 1982, the companies have become accustomed to price discounts in acquiring pool stocks. And if the cooperatives remain firm on not discounting the current stocks, a critical question becomes will the companies continue to suffice their additional needs from foreign sources.
Page 34 PREV PAGE TOP OF DOC In recent years, Burley imports have totaled around 200 million pounds annually, or about 40 percent of our total use. Last year, when U.S. cigarette production fell by 17 percent, Burley imports for consumption increased by more than 50 percent. While we have trade policy that limits the volume of imported tobacco into this country, the levels established under the Tariff Rate Quota system are not very restrictive. I think it is important to point out that the TRQ levels were negotiated back in the mid1990's when cigarette production was totaling around 750 billion units. Now with cigarette production closing in on 550 billion units, should the TRQ level be revisited?
In closing, the U.S. Burley tobacco industry is down, but it is not out. Tobacco companies cannot completely abandon a supplier who produces over one-quarter of the world's Burley tobacco and grows a leaf whose quality cannot be duplicated anywhere else in the world. Thus, if the industry can survive the current onslaught of lawsuits, which of course is a big assumption, but if it can, I believe the potential does exist for some quota improvement in the current years. But we have to be realistic that the current demand environment will not likely allow quotas to rebound back anywhere near the levels that we observed during the mid- to late1990's.
While tobacco will continue to play a smaller but yet important role in the State's overall ag economy, a major question is by whom? Potential changes in tobacco marketing, regulations and the program itself could result in a massive change in the structure of tobacco farming in terms of the number, size and location of producers, and how we actually produce and sell this crop.
While the Tobacco Program is always vulnerable, it currently appears to me that support for the program in Washington, DC has been enhanced in recent years in response to an improved understanding of the effect that the program has on tobacco consumption, taxpayer cost and family farms. Probably the biggest threat to the program today is from internal forces. How long will these growers continue to support the program amidst declining quotas, increasing lease rates, higher no-net cost fees and contract growing? Should grower leadership support policy to transfer quota into the hands of actual producers during this downsizing era to maintain their support of the program? Also, will the tobacco companies continue to support the program not only publicly but also through their actions. And finally, and perhaps more importantly, will there be leadership to step forward to somehow bring the tobacco companies and the farm group leaders together to have an open, productive and healthy dialog on the future of the program and the industry?
Page 35 PREV PAGE TOP OF DOC Thanks again for the opportunity to address this committee, and I certainly look forward to working with you all as we attempt to sustain and improve our rural economies that we represent.
[The prepared statement of Mr. Snell appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Snell. And our last witness from Winchester, Kentucky, Mr. Wiseman. Welcome.
STATEMENT OF SHANE WISEMAN, GROWER, WINCHESTER, KY
Mr. WISEMAN. Thank you.
Good afternoon. My name is Shane Wiseman, I am a vocational agriculture teacher at George Rogers Clark High School in Winchester, Kentucky. I would like to thank you all for this opportunity to share some of my concerns with you all facing the tobacco industry today.
In 1998, I was making a living as a full time tobacco farmer, I grew 17,562 pounds of Burley tobacco on my home family farm. In 1999, my quota was reduced over 28 percent to 12,504 pounds. This reduction played a major role in my decision to pursue a teaching career and farm only on a part time basis.
The proposed 2000 quota will leave me with approximately 6,840 pounds. This is a decline of over 61 percent in a 3-year span. I consider myself fortunate because I had an education to fall back on. However, this is not the case for most of Kentucky's tobacco farmers.
Throughout the State, alternative crops have been proposed, an analysis of my farm presents me with only 30 acres of tillable land on a 320-acre farm. If I chose corn as an alternative crop, the income generated would be only $3,000 to $3,500 on this 30 acres; whereas, Burley tobacco grown on this same 30 acres could generate over $75,000. I am not opposed to alternative crops, but I feel that markets must be developed for them to be profitable to the farmer. I have attempted myself growing sweet corn for the last 3 years. I sold this sweet corn at the local farmers' market, but because of the lack of marketing skills and competition from major food chains, grocery stores and other farmers, this was not profitable.
Page 36 PREV PAGE TOP OF DOC Today, new approaches to Burley tobacco are on the horizon, such as contracting directly to the companies. However, I remain skeptical of the contracting concept and I am fearful that this is a way to end the price support program. The price support program is essential for the small Burley producer to have any chance of survival.
In conclusion, I know that I must face the facts if I want to continue farming here in central Kentucky. I realize that I have two products that will increase the farm income at my farm, and that is beef cattle and forages. In order to do this successfully, I must have technical and financial assistance in the form of development of marketing techniques, effective feeding and health programs, pasture improvement and improved overall genetics.
I feel that the Government program that was just recently put into place providing the farmer with up to $2,500 allowing us to seed and fertilize our pastures due to loss of pastures from the drought in 1999 is definitely a step in the right direction. We need more programs like this one, not only financial assistance, but educational and technical assistance. Thank you.
[The prepared statement of Mr. Wiseman appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Wiseman and thank you to all of you on the panel. We will now have some exchange of questions here, and again I am going to ask each of the members to take just a few minutes with their questions so that we can pass that opportunity around to each of the members here. We can always come back for a second round of questions.
I am going to start on my left with Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you. Thanks to Mr. Fletcher for inviting me and you for holding the hearing, and for the gentlemen and lady for their testimony today.
Page 37 PREV PAGE TOP OF DOC I come from the middle part of the country, the western part of Kansas, represent about three-quarters of the State, a very rural district, very agriculturally oriented. Wheat, cattle and corn are our products. What I am hearing today is relatively new to me and I am glad to receive an education from those of you who are attempting to earn a living just like the farmers of Kansas are.
I have a number of questions, but at the chairman's request that we leave a lot of time for others to speak, let me just ask kind of broadly what direction you see the tobacco industry going in light of what I assume is a continual reduction at least in demand for the product in the United States. Part of that question revolves around what percentage of tobacco products are exported versus imported, where is the market, and where is the market going. And my second question is explain to me about the issue of partnering or contracting. If I understand correctly what I am hearing and what I have read in your testimony, this is a lot like my beef packers who contract directly with cattlemen or feed yards to provide or formula price their product. And are thereis this happening yet? Are there farmers who are contracting today and so would there be farmers across Kentucky who are taking I guess advantage of this circumstance?
Mr. MCKINNEY. I might address your last question first. The contracting has started. Not too many farmers know a lot about it yet, they need to go and visit the receiving station and look at the contract and the amendments to it and learn about it. I would say that what scares us is with all the fights that you have seen in Washington and so on and all the fights that we participated in here in Kentucky with the major manufacturers, any time we get into those brawls, we are familybut all of a sudden now we are partners. And we are concerned that there might be a divorce next. We have gone from family to partners and I am not sure what is next. We are very concerned.
Page 38 PREV PAGE TOP OF DOC And I will go back to one of the comments I made in my other comments. We are willing to work with the manufacturers to make some changes in getting them the type tobacco and the quality and the quantity they need. We are willing to do that and we have to do a lot of those changes through and with the help of you. Now we think we have made some of those changes, but that does not seem to be good enough and I think a lot of it boils down that we want to contract with growers for tobacco, which means we want to buy your tobacco for less.
Those contracts have to be fair, but we have to be allowed to negotiate those.
Mr. MORAN. Is the explanation for the reason for contracting, at least the stated reason, is quality as compared to price?
Mr. MCKINNEY. Mostly I think it is talking about quantity and yet that is hard for us to understand because they passed 230 million pounds this year of decent tobacco, we think. I would suggest Dr. Snell answer the first question.
Mr. MORAN. Dr. Snell, in that regard, I heardmaybe it was Mr. Mitchell talk about the Florida case and may bankrupt a legal industry. I am trying to get a feel for where we go and how supply and demand plays a role in this industry in the future.
Mr. SNELL. I think from the company's perspective, they feel that they can win that case on appeal, but the issue is whether they will be bankrupt in the bonding process. And again, that is a very serious issue, the lawsuit itself and the potential awards that could come out of that case.
Again, to your earlier question about the export market, I think we all realize sitting here today that there is potential in the overseas market. About 1 out of every 4 pounds of Burley tobacco produced in the world market is produced here in the United States. It is a growing world market and just like with a lot of our agricultural commodities, we have to try to take advantage of some global opportunities. But the domestic market is going to continue to be impacted adversely by lawsuits and the other regulatory and political issues facing the industry.
Page 39 PREV PAGE TOP OF DOC Mr. MORAN. Thank you, Mr. Chairman.
Mr. EWING. I am next going to Congressman Bob Riley of Alabama, who is going to have to leave us. So we wanted to get his questions in.
Mr. RILEY. Mr. Chairman, I appreciate it, and I appreciate the testimony. Coming from Alabama, we do not have a lot of experience in tobacco and it has been fascinating to listen to your testimony today.
We had a similar hearing in Auburn University a couple of weeks ago, and it is amazing to sit there and say we have changed products from peanuts or cotton to tobacco, but all the witnesses tend to tell us exactly the same thing. It seems likeand I have been involved in agriculture just about all of my life, for the last 32 years and still am involved in it now. But I do not know that I have ever seen a time in this country when you look at every commodity and it is depressed. Every farmer in every region of the country producing whatever product is losing money. And I think that is one of the things we are trying to do now, we have got to make a fundamental decision, as far as I am concerned, in this country of whether or not we want to maintain family farms. And if we do, we are going to have to address some of the competition that we have coming from Europe, because we cannot ask you to compete with subsidized farmers throughout the rest of the world. And I think essentially that is what we are asking you to do today, and it is across the board.
I have no doubt that you are probably as efficient and as cost-effective as any tobacco producers anywhere. But I also believe that you are being asked to compete with people with one arm tied behind your back. I do not think you can do that.
I think one other thing your testimony does point out is the inter-relationship we have, not just with farm policy, but with our total economic policy. Mr. Penn said a moment ago if you could do away with that $30,000 insurance premium you have to make, it would make your farm much more efficient. If we can get to the point that we can give you investment tax credits like we once did, accelerated depreciationsome of the other things that help you become more competitive may not be in the farm program.
Page 40 PREV PAGE TOP OF DOC I think all of you realize we have passed some reductions in death taxes in the last few years. Unfortunately our President saw fit to not sign it into law. I think we have a consensus in the House and in the Senate that we want to do away with those once and for all and I hope that next year we have an opportunity to do that. I think we will, I think we can.
But one of the things we have to do as a Congress is try to develop some type of comprehensive program that keeps you competitive. And I do not know that we are at a point in this country where we can do it simply with farm programs.
One other note, and this is not in the form of a question. But I grew up in the poultry business in Alabama, when I finished the University of Alabama, my brother and I went into the egg business and we supplied all the Safeway Stores in Washington, DC with all of their eggs for about 2025 years. When I first went into the business, there were 135 independent producers in Alabama. Through contracting, there are none left. Take contracting, take partnering, take whatever you want to call it very, very seriously because it is efficient, it is effective. But long-term, I cannot think of anything that would have more of a devastating effect on the local family farm than contracting or partnering. I can understand very easily why the larger tobacco companies would encourage it, but as one of you testified a moment ago, when someone walks in 5 years from now and throws a contract down on the table that you do not like, you really do not have any choice but to sign it or get out of business.
I think all of us want to protect the family farm, I think all of us believe that there is more involved in a family farm than just producing a product, it is a lifestyle. I think it is almost the moral fabric of this country and I hate to see it dissipate and go away. We have done this in so many other commodities thatit is your choice, but I hope you do think very long and very seriously before you go that route.
The one question that I do have, and I guess it is to Mr. Snell. You said that we have gone from 750 billion piecesI assume that is a cigarette or a
Page 41 PREV PAGE TOP OF DOC Mr. SNELL. Yes, sir.
Mr. RILEY. Down to 500. If I understand your testimony, our imports or the ability to import tobacco in this country have remained essentially constant during that period?
Mr. SNELL. They have actually increased somewhat during that period, Congressman.
Mr. RILEY. Can you, as an economist, give me some kind of superstructure to work within? I do not understand how we have allowed that to happen if our demand has dried up by 25 to 30 percent, how can we then expect to import more product? Is it strictly a basis of price? I mean how much would you import normally just for blending purposes or whatever?
Mr. SNELL. I think it goes back to the mid1990's, we did have a law in place called the domestic content legislation which was very restrictive in constraining imports, but basically GATT made the decision that we had to revise that trade policy and what we put in place was the Tariff Rate Quota system, which basically allowed the companies more freedom to import tobacco into this country. And as a result of that change in trade policy, we have seen imports go from about 25 to 30 percent of the total use of tobacco in this country up to 40 percent plus. So they have just simply substituted a lot more foreign tobacco for U.S. tobacco even though in total they are using less tobacco.
Mr. RILEY. Can you tell me what the tariff rate is on imported tobacco into this country?
Mr. SNELL. We have a tariff rate quota level of roughly 330 million pounds or 150,000 metric tons. It is my understanding as long as the companies stay below that level, then they are not subject to 350 percent ad valorem tariff I think it is. The thing is that once a company brings tobacco in from a foreign country, if they utilize that tobacco, blend it and export that tobacco out in terms of a final product or in terms of a cigarette export, then those imports are not counted against that quota level. We have been exporting a fairly significant volume of cigarettes out of this country.
