SPEAKERS CONTENTS INSERTS
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REVIEW OF TOBACCO BUYOUT PROPOSALS
SUBCOMMITTEE ON SPECIALTY CROPS
AND FOREIGN AGRICULTURE PROGRAMS
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SEPTEMBER 26, 2002
Serial No. 10724
Printed for the use of the Committee on Agriculture
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COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
JOHN A. BOEHNER, Ohio
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky1\
Page 3 PREV PAGE TOP OF DOCCHARLES W. ''CHIP'' PICKERING, Mississippi
TIMOTHY V. JOHNSON, Illinois
TOM OSBORNE, Nebraska
MIKE PENCE, Indiana
DENNIS R. REHBERG, Montana
SAM GRAVES, Missouri
ADAM H. PUTNAM, Florida
MARK R. KENNEDY, Minnesota
GEORGE W. GEKAS, Pennsylvania2\
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
EARL F. HILLIARD, Alabama
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
Page 4 PREV PAGE TOP OF DOCBARON P. HILL, Indiana
MIKE THOMPSON, California
BARON P. HILL, Indiana
JOE BACA, California
RICK LARSEN, Washington
MIKE ROSS, Arkansas
ANÍBAL ACEVEDO-VILÁ, Puerto Rico
RON KIND, Wisconsin
RONNIE SHOWS, Mississippi
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
Subcommittee on Specialty Crops and Foreign Agriculture Programs
TERRY EVERETT, Alabama, Chairman
SAXBY CHAMBLISS, Georgia
BOB SCHAFFER, Colorado
WILLIAM L. JENKINS, Tennessee
MICHAEL K. SIMPSON, Idaho
ROBIN HAYES, North Carolina
Page 5 PREV PAGE TOP OF DOCDENNIS R. REHBERG, Montana
ADAM H. PUTNAM, Florida
GARY A. CONDIT, California,
Ranking Minority Member
SANFORD D. BISHOP, Jr., Georgia
JOHN ELIAS BALDACCI, Maine
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
KEN LUCAS, Kentucky
BENNIE G. THOMPSON, Mississippi
MIKE THOMPSON, California
PELHAM STRAUGHN, Subcommittee Staff Director
1\ Resigned from the committee March 20, 2002
2\ Appointed to the committee July 27, 2002
C O N T E N T S
Bishop, Hon. Sanford D., Jr., a Representative in Congress from the State of Georgia, opening statement
Clayton, Hon. Eva M., a Representative in Congress from the State of North Carolina, opening statement
Page 6 PREV PAGE TOP OF DOC Everett, Hon. Terry, a Representative in Congress from the State of Alabama, opening statement
Hayes, Hon. Robin, a Representative in Congress from the State of North Carolina, opening statement
Lucas, Hon. Ken, a Representative in Congress from the Commonwealth of Kentucky, opening statement
Aiken, Jeff, tobacco farmer, Telford, TN
Brown, A. Blake, Hugh C. Kiger Distinguished Professor, North Carolina State University, Raleigh, NC
Fletcher, Hon. Ernie, a Representative in Congress from the Commonwealth of Kentucky
Goode, Hon. Virgil H., Jr., a Representative in Congress from the Commonwealth of Virginia
Hill, Hon. Baron P., a Representative in Congress from the State of Indiana
Jenkins, J.M., Jr., tobacco farmer, representing the Virginia Tobacco Working Group, Blackstone, VA
Page 7 PREV PAGE TOP OF DOC Johnson, Albert M., chairman, South Carolina Agriculture Commission, Galivants Ferry, SC
McIntyre, Hon. Mike, a Representative in Congress from the State of North Carolina
Moore, Sam, president, Kentucky Farm Bureau, Morgantown, KY
Payne, Tommy J., executive vice president, external relations, R.J. Reynolds Tobacco Holdings Inc., Winston-Salem, NC
Schafer, Michael, president, Indiana Tobacco Growers Association, Madison, IN
Snell, William M., agricultural economist, University of Kentucky, Lexington, KY
Szymanczyk, Michael E., chairman and chief executive officer, Philip Morris USA, New York, NY
Answers to submitted questions
Vickers, Lamar, tobacco farmer, Nashville, GA
Watson, Steve, vice president, external affairs, Lorillard Tobacco Company, Greensboro, NC
Page 8 PREV PAGE TOP OF DOCPrepared statement
Answers to submitted questions
Wooten, Larry, president, North Carolina Farm Bureau, Raleigh, NC
Alliance for Health Economic and Agriculture Development (AHEAD), submitted statement
American Cancer Society, American Heart Association, and the Campaign for Tobacco-Free Kids, joint statement
Brown & Williamson Tobacco Corporation, submitted statement
Jones, Hon. Walter B., a Representative in Congress from the State of North Carolina., submitted statement
Flye, Bruce L., president, Flue-cured Tobacco Cooperative Stabilization Corporation, submitted statement
The Tobacco Commission, submitted statement
REVIEW OF TOBACCO BUYOUT PROPOSALS
THURSDAY, SEPTEMBER 26, 2002
House of Representatives,
Subcommittee on Specialty Crops
and Foreign Agriculture Programs,
Committee on Agriculture,
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The subcommittee met, pursuant to call, at 10:05 a.m., in room 1300, Longworth House Office Building, Hon. Terry Everett (chairman of the subcommittee) presiding.
Present: Representatives Chambliss, Jenkins, Hayes, Rehberg, Putnam, Bishop, McIntyre, Etheridge, Lucas of Kentucky, Hill, and Stenholm [ex officio].
Also present: Representatives Clayton and Gekas.
Staff present: Pelham Straughn, subcommittee staff director; Callista Gingrich, clerk; Quinton Robinson, and Kellie Rogers. Mr. EVERETT. Good morning. This hearing will come to order. Before I get started with the opening statements, let me point out a couple of things. Number 1 is, I start hearings on time; No. 2, I am a strict enforcer of the 5-minute rule. That is for my colleagues as well as all witnesses.
We will likely be interrupted today on several occasions with having to leave and go to the floor. So in my estimation, that is another reason that we need to move this hearing as quickly as possible. In the questioning period, should we need additional time or a second round, we will certainly have it.
So let me start my opening statement.
OPENING STATEMENT OF HON. TERRY EVERETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA
Good morning. I want to thank all members, all witnesses for appearing before this subcommittee. I know some have traveled particularly long distances to appear before us, and it is greatly appreciated.
I especially want to thank the producers who are taking time to be with us today, as I know this is a busy time of the year for farmers, with harvest going on right now. As you may see by the length of the witness list, the subcommittee tried to be as fair as we could by allowing as many witnesses as we could accommodate.
Page 10 PREV PAGE TOP OF DOC If you notice, we have grower witnesses from seven tobacco-growing States, four from Flue-cured regions and three from Burley regions. We have two economists, one from a Burley State and one from a Flue-cured State. The subcommittee will allow Members of the House who have introduced bills to testify. And finally we offered manufacturers an opportunity to testify.
During the preparation of the farm bill debate, the chairman and ranking member of the full committee held dozens, literally dozens of hearings across the country and Washington to hear what producers wanted out of their new program. This hearing today is being held in that same spirit. The subcommittee wants to hear what the producers want their program to look like in the future.
Of course, the main topic today, that will be discussed today, is the potential of a buyout of tobacco quotas. This phrase ''buyout of quota'' seems to still be ringing in my ears as this very subcommittee held hearings 15 months ago to review the future of the Peanut Program. We came away from the hearing with the knowledge that the peanut quota system was not a viable option, and we had to set forth and form a posse that took a step away from the old and looked toward a broad step toward the future.
Members do not want to see the Peanut Program and the producers face the real possibility of peanut quotas being cut year after year as the tobacco quota has already experienced. The price tag on buying out the peanut quota is large, and I think Congress and this subcommittee need some answers to some serious questions.
Number 1, why should the Congress pass legislation to buy out tobacco quota?
Number 2, who should pay for such a buyout?
Number 3, how much would a buyout cost?
Number 4, what should a post-buyout Tobacco Program look like?
Page 11 PREV PAGE TOP OF DOC The history of the Tobacco Program is long, has served tobacco farmers for well over 60 years. The question we must ask ourselves is, has the Tobacco Program run its course? Should we look toward a different future? And is a buyout a way to get there?
The ranking member is not here, so we will proceed with our first panel. All members will submit their testimony for the record. Mr. Bishop has been sort of designated as the ranking member, so we are going to allow him to speak.