Page 42 PREV PAGE TOP OF DOC Mr. RILEY. Can you tell me how the European Union's tariff rate affects the export of our tobacco into their countries?
Mr. SNELL. I am not familiar totally with the European trade policy. I do know that they do have some significant export subsidies, at least in the past, on their tobacco. But as far as specifics on other trade policy issues with the EU, I am not familiar.
Mr. RILEY. Would you say that our tobacco farmers, our growers, our Burley producers are competitive as far as price goes with the rest of the producers of the world? And if not, how much of a differential is there?
Mr. SNELL. Well, if you take our $1.80 to $1.90 a pound tobacco, that is comparable to tobacco being paid in other countries of 7080 cents a pound. Obviously we have a quality premium for our leaf. It all depends on how much demand or quota we actually want out of our system. We can sell more tobacco if we lower our price, but the question is how many of these farmers at this table, can survive lower prices. We went through price cuts with tobacco back in the mid1980's, demand increased for U.S. tobacco, but we were not able to supply enough tobacco to meet that increasing demand. It is very difficult for these farmers to pay $8 to $10 an hour for labor when they have to compete with $8 to $10 a day labor in some countries, or even lower than that.
Mr. RILEY. Mr. Chairman, thank you a lot. I have got to catch a plane, folks. Let me tell you though, my wife and I travel to Lexington every once in awhile and if I ever have an urge to leave Alabama, this is the place I want to come. You have got some of the most beautiful farmland in the world up here. Thank you very much.
Let me make one other partisan request. Please send this guy back up here, he is the best thing you have sent up there in a long time.
Mr. EWING. Mr. Thune.
Page 43 PREV PAGE TOP OF DOC Mr. THUNE. Thank you, Mr. Chairman. Let me too say thank you to Congressman Fletcher for hosting us down here and to tell you that nobody works harder or fights harder for Kentucky's farmers than does Ernie Fletcher. I want you to know you have got a good man up there. I come from South Dakota, we only have one Member of Congress in South Dakota, so I am all you get. But let me say on behalf of the entire congressional delegation of South Dakota, thanks for welcoming it to your home State. [Laughter.]
There are a lot of parallels. I grew up in western South Dakota in a town of 650 people and the size of our operations are a lot larger out there, we have cattle ranches that are 10,000 acres, 20,000 acres and beyond. But the way of life is the same. We have family operations, and you get in the eastern part of my State and it is smaller operations and they are farmers and we grow soybeans and corn and wheat and things like that. But it is a tradition and a heritage of family farming and I think that is what, listening to your panel too, is really under attack here as a way of life, it is an assault on your way of life. And if you look across any commodity in this country today, every one of them is in the tank.
It is interesting to hear some of the statistics that have been shared here today. But I think you haveI see a lot of parallels in what is happening in farm country in my part of the world and what is happening down here. The family farm structure, as we know it, is really in decline. In fact, it is in free fall across this country. There are a lot of reasons for thatI mean, the biggest landowner in my home county in western South Dakota right now is Ted Turner. He has got a 100,000 acre buffalo operation. But you are seeing that change occurring all over the country. And I think it is a very troubling and disturbing trend for those of us who want to see and keep intact that way of life that we have grown up around and which I think provides the bedrock value system that shaped this country and continues to make it great.
So I have a real concern listening to your stories, that there are a lot of similarities between those and the ones that I hear day in and day out in my State of South Dakota.
Page 44 PREV PAGE TOP OF DOC Let me, if I might, just ask a couple of questions because it seems to me at least that there arein listening to the whole question on imports and exports and the discussion that was just had with Mr. Riley, I see where the biggest importers into this country of tobacco products are Argentina, Brazil, among others. And in talking about the TRQ, there is a lot more room to grow up to that cap. I mean right now, we are only scratching the surface, we are about half way there. They could continue to import a lot more.
Are those countries, would you characterize I guess what they are doing as dumping product in this country, or if they are in compliance I suppose with the GATT agreements, they are not, but the question I have is in the whole net of exports versus imports, we are importing so much more and the question that came up earlier about supply, it seems like if we have got an ample domestic supply, that manufacturers would not be buying as much from foreign producers, foreign suppliers, they would be buying it domestically. And yet, you have seen this big spike in imports, at least in the last few years, of these products.
I do not know how you get at this whole question, but what are our biggest export markets? I mean, where is the product that we are exporting out of this country going and what can we do to increase our exports? I mean how can we furtherif you are looking for something that we could do at the Federal level as part of our export trade policy, what can we do to enhance and bolster our ability to move more of that product outside the country since we are seeing a decreasing demand for a lot of reasons in this country.
Mr. SNELL. Our major export market, Japan, is the generally the biggest; Germany also imports a lot of U.S. Burley tobacco. A few years ago when the Russian market opened up, we were moving a lot of final product over into Russia, but now cigarette companies have movedbasically have opened plants up in those particular markets and that particular market has dried up somewhat.
I think farm leadership has gone the route in recent years that it is difficult to talk to their farmers about price competitiveness, we have to talk more about quality competitiveness and I think we have made some gains improving the quality of our product overseas, but given the financial situation of a lot of foreign economies overseas, they have been more concerned with the price issue than quality. And again, i think as the Asian economy improves and some of the other economies pick up, that I think we will see some potential for growth in U.S. leaf exports. I know the farm leadership has been critical somewhat of the Department of Agriculture being stripped of its power through the Export Enhancement Program and other programs to promote tobacco compared to other commodities. Those are some of the issues.
Page 45 PREV PAGE TOP OF DOC Obviously on the finished product side, the manufacturers have made a management decision to move some of their plants overseas, given various political and legal reasons in this country and the farm leadership does not have much control over that.
Mr. MCKINNEY. I think the economic enhancement funds being stripped away from tobacco has hurt us more than anything and it is primarily because there is a lot of confusion between Joe Camel and Joe Farmer and there is a whole lot of difference. Because Joe Camel and others have had to take such a hit, anything associated with tobacco takes a hit. So there is no enhancement funds available to us to work on exports at all.
I was in Africa and I asked a fellow that pretty much runs the tobacco industry there, I said how did Malawi come to have a tariff rate quota of 30 million pounds. He said it was not any problem, we hauled a couple of USDA guys around a van one day and showed them some elephants and they got tired of touring and they asked us what numbers we had in mind and we said what about 30 million and they said fine and they were going back to the United States. So that is how the negotiations went for us. And it is not saying that USDA is all bad, it is saying that tobacco takes such a low priority and you all are not allowed to talk about it too much because it is a bad word.
Mr. THUNE. Right.
Mr. MCKINNEY. But I wish people would look at us and see that these are hard-working farmers, they are not Joe Camel, they are Joe Farmer.
Mr. THUNE. Well, I guess the only observation is that in light of circumstances domestically and because of declining demand, it seems like if there is a way that we can capture more of that export market, that there is a market out there, if we can find ways that we can enhance our ability to allow the growers to get into those markets, it would be well worth our investment.
But one other question, I was just looking, there is some information that was provided by staff here about the quotas and in 1994, the quota was 543 million pounds, in 1999, 453 million pounds and the acreage however during that same period has increased, Burley acreage, by about 15 percent. And the question I have is have yields per acre declined? If not, where is the extra tobacco going?
Page 46 PREV PAGE TOP OF DOC Mr. MCKINNEY. I did not follow all of your numbers, but we are on a poundage system now. For estimating purposes, we keep track of how many acres we have planted and either there is a misprint there or something, but as quota decreases, acreage does also. So that is a misprint or something.
Mr. THUNE. Yes, what I have got here is 1994 was 543 million pounds and in 1999, 453 million pounds quota. Acreage over that same period went from 266,000 acres grown in 1994 to 306,000 over that same period.
Mr. SNELL. We have had some disease pressure put on the crop in recent years and planting a little additional acreage is cheap insurance.
Mr. THUNE. Okay.
Mr. EWING. I think our staff is willing to wrestle you on that, they believe the acreage has gone up.
Mr. SNELL. A lot of our farmers out there keep on thinking that this may be the last year of the program and as a result, they keep on planting additional, hoping that there will be a market out there for it. But as Danny pointed out, we do have a quota system which would prevent excessive marketings and I am fearful this year with the big quota cut that we are going to have over-plantings once again here in this State.
Mr. THUNE. Thank you, Mr. Chairman.
Mr. EWING. Mr. Jenkins.
Mr. JENKINS. Thank you, Mr. Chairman, for holding this hearing here and certainly to Congressman Fletcher for being our host. Now you have not got me back to east Tennessee yet, but we are getting really close, did not take that long to drive up here today. This is the same kind of country that we have, the same kind of farming that we have.
Mr. EWING. Bill, you are going to have to talk faster, you just cannot talk with that southern drawl and get it all in in 5 minutes. [Laughter.]
Page 47 PREV PAGE TOP OF DOC Mr. JENKINS. I do not know if you have the same problem or not, Ernie, but when I back to Washington, they say if I stay in east Tennessee for more than a week, they cannot understand me. [Laughter.]
But I have got relatives here in Kentucky, most of them east of here. I find I am welcome when I tell people that my cousin who is up in Harlan County may accompany me if I am not treated properly. [Laughter.]
Let me say to this panel that you did a great job. Our job in doing these hearings is to go out across this country and to gather information and to take it back to the Congress and hopefully eventually it will get to the American people. And that information has to be good, has to be reliable, has to be succinct, in order for us to get it back.
Now there is a lot of misunderstanding, as you have all pointed out, about what tobacco is all about. And I am hopeful that this panel is going to get some information here today and they have, that they can take back and share with the rest of the Congress, that is going to be really helpful.
You have covered a lot of territory, talked about the entire ball game, but I would like to go in detail for just a minute, because we all know that in order to get things back where they should beand it has been said that we need to sell some more tobaccoso one of the prospects for the future is China. And we are going to vote soon on permanent normal trade relations for China. This question has been asked in hearings before, but I would like to know for those of you on the panel, just raise your hand, how many of you think that we as a Congress ought to vote in favor of permanent norman trade relations for China? Will you raise your hands?
[Show of hands.]
Mr. JENKINS. How many of you think we should not?
[Show of hands.]
Page 48 PREV PAGE TOP OF DOC Mr. JENKINS. All right, sir.
For those of you who think that we should, let me ask you, should we put some conditions on our vote, should we withhold our vote on permanent normal trade relations with China until some conditions are met? For example, the Chinese say that they do not want to import our tobacco because they say it has blue mold. Now we believe our scientific community when they say that we are not going to send blue mold to China in cured tobacco. But should we withhold our vote and should we make sure that that point is made before we enter into and vote for permanent normal trade relations with China? Do you think that ought to be a condition of it?
Mr. Rankin, you said yes. Do you think that ought to be a condition?
Mr. RANKIN. Yes, sir.
Mr. JENKINS. Mr. Penn?
Mr. PENN. I do not know the political ramifications of all the Chinese thing, but I told you in my testimony that we have gone from production agriculture to subsistence agriculture and in my view, anything we can do to help us sell our product overseas and export it needs to be seriously looked at.
Mr. JENKINS. I understand that. In addition to the connection to east Kentucky, I have lived on a farm all my life, still have a farm, have grown Burley tobacco all my life and understand exactly where we are coming from.
Now in addition to the exports, we have got to get this tobacco out of the pools, as you have pointed out. And do I understand that there are 230 million pounds in the pool in Kentucky, is that the figure?
Mr. MCKINNEY. There is that much in Kentucky and then you have
Mr. JENKINS. You have 417 million pounds across the country, is that right?
Page 49 PREV PAGE TOP OF DOC Mr. MCKINNEY. Three hundred-eighty million in Burley.
Mr. JENKINS. Now Mr. McKinney, I have known people who have occupied the same position that you have, it is my understanding now that you are absolutely free to go out around the world now without any restrictions on you and to sell this product that is in these pools, is that correct?
Mr. MCKINNEY. That is correct.
Mr. JENKINS. Do you feel like not only for this State but all our States have really pushed the point of getting out and trying to sell this tobacco?
Mr. MCKINNEY. Yes.
Mr. JENKINS. Do you think the quality is so low that we need to have a fire sale?
Mr. MCKINNEY. I do not think the quality is so low on all the tobacco, certainly there is a problem with some of the tobacco that we have, particularly from the 1999 crop. I do not mind having a fire sale, but I hate to have a fire sale that goes to replace tobacco that we would like to stand by next year.
Mr. JENKINS. Okay, I detect from your testimony that you feel like the companies are not treating us absolutely fairly.
Mr. MCKINNEY. You understood correctly.
Mr. JENKINS. All right, sir. [Laughter.]
Well, let me tell you, you are not alone, Mr. McKinney, there are some other people around this country who have that same feeling. Is there some of it that is of poor enough quality that it ultimately ought to even be destroyed?
Mr. MCKINNEY. I believe so.
Mr. JENKINS. You got an estimate of how much of it is in there?
Page 50 PREV PAGE TOP OF DOC Mr. MCKINNEY. If we look at the 1999 crop, we would say maybe as much as 50 percent, 40 percent, something like that, we are talking maybe 100 million pounds.
Mr. JENKINS. Now for the rest of these folks who do not know a lot about tobacco and have not gone through this, I am trying to make this point, because that is one of the ways that we can get some restoration on these allotments is to get rid of this pool tobacco, get some exported, but we have got to get the tobacco we have got on hand out of our way in order to get restoration, which you have pointed out, these cuts have been absolutely drastic, 45 percent for this year. No industry, no business, no operation can stand a 45 percent cut in their operation for a long period of time and remain healthy.
Mr. Penn, you painted the big picture I thought very well in your testimony. Let me ask you, do you agree thatyou mentioned all the pressures that are coming to bear on tobacco, the courts, the anti-tobacco folks, even some elements of our own Government. Do you agree that the end result of these actions will be to drive these companies that manufacture cigarettes out of the United States of America into other countries?
Mr. PENN. That is my concern; yes, sir.
Mr. JENKINS. And when that happens, do you agree that we are going to lose all our farm jobs and we are going to lose all our manufacturing jobs?
Mr. PENN. I do not know if I agree with lose all our manufacturing jobs and farm jobs. What you have to understand
Mr. JENKINS. With respect to tobacco.
Mr. PENN. With respect to tobacco, with one caveat. The average age of the Kentucky tobacco farmer is 54.9 years of age. And so the time clock is ticking here. This land is going to change hands in the next 10 to 15 years because of the time clock. And we are not going to replace tobacco with any one element, it is going to take farmland protection, it is going to take family farm, it is going to take a lot of things to cover it, this one thing is not going to solve it.
Page 51 PREV PAGE TOP OF DOC Mr. JENKINS. That point has been made. But if we drive these companies out of this country and we lose the farm jobs and we lose the manufacturing jobs, nobody, nobodynot the worst enemy of tobacco has said let us not have cigarettes. So we are going to import those cigarettes from other countries.
Mr. PENN. We are going to go from exporting to importing.
Mr. JENKINS. And they are not going to be as good, but in the meantime we have lost all of our tax revenue, we have lost all of our jobs in connection with this industry. And that is exactly I think the point that you were trying to make in your testimony.
Mr. PENN. Yes, sir.
Mr. JENKINS. The chairman is looking at me, so I have not been brief. Mr. Chairman, thank you.
Mr. EWING. Well, Bill, you did very well, thank you.
Mr. LEWIS. Thank you, Mr. Chairman. I also wanted to compliment the panel today. You have done a very good job in giving your testimony.
I want to pick up where Bill left off there. The permanent normal trade relations with China. There are 360 million tobacco users in China. Ambassador Barshefsky just completed a very good round of negotiations and got some good agreements on trade with China. But there were two areas, fertilizer and tobacco, that I think those negotiations kind of came up short. Ambassador Barshefsky is going back to the table with China on fertilizer.
Now we got a tariff cut I think from 40 percent down to 10 percent on tobacco. But the problem with the monopoly in China, we will not be able to distribute and to compete with the end product of tobacco, which hurts. There is a bias, evidently in this administration, towards tobacco. Are you familiar with those negotiations withMr. Snell?
Mr. SNELL. No comment.
Page 52 PREV PAGE TOP OF DOC Mr. LEWIS. Okay. But 360 million tobacco users. And I asked the Ambassador if she would go back, as she is going back with fertilizer, and renegotiate to have the opportunity to really be able to compete with Chinese tobacco, which that should not be a real problem, and she said no.
And Bill just mentioned a little while ago, should we put conditions on our vote for PNTR. I think that we should put a condition there that unless there is a new negotiation on tobacco, that we should maybe make them really doubt our vote on that arrangement.
But Mr. Snell, how important do you think that China will be for our trade and our exporting of tobacco?
Mr. SNELL. Well, you correctly pointed out that it is a huge market. In fact, China is the largest tobacco consuming market in the world, approximately three out of every 10 cigarettes smoked in the world is smoked in China. It is primarily a Flue-cured blend, or type cigarette, they do not have a lot of Burley tobacco in their blends, but the U.S. tobacco companies have been successful in promoting the American blended cigarette throughout the world. Our problem basically, besides the trade policy issue in China, has been just the ability to afford U.S. tobacco and tobacco products. With a growing middle and upper class in China, I think the potential down the road would provide a significant outlet for U.S. tobacco.
Mr. LEWIS. Thank you. Let me ask Mr. McKinney a question. I want to ask you about discountingPhilip Morris. Did they ever give you an amount that they would be willing to buy out of the pool if you discounted it?
Mr. MCKINNEY. We had two conversations with them. One jointly with the group in Tennessee and then they came to Lexingtonthey being Philip Morris. On one occasion, I quote, when asked how much are you willing to buy, I quote, ''We do not know, 20 million, 30 million, maybe 40 million, we do not know.'' When we asked them in Lexington, they said, ''I do not know, but it will be less than we bought in Flue-cured.'' And we knew that they bought 55 million pounds in Flue-cured. So we assume that they might buy 50 or less or something in Burley. That is as close as we got.
Page 53 PREV PAGE TOP OF DOC Mr. LEWIS. And you never did get aif you did not know the amount, you certainly probably did not get a price that they were willing
Mr. MCKINNEY. They kept talking about world price and I would not say that they offered 50 percent, but that is what we understood in the end, 50 percent discount.
Mr. LEWIS. Mr. Chairman, if I can ask one more quick question.
Mr. EWING. Go ahead.
Mr. LEWIS. Mr. Snell, how long can the program last if we see a continued drop in the quota? What does the future look like? What is your best guess and projection?
Mr. SNELL. First, I have always felt it would be very difficult for the Kentucky tobacco farmer to vote out the program, given the structure of tobacco farming in this State. I think I have more concerns in the Flue-cured Belt where they have large-scale growers that just cannot continue to take quota cut after quota cut. And I think we realize that if the program is voted out in Flue-cured, it would be difficult for us to maintain just a Burley Tobacco Program without that political support in North Carolina. So I think the next 2 to 3 years, if we do not see a rebounding in quota, again, I feel like more pressure is being put on the growers to vote out the program than maybe in Washington, DC. And the question is, is contract farming leading down the road towards growers really questioning the benefits of the program.
The program provides for two things. It provides for a quota amount and provides for a price guarantee, and certainly through a contracting system, those two elements can be part of a contract. The concern we have is what does that contract look like 5, 10 years down the road, especially if you do not have the safety net of the Tobacco Program to fall back on.
Mr. LEWIS. You made a statement earlierwhen I first arrived in Congress, it was a battle every year in the agriculture appropriations bill to protect the program. That, I do not think is the case today, because I think there are those who understand that the program is beneficial for many concerns there. But I agree, I think the real concern about the program is just the problem with the drops in quota that is going to be coming, I am afraid, unless we can turn something around here.
Page 54 PREV PAGE TOP OF DOC Thank you.
Mr. EWING. We will turn to our host. Before anybody starts running to the door at 3:00 to get out of the parking lot, I will tell you that I think Ernie has to leave, he has another appointment right here, but some of the rest of us have a little time and we are going to stick around and finish this questioning and I know we have some visitors from this area and out of State and we want to hear from them. So we will give this more time, I think the discussion is very helpful.
Mr. FLETCHER. Thank you, Mr. Chairman. At this time, rather than ask more questions because I have had the opportunity to talk with most of you on a regular basis and ask a lot of questions. Very briefly there are three things, maybe Mr. Penn, you could say that affect the quota for next yearif not yourself, then maybe somebody else can answer that. What is the USDA using to estimate the quota when they put out this 45 percent reduction? Danny?
Mr. MCKINNEY. I am not sure I understand your question.
Mr. FLETCHER. The quota that the USDA puts out, expected quota, is based on I believe three different items. Could you just review those for the folks here?
Mr. MCKINNEY. Okay, there are three parts of this quota formula. The first is the companies are required to turn in by January 15 their intent to purchase, then we add their intentions to the next figure, which is an average of the exports over the past 3 years; add those two figures together. The third item is they look at the pool stocks, how much inventory do we have on hand. We are supposed to have 50 million or 15 percent of the last year's quota, whatever that is. If it is too much, if we have too much on hand, then we plug a minus figure in there. If we do not have enough, we will add it. Those three figures together is what our quota will be for this coming year.
Page 55 PREV PAGE TOP OF DOC Mr. FLETCHER. With that in mind, let me ask this one question before we move on. Say a portion of the quota, say the 1999 crop, which you said really you could consider part of it a disaster crop, 50 percent I believe is the number you said. If that were to either be destroyed or somehow disbursed in a fire sale, what would that do to increasing the quota for next year?
Mr. MCKINNEY. If we destroyed 50 percent of the 1999 inventory, we wouldmaybe I look at it a little differently. Instead of taking a 45 percent cut this year, we would have taken maybe a 30-ish percent cut. So you are looking at about 10 percent or so difference in the quota for the next year.
Mr. FLETCHER. Say you had a fire sale and sold 50 percent of it at a world market, if you say 50 percent of the cost, if that was kind of what you said; what would that do for the no-net cost to the farmers and how much would that increase their costs?
Mr. MCKINNEY. If we have to use our no-net funds to do that, then we are going to run the no-net costs from 3 cents for each pound that I sell this year as a farmer, from 3 cents to 1012 cents a pound, a big part of the profit.
Mr. FLETCHER. So you are talking, if we have a fire sale, we may increase the quota but then we take all the profit out of that remaining quota. So if there was some help in loan forgiveness or whatever on that, how much do you think that would be on this amount, 50 percent, say it sold at a 50 percent level of the cost or price, support price?
Mr. MCKINNEY. If we are looking at Burley only, you are talking about $200 million or something another, to forgive the loan on part of this tobacco that is probably a disaster as far as usability, couple hundred million or so.
Mr. FLETCHER. Okay, thank you. In the interest of time, Mr. Chairman, let me yield the rest of my time.
Mr. EWING. Thank you, Ernie.
Page 56 PREV PAGE TOP OF DOC To follow up on that, just a couple of questions. The Flue-cured industry got rid of their surplusI may not say this just right, sodiscounted and sale. The Burley industry decided not to do that. Because of that, the Flue-cured is taking less of a cut in their quota, but they did add 2 cents to their cost that they had to repay.
In retrospect, would we do it the same way here in Burley country, or would it have been better to have done it another way. And I do not know, Mr. McKinney, they are all looking at you, so
Mr. MCKINNEY. We had the history of what Flue-cured had done when we considered it, and we being 30 farmers that run the Burley Tobacco Growers Co-op. They looked at the situation, they had to take some other things into accountone, the Flue-cured inventory was not as large as ours. Their no-net fund, the fund itself had something around $100 million more in that account than we had and then when you come back and say how much are we going to add no-net cost to the farmers, their quota is bigger, so they could spread that out over more pounds, more farmers, than what we had the ability to do. So when all was said and done, had we moved the maybe 50 million pounds, Congressman Lewis, maybe they would have bought 50 million pounds, we would have moved that but we were going to charge our growers about $70 million to get that accomplished in order to grow maybe 25 million more pounds. And I know all those numbers do not follow necessarily, but to get 25 million more pounds of quota, to go from a 45 percent cut to maybe a 43 percent cut, 42 or something, it was going to cost our growers about 10 cents a pound, almost $70 million, to replace that fund over there. And it just did not make good sense to us. And so there are some differences between Burley and Flue.
Mr. EWING. This just kind of a generalization, but many Members of Congress, when we get to talking about something like this are not from Flue-cured nor from Burley tobacco country, and the tobacco industry needs to present a unified front in Washington, if you are going to get the most assistance out of it. And at this point, we really do not have that unified front because I think the Flue-cured thinks we bit the bullet and Burley did not and that is kind of the way it comes across to Members of Congress.
Page 57 PREV PAGE TOP OF DOC I just make that statement and I am sure you in the industry can see that and know that is a problem.
I had just a couple of other questions I wanted to cover before we go to the audience. In the written testimony, several of you suggested tobacco quotas should be put in the hands of the actual growers. How do you propose to accomplish that? Now I am assuming that tobacco quotas are owned by retired people, people in nursing homes, inherited quota, and they rent those, there is an income level on that quota, I assume, to actual producers; is that correct? That is the way the system works?
Mr. MITCHELL. I will let Mr. Penn talk about maybe how to do it, but explaining maybe why I feel that way, I think when you haveas Mr. Snell was talking about earlier, we used to have a 600 million pound basic quota, or thereabout. And when the pot of tobacco pounds is that big, it is big enough to support all the people that have got their hands in it. and as it gets smaller and therefore, lease prices go up, the people that actually take the risk in the crop, the growers, are paying more for the lease. The ones that lease it out are making more money. Proportionately their income increases, the lower their quota gets, amazingly so.
Mr. EWING. Is that total income increases?
Mr. MITCHELL. I would think so. Whereas if a person had a 20,000 base and was getting 10, 20 cents a pound, on a 10,000 pound base getting 6070 cents a pound, he or she is making more money. He does not take any risk in the crop, he does not pay into the no-net cost fund, does not pay for the grading fee, and is coming out pretty good. These are people that lease like year-in and year-out.
Mr. EWING. I do not like to interrupt, but before we get past that, who runs that price up?
Mr. MITCHELL. Supply and demand.
Page 58 PREV PAGE TOP OF DOC Mr. EWING. The producers.
Mr. MITCHELL. Probably me and other producers.
Mr. EWING. We have the same thing with cash rent.
Mr. MITCHELL. Exactly.