OPENING STATEMENT OF HON. SANFORD D. BISHOP, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA
Mr. BISHOP. Thank you very much, Mr. Chairman.
In the absence of the ranking member, ladies and gentlemen, I thank you all for taking the time to discuss this matter of the tobacco buyout, which is of such great importance to the tobacco farmers, particularly in the State of Georgia and, of course, across the Nation.
This legislation, however, is not just important to farmers, it is critical to the communities in rural Americathey rely on the production of tobaccowho in the past 6 years have seen their economies literally crash all around them. The quota system for tobacco in the United States goes back over 60 years. It began as a program intended to control the production of tobacco and stabilize the price, while at the same time, preventing any one company from monopolizing the market.
For the most part, this program was successful in achieving the intended objectives. USDA designed specific formulas that produced new quota numbers each growing season, using data such as trends in the national consumer consumption of tobacco. But when new quota numbers were reached, growers were given new guidelines to follow.
During the life of the quota system up until the lawsuits that were initiated in the mid1990's, these quota numbers rose and fell slightly, but never substantially enough to damage the financial positions of the producers and the communities supported by the industry.
Page 12 PREV PAGE TOP OF DOC In the mid1990's, however, after successive victories by State governments and anti-tobacco organizations, the quota system began to shift, due largely to market forces and public opinion pressure to decrease domestic cigarette purchases. This, in turn, led to an increased reduction of the tobacco quota that USDA allowed farmers to produce.
By production year 2002, the allowable quota production had been reduced over 40 percent. The result was 6 years in which the average income of a tobacco producer was cut by nearly half. In retrospect, it is clear that this shift has had a dramatic impact on the producer, the land owner, agriculture suppliers, and the surrounding communities; and in many instance, the reduced production has had a severe impact on local tax bases.
The tobacco buyout proposal was first conceived during the height of the tobacco lawsuits. Then it became clear to many within the industry that stronger FDA oversight was becoming a fixture within the cigarette trade, from the field to the grocery store. It also became clear that for the U.S.-based producers, these changes meant that structure of the old quota system needed to be changed.
Today, we know that a tobacco buyout will result in a reduction in the amount of producers, hopefully increasing the price while adjusting the rate of domestic production to more effectively mirror the reduction in domestic tobacco consumption.
Mr. Chairman, tobacco farmers and rural communities continue to suffer from the wave of negative press, bad practices, the excessive court judgments. So let's be perfectly clear. This legislation is not a charitable donation to tobacco farmers. In the past 5 years, the tobacco industry has paid over $90 billion back into the U.S. Treasury. Money that has gone toward health care, education, and numerous other sectors of the U.S. economy. That is good for the country. So we must be fair and recognize the injustice that has been done.
The rules for these good citizens have changed. Their incomes and their tax bases have been hit, and they have been hit hard. All that we ask is that we level the field for these hard-working Americans.
Page 13 PREV PAGE TOP OF DOC If the farmers who want to get out, get out, let's give the growers who want to stay in a fair shot at making a living. Let's give the buyout the consideration it is due.
And I would like to welcome the witnesses that are here, who have a personal stake in the outcome of this debate. And we want to hopefully glean from you the best ideas so that we can meld the best results for a tobacco industry that has been hit hard and for communities that were tobacco-supporting communities in rural communities that have been hit hard also.
Thank you, Mr. Chairman. I yield back.
Mr. LUCAS of Kentucky. Mr. Chairman, point of order.
We have a lot of folks out here who have traveled a great distance to come here to be a part of this hearing, and they can't get in. I don't know what protocol is, but we have got 35 seats here that are unoccupied and will not be occupied. I can't imagine why we shouldn't bend the rules or do whatever we need to do to let some folks come in here that have traveled great distances to be here.
Is there some way that we can let some of these folks in with all of these empty seats?
Mr. EVERETT. Would the staff check on that and get back to me, please.
Now, let me recognize our first panel. And it is the Honorable Ernie Fletcher, Member of Congress from Kentucky; Honorable Virgil Goode, Member of Congress from Virginia; Honorable Baron Hill, Member of Congress from Indiana; and Honorable Mike McIntyre, Member of Congress from North Carolina.
Mr. Fletcher, would you please begin.
STATEMENT OF HON. ERNIE FLETCHER, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH OF KENTUCKY
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Mr. FLETCHER. Thank you, Mr. Chairman. I want to thank you and the ranking member, Mr. Bishop, for holding this hearing. It is a very important hearing for not only my State, but multiple States and, I really think, for the tobacco industry as a whole.
Let me review some recent developments in the history of tobacco. And let me say from the outset, I will enter my testimony that I am giving you in the record, if you do that, and then make some remarks that are separate from that.
Farmers have experienced almost a 50 percent reduction in quota since 1998. They have also experienced escalating costs of leasing and instability in the leasing program.
They have also seen and experienced the four TLAP payments to avert bankruptcies and farm foreclosures. Basically, the rising cost of production with these lower quotas has been a recipe for disaster in many of the tobacco States among family farmers that grow tobacco.
Let me review the history of tobacco just briefly. From the year of 1612 when John Roth began growing tobacco at Jamestown until 1940 when we had the first effective program for controlling the production, until 1982, to the no-net-cost of the Tobacco Program, we have seen a progression of the need for some sort of program or some sort of control, because of the instability, historically, of tobacco prices.
And I want to read a quote from John M. Berry, Sr. In 1984, he was the vice president of the co-op and he testified before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry in opposition to Senate Bill 2318. At that time, this is his quote:
The tobacco growers of the Burley era are a bit restless and anxious for the fortunes after 1984. They are obsessed with vivid recollection of those days of 6-cent tobacco, farm foreclosures, unpaid tax bills, scarcely enough of anything except fear.
Page 15 PREV PAGE TOP OF DOC They fear the premature death of the present program, substitution of another hastily devised, without the material consideration and study that the envisioned permanent or long-range program must draw if it is to become a workable improvement.
I think that quote is still very applicable today as we begin to look at the future of our tobacco industry.
As we begin to look at any tobacco legislation or buyout program, it is also important to realize that tobacco is a unique agricultural product because of its health concerns and substantial health concerns. We have seen ongoing litigation that has plagued this industry related to those health concerns, and that makes tobacco a very unique product.
We also realize that the history of tobacco is very important, and you will even find in our U.S. capitol tobacco leaves on the architecture that are representing how important this product was in the history of this Nation.
I would like to give just a brief summary of the legislation that I am putting forth. Currently, quota holders will be compensated $8 a pound. Growers will be given $4 a pound, and there will be an additional $2 a pound to encourage those that would like to get out and forgo the right to produce tobacco in the future.
It will maintain a supply management system to avoid and avert the 6-cent tobacco you heard in the quote. It will establish a program that provides some production cost support. But this will reduce the price of what tobacco companies pay for tobacco.
We have a number of supporters of legislation. We have the only bill that has health care entities such as the American Heart Association, the American Cancer Society, that support this legislation.
Some criticisms of the bill. One is user fees. But let me say that I think that it is important that we realize that phase I money will be reduced or eliminated by the implementation of user fees. It can also be offset by the reduction in the price that is paid for tobacco. That means that very little of this will be passed along to the consumers.
Page 16 PREV PAGE TOP OF DOC Let me say it is very important in a post-buyout era that we have a supply management system. Some folks say, well, you can't buy an individual's truck and let him drive it home. I agree that is true. So the program needs to be eliminated as it is now. A supply management system, though, is very important if we realize and take into account the history of this industry, so that we don't have farm foreclosures, plummeting land values and we see foreclosure of many of our family farms.
So I think it is critically important as you look at this legislation that you realize that this is the only piece of legislation that has broad support across all of the different types of tobacco, including the health care groups, which is extremely important. I think it has a reasonable way of financing this without dipping into the Treasury or going further in debt, which we see we are having to do here in our own budget.
So, Mr. Chairman, I encourage the urgency of the passage of a piece of legislation of this sort, and again I want to thank you for the opportunity to come and testify on this legislation and for you holding these hearings.
Mr. EVERETT. Thank you. Congressman Goode.
STATEMENT OF HON. VIRGIL H. GOODE, JR. A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH OF VIRGINIA
Mr. GOODE. Mr. Chairman, I too want to thank you and each member of the subcommittee for holding this hearing and for allowing the opportunity for so many from tobacco-land and from other entities interested in, involved in, tobacco to be here today.