Mr. EWING. But the producer is the one that is running it up.
Mr. JENKINS. Mr. Chairman.
Mr. EWING. Yes.
Mr. JENKINS. One good way to make this point is the difference between last year and this year. With these 45 percent cuts in allotment, there may be people in this audience who will be looking to lease tobacco and they may be looking at paying 40, 50, I have even heard 60 cents per pound for that lease. Last year, these same producers probably were able to lease at least a part of their allotment, if not all, at 10 cents per pound. Did it go for more than 10 cents last year, in Kentucky, Mr. Penn?
Mr. PENN. Yes, sir. Let me respond to that, by telling you, what happens is it goes back to the subsistence farming thing. You try to keep an economic unit together and you have barns and sticks and equipment and labor and all that to raise a certain level. When you drop as drastically as we have dropped, you have people that are depending upon you being able to acquire that tobacco to keep your employees. So you have a tendency to spend more than you should if you put the pencil to it, to acquire this lease. Roughly one-third of the tobacco produced is leased from somebody else. They do not have facilities, they do not have intentions of raise it. They would not raise it if it was 10 cents a pound and they sure will not raise it if it is 60 cents a pound. So it is not a popular thing to consider, it has a lot of political ramifications, but the truth about the matter is we are paying a pretty high franchise fee just to grow the stuff.
Mr. EWING. Well, excuse me, but it is starting to get into my brain and it is different from cash rent because if you are cash renting, you have got to have the acre of ground to cash rent. In this case, you have got to have quota and if your quota is cut, you have got to go out and pay more for other quota, and I understand exactly what you are saying. It works in a very different way.
Page 59 PREV PAGE TOP OF DOC Mr. MORAN. It is coming into my head too, because I have often thought thatno offense to Dr. Snell, but supply and demand is a real problem in agriculture because we have fixed costs to cover, and so when the price goes down, we have to produce more to cover our fixed costs. And you are doing the same thing. You are going out to get more quota to take care of the basic costs of being in business. And it is a real problem for all of us in agriculture, at least in the short run. I assume supply and demand ultimately works, but in the short run, you are going to have to cover costs by increasing production at lower prices. And the theory would be that as the price came down for the commodity, we are going to produce less. But we have a tough time doing that and staying as a viable entity.
Mr. EWING. One final question. If farmers produce more pounds of tobacco than he owns quota for, what happens to the additional tobacco?
Mr. MCKINNEY. Tell them what you do with yours.
Mr. MITCHELL. If we raise more than what we have quota to sell for, you store it in the barn to hopefully get enough quota the next year.
Mr. EWING. So you hold it. How longit is not like a cigarette that has been left out too long, it does not get stronger? You can store it for a long time?
Mr. MITCHELL. Yes, you can, and actually sometimes it gets more desirable to the company because it tends to lose weight over the years or months and they get more for the buck basically. But you have already got your costs tied up in that crop and holding it for a year is not a real good situation.
Mr. EWING. Is there a lot of tobacco being held?
Mr. MITCHELL. Not last year, because we have just come off of two extremely dry drought years. Just that in itself really took a blow to the farming community, and many farmers actually came up short the last couple of years.
Page 60 PREV PAGE TOP OF DOC Mr. EWING. Anyone else before we go to the public?
Mr. EWING. I would like for the members of the panel to stay seated and those questions may be for you.
Over to this side. If they will come over to my right side, anybody with a question, and we are going to ask that you fill out a card, not before you do the question, but after you have done the question, so that we have a record of everything for the transcript here. Do we have somebody in the audience that would like to ask a question or make a comment? There is a real good prize for the first person. This gentleman back here, would you come over to this side then?
Mr. SHARP. My name is Brown Sharp, I am a resident of Fayette County and a tobacco grower and have been a tobacco grower for I believe 50 years.
The no-net cost program does not work because imports are not controlled in this situation. Our farmers comply with the formula that is figured out and the amount that tobacco companies can import has no limit on it, and also they are not charged any price. So as we are cut 28 percent in the previous year and 45 percent this year, imports drastically increased. The tobacco companies know this, so it is easy for them to overload our pool stocks and put us in a position where we are carrying too much pool inventory and have to sell out at a discount. We have done this three times so far, so we should know the real trouble is that we have no control and no price control or quantity control on imports. The companies well know this and they are being pressed with lawsuits and other things and they are looking for ways to solve their problems and the easiest way they can solve their problems is to press the farmer, the producer. And that is what they are doing.
So I think there is a way that this can be solved and I think we have the carrot on the wrong end of the horse. We charge the companies, when they buy, a no-net cost fee and the producer puts up an equal no-net cost fee. But if the charge was related to the inventory in the pool and it was collected by the sale of the cigarette on excise taxin other words, the 100 million pounds in the pool would equal 1-cent excise tax. And if there are 400 million pounds in the pool, it would equal 4 cents excise tax for Burley and probably about the same thing for Flue-cured. Then you would accumulate a fee, a fund, that would be big enough to do your discounting around the world.
Page 61 PREV PAGE TOP OF DOC What I am saying is the carrot is on the wrong end of the horse, the tobacco companies, if they knew they had to pay when inventories was high, they would take a close look at that tobacco when they walked over it at the auction sale. So that is where this thing ought to begin.
Probably, if I understand it right, 2 cents on the excise is about $475 million. So what I am saying is you would have to figure it out but probably 4 cents on the excise tax set aside for the no-net cost fundthere are four parties here that stand to lose severely and one of them isof course, we know the growers stand to lose, they are already losing. But tobacco companies are pressed because of the continued lawsuits. The taxpayers have not realized it yet, but if the Tobacco Program does go out, it is a non-recourse loan and it has to be picked up by the taxpayer. This program is supposed to be no-net cost to the taxpayer. If you are going to guarantee it to be no-net cost to the taxpayer, it is time to start right now and set aside enough money to where you will have a reserve that is equal and big enough to take care of this tobacco that is in the pool. It can be done easy by putting 4 cents excise tax on the cigarette when it sells and put it in a fund that is in the no-net cost fund and can be used for the discount and resale of tobacco around the world.
Also, tobacco needs to improve its image in the medical society and I think 2 cents ought to be dedicated for the investigation of what causes the diseases that we have. Cancer, all kinds of cancer and a list of the most disastrous and harmful diseases in the United States, if 2 cents excise tax was dedicated to that, you are talking about $475 million. So what I am saying is perhaps a fund of 8 cents to tobacco inventories, which tobacco companies could work down by reducing the inventories, and 2 cents for medical discovery, would probably solve this whole thing.
That is my statement.
Mr. EWING. Thank you. Any comments from the panel?
Page 62 PREV PAGE TOP OF DOC I guess my only thought is if the Congress ever gets started increasing the taxes, I do not know how you hold that down.
All right. Mr. Smith.
Mr. SMITH. Related to some of the things the gentleman just stated there awhile ago, this is I guess more of a challenge or more of an opportunity to talk about matching funds from Federal rather than taxes or fees, but we have a system in Kentucky that designates 1 1/2 cents for a pack of cigarettes I believe it is, to Tobacco Research Institute, which is here in this area, we think one of the finest of its kind in the world. The real future of tobacco other than consumptionand we think tobacco is always going to be consumed by a certain percent of the general publicbut one of the outstanding things that we have maybe to look at for futuristic growth in tobacco production is in the area of pharmaceutical and medicinal purposes. A lot of work has been done, we have got two biotech companies in this State, one of them is devoting a lot of money, a lot of research, a lot of resources toward that and has made giant strides in developing pharmaceutical or medicinal purposes with tobacco.
I am wondering if there could not be through the investment of appropriation of rural development funds matching funds to a State or to an organization that did that type work to increase consumption or to increase production of this crop. Now realizing it will never be a mass production as we know it today, as we have used the tobacco basically for human consumption, but it certainly would be an incentive I think for added uses and added investment for research and development of those kinds of purposes. It is more of a statement or challenge than it is a question.
Mr. FLETCHER. Thank you.
Commissioner Smith, let me say it is very difficult when you start increasing taxes on the floor, it is really going to have some uncontrolled effects. We also this year in the budget increased funding for NIH, I know you mentioned several million dollars, we increased funding for NIH, National Institutes of Health, for $1 billion. And one of the things we have done is take revenues and part of that revenue has come from excise tax on cigarettes because we have had I guess four or five increases since this administration has taken office, on excise tax. We put that $1 billion with NIH which certainly will help with the issues and the things you are talking about.
Page 63 PREV PAGE TOP OF DOC I think there are other things that can be done and that is the reason for these hearings. Certainly the makeup of the tobacco plant allows it to have some really very interesting, exciting possibilities in the future in producing some pure products that may have certainly some utility in the medical community. And we would love and are excited about that possibility.
There is always going to be the consumption and we grow the finest Burley in the world right here. I think the panel has done an excellent job.
I am going to need to leave here briefly and allow this to continue, but you all have done an excellent job. I am just very pleased with the diversity on the panel of the perspectives and yet the quality of the testimony.
I think it has helped tremendously with this subcommittee to educate us. I know when I have been on the floor, I have talked to folks and they feel like ''we are subsidizing tobacco, what do you want.'' And when I talk to them I say no, we are not. And I think it helps, the more of these we have, for them to understand that we are not, this program is paid for by farmers. And other ways of helping, looking at the pool stocks and certainly we are going to be doing that, working very, very hard, as we did last year and were able to bring some support back here to bring support and I appreciate all of you coming and certainly, Commissioner Smith, to work with the Federal and State level to see about some of these ways of making sure we look at the short term problems we have of next year and not only that, but long-term stability problems as we look in to PNTR with China, possibly opening up the market, decreasing tariffs, looking for other export markets, I think it is very important.
I do not know what can be done about TRQs. We have discussed that and if the tobacco companies took advantage of all of that, it would have even a greater devastating effect and I think we need some way to certainly increase pressure on the industry to get them to buy more domestic tobacco, because they do have that flexibility.
Page 64 PREV PAGE TOP OF DOC Again, I thank each of you and sorry I am going to have to leave early. My schedulers have scheduled me a little tighter than I probably should have been, but again, thank you all very much.
Mr. EWING. Thank you, Ernie, and thanks for your hospitality.
Do we have anyone else from the audience that wants to be heard?
Mr. WELLS. Thank you, Mr. Chairman. I am Hugh Wells from over in Tennessee, if you will permit another Tennessean to come over here along with Congressman Jenkins. I live in a community just adjoining Congressman Jenkins, we are certainly proud to have him as a Congressman representing us in Washington.
In our community, I am from the capital of the Burley Belt for the State of Tennessee, that is Greeneville, Tennessee. We sold back some $35 million in tobacco until our cuts started taking place, quota reductions and so forth. We are down now until next year, we will be selling about 4 million pounds of Burley tobacco. The University of Tennesseeif you will permit me to say that over here in the University of Kentuckysays that this tobacco, the income circulates in our community seven times. Ladies and gentlemen, we are taking a drastic, drastic cut. We thought we had a coalition, we thought we had a group working together. This is with the companies, this is producers, this is the landowners, this is the people who were involved in the industry, the manufacturers. But somehow or another, someone has slipped aside from us, so now we have become fragmented. We have lost part of that coalition that we had if we were going to be successful with our tobacco industry.
Now we have mentioned something else here that I think we should be very cautious about. This is the fact that we are going to move the tobacco into the hands of the producer and take it away from the owner or whoever has bought the land and owns that quota. I think we need to look at it, we do not need to further fragment our coalition that we have. It is something of vital concern.
Page 65 PREV PAGE TOP OF DOC When the Government received $12 in taxes for every $1 that we receive as producers and then when they say that we need to get out of the tobacco business or they are going to take our allotment, the companies will not buy our tobacco, they are going to import tobacco in, that puts us in serious trouble, because ladies and gentlemen, the tobacco farmer needs his price support, we need the insurance, the insurance that we have that covers our crop, our crop insurance. Without that, very few of the farmers in our area can furnish the money and take the risk and so forth, they are going to have to go hunt another job.
Now we have talked about the American dream, and I will close. The American dream in our part of the country is a man and woman who has bought themselves a little farm, they work at factory work drawing $6.50$7 an hour, no way they can send those boys and girls to college. They sent those boys and girls to college with the tobacco allotment they had there. Their dream was to be when we get our children educated, we have bought their clothes, paid their tuition and so forth, we will have our little farms and so forth where we can sit back and watch the sun set and the sun come up of a morning and live happily ever after, we will raise a little tobacco to go along with our social security.
Ladies and gentlemen, that American dream has become an American nightmare.
Again, I thank you so much for giving me the opportunity to be over here with you and we certainly appreciate Congressman Jenkins inviting us. Thank you.
Mr. EWING. Thank you.
Mr. JENKINS. Mr. Chairman, may I say one thing about Mr. Wells?
Mr. EWING. Well, I think you need to answer him. He said something good about you.
Page 66 PREV PAGE TOP OF DOC Mr. JENKINS. Well, let me tell you, he did not tell us all there is to know about himself. In addition to being an honest to goodness tobacco, cattle farmer, Mr. Wells is a banker extraordinaire, but at one time in his life, he was a chief of police for Greeneville, Tennessee and gained a reputation of being about as fearless as Wyatt Earp in the Old West. [Laughter.]