Since the consideration of the national tobacco settlement legislation in 1998, there have been discussions of a buyout for tobacco quota holders and producers. Many growers and quota holders in the fifth district of Virginia have contacted me about the need and desire to have a buyout that improves the efficiency and competitiveness of U.S. tobacco production and compensates persons for their quota assets.
Page 17 PREV PAGE TOP OF DOC The Virginia Farm Bureauand there are two representatives here on the front row from Virginia Farm Bureauthe Virginia Tobacco Growers Association, Concerned Friends for Tobacco, and the Virginia Agricultural Growers Association have formed a working group to formulate their views on what the future of the Tobacco Program should be and what action should be taken to improve the well-being of farmers and their communities.
I have introduced legislation which reflects some of the working group's core principles of a buyout and future tobacco production system. H.R. 4753 only addresses the issues directly related to the buyout and a system to replace the current Tobacco Program that enables family farms to continue to earn a living raising tobacco.
Many of the quota holders and growers in the fifth district have indicated to me their support for a buyout. However, those who grow and farm tobacco should have some protection. Just as there are measures in place that provide a safety net for other agricultural commodities, there needs to be a safety net for the tobacco farmer. The various buyout proposals differ on the post-buyout landscape and how much safety net, if any, there should be.
What does seem to be consistent is the view that a quota buyout would help increase the competitiveness of U.S. tobacco by eliminating the expense of buying or leasing quota, thus enabling the support price to be lowered which would make U.S. tobacco more competitive with the cheaper foreign tobacco.
Recent years have seen a decline in tobacco consumption in the United States combined with an increase in the amount of tobacco that is imported. This has resulted in significant quota cuts for American tobacco producers. The growers that I represent in Southside Virginia have been growing some of the highest quality tobacco leaf in the world for hundreds of years. They feel that a buyout of the quota and subsequent drop in production costs will allow them to market their high quality leaf more effectively against cheap foreign tobacco.
Again, I want to thank you for holding this hearing and allowing grower organizations from Virginia and other tobacco-producing States to express their views on this matter; and I hope that your subcommittee, by working together with the various interests here, will be able to reach a composite of legislation that will be fair to growers, will be fair to quota holders, and will be fair to tobacco manufacturers and all others involved in tobacco in our country.
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Mr. EVERETT. Thank you. Congressman Hill
STATEMENT OF HON. BARON P. HILL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF INDIANA
Mr. HILL. Thank you, Mr. Chairman. I too want to thank you for holding this hearing. And I am going to read my remarks in a minute.
But every weekend that I go home to Indiana, I have some tobacco farmer come up to me and ask me, are we going to do anything in Congress to help them out? I emphasize this point because my tobacco farmers, as I know my colleagues' tobacco farmers, are desperate. And I am hopeful that we can reach consensus on all of this and really put forward some legislation that will help these farmers out. It has been a way of life for them their whole lives, and they need our help; and I hope we can rise to the occasion and get this done.
I want to thank you again for holding this hearing. I am very pleased that my colleagues on the Specialty Crops Subcommittee and I have this opportunity to examine the program and the potential for buyout. I also appreciate your inviting my colleagues and me to testify on this panel. We have all introduced our versions of buyout legislation over the last 17 months.
I am also glad to see so many tobacco growers here this morning, including Mr. Mike Schafer, the president of the Indiana Tobacco Growers Association and a constituent of mine. Thank you, Mr. Chairman, for inviting Mike to testify.
Clearly the number of buyout plans that have been produced by Members of Congress and outside groups demonstrates the high level of interest among our constituents, the tobacco growers, for a buyout. It also demonstrates the degree to which tobacco growers feel the price support program is no longer working the way it was intended.
Page 19 PREV PAGE TOP OF DOC Many people do not realize that tobacco is grown in southern Indiana. Certainly Indiana tobacco production cannot compare with the amount of tobacco produced in Kentucky and North Carolina, but Burley tobacco is king in several of my counties and my congressional district. And I want to do my best to represent those areas. I worked hard to get to know the tobacco growers of southern Indiana and their concerns. One thing they have made clear is their desire to get a buyout sooner rather than later.
For that reason, I introduced House Resolution 1658, the Burley Buyout Act, or better known as BUBBA, in the spring 2001. BUBBA was the first piece of buyout legislation to be offered in Congress in several years. I am pleased that not even 2 years later, we are here discussing the potential for a buyout.
I introduced BUBBA after talking to my tobacco growers on a regular basis over many months. Together, we concluded that Indiana growers were ahead of the curve in terms of their thinking on a buyout. In additionand this is keymany growers told me they want a buyout even if it means ending the program. They know the program is no longer working the way it was intended to, back when it began 10 years ago. They know it is time for a major review of how tobacco growing works in this country.
Instead, I wrote a bill that gets the Federal Government out of the tobacco business entirely and lets the farmers grow as much tobacco as they want. BUBBA deals only with Burley tobacco, not Flue-cured or other kinds of tobacco.
What BUBBA would do is fairly compensate both quota owners and active growers who have relied on the price supports for many years. Quota owners would be bought out at a price of $8 a pound, and growers would receive a transition payment of $7.50 a pound over 5 years. In addition, $50 million over 5 years would be available in grants to tobacco-dependent communities. I do not address FDA regulation of tobacco or tobacco products in my bill.
The funding, which is without a doubt the No. 1 question we all face when we discuss the potential for a buyout, would come from budget surpluses that existed at the time I introduced this legislation. I am keenly aware that those surpluses no longer exist. Of course, I realize that the funding of a buyout through a budget surplus is not an option at this time.
Page 20 PREV PAGE TOP OF DOC With BUBBA, I am pleased I was able to lay down a marker and renew discussion among tobacco farmers and Members of Congress. I believe one reason we are here this morning is because of BUBBA.
Most importantly, I feel strongly that we all need to be flexible. And, Mr. Chairman, I couldn't emphasize this more. We all need to be flexible and willing to compromise so that we can work out a buyout. It is essential we move forward together to achieve our ultimate goal, getting a sensible buyout for our farmers.
I look forward to working on this issue in a bipartisan manner with my colleagues on this subcommittee and Members like Ernie Fletcher, Virgil Goode and Michael McIntyre. We all want to ensure that there is a future for tobacco in this country.
And, Mr. Chairman, I again want to thank you for the opportunity to testify and for your seriousness about this issue, which is very important to the tobacco farmers all across America. Thank you.
Mr. EVERETT. Thank you very much. Being from southeast Alabama, I did not realize that BUBBA had reached up to Indiana.
STATEMENT OF HON. MIKE McINTYRE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Mr. MCINTYRE. Thank you, Mr. Chairman. I would like to thank you, along with the members of the subcommittee, for this hearing today on legislation that is critical to the future of tobacco farmers and tobacco in America. Across the Tobacco Belt, from farmers to their families to the communities that depend upon tobacco as a means to support their way of life and their very economies, the need for a change in the current Tobacco Program is clear.
Page 21 PREV PAGE TOP OF DOC Although he won't be able to actually testify today among the several panels, I did want to thank the chairman of our agricultural advisory committee, Mr. Jimmy Pate, for traveling the distance from North Carolina to be with us today on behalf of the hundreds and, indeed, thousands of farmers not only in our area of the State, but throughout North Carolina.
In each of the tobacco-producing States represented today, we have answered the threshold question: Should there be a buyout? Indeed, because of the various pieces of legislation that have been introduced, we are at this point today. So we have accomplished our first goal in introducing our legislation, along with my colleagues, that brings us to this point and to this very hour to talk about the future, now, of how to best do that buyout.
Literally thousands of farmers are awaiting our answer on how we do it. The companies represented here today serve to reinforce that need for a fundamental change. I am excited about their presence today as well. Change is brought about by direct contracting with manufacturers, by pending and future litigation of the tobacco industry, by ever-increasing foreign competition, making it clear that something must be done.
In my home State of North Carolina, as in other tobacco-producing States across the Nation, tobacco indeed is more than just an agricultural product; it is the very income that has been generated through generations and years of providing for college educations, building roads, building hospitals, supporting local small businesses, and has been the backbone of local economies. For generations, tobacco indeed has been an integral part of the economy and the way of life. That is why the future is so important. And that is why it concerns us that tobacco has been in jeopardy.