Mr. EWING. Do we have anyone else? Yes.
Mr. MARENO. Chairman Ewing, the rest of the panel, thank you very much for coming to Kentucky to discuss this very important issue.
My name is Tony Mareno, I work for the Kentucky Department of Agriculture. Chairman Ewing, I want to say something about the congressional subcommittee. I am a native of southern California originally and I had the privilege to attend one of these subcommittee meetings in Riverside, California, as you came out and talked to our agriculture producers down there.
One of the things that came out of this meeting is all of our congressional representatives decided to get together and form a consensus to charge the Department of Commerce to go out and find new international markets for our agriculture and value-added products in that region. It was a very effective strategy, we were able to do that, especially open up some new markets in Mexico for regional products. I think most of that success is owed to the committee because you all started the ball rolling with that and it was as a result of the committee meeting that we were able to get something done. So congratulations to you on that.
I hope we can also build on that here in Kentucky, the momentum this meeting has provided us in order to look in to new export markets. Phytosanitary and sanitary barriers are a huge, huge problem. Perhaps we can look into some tobacco markets in the Pacific rim as well, where we might be able to export tobacco in that context.
Page 67 PREV PAGE TOP OF DOC But I also wanted to speak a little bit about alternative funding mechanisms that we might take a look into export-related programs, line item type fundings or to build on what Commissioner Smith said, rural development monies as well as monies that the EDA or the Department of Commerce might offer for some kind of export assistance program that might augment what we are already trying to do.
So basically that is my question. I am new to this State, I have been here for about a year, it is my privilege to work with tobacco farmers at this very important juncture and the opportunities for the future are immense. I am here to work towards that goal and I thank Commissioner Smith for the opportunity to do that, and I thank you all for being here.
Mr. EWING. Thank you. You are with the Kentucky Department of Agriculture?
Mr. MARENO. Yes.
Mr. EWING. I have a question for you or for the panel here. How do we compete in world markets with tobacco when our prices are higher here than they are in the world market? Does that not prohibit us or inhibit us from being able to ship overseas?
Mr. MCKINNEY. It is okay if it is higher as long as it is better, and we think ours is. And that is notI am not saying that to be funny, our quality is unmatched, and more particularly we have some characteristics in our tobacco that are unmatched anywhere in the world. And so we hope to be able to use those characteristics to get into other markets. Manufacturers have done that so far, we just need to do more of it.
Mr. EWING. Mr. Mareno.
Mr. MARENO. One of the issues as well, tobacco, I will leave that to the experts and I do not mean to steal any of the momentum of the issue for farmers in particular, but so much can be done also with alternative crops. I realize that nothing replaces tobacco in terms of importance to Kentucky and the lifestyle, but there is other things that we can look into making money for, perhaps 20 or 30 years down the line, even though I realize that tobacco is a very, very important crop for Kentucky. But let us not lose the forest for sake of the trees.
Page 68 PREV PAGE TOP OF DOC Mr. EWING. Thank you. And one thing that I am sure all of us here on this panel could support would be the elimination of the prohibition against using any Federal money to promote the sale of tobacco overseas. You ought to be treated the very same as any other legal crop grown in America.
Mr. DYKES. Chairman, I rode up here with Congressman Jenkins and he swore if I got up, I could not ride back, but since I see some more east Tennesseans, I have got me a ride home now. [Laughter.]
Mr. DYKES. So I am going to take this opportunity to speak my mind.
I certainly appreciate you all's time. I know what kind of schedules you all have and I know what kind of commitment it took for you all to come here today.
I am not only a tobacco farmer, but I work for the Farm Service Agency under USDA, and work in the neighboring county to Greene County and stand day in and day out and watch these tobacco farmers come into our office.
What I do not like to see dying is a work ethic. Tobacco farmers are hard workers and so many families throughout the Appalachian region, the tobacco is the margin and they need that. They are hard workers. So do not take that away from them. And without the quota system, they cannot operate.
And we talked about the contract buying, and I have got my package at home, and through 6 pages of fine print, and I think they referred to schedule C or whatever, but I never did get that schedule C, they never did talk about price. So that is one thing that was missing from contract growing.
Another thing, let me talk to you as a parent. I have a 4-year old daughter and a 2-year old daughter. I do not need anyone telling me about tobacco and my kids, that is my responsibility. They may tell me tobacco today and tomorrow they will probably be telling me that they cannot have red meat.
Page 69 PREV PAGE TOP OF DOC In the past 8 years, I have watched the dairy industry in Washington County, Tennessee go from 120 grade A dairies to about 50 today. The only reason I have 50 dairy operations in operation in my county is because of Burley tobacco. All 50 of those dairy operations produce tobacco. I am continuously amazed at the anti-tobacco group. They want to travel out of the urban areas into the farm communities in the fall of the year to get themselves a pumpkin or a bale of straw, but they never notice the Burley tobacco hanging in the barn that allows that man the opportunity to produce those other crops. It is the same way on my farm. The reason I have 15 or 20 beef cows is because of Burley tobacco.
Mr. Snell, when we see his information and he works closely with our economists in Tennessee, but there will never be a man smart enough to trace the tobacco money up and down the hills and the hollers of these communities because it allows the buying and selling of equipmentI can assure you that no economist will ever trace those tobacco dollars because it buys every piece of farm equipment, it buys every beef cow and I am just here to speak on their behalf and appreciate the job that you all do and hopefully we will find a way to get these quotas restored.
Mr. EWING. Do we know how much the cost of tobacco is in a cigarette or a pack?
Mr. MCKINNEY. It gets so small in a cigarette, but in a pack, we think there is something like 4 to 5 cents.
Mr. EWING. That is what I thought, yes.
Come on around, sir, and introduce yourself.
Mr. MOORE. Gentlemen, I would like to thank the panel and the committee for your efforts today. I am a central Kentucky tobacco farmer, live about 30 miles southwest of the Lexington area.
I just wanted to call to your attention something that I seen in a Farm Journal magazine several years ago. Dr. Snell perhaps could address this better after I give you the figure. We have been raising, until the tobacco cuts got so drastic, trying to raise about 60,000 pounds of tobacco, which acreage-wise, we will just take the figure of 20 acres to produce that amount of tobacco. Actually more than that, but I am just going to use a figure of 20. For which Farm Journal magazine, which its economics department has set up these figures, for each acre of tobacco that I growed, I would get a gross income of about $4,000, the total taxes on that tobaccoand my farm ended up where I was getting $80,000the tax situation was $800,000. That is off of a 190-acre farm. That seems a gross injustice to me.
Page 70 PREV PAGE TOP OF DOC Thank you.
Mr. EWING. You are referring to all the taxes paid on that
Mr. MOORE. All the taxes. And those are figures from the Farm Journal. Dr. Snell may be able to address that better.
Mr. EWING. And those are just on the enhanced value, I mean the company profits, all of that is included, or is it just the specific tobacco taxes?
Mr. SNELL. That is the tax component assuming that the tobacco produced on that farm was sold and consumed domestically.
Mr. EWING. Anyone else?
Mr. EWING. Does anyone on this panel have concluding comments? Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you, concluding would suggest that you want them to be brief.
I appreciate the panel's testimony, I have learned a lot today, I had a lot to learn. But one thing I might point out is that your cry for the use of the Export Enhancement Program, those of us that produce crops that the Export Enhancement Program qualifies for, this administration, this Department of Agriculture has not used the Export Enhancement to help any of us export products and we have a tremendous unlevel playing field. And in that regard, it seems to me that if I learned something about the Tobacco Program, the problem we face is that you have a quota system that limits the amount that can be sold, but we do not have any realistic limitation on the amount of tobacco that is imported. The system seems to me to be just inconsistent, that it cannot work based upon that being the framework under which we are trying to operate this farm program. Have I missed something?
Page 71 PREV PAGE TOP OF DOC Thank you, Mr. Chairman.
Mr. EWING. Mr. Lewis.
Mr. LEWIS. I would just like to ask one more question real quick.
If we are able to get some more emergency supplemental moneylast year, we were able to get the $328 millionwould you rather that money be sent directly in a cash payment or would you rather have that money go to reducing the quota? How would you like to see that applied?
Mr. MCKINNEY. Let me go home and think about that now. [Laughter.]
I think if you ask the growers
Mr. LEWIS. I mean not the quota, but the pool.
Mr. EWING. Ron, they want it in the mailbox.
Mr. MCKINNEY. If you ask growers, most growers will say send me the money, I will figure out how to spend it. But at the same time, I think we have to look at ways, if we send the grower $12, should we keep those $12 from several growers and do something with it to build for his future. God has not died and left me in charge or the Burley co-op or the council or anybody else. Those things have to be looked at by a lot of people, by folks like yourself to say with this amount of money, here is what we need to do. And I think every situation is different.
Mr. LEWIS. Well, that is right. But it seems to me like maybe there are several people out there that are looking for a little hope for the future, that that might be a little more interesting than
Mr. MCKINNEY. That money can be put to good use in either of those ways I think.
Page 72 PREV PAGE TOP OF DOC Mr. LEWIS. Thanks.
Mr. EWING. Mr. Thune.
Mr. THUNE. Just again, Mr. Chairman, to echo what has already been said and say thank you to the panel for what has been excellent testimony. This is very instructive for those of us who come from other parts of the country who are still on the learning curve when it comes to tobacco farming. So I appreciate the great testimony that we have heard today.
It sounds a lot like your industry right now is much like other commodities and that is that we lose a little bit on each sale but we make up for it in volume. And you can only do that for so long and I guess the thing I would say to you is we are going to be looking obviously at the changingthis current farm bill expires in the year 2002 and so would welcome your input into fashioning a program in the future that makes sense and that will sustain your industry, and I hope that you will provide that input to us as that time comes upon us.
So again, thank you for the opportunity to be here today and to learn a little bit more about what you do. Those of us who are faced with policy decisions in Washington, we cover a wide range of issues on the Agriculture Committee and those of uswe tend to have more of a comfort level with those areas that we are more familiar with. But this has certainly been useful for me. So thank you.
Mr. JENKINS. Thank you, Mr. Chairman, and let me say thanks to you again for deciding to hold this hearing and for deciding to hold it at this place. Some of these folks are close enough to east Tennessee that they are like me, they talk funny, but I submit to you that you are among real Americans. You will find them also in South Dakota and you will find them in Kansas and you will find them in Illinois and all around, but they are folks who work really hard, they will not hesitate to put on a military uniform and go fight for their country, and that has been their history. And they are growing a crop that has been legal since before we were ever a nation in this country, for more than 200 years tobacco has been a part of the economy of this country.
Page 73 PREV PAGE TOP OF DOC I fear that a lot of their problems are being brought on by those people who would push upon us all some form of political correctness. And it is my hope that this committee, after hearing this message, will take this message back to the Congress and try to convert it to some action that will see that we in east Tennessee and the people in the State of Kentucky are not victims of somebody's idea of what this nation should look like.
And I thank you again, Mr. Chairman, for coming here. Thank you.
Mr. EWING. Thank you and thank you to all on the panel and to all of the members who have participated, and again to Ernie Fletcher and his staff.
Let me say just a couple of things in summation. Number one, your program is permanent, it does not expire in 2002. And I remember going through the fight of the farm bill in 1996 and we were just thankful we did not have to address tobacco. We had plenty of controversy on the table. That does not mean that the Congress cannot address the Tobacco Program and changes in it any time, but if they do nothing, the current program continues to exist.
And as a producer of corn and soybeans from Illinois, something that you might want to think about, and it does not really affect things, but it may affect the way a lot of people in the rest of the world look at the Tobacco Program. There are very few places where you can farm on 5 acres or 5 to 50 acres and make the kind of money that you make with the tobacco crop. Now on the other side of thatand the reason I asked the questionthe consumer of tobacco is not paying through the nose because you make a good living on a small number of acres. If it is a few cents a pack, it is very much in line with what the wheat is in a loaf of bread, a very few cents. So again, the American farmer is not getting a whole lot out of it and is not jabbing or gouging the consumer when our prices go up very much. But we all know we face many middle people in every industry, whether it is what we grow in Illinois or what you grow here in Kentucky.
So one of the things that I think agriculture of all kinds has to do is educate, educate, educate and continue to tell our story out there to the American public, because more and more of our citizens do not even have a grandparent who was raised on a farm. In my generation, most everybody had a grandparent that came from the farm or maybe a parent or maybe even some of us were fortunate enough to do that. But the farther we get away from production agriculture to the citizens of this country, the bigger our challenge is to talk about what we do. And it has always been my pleasure as chairman of a subcommittee that has almost nothing to do with my district to know that a farmer is a farmer is a farmer wherever he is and they are really the backbone of America.
Page 74 PREV PAGE TOP OF DOC Thank you all for coming. The record will stay open for 10 days if you want to submit anything in writing, or any member of the audience, to the record for this hearing, you can do so by submitting it to the Agriculture Committee in Washington, DC.
Thank you all very much.
[Whereupon, at 3:40 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Jerry Rankin
I would like to take this opportunity to thank the U.S. House of Representatives Committee on Agriculture and Congressman Ernie Fletcher for giving me this opportunity to testify .
My name is Jerry Rankin, I am a third generation tobacco farmer and along with my father own and operate what was until now a profitable tobacco warehouse. This 1999 crop was the 30th crop for me to grow and work in almost every day of the season.