Tobacco quotas, as we know, continue to shrink from year to year. And as the right to grow tobacco becomes more expensive, farmers and their families are desperate for a drastic and new direction for the Tobacco Program. And that is why a buyout of tobacco marketing is so important. That is why I introduced H.R. 3940.
Page 22 PREV PAGE TOP OF DOC Our bill provides for a buyout of the Federal Tobacco Program, provides for an orderly economic transition, and answers the tough questions about, OK, how do we fund it, how do we actually do this? We have a very comprehensive bill that moves away from the current price support systems, grants limited regulatory authority to the FDA, and does so at no net cost to the taxpayers.
Under this legislation, the tobacco quota owners will be compensated $8 per pound and growers $4 per pound. In order to provide an economic transition away from the marketing of tobacco based on quotas and price support, H.R. 3940 ensures that traditional tobacco-growing areas are maintained, so that communities that have been dependent upon the money generated from the production and sale of tobacco continue to remain economically viable.
In addition, the FDA authority granted by our bill will establish fair and equitable regulatory controls over the manufacturer, sale, and distribution of tobacco products. However, may I emphasize, the FDA would not have authority over tobacco farms or tobacco growers.
This legislation we have proposed is not the be-all and end-all of all buyout proposals. Indeed, as evidenced today, there are several different ideas about how best to do this. We feel that our bill is the most comprehensive and answers the most questions, indeed the critical questions of the next step involved in a buyout. But indeed I am willing to work with my good friends and colleagues at this table and other colleagues that serve on this subcommittee, to find the best possible resolution; that we may serve the farmers, their families and the communities that we represent, and work with the companies to make sure that we have an equitable solution, one that is realistic and one that can pass the House of Representatives and, ultimately, the Senate. For, indeed, that will be the key to any legislation that moves forward.
This is a vital step, Mr. Chairman. We have come a long way this year. Indeed, because of the bills that we have introduced, we are now at this point; and we are excited because now is the time to stop the uncertainty that has surrounded the Tobacco Program. Now is the time to start toward a viable solution that will positively affect the future of tobacco. We can and we must do this.
Page 23 PREV PAGE TOP OF DOC Mr. Chairman, thank you for holding these hearings. I look forward to working with you and my colleagues, not only at this table, not only the tobacco companies and the farmers that are represented here today, but with all of Congress to find the right way to get this done.
The families of our farmers, our communities back home, the economies of so many small towns and communities and counties across America need us to act and to act quickly. And I look forward to our doing so. With your help and the cooperation of those who are here today, we indeed can do it.
Mr. EVERETT. Thank you.
Before we go to the questioning of this panel, let me say to the farmers out there thatfirst of all, let me say to this panel, I appreciate what you have done. You have shown some leadership in getting these bills introduced. And also I would like to say to the farmers, there is not a single member of this subcommittee with tobacco interests who has not talked to me about how critical this problem is.
We will now move the questioning, and by the way, the way we are going to do questioning, this is such an important hearing that we will probably have a number of second rounds. I would ask everybody to hold each round to 5 minutes, and then we will come back for second rounds, or third rounds if needed.
Mr. CHAMBLISS. Thank you very much, Mr. Chairman. And let me particularly thank you and Mr. Condit for acceding to our request to hold this hearing.
And to my four colleagues out ther, I say thank you again for your great leadership on this issue.
As all of you know, the four of you, along with everybody else back here and some other folks, too, from tobacco-growing areas been meeting on a regular basis over the last several months to try to figure out the best way to deal with this very complex issues.
Page 24 PREV PAGE TOP OF DOC And, Baron, I was particularly interested in your comment in your prepared statement there about the fact that when you introduced this bill, some of your colleagues came up and said, What are you doing? You are crazy as the devil. And they even laughed at youI think is what your comment waswhen you talked to them about the tobacco buyout. And that is exactly the same type of situation that I have had when I have talked to some of my colleagues who don't understand the plight of tobacco farmers.
It has been difficult for me to communicate to my farmers, who are extremely frustrated just like farmers in Kentucky, Virginia, Indiana, and North Carolina, about what has happened to our industry over the last several years. And when you try to explain that you got 434 other Members of Congress up here on the House side that you have to deal with and try to explain this to them, it is very frustrating to them, because it is frustrating to us.
Again, as all of you know, I have been hesitant to sign on to any bill until I felt like there was a bill out there that, No. 1, we could get passed; and second, was going have the primary goal of ensuring that our quota holders were compensated right.
The $8 and the $4 is the one that we have commonly agreed on, and seems to be readily acceptable. I am pleased that all of you have those numbers in your bill.
The other aspect of it that has bothered me significantly is the fact that each and every one of you alluded to, that is, that we want to make sure that this industry, which has been so vitally important to each of our respective States and to our region of the country, survives for the long term.
There are a lot of hazards associated with this industry, and those hazards are communicated from an educational perspective to the public. But I want to make sure that the industry does survive, both from an institutional standpoint, as well as, particularly, from a grower's standpoint. If somebody wants to continue growing tobacco down the road, we have got to craft a piece of legislation that is going to ensure that happening.
Page 25 PREV PAGE TOP OF DOC Two of your billsErnie, yours, and Mike'shave FDA regulations in there. That bothers me, very honestly, and I have talked with each of you individually about it, as well as expressed my opinion in our group. I am bothered by the fact that if it weremaybe the regulations you have in there that we wound up with, that wouldn't be a problem.
But the problem is going to be, we all know and we have all agreed that that is not where it is going to stop, that the Senate has got much stronger FDA regulations. That, in my opinion, would not be good in the long term for the industry.
I have had farmers tell me they don't carejust like you, Baronthey don't care what happens to the industry; they just want to get bought out, because they feel totally isolated out there from a grower perspective and from an industry perspective. And theythey just want to get compensated for their quota and move on to something else.
And I can understand that. But I have also got a lot of folks out there who want to continue in the industry. And trying to find the right meeting of the minds there has been the difficult issue that all of us have had to face.
We are going to be introducing another bill today. It is a bill that Senator Helms and Mr. Hayes and Mr. Burr and Mr. Etheridge and a number of usMr. Bishophave been working on literally for months to try to put together. And it is a bill that I think takes the best attributes of each one of your bills. It does not have FDA regulation in it, but it does compensate our quota holders without additional user fees.
This is another issue that our growers don't understand. They are getting compensated today with some of the MSA money thatas soon as we pass this bill, that money is not going to be there. And again, it has been difficult from the standpoint of communicating to our growers some of the difficulties and complexities that we have to deal with.
But, at the end of the day, I think there is no question but what we all agree on one thing; that is whyas you say, Mikeit is so critically important that this hearing be held today. That is, we all agree on a buyout, we all agree that our quota holders and our producers need to be adequately compensated. And I think all of us have agreed all of the way through this that our ultimate goal is to ensure that that happens and to ensure that the industry does survive. It is critically important to the infrastructure of each of our States and toit will have a significant economic impact on our region if the industry does not survive.
Page 26 PREV PAGE TOP OF DOC So I have made my speech, Mr. Chairman. I don't have time for questions. But I will come back when we get to the second round.
Mr. EVERETT. Thank you.
Mr. BISHOP. Thank you very much, Mr. Chairman. Let me associate myself with the remarks of my colleague from Georgia, who shares tobacco growing areas with me, Mr. Chambliss; and also my colleagues at the table, who have done such a tremendous job in trying to bring this issue forward and to put it on the table for us to consider today.
I would like to just explore some of the aspects of two of the bills in particular, the Fletcher bill and the McIntyre-Davis bill, just to try to understand and to try to put it in the context of where we are here in the Congress.
I understand, Mr. Fletcher, that your bill, as it is designed, would cost substantially more than the other bills that have been offeredthe McIntyre bill, for example; and of course, the Chambliss bill that he has mentionedbut the bottom line is, that it will be better for the producer. And I think all of us want to have as much positive outcome in this process for the producer as we can possibly have.
The other aspect is that when you consider the additional costs, and you also consider the fact thatand that cost comes from an extra $2 in your bill that will pay for those growers who decide to opt out of the business altogether, which will make yours cost $14 a pound as compared to $12 in the McIntyre bill.
You offer some FDA oversight.
Now, first off, given the fiscal climate that we are in, don't you think that we are going to have to really, really look closely at the cost figures if we are going to have any chance of getting anti-tobacco Members of the Congress to support this buyout?
And, second, on the other hand, we have gotboth in the McIntyre bill and in the Fletcher bill, we have FDA going onto the farm. And, of course, added regulations is a headache and a nightmare for growers. And thethe other side of that coin, as I understand it from the liability perspective, is that if FDA gets involved in it and establishes standards and regulations, it would possibly reduce the possibility of liability for the tobacco companies and the people who are growing in the tobacco industry.
Page 27 PREV PAGE TOP OF DOC So would you just kind of touch on those aspects, both you, Mr. Fletcher, and Mr. McIntyre, because I think that we have got to come at the end of the day with something that is helpful to the industry, helpful to the growers, helpful to the communities, but at the same time that is passable. Pwould you comment on that?
Mr. FLETCHER. Yes, thank you, Mr. Bishop. We certainly appreciate your support and work in this effort, as well as Mr. Chambliss, whoboth of you all helped get our TLAP payments for farmers.
Let me say a couple of things. One, my bill has no FDA regulation in it. I know there is some discussion that it might have, but it has absolutely no FDA regulation. So let me clarify that for the record.
It is the only one that has health care groups. The $2 a pound additional, I think is well worth it, considering the fact that we will have a number of farmersand I estimate about 6-, 700 farmers I met with recently, probably 60 to 70 percent will elect to forgo the licensing right in the future.
The reason we establish a supply management system is that we are going to avoid the large payments that we have seen in other farm programs. And I supported the farm bill, but if you look at the escalating cost of government payouts to farmers, having a supply management system will avoid that in the future, so we won't be coming back to this table or coming back to members of this committee, asking for authorization for other TLAP payments and things, because we will control the supply.
So I think the cost is spread out, it is amortized.
The user fees we said will eliminate the phase I money. We have been very clear with that, as Mr. Chambliss said. Additionally, it will reduce the cost, the price of the tobacco, so very little of that should be transferred to the consumer.
Mr. MCINTYRE. Thank you, Mr. Bishop, for your excellent comments. You saidand I was jotting down as you were speaking about, in both the Fletcher and McIntyre bill, the concern about the FDA going onto the farm. But as I mentioned in my testimony today, and as our legislation states, it prohibits the FDA from going onto the farm. We have been very sensitive to that, and we want to make sure that they don't.
Page 28 PREV PAGE TOP OF DOC It specifically deals with the other aspectsthe distribution, the sale, the manufacturer, the labeling. So I want to make that abundantly clear, because they are prohibited from going onto the farm and interfering with the farmer's work.
The liability issue is one that weyou know, like the other, we know what we are dealing with. That is a horrible situation right now, not only what the tobacco companies are facing everywhere they turn, but in turn that affects the farmers. We know that affects what is going to happen to tobacco production with the uncertainty that is put over the whole community of tobacco with the pending litigation and possible future litigation.
And that is another reason that if you have the type of regulation that, hopefully, there will be an opportunity to lessen the number of lawsuits that there have to be, because there won't be all of that uncertainty. This is another aspect of dealing with uncertainty, knowing what you have got out there and knowing what the regulations are and knowing what the expectations are for the farmers and for the companies.
Mr. BISHOP. Thank you.
Mr. EVERETT. Before I go to Mr. Jenkins, let me also recognize Mrs. Clayton, who is a member of the full Agriculture Committee, and a valuable member, and who, unfortunately, we will be losing after this year.
And, Eva, really hate to see you go.
And George Gekas, who has now been put on the full Agriculture Committee and is a potential member of this subcommittee.
Mr. JENKINS of Tennessee. Thank you, Mr. Chairman.
Let me go back, Mr. Fletcher, and pick up on Mr. Bishop's comments. Ernie, you have had folks in our part of the country come to endorse your bill. I believe you have the support of the Tennessee Farm Bureau, and you have many others. And I think they did it on the basis that there was no FDA control in your bill, and I appreciate your explanation of that.
Page 29 PREV PAGE TOP OF DOC You mentioned that there were health organizations. I don't remember if you named those organizations. But what health organizations do you have in support of your legislation, and what is their incentive to be in your corner on this particular issue?
Mr. FLETCHER. Thank you, Mr. Jenkins. I want to again thank you for your work for the tobacco growers in the past and nowand future as well.
The Alliance for Health, Economic and Agriculture Development, Concerned Friends of Tobacco support it, the American Cancer Society supports my bill, the American Heart Association, the Campaign for Tobacco-Free Kids.
One of thelet me say this. We have few members, relatively speaking, that have a direct interest in tobacco from a constituency standpoint, so I think it is critical that we have the health care groups' support as well.
The additional $2 a pound is something they are interested in, because they would like to have resources for family farmers who want to diversify and no longer grow tobacco. So we provide that. I think that additional payment is very important; I think it is going to be very helpful and make the bill more appealing to a number of legislators.
I think the other considerationsI think there are some concerns that FDA regulation in the future may be part of a larger bill in order to get support. I agree, I think it would be very important to make sure that we keep the FDA off the farm if that should happen, but that is not part of my bill.
Yet we were able to get the health care groups also, because of the supply management system subsequent to the buyout, and I think that is very important, to control the supply. It does take into account our need to compete in the global economy, which the current program doesn't.
Mr. JENKINS of Tennessee. Do you know if these same health organizations are in support of any of the other three plans that have been outlined here?
Page 30 PREV PAGE TOP OF DOC Mr. FLETCHER. Not that I am aware of. But we would leave that to some of the other folks to address.
But we tried to work hard. We have the largest coalition. And that iswe have the Burley Stabilization Co-Op; the Burley Tobacco Grower's Co-Op; the Council for Burley Tobacco; Dark Fire Tobacco Association; Flue-Cured Stabilization Corporation; Indiana Tobacco Growers; Ohio Tobacco Growers; Missouri Tobacco Council; South Carolina Grower's Association, Virginia Working Group; Ohio Farm Bureau Advisory; Kentucky, Missouri Farm Bureau; North Carolina, Tennessee, Virginia Farm Bureau; Commodity Growers Co-Op, in addition to the health care groups.
I think it has the broadest support of any bill.
Mr. JENKINS of Tennessee. I agree with the comments of others that eventually we are going to have to have all of these bills brought together. I haven't seen Mr. Chambliss' bill, but maybe, perhaps, it will be gathering all of the good points of all of these bills that everybody can get together on.
But, ultimately, in order to have the support that is needed, we are going to have to understand all of the provisions.
You did not explain in very much detail what your supply management system is going to look like. And could you do that for us?
Mr. FLETCHER. Yes, let me do that briefly.
Let me say, first off, I am certainly willing to work with a number of folks. The colleagues we have met with have some very good ideas. No one has a monopoly on all of the good ideas. So I look forward to working with everyone for a bill.
Bottom line is, post-buyout, it provides a licensing program where the growers are 100 percent at risk, so we avoid the leasing and some of the other problems. It is licensed, it is kept in the counties where the current tobacco is grown so that it doesn't shift. It protects the small growers so that we don't have migration, just the large corporate growers. It does provide a production cost whichwe have input from all parts of the industry to establish that production cost. It also helps stabilize and avoid some of the problems that we have had with the expectation of purchase, so that it will stabilize the co-op and the pool.
Page 31 PREV PAGE TOP OF DOC So I think it isit takes everything we have learned over the years from the problems that we have faced and tries to integrate that. That is why we have the support of allthe broad support we do, because we have worked with all of the groups to bring in their expertise to put this piece of legislation together.
Mr. JENKINS of Tennessee. Thank you, sir.
Mr. EVERETT. Thank you. Mr. Etheridge.
Mr. ETHERIDGE. Mr. Chairman, thank you. And let me thank you and Representative Conditand you particularly, because when we asked you if you would hold the hearing, you obliged. I want to publicly let you know again how appreciative we are for your being here today.
As have you already heard, this is a very important meeting. It is important to an awful lot of folks. And I also want to thank my colleagues who are seated at the table this morning for your willingness to take the sponsorship on behalf of the American farmers and for coming here today to share with us the details of your proposals.
And I guess I ought to, in thein good faith for full disclosure, I am a cosponsor of the Fletcher bill, because I really think it represents the best deal for farmers. However, before I go further, I think I should also say that I recognize that each one of the proposals that are before us this morning have merits, and the other one that is going to be forthcoming, because each of you have made a significant contribution to get this forwardvis-a-vis, Mr. Chairman, the number of farmers who have shown up here today to be a part of this. If we had held it a month ago, they couldn't have been here, they would have been out housing tobacco, and some of them aren't through yet, I know in North Carolina.