Growing and marketing tobacco has given me an opportunity for a better lifestyle. My wife judy and I have sent our three children to this very university for degrees. I know how important the Burley tobacco growers coop and the marketing service are to me.
As a farmer I see it everyday on the warehouse floor. The percent of tobacco placed under loan climbed steadily throughout this marketing season.
This season 230 plus million pounds were placed under loan, 41.9 percent of the net sales.
My personal crop for this year was almost 130,000 pounds. 100,000 grown on my land, with 50,000 pounds of quota that I own and 50,000 pounds that I lease in, and the other 30,000 pounds I grow as a tenant on neighboring farms.
I participate in almost every aspect of the industry up to the actual processing of the leaf.
Page 75 PREV PAGE TOP OF DOC The last of my crop for this season was sold on February 22. I personally had about 12,000 pounds on the warehouse floor with approximately 254,000 pounds total to sale, only 4,700 pounds were purchased by the tobacco companies.
The Burley co-op received all of my personal crop and the balance of the offering at my warehouse that day. You can imagine that not only me but all the other sellers were very proud to have the support of the Burley co-op .
On our last sale day, March 16, we had 113,000 pounds to sell with three of our buying companies present, they all walked beside the row with their hand at their side and never made a bid. the entire floor of tobacco went to the Burley co-op at $3 below our season average.
Some days the tobacco companies will come on sale and buy almost everything on the floor and the very next day they may buy 55 percent of the tobacco, maybe 30 percent or maybe 8 percent or not at any.
that has happened this year on my floor. the people who were lucky enough to have their tobacco purchased by companies have typically put in the same amount of hard labor on their crop as the people who placed their crop under loan with the co-op. On days like this I try to help my farmers by bidding on the tobacco myself.
The Danville market sold 22 million pounds of burley this year and the warehousemen helped hold the price with approximately 1 million pounds.
During the second week of sales a crop of tobacco had a greenish tinge. The marketing service put a low grade on the entire crop. The farmer came over and asked me about the grade and was concerned about the price support of $1.61 per pound. the farmer told me he could not take that price. When we came to the crop in the sale not one company made a bid. When we got to the end of the row there stood my farmer with a very disgusted look on his face and he grabbed my shirt and said he needed my help. I told him to wait until after the sale. Immediately after sale I took two buyers over to the crop and asked them to take a second look at the crop. neither of them were interested in helping the farmer. I bought in the crop so the farmer would have some money. The second week back after the holiday break I put the crop out for sale again and the same buyers that had not made a bid before bought every pile. The farmer was overwhelmed when I handed him a check for over $4,000.
Page 76 PREV PAGE TOP OF DOC My warehouse tries to help our farmers by providing some financing, locating crop insurance, furnishing hauling as needed, baling twine, as well as unloading sorting and grading and lining it on the auction floor.
The warehousemen are responsible for providing the labor from the time the tobacco is unloaded until the tobacco is shipped out many weeks later.
We also provide a safe dry place for farmers to store any tobacco they have over their quota until the next season.
A few weeks ago Phillip Morris announced they would be partnering with a limited number of farmers on a contract basis.
This bombshell came just days after the Burley tobacco growers co-op board voted unanimously to send a message to the companies that they would not discount the tobacco in the co-op. If the pool stocks would have been discounted would we be looking at contracting and the end of the marketing system?
Partnering reminds me of something I heard many times from one of the smartest men I have ever known in this industry who said ''If the tobacco companies ever get control of the tobacco farmer may God have mercy on his poor soul.''
Partnering will ultimately destroy the price support system, the quota system, and Government grading. All of these programs have served the farmer well and at very little cost to anyone except the farmers who will be left with nothing but a tremendous debt load and the promise of an alternative crop. The other people that will lose will be the warehousemen that have served the farmer, but are left with buildings and equipment that are obsolete.
We farmers are on our knees now some praying, some weak from worries and others scared about how we will make our farm payments. Right now gas prices are going up, tobacco lease prices are going up, quotas are going down, and the worst thing of all tobacco partnering.
Page 77 PREV PAGE TOP OF DOC The system as it is offers buying companies a place to see and fairly bid on the crop, the farmers have a fair price support system and the right to see the grade put on their crop and then the price put on it by the company and decide for himself if that is acceptable.
The warehousemen act as mediator between the buyers, marketing service, and the farmers. we have a stable supply of a quality product, with checks and balances already built in just like our founding fathers had in the constitution.
Tobacco is the proud heritage and the financial backbone of farm families and their communities not just a giant multinational corporation. Tobacco has taken many hits in the past few years with many changes. This is one segment that is best left alone.
Testimony of William M. Snell
Thank you Mr. Chairman. It's certainly a honor for me to testify before this committee. My name is Will Snell. I'm an agricultural economist at the University of Kentucky where I work closely with policymakers and farm organizations on tobacco policy-related issues. For the past three months, I have been participating in meetings across the state with tobacco quota owners, growers, and local business owners regarding the current tobacco situation and outlook. It has been a very challenging and exhausting period as I've had very attentive audiences, desperately seeking any positive comments that I can deliver on the current outlook for their livelihood.
The previous decade can be characterized as one of considerable instability as the industry experienced both record highs in terms of quota, cigarette production, and exports, while closing out the decade with record imports, escalating pool stocks, and dwindling quotas. As Kentucky tobacco farmers begin to plan for the 2000 season, they undoubtedly are a part of an industry that is beginning a new millennium in the midst of major changes and challenges.
Page 78 PREV PAGE TOP OF DOC As we enter the 21st century, Burley quotas have been reduced by almost two-thirds from their record high level in 1997, pool stocks exceed 400 million pounds, exports are slumping, and imports account for around 40 percent of total tobacco use in this country. The international market for U.S. leaf has the potential for growth in the future, but domestic demand will likely continue to slide in response to legal, political, health, and economic pressures, as well as the shift of U.S. cigarette production overseas. Consequently U.S. cigarette production in this post-tobacco settlement era is moving towards 550 billion pieces, or nearly 30 percent below the record level established in 1996. This production level, coupled with anticipated leaf exports and recent import patterns, suggests a total demand level for U.S. Burley in the neighborhood of 400 million pounds, compared to our more traditional level of 600 million pounds.
While demand has declined to around 400 million pounds, the extremely large drop in the 2000 quota, along with an expected small volume of carryforward quota into the 2001 season, could potentially limit marketings well below this demand level. In the short-term, the companies will likely respond to this tightening supply level by drawing down on their inventories, but there is a limit as to how long they can pursue this strategy.
The current quota formula was revised in the Tobacco Improvement Act of 1985 to yield a more market-oriented supply level. In theory, the quota formula seemed ideal. The formula components consisted of manufacturer purchase intentions as a guide for domestic demand, a three year moving average of leaf exports as a measure of export demand, and an adjustment for reserve stocks levels.
If the quota formula would perform as designed by the 1985 act, the tobacco companies, amidst this tightening supply situation, would either (a) boost future purchase intentions or (b) buy from the pool, or a combination of these twoboth of these would have a tendency to put some upward pressure on the quota in the coming years. However, a third option, which hinders the ability of the quota formula to moving towards a more stabilizing equilibrium position, would be for the tobacco companies to continue to utilize a greater percentage of imported tobacco.
Page 79 PREV PAGE TOP OF DOC Given the volatility in quota and pool stock levels, there are many questions being asked as to whether the quota formula is actually working in balancing supply with demand. In reality, previous actions such as inflated purchase intentions, quota cut limitations, and abuses associated with a large volume of carryforward quota, have hindered the effectiveness of the quota formula during the 1990's.
While changes in the quota formula currently being offered by farm leadership, including tying penalties associated with underbuying purchase intentions with the basic quota instead of the effective quota, adjusting the export average calculations, changing the reserve stock level adjustment, and limiting the volume of carryforward quota will help in reducing quota instability over the long-run, they will not go far in minimizing short-term quota instability.
In fact, quota instability is inherent with the design of the program. When other agricultural commodities experience excess supply or depressed demand conditions, prices adjust rapidly, which leads to quantity adjustments as well. But tobacco is different. The Tobacco Program results in enormous price stability as witnessed by market prices staying relatively constant in recent years despite a multitude of adverse factors. Consequently almost 100 percent of the adjustment in an excess supply/demand situation for tobacco must occur on the quantity side of the ledger. If less volatility in quota is desired, the program must be revised to allow for more flexibility in price - which of course is a very controversial issue.
Outside of the legal and political uncertainties facing the industry, rebounding of quotas in the short-term hinges critically on two factorsselling loan stocks and constraining the growth in imports. Despite the current outlook for tobacco, I am convinced that the companies have a need for some of the existing pool stocks given the anticipated tightening supply situation. But since the adoption of the No-Net-Cost Act of 1982, the companies have come accustomed to price discounts in acquiring pool stocks. (And discounting will likely be necessary in moving the 1999 crop.) If the cooperatives remain firm on not discounting (pre1999) stocks, a critical question becomes will the companies continue to suffice their additional needs from foreign sources?
Page 80 PREV PAGE TOP OF DOC In recent years, Burley imports have totaled around 200 million pounds annually, or about 40 percent of total Burley use. Last year when U.S. cigarette production was down 17 percent, Burley leaf imports for consumption increased by more than 50 percent. While we have trade policy that limits the volume of imported tobacco into this country, the levels established under the Tariff Rate Quota (TRQ) system are not very restrictive. I think that it is important to point out that the TRQ levels negotiated in the mid 1990's were established when U.S. cigarette production was totaling nearly 750 billion units. Now with cigarette production closing in on 550 billion units, should the TRQ level be revisited?
In closing, the U.S. Burley tobacco industry is down, but not out. Tobacco companies cannot completely abandon a supplier who produces over one-quarter of the world's Burley and grows a leaf whose quality cannot be duplicated anywhere else in the world. Thus, if the industry can survive the current onslaught of lawsuits, I believe the potential does exist for some quota improvement in the coming years. But we have to be realistic that the current demand environment will not likely allow quotas to rebound back anywhere near the levels observed by the industry during the mid to late 1990's.
As a result of these market conditions, tobacco will likely play a much smaller, yet still an important role in the state's agricultural economy. Consequently, our one billion dollar tobacco industry in the state may fall in the neighborhood of around $500 million for the foreseeable futurewhich still surpasses the anticipated value of all other crops grown in the Commonwealth. But horses and cattle will overtake tobacco as the state's largest agricultural enterprises, and the future growth in the Kentucky ag economy will depend greatly on our ability to diversify and improve management and marketing strategies for alternative enterprises.
While tobacco will continue to play an important role in the state's overall ag economy, a major question is by whom? Potential changes in tobacco marketing, regulations, and the Tobacco Program could result in a massive change in the structure of tobacco farming in terms of the number, size, and location of producersand how we actually produce and sell this crop.
Page 81 PREV PAGE TOP OF DOC While the Tobacco Program is always vulnerable, it currently appears to me that support for the program in Washington DC has been enhanced in recent years in response to an improved understanding of the effect the program has on tobacco consumption, taxpayer costs, and family farms. Probably the biggest threat to the program today is from internal forces. How long will grower support for the program continue amidst declining quotas, increasing lease rates, higher no-net cost fees, and contract growing? Should grower leadership attempt to transfer quota into the hands of actual producers during this downsizing era to maintain their support of the program? Also, will the tobacco companies continue to support the program not only publically, but also through their actions? And finally, and perhaps more importantly, will there be leadership from someone to bring the tobacco companies and the farm groups together to have a healthy and productive dialog about the future of the program and the industry?
Thanks again for this opportunity to address this committee. And I look forward in working with you as we attempt to not only sustain, but improve the rural economies we represent.
Testimony of Frank Penn, Jr.
Good afternoon Chairman Ewing, Congressman Fletcher, and distinguished members of the committee. I want to thank you for taking time out of your busy schedules to come to the Bluegrass region of Kentucky to discuss the important issue of tobacco.
My name is Frank Penn, Jr. and I have been a tobacco farmer for 35 years. Having been raised on a tobacco farm I found out early that tobacco spells work. Having diversified my farming operation the last 20 years we now raise 50 acres of tobacco and board 60 head of horses. Three years ago I had a base quota of 100,000 lbs. of burley tobacco. Today it is 63 percent less.
We must realize that there will always be cigarettes produced. The question is will we be a producer or a historian ? Will we raise tobacco or just talk about it? The future of Kentucky's agricultural economy depends on a common sense approach to what is left of a viable legal product. We are caught in a 60 year old mind set . . . ''control production and uphold price''. This has resulted in less American burley being used in our products. With a high worldwide demand for burley tobacco we should seek every opportunity to find markets for our domestic leaf.
Page 82 PREV PAGE TOP OF DOC I have been taught all my life the fundamental rule of agriculture . . . if you cannot sell it then do not produce it. There are several questions which we as tobacco producers must face.
1. Q. Can contracts and price supports co-exist ? Only if both parties want it to happen.
2. Can U.S. burley become attractive again ? Only if both parties want it to happen.
3. Can Kentucky's 1998 $1 billion dollar tobacco receipts be achieved again ? A. Only if both parties want it to happen.
4. Can Kentucky's tobacco farms survive ? Only if we can break this 60 year old culture.
My answer to these questions is to let go of the fact that tobacco is an entitlement. Raise it, sell it, or lose it (tobacco quota) is not a popular opinion but one that must be faced. To elaborate, let me explain this in more detail. The cost of acquiring pounds of tobacco from people who don't want to produce it has become excessive. Thereby, the profit margin has narrowed to a level that is difficult to justify. At some point the tobacco must be placed in the hands of the people that grow it on some type of phased in basis.
I have mentioned some problems with the tobacco issue but in addition to that we continue to have serious problems with the tax code, specifically the inheritance tax (or death tax as I like to refer to it.) For many farm families this means the difference between selling a treasured piece of our heritage to an unknown individual or having our heirs take on a dangerous level of debt to attempt to pay the taxes and run the farm. In either case the family farm is in serious jeopardy. I have paid taxes all my life (income, property, sales, capital gains, etc.) and now as the final insult I will now be taxed by the Federal Government upon my death for the value of my farm.
Page 83 PREV PAGE TOP OF DOC As land values have increased the exemption level for a farm's value should be raised from the current $ 675,000 to $ 2 million effective in 2001. The result of this will be to save many family farms for future generations of farm families.
My brothers, sister and I spend $ 30,000 per year for insurance on our 87 year old mother so that we can pay $ 400,000 in Federal inheritance taxes to the Federal Government and keep the land we already own. (Something is wrong.) To couple that with the 63 percent quota cut in our tobacco base in 3 years we as tobacco producers have gone from production agriculture to subsistence agriculture.
I would like to thank this Committee and especially Congressman Fletcher for making this hearing possible. I realize that many of you may not have come from a farm background or know a great deal about Kentucky agriculture but you certainly do know people and how to address problems. As constituents those are very precious characteristics to us. Until last year when this Committee came to Lexington, I do not recall a Congressional Committee coming to this area to discuss the tobacco issue. Your attendance here today shows your support for this issue and means more to the tobacco farmers of this state than we can express. For your commitment to the aforementioned points I say thank you for a job well done. You see, tobacco is not just a commodity to us; it is a way of life, a heritage if you will. With individuals such as yourselves working on these problems with us we know that we have a chance to continue that heritage.
Statement of Danny McKinney
For almost 60 years we have had a Tobacco Program that has worked. This program has leveled the playing field between the large growers and the small growers and acted as somewhat of a shield between the small growers and major corporations. That is all being threatened right now. I think our legs have somewhat been cut out from under us through quota cuts and now contracting is about to finish us off. I will back up and say that it has been a tough year, drought wise, for a lot of farmers. The drought caused a lot of suffering for tobacco farmers as well as other people in agriculture. Fortunately, we were able to get some Master Settlement money, phase I and phase II, and the direct payments from phase II has been a big help to our farmers. Most of them got their checks back in January. Added to that, and again to help save us, we are getting some Federal disaster funds, probably within the next month. And those funds here in Kentucky will be divided up among the farmers the same way phase II money was divided up. In fact they will use the same application. That money is going to come at a very, very critical time for our farmers. And I want to personally thank all of our people that worked on it from Congressman to Senators. I would tell you that it will save some farmers this year and its coming at a time when they need operating money and so its going to be a big help. We've gotten through 1999 and have gotten another crop raised. Quite a bit of that crop, 230 million pounds, came to the cooperative and went under loan to the Burley Tobacco Growers Co-op. A lot of people stand and scratch their head and wonder why and how that happened, and I think overall it was part of a strategy of one of the major cigarette manufacturing companies to not buy the tobacco, to somewhat overload our pool out here and force us into contracting that they have wanted for a long time. Its been a tough year, we've had some things that helped us, but now we're in a situation with our backs are to the wall again and we're having to fight for our livelihood. Philip Morris has recently started contracting, that is signing agreements with growers to grow the tobacco directly for them and therefore going around, or at least not going through the auction system. The Burley Co-op has opposed the contracting, we've worked on legislation in Frankfort to not stop the contracting but to create a system where the farmer knew that somebody was at least looking over his contract and putting him in a position where he will feel better about it if he is forced into contracting. Most of us have tried contracting in some form or another, never in tobacco, but we have in some vegetable crops, a lot of people have tried it in poultry, swine, and the fact is, it hasn't worked. When all is said and done there's that one farmer pitted against a major manufacturer who has the checkbook. Remember the cliche ''its the Golden Rule, the one with the Gold makes the rule.'' Well, that's the way it will be with tobacco contracting. Oh, it will probably be fine for the first couple of years, but by then I expect the Tobacco Program will be out of business, because here is what is going to happen.
Page 84 PREV PAGE TOP OF DOC If 100 million pounds, almost one-third of our tobacco does not go through the auction, and then next year more of it, because once the major company starts buying through contract and taking that tobacco from the auction floor and then because of no selection available, the other manufacturers will be forced to do the same thing. So eventually what you are looking at is no tobacco going through the auction system unless its somebody who has messed up or that the company didn't need their tobacco after all. But there will be no auction system. One of the biggest things that is going to happen to us is the fact that this contracting will cause the grading service to cut back so drastically on employees that they will not be able to cover the markets and eventually not be able to collect enough money to even pay their employees. So I expect in two years your grading service will be gone and you can't have, or we have not been able to have up to this point, a Tobacco Program without the grading service. Over all the scheme seems to be that the manufacturers want our tobacco cheaper. Well, one of the things that could keep this from happening is if we could keep the program. For that tobacco that is contracted it should be paying a grading fee. The farmer that is not paying the grading fee still has the opportunity to return to the auction system where he knows he can get his tobacco sold. Yet he has not contributed anything, but he does have the luxury of doing that. Meanwhile another farmer stays within the program and he is paying his fees every year. I think it should be required that all tobacco pay a grading fee and if the grower chooses to have his tobacco graded by one of the US graders that would be fine, the choice would be up to the farmer, and all tobacco pays a grading fee. Our concern overall, is that we are not sure our farmers know what they are getting into, and know what they are doing to themselves on down the road. Again the contracts could look attractive this first year or two, but once the program is gone, then the contract is thrown onto the breakfast table and you're told, ''there it is, take it or leave it.'' Suddenly you don't have a program to fall back on then. We are really concerned about contracting, we have offered to do some things within our program to avoid the contracting, but to this point it has not been well received by the companies. We will continue to push for farmers being protected. The best protection they have is the program. It is the only protection they have. Our farmers are depending on the program. To have that program we must depend on you. Keep our program in place. And if we can weather this storm, this attack from contracting, possibly we can get through. There is a lot of exciting things coming down the road for tobacco, the nitrosamine issue that would make a cigarette safer, a lot of things going on that could cause us to increase our production, however, for us to be around to do it, we have to have our program. Please help us keep it in place. Thank you.
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Testimony of Marie Masters
Good afternoon Mr. Chairman, Congressman Fletcher and distinguished members of the Committee. Thank you for coming to Kentucky and allowing me the opportunity to speak on a topic that means a great deal to me. As a tobacco farmer, this is a critical time for me and all tobacco farmers and I sincerely thank you all, especially Congressman Fletcher for thinking of me and the many tobacco farmers during this difficult time.
My name is Marie Masters and I live in Fayette County. I have lived on a farm for 40 years and have been responsible for raising a tobacco crop on this farm for the last 10 years following the death of my husband and my farm manager.
From my standpoint, the single most important thing that we must do is to maintain the current Federal Tobacco Program. For many years it has provided support to young and older farmers to provide for their families, to pay mortgages, to put children thru college, and countless other items. I believe that it is critical that we keep our young people on the family farm. To that end, the following are some of the things that I believe would help young and older tobacco farmers do what they do best: to raise tobacco.
(1) Put tobacco in the hands of the actual grower
(2) More affordable crop insurance
(3) Continued safety net (T-LAP monies) paid directly to farmers in disaster years.
These monies will be invaluable to us as costs for fuel, equipment, fertilizer, new technology, labor, et cetera have increased for the farmer while the price for our product has not increased. In addition, high taxes including the capital gains and estate taxes have made it increasingly difficult and in many cases impossible to pass the family farm on to future generations for many farm families.
Page 86 PREV PAGE TOP OF DOC As a farmer I know the importance of clean air and water, as I am a steward of my land , however; I do not need and cannot afford additional rules and regulations from the Government that restrict my ability to produce my crops. I should not have to worry about whether my tractor injures or kills an endangered species such as the snail darter.
The decision by the U.S. Supreme Court last week refusing to allow the FDA the authority to regulate tobacco was the one bit of good news that we in the agriculture community have heard recently. As Congress has the sole authority to make this decision, I urge each of you to keep FDA off the farm and allow me to continue to produce a legal crop. I want to emphasize that I do not support kids smoking but agree that this is an adult decision that does not need the overreaching arm of the FDA.
The issue of trade, specifically the import/export situation regarding tobacco has been devastating to the U.S. tobacco farmer. We grow the best burley tobacco in the world and we want it bought and used in the world market. To the extent that it is possible I ask each of you to help create an environment that will encourage the U.S. tobacco companies to purchase more domestic leaf. Also, as you are probably aware, the gray market cigarette issue has adversely affected our markets and pocketbooks, especially as it concerns the Master Settlement monies which only add to the problems that we face as producers.
For small, medium, and large tobacco farmers it has become increasingly difficult to find help to get a tobacco crop from the field into the barn and to the warehouse. I thank Senator Mitch McConnell and others for their work on simplifying the H2a migrant worker program and hope that continued progress can be made to reduce the paperwork and bureaucracy involved with this important program. The farm labor problem has been a significant obstacle for many farmers for a number of years and especially now, during this time of uncertainty, we ask you for your help in making this as simple as possible to implement.
As the costs for producing a tobacco crop have increased I am concerned with the statements by some who wish to impose additional taxes and fees on tobacco products. To further add insult to injury, I am distressed to know that the Justice Department has indicated that they plan to file suit against the tobacco companies. In no uncertain terms, I ask you to oppose any additional taxes on tobacco products and to oppose the aforementioned lawsuit by the Justice Department. Adding additional costs to the product I produce will not help me stay on the farm. Additionally, filing lawsuits against the tobacco companies will only tend to drive them away from the U.S. and further damage my prospects to produce a legal product that has a high worldwide demand.
Page 87 PREV PAGE TOP OF DOC Having said that, on the issue of contracting of tobacco, I do not plan to contract my crop and wish to sell only thru the Federal Tobacco Program. The Tobacco Program has proven over time to have been one of the most successful agriculture programs and I support the continuation of it.
In closing, I thank each of you for coming to Kentucky to hear from some of our producers. I know that many of you traveled a great distance to be here and listen to our concerns. For your support I say thank you very much. I have always thought that decisions by legislators are best made when legislators hear firsthand about a problem from the individuals involved with that problem in their local communities. For your support you are to be commended. I trust that you will continue to support us and do your best to help agriculture which is the real backbone of America. Thank you again for your help at this critical time.
Statement of Billy Ray Smith
Perhaps no legal crop has ever been more a divider of people than tobacco. The Kentucky tobacco farmers who provide for their families through the cultivation and production of this crop feel a deep historic kinship to earlier generations who have similarly toiled in the heat of a tobacco patch. It is to these people that tobacco farming has become more than merely a means of making ends meet, it Is a historical link to an ancient and proud heritage, one that is received from a previous generation and given to the next.
Tobacco farmers have never been shy about protecting their crop and their heritage from those that wish to make such farming less profitable. The early 1900's were an era of violence throughout the tobacco belt and particularly in Kentucky, precipitated by unfair prices offered by the Duke family tobacco monopoly. Dozens of lives and millions of dollars in property damage were lost when the battle between farmers and the monopoly turned violent. The tobacco farmers were aided by their government, first with the dismantling of the Duke trust by ''trust busting'' President Theodore Roosevelt and secondly with the institution of the Federal Price Support Program by the next President Roosevelt in the 1930's. This program gives growers some control over their destiny and creates a degree of stability for the industry in Kentucky. The program stabilizes farm income by limiting production and supporting the economic and social well being of the rural community. Our farmers have suffered low commodity prices, a drought, and severe quota cuts, and now there is discussion of removing their safety net, the program. Our Kentucky tobacco growers understand the importance of the program. That is why they gave it a 97 percent approval rating by referendum votes last time.
Page 88 PREV PAGE TOP OF DOC Without the Tobacco Program, rural Kentucky will be a different place. There will be far fewer tobacco farms. Big growers will get bigger and the smaller ones will be forced out.
The tobacco dollars will be consolidated in the big growers' hands. Remember the average Kentucky tobacco farmer raises 5.7 acres on his 130 acre farm and this is the very farmer that needs the protection offered by the program. This Burley farmer is on the lower end of the production chain and receives only 2 cents of the cost of a pack of cigarettes. This is the very person that needs to receive a price increase so that our growers can participate in the prosperity that the rest of the nation is experiencing. When Secretary Glickman was in the Bluegrass 3 years ago, he made the comment that the reason the agricultural economy was stable in Kentucky was due to the Federal Tobacco Program. Clearly, in terms of financial stability , the tobacco price support program has achieved a level of success that few other Federal initiatives can claim. Farmers value a rural way of life and the sense of community that comes from it is more important than what's in the bank. The hard strenuous work they do is in no way commensurate with the income they receive but our farmers want to farm and keep the land green for future generations. It's a way of life. Farmers treasure the freedom, the challenge and the tradition that they've long known and enjoyed along with the satisfaction that comes from growing a good crop. Let's not take that dream away from them by removing their safety net, the program. Eliminating the program either directly or by the backdoor approach of contract buying would cause a flood of cheap tobacco, which would produce a windfall of record profits for cigarette makers while bankrupting the average Kentucky tobacco farmer.