I grew up on a tobacco farm. I don't know that many other people here that did. I still have a little allotment. My son still grows tobacco. I remember when you could take 7 or 8 acres of tobacco and rear a family. Today, you lease that to someone who may be growing 50 or 100 or 300 acres. That is the change that has taken place in Flue-cured tobacco.
Page 32 PREV PAGE TOP OF DOC I represent one of the largest Flue-cured districts in the United States. North Carolina grows about 60-plus percent of the Flue-cured tobacco. So it is very important to our State, to my district. And our farmers have had a difficult time for a host of reasons.
One is that thepart of it is why it is so important that we deal with this, Mr. Chairman, at some point. We either put it up or deal with it, because it is driving up rents. Farmers are anticipating and quota holders are anticipating some kind of buyout and that is, in itself, driving costs.
My farmers and I know that the current system needs fixing. Whether it is called reform, transition, or a buyout, they want it. And I think we need it if we are going to be able to continue to have a viable program for farmers to operate in, whatever that program may happen to be. And it needs to be sooner rather than later.
And each one of you has already testified to the point. I think all of the bills will. And each one of us on this committee knowsthe billion dollar question, I guess, is thatliterally is, how do we get there from where we are today?
And Congressman Hill touched on it earlier. The fact is, that we are running huge deficits here now in the Federal Government. We haven't passed appropriation bills yet, and the fiscal year is going to end in about 10 days, and we are consumed on the Hill by ourthe issues we ought to be dealing with, with homeland security and Saddam Hussein and time is running out.
And if we can't get a consensus very quickly among those of us from tobacco States, we certainly can't bring the other 200-some Members of this Congress along with us, because they are not as interested in this issue.
And I think Representative Fletcher touched on it earlier, it is very critical that they become partners with us; otherwise, we can't get it done now or in a lame duck session, but at least we can start the process.
Page 33 PREV PAGE TOP OF DOC Listening to your testimony, though, I think it is clear we have started along that road. We aren't there yet, but we have started the process. Several of us who are on this subcommittee and seated at the table are part of a working group, as Mr. Chambliss said a while ago, and have been working on this now for many months. And if we keep working together, I think that we can get there, because I think it is very important.
While each of us is working hard on each of your proposals, I think the very healthy thing that is happening, as a result of the working group and here today, is that there is flexibility. Each one of us has our own ideas about it. We are on different bills.
But I hope it will keep coming. I hope we will keep working together, show the flexibility and the willingness to compromise, because if we don't do that, and we get concerned about our own pieces, the people who are really going to lose are our farmers, who really are in trouble right now. They are eating up their equity to stay in the business. And this is one way to infuse some resources back in, so they can ultimately compete.
Mr. Chairman, my time has run out. I will ask questions on the next round. Thank you.
Mr. EVERETT. Thank you.
Mr. PUTNAM. Thank you, Mr. Chairman. I would like to hear from each of our colleaguesI tried to jot it down as part of their opening statement; if each one of you could tell us how much your bill has been scored at, and how you pay for it.
Mr. MCINTYRE. I will be glad to go ahead first.
We are waiting for the final scoring fromCBO. The preliminary indications indicate that it will be budget-neutral. One of the hallmarks of our bill is the FDA regulation because it does several things: It provides the formula to pay for this. That is the big issue, how are we going to pay for it. So it provides the payment mechanism through the user fee, which will be able to be done. The companies will be paying that as part of it, and that will fund it so that we don't have to depend on other revenues or other taxes or any other source.
Page 34 PREV PAGE TOP OF DOC Mr. HILL. I introduced my bill back in May 2001, during the time when there were significant surpluses that existed at our Federal budget, and so I don't have any funding mechanism at all. I wanted to draw from the surpluses in order to make the buyout.
The total of my bill is $7.75 billion. I know that now that since the surpluses don't exist, that there needs to be adjustments in my bill to compensate for the cost of the bill, and that is a part of the flexibility that we have been talking about here this morning.
Mr. GOODE. We don't have a direct number yet, but it is estimated that a buyout would cost between 15- and $20 billion. My bill is solid on whether you use existing revenues from the cigarette tax which would impact the rest of the budget, or whether you add on a user fee. And I will leave that up to the committees of jurisdiction.
My bill focuses on the buyout provision, and it also has in it that the corporations set up under my bill can touch upon checkers, graders, warehouse people, and others that are directly impacted by buyer programs if the corporation, which is a mixture of producers and growers and manufacturers and health groups, so decides.
Mr. EVERETT. Mr. Fletcher.
Mr. FLETCHER. Yes, sir. The estimates range from $17.3 billion for the $8 and $4 up to $19 to $20, depending on the extra $2 a pound and how many people would take advantage of that.
The way we have set ours up is through the Commodity Credit Corporation, which would pay it out, and then we would amortize that basically through a user fee. That probably would end up resulting in the user fee would pay it possibly over 10 years. It is difficult to say exactly how long that would be. The user fee would be on all tobacco products. It would actually score zero because the user fee would cover all of the cost. And, additionally I think it is importantit is going to be very, very difficult to get the bill passed, I think, no matter which bill it is. And I think it is going to be virtually impossible to justify deficit spending on the buyout. And that is why I felt like we had to have some reasonable way of funding the buyout.
Page 35 PREV PAGE TOP OF DOC Mr. PUTNAM. So, just to clarify. Your user fee would be at the end product on a per pack?
Mr. FLETCHER. That is right. It would be on all tobacco products, whether they are smoke or smokeless.
Mr. PUTNAM. And, Mr. McIntyre, yours is slightly different than that? Or is it the same funding mechanism?
Mr. MCINTYRE. Well, in a sense it is the same. Our user fee would be on all the tobacco products, and when that is paid, it is paid by the companies to the FDA, which would fund the program, much like currently pharmaceutical companies pay the FDA now. And so it would provide the funding mechanism directly without having to depend on other Government revenues.
Mr. PUTNAM. But yours is dependent upon FDA regulation?
Mr. MCINTYRE. Right. That is the funding mechanism.
Mr. PUTNAM. And this would not include FDA regulation; is that correct?
Mr. FLETCHER. Yes.
Mr. Putnam, let me make a correction in what I said, because ours actually is basedit is a user fee on the companies based on the percentage of market that they have, which is based on the number of packages that they sell of a particular product. But it is actually on the user fee, it is not on the end product marketed. It is identical as far as how the user fee is set up to the McIntyre bill. It is just that it does not go to, the user fee, to the FDA, it goes to the Commodity Credit Corporation to pay off the buyout.
Mr. PUTNAM. Thank you.
Thank you, Mr. Chairman.
Mr. EVERETT. Mr. Lucas.
Page 36 PREV PAGE TOP OF DOCSTATEMENT OF HON. KEN LUCAS, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH OF KENTUCKY
Mr. LUCAS of Kentucky. Thank you, Mr. Chairman. And I want to thank you and my colleagues at the table for their efforts in trying to move this issue along.
Of course, we recognize the tremendous importance that tobacco plays in all of our communities, and I think the turnout here today shows how critical this issue is. And I want to thank all thein particular, the farmers who have traveled a long distance to get here. And I am personally very sorry, I know we have a group of Kentucky Burley farmers out there that can't get in the room, and I am sorry about that, that they can't personally witness these proceedings.
I am, however, particularly pleased to have Mr. Sam Moore here. Sam is president of the Kentucky Farm Bureau, and that is our largest farm organization in Kentucky. And Sam will be an excellent spokesperson for farmers all across Kentucky because he has significant experience in dealing with the issues relating to tobacco. I have been fortunate to have the opportunity to work with Sam since I have been here in Congress, and I know his insights and observations will help all of us on this committee understand this situation that our Burley tobacco farmers are facing.
I also have some firsthand knowledge about the challenges that our farmers face. I grew up, like Mr. Etheridge, on a tobacco farm, and mine happened to be in Grant County, Kentucky, and like so many people here today, tobacco helped put me through college. I don't want to reminisce too much, but I still remember the sweet smell of tobacco on the warehouse floor; and when we had a good sale, that meant we had a good Christmas, and I can remember that from my boyhood days.
However, we know times have changed in the last several years, and things have gotten extremely difficult for our tobacco growers. The quota cuts and drought and other diseases have been hurting our family farms. We are facing a time with our farmers of uncertainty, instability. Not only does this hurt all of us in the districts where tobacco is grown, but when our farmers are hurting, all of rural America hurts along with them. And on this committee we just have a responsibility not to let this keep going on.
Page 37 PREV PAGE TOP OF DOC So, I am very impressed with the way that the Burley and the Flue-cured folks are working together to try to make strides on this problem. While there are differences that remain in this bout, one thing is clear: All the farmers agree we need a buyout, and we need it now, and timing is critical. The next growing season is fast approaching, and our farmers need to know how to plan.
In Kentucky, I believe that the majority of growers will take the buyout if one is offered at a fair price. There are pessimists out there who think that we can't get this done this year, but I am an eternal optimist, and I think this group shows the strong commitment we have from our growers in seeing that positive things happen as soon as possible.
And as the only member on the Agriculture Committee here from Kentucky, I am committed to fight for the way of life of our tobacco farmers in the communities that I represent, thattobacco, where it is so important.
I want to thank you, Mr. Chairman, for your leadership and commitment to finding solutions to this issue that we are facing, and we must find a solution, and we must find it soon. I will ask my questions later. Thank you.
Mr. EVERETT. Thank you.
Let me just briefly mention that we are going to go to Mr. Hayes, and then we have a series of three votes, and we will ask staff to let us know when we are about 8 minutes out, which should give us 10 minutes.
STATEMENT OF HON. ROBIN HAYES, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Mr. HAYES. Thank you, Mr. Chairman. And thank you for holding these hearings; they are vitally important.
Page 38 PREV PAGE TOP OF DOC In my district in North Carolina, the eighth district, I have growers, and I have manufacturers. Both of them are vital components to the future of our industry. Both of them have to be strong. And that is what we are all here about, maintaining that industry. And I appreciate what they are doing.
I want to thank Larry Wooten of North Carolina Farm Bureau for all of their participation. Thank you, Mr. Lucas, for calling attention to the farmers that have traveled so far. That is what this is about. And specifically Graham Morton and Richard Brenneger who have come from North Carolina.
It is a known fact there are a few of our Members here who would like to eliminate this industry. We want to make sure that doesn't happen. If they were successfuland they should not and hopefully will not beour foreign competitors are anxiously awaiting that opportunity. So this committee is about making sure that the legal product is maintained as a viable part of our agriculture and manufacturing industry. And I appreciate you all doing that.
And Mr. Etheridge mentioned an appropriations bill. We all want to get rid of deficits. I think it is only fair to mention that the Senate has no budget. How do you pass appropriations bills out of the House into a Senate that has no budget and cut the deficit?
So again, Mr. Chairman, thank you very much for bringing us here today. I appreciate all of you all at the table and behind and in the halls who are working very diligently, who are making sure that our industry, which includes our growers and manufacturers, remains healthy and a big part of our national economy.
Mr. EVERETT. Mrs. Clayton.
STATEMENT OF HON. EVA M. CLAYTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Page 39 PREV PAGE TOP OF DOC
Mrs. CLAYTON. Well, let me just make a brief comment. I would ask unanimous consent to enter my full statement into the record.
Mr. EVERETT. All Members' full statements will be entered into the record.
Mrs. CLAYTON. Good.
I want to acknowledge also, this is a big issue. It was a big issue as we were talking about the farm bill. And as Representatives Chambliss and Everett would note, when we were doing the buyout for the peanuts, we were asked how come we couldn't do the buyout for tobacco. And because of the issues that Representative Fletcher so wisely stated, you have to craft a bill that you can get 218 votes.
So I want to commend each of the Members at the table for taking the leadership to put forth a proposal that brings this dialog together so that we can find ways of coming together. I think the winning strategy is going to be a strategy that can bring 218 votes together.
So I thank all the farmers who are in the hall and overflow room. And thank you, Mr. Everett. As you always do, you are very accommodating to the needs of rural America as well as agricultural.
Mr. EVERETT. Well, you are a champion of rural America, and we appreciate you.
Mr. Chambliss, a brief remark.
Mr. CHAMBLISS. Just to comment to apologize to Mr. Fletcher for saying you had FDA regulations in your bill. We have had so many of these. And this is an indication of not just the complexity of the issue, but the complexity of all the bills. And I didn't mean to castigate you any with the FDA. So I apologize to you and to the folks that support your bill, because it does not have FDA regulation in it.
Page 40 PREV PAGE TOP OF DOC Mr. EVERETT. The hearing will be recessed until we return from the vote. Thank you.
Mr. EVERETT. If you will you please take your seats, we will resume the hearing.
A little update. I have asked, at the request of the first panel, that they be dismissed. Several of them have markups. That obviously is not a lack of interest on their parts, and I think they have demonstrated, as well as the members of the committee, how interested they are in this subject. But we will now move to the second panel.
Mr. Sam Moore, president, Kentucky Farm Bureau; Mr. Larry Wooten, president of the North Carolina Farm Bureau; Dr. William M. Snell, agricultural economist, University of Kentucky; and Dr. Blake Brown, distinguished professor, North Carolina State University.
Gentlemen, if you would please be seated.
I am going to remind all witnesses that we strictly enforce the 5-minute rule. Your complete testimony will be entered into the record. And, Mr. Moore, if you will, please begin.
STATEMENT OF SAM MOORE, PRESIDENT, KENTUCKY FARM BUREAU
Mr. MOORE. Thank you. My name is Sam Moore, and I am a farmer from south central Kentucky. I am also president of Kentucky Farm Bureau.
Chairman Everett and members of the committee, I appreciate you inviting me to make some brief remarks on the tobacco buyout today.
Page 41 PREV PAGE TOP OF DOC I have been active in Farm Bureau for over 30 years, and I can recall many contentious debates on tobacco policy, but none as important as the subject we are talking about today. When tobacco buyout legislation passes, it will certainly determine the future of the tobacco industry.
When most people discuss the buyout issue, all they want to talk about is the money, and I know it is on Congress' mind as you try to decide on the future of tobacco farm families. It is certainly on the minds of farmers in my State. As you know, most of the current bills offer payouts over 5 years. As president of the Kentucky Farm Bureau, what labors most on my mind is what happens in the 6th year when the payments stop coming. What happens to growers who want to produce tobacco after the buyout?
Tobacco is so ingrained in farm families across Kentucky that there is a new generation of young folks hoping to make a living and provide for their families from producing a tobacco crop. Will they have protections, or will they be strictly at the mercy of the tobacco companies? Will tobacco production still be an option in their counties?
My goal is to get a buyout as soon as possible, but also to ensure that people who work hard to produce a crop will have assurances that tobacco production with appropriate safety nets will continue to be an option for them.
Kentucky ranks fourth in the United States in total numbers of farms only because so many people in our State have tobacco allotments. Many people looking at our State would say that only the flat ground in west Kentucky is suitable to agriculture production, but farmers in the hilly ground of eastern and central Kentucky have been able to stay on the farm because of tobacco.
Large tobacco farmers will prosper the most under the buyout proposal. They have the land, expertise, and resources to produce some of the best Burley tobacco in the world. My hope is that buyout language will allow those growers to continue producing that tobacco and put the tobacco into the hands of the people who actually want to produce it.
Page 42 PREV PAGE TOP OF DOC The small family farm culture of eastern Kentucky is a tougher situation. Counties in eastern Kentucky generally have some of the highest poverty levels not only in our State, but in the country. Tobacco adds about $150 million annually to the economy of eastern Kentucky. A massive move of tobacco production out of eastern Kentucky would be devastating to that region. I think it is vital that Congress offers a buyout that maintains some type of safety net that will ensure that farmers will be offered a price for their crop that is at least equal to what it costs them to produce it, and a plan that will ensure that tobacco does not completely move out of such dependent regions as to cause harm to the small family farms of Kentucky and other tobacco-dependent States.
I hope that as you consider tobacco legislation, you don't buy into the sometimes popular beliefs of ending supply management and safety net programs. Rather, I hope you will consider legislation that adequately compensates quota holders and growers who want to exit the business in an economically possible way, but also protects those growers who wish to continue growing tobacco.
Kentucky Farm Bureau believes that H.R. 5035 sponsored by Congressman Ernie Fletcher and cosponsored by many on this committee is the buyout plan that is fairest to growers. The Fletcher bill was a result of a series of meetings of Burley, Flue-cured, and dark tobacco leaders. Those leaders met on April 5 in Raleigh, NC and came up with a set of consensus points for buyout legislation. Congressman Fletcher's legislation mirrors those consensus points almost identically. Therefore, I think it is safe to say that H.R. 5035 most closely mirrors what tobacco farmers hope to achieve from buyout legislation.