The true greatness of the program is not in what it does for the economy or that it keeps cheap tobacco from the cigarette companies. The greatness of the tobacco price support program is that it is a program designed for the ''working man.'' It is a program that benefits people who work hard and value living a lifestyle as their family has done for generations. It is not a handout nor is it Government charity.
Page 89 PREV PAGE TOP OF DOC Why are we seeing grim faces in our tobacco communities? It could be that they were just recovering from a big quota loss in 1999 of 28.8 percent and foreign tobacco imported into the United States increased 28 percent. To make matters worse, in 2000 the tobacco farmer received another quota cut of 45.3 percent, and the foreign imports are still increasing.
Right on the heels of the cut, Phillip Morris announced it will conduct direct marketing with the growers. Then cross-county leasing was voted on earlier without the knowledge of the quota cut to come. All of this has wreaked havoc on the tobacco farmer, and he still is not clear with what is to happen days before the planting season is to take place. The Growers and tenants will suffer the most from the 45 percent quota cut. They can't just go out and lease more tobacco because there is only so much out there and it will only spread so far. They also have incurred substantial debt to purchase equipment and now have not much use for it. The young farmer will have to learn some new skills to bring in the income he was receiving from his tobacco crop.
The quota cut the State of Kentucky took is equivalent to 25,000 jobs paying $20,000 a year. We had such a fanfare when the Toyota plant opened and were so impressed with the economic effect it would have on the State, yet this cut is equivalent to five Toyota plants closing and hardly a voice has been heard. Tobacco growers are leery of the contract buying offered by Philip Morris and well they should be; they have seen what has happened to the chicken farmers , the hog farmers and aquaculture in Delaware.
The concentration of corporate buying power recently pushed hog prices to Depression-era levels. The price dive was the last nail in the coffin for many independent hog farms.
Contract farming reduces family farmers to hired hands and puts them at the mercy of predatory corporations. The meat packing industry is controlled by so few firms that they can change the price any day.
Page 90 PREV PAGE TOP OF DOC The Brazilians, the Argentineans and the Mexicans are under contract with the companies. Ask them if they have lost any of their independence we farmers are so proud of. Ask them who tells them to spray what and what happens if that tobacco is not the color they want? Do you take it back home or do you sell it to the Burley Co-op? What if that co-op is not longer in business? What then? The effects of the quota cut will not be felt in its entirety until November and December. Then it won't be just the farmers who feel the cut. It will be the bankers, the feed stores, the equipment stores, truckers and the country store. I was at an auction Saturday and watched an almost new tobacco setter go for $1,700 ( original cost had been $8,000).
This is just the first of many auctions we will see with no chance of recovering a decent price. If the tobacco companies really were worried about getting the tobacco they need, they have some options other than contracting, those being: import less burley and let the American farmer grow more; The companies could negotiate in good faith to buy part of the surplus, instead of demanding an unreasonable discount; and. the companies could work with the Burley Tobacco Growers Cooperative Association instead of trying to cripple it. Philip Morris is pursuing a divide and conquer tactic.
The Department of Agriculture has put a great emphasis on diversification of our crops. We have employed specialists in Livestock, Horticulture, Organic Farming, Vegetable Farming, Wood Products and Marketing.
Some farmers have experimented with growing grapes for wine, cucumbers, shrimp, peppers and ostriches, all with mixed results. Tobacco growers clear $1,500$2,000 an acre, which makes it hard to compete with other crops, and on a small farm every acre has to count economically.
The tobacco farmer has been used to planting a seed knowing when it will be harvest and marketed and what price would be received.
Page 91 PREV PAGE TOP OF DOC Now we are encouraging him to invest in a crop that very little is known about and the market is variable.
If anyone discovers a solid alternative, other farmers are certain to dive into the business and wipe out the advantage. I visited with a tobacco farmer this summer in Ashland, Kentucky. He had used his entrepreneurship and set up a nursery and flower shop. He had used his imagination and included a pumpkin patch to encourage school groups to tour, and he was very creative with his displays. He had been in business 10 years and was doing very well until the tobacco crisis hit and more people jumped in the business. He also showed me his $20,000 mulch pile. The pile was created from flowers lost in the drought. He said he and his wife would have to evaluate the financial situation and decide whether to continue.
This example shows it will take many, many ideas to help the 45,000 tobacco farmers find new income producers. We can't all raise strawberries or no one will make a profit.
The Kentucky farmers are selling produce in open city markets, they are searching for niche markets, they have tried contractual arrangements with chicken and hogs, they are operating value-added marketing co-ops and are venturing into aquaculture. All these projects have added income to the family farm, but we have not found the alternative to tobacco. Most family farms are diversified, but tobacco pays the bills. So what are we going to do for our farmers? There is discussion that we might be able to reduce the cut in half. That still would mean a 55 percent cut over 2 years.
As James Gash, an Owenton cattle farmer, wrote, ''The right course is far from clear. Surely, however, there is strength in knowing the past. In the same fields in which we toil, farmers responded to a crisis with a unity and resolve seldom equaled in the history of agriculture.'' It was a response that sent ripples around the world and still has the capacity to speak to us today.
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Statement of Donald T. Mitchell
First of all, let me say thank you to the Agriculture Subcommittee for coming to Lexington and for allowing me an opportunity to give a growers perspective on the current situation and conditions that farmers in Kentucky are facing for the coming year.
My name is Donald Mitchell. I am 37 years old and have been a full time farmer for 20 years. I farm with my brothers in Woodford County, KY. Our operation typically produces between 5060 acres of burley tobacco and we pasture over 300 feeder steers annually. I am a 4th generation tobacco farmer. In a typical year, tobacco usually comprises over two thirds of our net farm income. I live in an area that is dependent on tobacco. Fellow growers and I have experimented with other enterprises to help supplement our income but tobacco has been and still remains the bread and butter of Central Kentucky's agriculture community.
How important is tobacco to us? According to The University of Kentucky crop budget, farmers would have to produce around 50 acres of hay or over 100 acres of corn to generate the same net return as just 5 acres of tobacco. Census data reveals that the average harvested crop land for Kentucky tobacco farms is just 22 acres. At this point in time, there is no alternative crop to replace tobacco income; even though most growers remain open to new ideas and suggestions. We want to stay on the farm and tobacco is our way to accomplish that.
Every year, tobacco farmers face many challenges. Some of these include: the weather during both growing and curing seasons of our crop, increasing costs of production, insects and diseases such as blue mold and black shank, and finding seasonal labor. After meeting these challenges, we must generate enough income as a self employed individual to provide health insurance and retirement savings for ourselves and our families.
Today, we have a whole new list of challenges. Some of these include: a 1999 burley quota cut of 28 percent which was a record at that point, followed by a much larger devastating cut of 45.3 percent this year. The effects will be felt in our communities this fall when we market this record low quota. We hear reports of increasing imports of foreign tobacco by cigarette manufacturers. Pool stocks are bulging at 417 million pounds, and according to American cigarette manufacturers, much of this tobacco is undesirable due to abnormally dry curing conditions last fall. In addition, we are being introduced to contract production which is a major threat to our tobacco price support program. Farmers are facing exorbitant lease prices of 6070 cents a pound. Our manufacturers are faced with increased taxation and litigation expenses and a law suit in Florida that very well may bankrupt a legal industry in this country. This list of challenges grows almost daily and makes our job as tobacco growers even more difficult given all the uncertainty.
Page 93 PREV PAGE TOP OF DOC While growers are feeling a severe financial strain, the manufacturers are still maintaining and expanding their profit levels. Trial lawyers are raking in an enormous amount of money from tobacco. One attorney reportedly received a payment of $400 million dollars from the tobacco settlement. This is more than a whole county of tobacco growers could expect to earn in their entire lifetime!
Our Government even profits from tobacco. According to the National Center of Policy Analysis, tobacco tax revenue on just one pack of cigarettes currently nets the U.S. Government over 12 times the revenue the growers receive and close to twice what the cigarette manufacturers net themselves. By increasing its tax on a pack of cigarettes to $1, the State of New York now makes close to four times the amount of revenue on that pack as compared to the manufacturer and 30 times that which growers receive from that same pack. It makes you wonder who really is addicted to tobacco? Maybe it's time to admit that U.S. tobacco is a revenue gold mine that should not be litigated out of existence.
So, as a grower what do I think can be done? First, I think we have to change our attitude of merely hoping we can improve the situation to one where we are determined to improve the situation. With a steady to declining domestic demand for tobacco, most would agree that any future growth of our industry is in the export market. Within the past two years the current administration has banned any assistance from the Agricultural Export Enhancement Program for American tobacco exports. As a result, tobacco (unlike other legal commodities) doesn't receive assistance that would help growers find markets for their product in other countries. Those same foreign markets will continue to purchase tobacco, if not from us, then from some other source. Ironically, USDA figures show that for a 10 year period ending in 1998, tobacco imports into this country increased a whopping 74 percent. Just in the past year imports rose an additional 50 percent, getting close to 300 Million pounds. One manufacturer last year had a 23 percent share of the domestic cigarette market but only purchased 1 percent of the total amount of Burley Tobacco sold in the United States.
Page 94 PREV PAGE TOP OF DOC We must work on reducing the tremendous amount of pool stocks. If this is not accomplished within the next 10 months, we could be looking at yet another large quota cut. All options should be considered. Work should continue on the plausibility of destroying some of the lower value, drought damaged 1999 crop. The possibility of discounting some pool stocks to offset imports pound per pound or securing an overseas market must continue to be examined. All these options would likely require some financial assistance.
Our Tobacco Program has been arguably one of the most successful Federal Farm Programs for over 62 years. It is currently being put under a tremendous strain. Changes are needed, such as getting tobacco quota into the hands of the ones that actually take the riskthe grower. We must work to guarantee that we will never again have the over supply of pool stocks that exist now. Regardless of the changes, I feel that the program must be the cornerstone for the future of Kentucky's agricultural industry. It must remain intact and secure.
Any changes we make must be designed to do two things; get tobacco quota in the hands of actual producers, and gain an increasing share of the tobacco export market at a profitable price for the growers.
Many farmers, myself included, are wondering if they should leave the farm and start over in a new career. I know many who are, and some are having that decision made for them due to financial reasons. The average age of a Kentucky farmer is over 55 years, but the majority of farmers leaving agriculture today are the young farmers. This situation poses a great risk to the future of agriculture in this and surrounding States.
I have a precious 3-year-old son who loves to put on his work boots and go to the farm with his daddy. I am very concerned that as he gets older, the experiences of growing up on a farm and way of life that my family has know for four generations may not be available to him. Times are complex, uncertain, and frightening.
Page 95 PREV PAGE TOP OF DOC In conclusion, Kentucky tobacco farmers are proud, independent, and resilient people who produce a high quality, legal product that is still in demand worldwide. We are a group who, when faced with all the adversity and uncertainty of today, are still willing to lace up our boots every morning and make an effort to retain our livelihood. Please work with us through and beyond our present circumstances for a brighter future for our families, communities and the agriculture industry.
Statement of Shane Wiseman
Good afternoon my name is Shane Wiseman, I'm a vocational agriculture teacher at George Rogers Clark High School in Winchester KY.
I would like to thank you for this opportunity to share some of my concerns facing the tobacco industry today.
In 1998 I was making a living as a full time tobacco farmer, I grew 17,562 pounds of Burley tobacco on my home farm. In 1999 my quota was reduced to 12,504 pounds. This reduction played a major role in my decision to pursue a teaching career, and farm on a part time basis.
The proposed 2000 quota will leave me with approximately 6,840 pounds, this is a decline of over 61 percent in a 3-year span. I consider myself fortunate because I had an education to fall back on, however this is not the case for most of Kentucky's tobacco farmers.
Throughout the State alternative crops have been proposed, an analysis of my farm presents me with 30 acres of tillable land on a 320-acre farm. If I choose corn as an alternative crop the income generated would be $3,000. Whereas, Burley tobacco grown on the same 30 acres would generate $75,000. I am not opposed to alternative crops but feel markets must be developed for them to be profitable. I have attempted growing sweet corn for the local farmers market, but because lack of marketing skills and competition from major food chains and farmers.
Page 96 PREV PAGE TOP OF DOC Today, new approaches to Burley tobacco are on the horizon such as cross county leasing and contracting directly to companies. I feel that cross county leasing from the growers standpoint with inflated prices has not allowed small producers to increase poundage grown to compensate for loss of quota. While quota holders have seen an income increase per pound, but a loss overall due to the drastic cuts in quota. I remain skeptical of the contracting concept and am fearful that this is a way to end the price support program. The price support program is essential for the small Burley producer to have any chance of survival.
In conclusion I know I must face the facts, if I want to continue farming. I realize that two products that will increase farm income are beef cattle and forages. In order to do this successfully I must have technical and financial assistance, in the form of development of marketing techniques, effective feeding and health programs, pasture improvement and improved overall genetics.