It is also noteworthy, I think, that Congressman Fletcher's bill is supported by the public health community.
I want to thank Congressman Fletcher and those Members in this room who support his legislation for looking out for the best interests of tobacco farmers. Members of this committee have a tough task ahead of them. While I understand that there are more urgent needs in our country than a tobacco buyout, I can't think of a more pressing need for Kentucky and the other States in the Tobacco Belt. Again, as you consider buyout legislation, I urge you to consider the 6th year and years thereafter as much as you do the 5-year financial impact of such a plan.
Page 43 PREV PAGE TOP OF DOC Again, Chairman Everett, thank you for inviting me to speak to this committee today.
[The prepared statement of Mr. Moore appears at the conclusion of the hearing.]
Mr. EVERETT. Thank you. Mr. Wooten.
STATEMENT OF LARRY WOOTEN, PRESIDENT, NORTH CAROLINA FARM BUREAU
Mr. WOOTEN. Mr. Chairman and members of the committee, I am Larry Wooten, president of the North Carolina Farm Bureau. I am also a quota owner and a tobacco farmer from Pender County, North Carolina.
Many of our members of North Carolina Farm Bureau and across the State depend on tobacco for their livelihoods, but many more are relying on this crop to help sustain the economic viability of their local communities. I thank the committee for holding this hearing to give farmers an opportunity to comment and to express our views on the challenges facing the future of tobacco.
Why am I here today? Farmers are concerned about the long-term stability and survival of the Tobacco Program. In addition, direct contract sales, world competition to the U.S. leaf, continued litigation, the continued erosion of farmers' equity in quota, and the general ill will towards Government involvement in tobacco are all working to undermine survival of the current program, a program that has served us extremely well since the late 1930's.
North Carolina Farm Bureau has spent countless hours working with our members on developing the future direction of the Tobacco Program. Extensive discussions have focused on how to remove quota equity from the cost of tobacco production. We have also focused on how to make our tobacco more competitive on the world market while ensuring the stability of our tobacco-growing communities. To accomplish this goal, we believe an effective and sustainable buyout plan must be developed to adequately compensate quota owners and provide transition assistance so growers can secure their future.
Page 44 PREV PAGE TOP OF DOC Farmers have invested their hard-earned dollars buying quota. Tobacco quota is taxed as real property in most North Carolina counties; the IRS treats tobacco quota as a capital asset. Tobacco quota has economic value for farmers, for communities, and certainly for governments.
The Tobacco Program has provided a stable source of income for both farmers and communities. It has created this income in places in North Carolina where there are few viable economic development alternatives. Mr. Chairman, numerous widows and retired farmers, and farmers who are fast reaching retirement, depend on income from tobacco quota. Instead of their retirement income coming from a 401(k), many have invested in a 401 quota.
Preprogram experience demonstrates the price volatility inherent in free-market tobacco. With the number of purchasers of tobacco shrinking every year, farm families need an adequate safety net for several reasons: Tobacco production is a very capital-intensive farming enterprise. For tobacco production to remain stable and profitable in the future, a thoughtful plan must allow for viable marketing options for our farmers. This plan must also provide for a stable supply of tobacco for the marketplace, both foreign and domestic. And lastly, a successful plan must minimize price volatility by providing a mechanism similar to the countercyclical safety net provided in the farm bill.
In April of this year, as Mr. Moore just said, North Carolina Farm Bureau hosted a meeting of tobacco organizations and interest from Flue-cured to Burley producing States. These groups met in Raleigh for the purpose of developing a consensus to offer guidance to Congress on drafting legislation addressing the future of the Tobacco Program.
Mr. Chairman, our growers have made one point loud and clear to me. The No. 1 priority of our growers in this whole debate is that we find a solution that provides economic stability to our farmers and that allows them to plan for the future. It is our belief that this future can only be assured by providing adequate compensation to quota owners and growers. It should also, I might add, allow U.S. tobacco farmers to supply the world demand for quality American tobacco.
Page 45 PREV PAGE TOP OF DOC Mr. Chairman and members of the committee, I thank you for your attention and for the opportunity to testify here today on behalf of North Carolina tobacco farmers.
[The prepared statement of Mr. Wooten appears at the conclusion of the hearing.]
Mr. EVERETT. Thank you. Mr. Snell.
STATEMENT OF WILLIAM M. SNELL, AGRICULTURAL ECONOMIST, UNIVERSITY OF KENTUCKY
Mr. SNELL. Thank you, Mr. Chairman and Members. It is certainly an honor for me to testify before this committee. My name is Will Snell. I am an agricultural economist at the University of Kentucky, where I work closely with policymakers and farm groups on tobacco policy-related issues.
One of my duties as an agricultural economist is to provide Burley tobacco farmers with the current situation and outlook for their industry. It is not an optimistic picture. Domestic consumption has declined considerably in recent years, with imports soaring and exports slumping. We have seen U.S. Burley demand fall from its traditional level of 600 million pounds down to around 350 to 400 million pounds.
While the industry has actually observed some degree of recent stability, I do not see any major market rebound for U.S. Burley growers under the current Tobacco Program and demand environment. This is not to say that the tobacco economy in Kentucky is going to slowly die away. Given its unique quality, characteristics, and its reputation as a dependable supplier, tobacco will remain an important agricultural commodity in Kentucky. However, under the current demand conditions, there are simply not enough tobacco dollars available to economically sustain the extremely large number of quota owners and growers remaining in the program. Consequently, unlike the discussion heard in these halls a few years ago, support for a buyout today is almost unanimous among farmers.
Page 46 PREV PAGE TOP OF DOC Undoubtedly, current buyout proposals would inject a significant amount of funds into tobacco farm economies during the first 5 years, but as Mr. Moore indicated, as far as my program, my major focus is upon what happens to those who remain in the industry beyond the postbuyout period?
We must recognize that given differences in farmers' ages, crop land, management, marketing skills, and alternative income opportunities, that the optimal tobacco buyout policy is going to vary across individuals, across regions, and possibly across States, and even across different types of tobacco. But at the end of the day, a consensus must surface that we yield an effective and fairly consistent tobacco policy across the different types of tobacco.
Our Tobacco Program has been a model over the years by providing price and income support to a large number of small family farms without a significant amount of Government funding, but today our program clearly is not working. Thus, the critical question we all have is do you terminate this program, or do you consider major surgery on the program?
If the program is eliminated as a part of the buyout, I think there is no doubt that we have some farmers in Kentucky and other States that will be able to survive and do well. By consolidating production, and eliminating lease prices, and reaping the benefits of economies of scale, production costs will be significantly lower for some of our growers. Yes, tobacco prices will fall and exhibit more volatility, but the tobacco companies will have to provide an economic incentive to produce. U.S. leaf exports will rebound, imports will fall, and more tobacco dollars may be generated in Kentucky, but we also have to realize that these tobacco dollars will be concentrated in a lot fewer farm families, in a lot fewer rural communities, and could easily move outside of the traditional growing areas.
Put simply, the masses of current Burley tobacco growers would not likely be able to survive in a nonprogram environment. If instead the policy goal becomes to provide some degree of price and income protection for tobacco farmers, like this body supported for most other agriculture commodities in developing the 2002 farm bill, then major modifications to the current program must be considered.
Page 47 PREV PAGE TOP OF DOC A program of direct and safety net payments could be adopted, but of major concern would be overproduction and the long-term cost of the program. If the policy goal remains to control production, then mechanisms should be put in place to determine an accurate demand-driven supply level and some means to transfer these production rights to active growers in a fashion that minimizes the value of that asset in both the short and the long run.
A recent survey in Kentucky indicates that between 50 and 75 percent of the Burley growers will exit following a buyout. Consequently, this will result in a massive redistribution of existing pounds to those who elect to stay in production. Provisions should then be adopted to quickly reallocate production rights away from nonproducing areas to guarantee the companies an adequate supply of tobacco. In order to prevent inflation of asset value, individuals possessing production rights should not be able to transfer these rights, and any accompanying transition payments should be completely decoupled from current production decisions.
Furthermore, if the goal is to provide some price protection but remain competitive, a guaranteed safety net should be established near the cost of production to provide additional measures to minimize the value of that asset.
And finally, a nonlegislative advisory body consisting of both grower and company representatives might be considered to allow the industry some flexibility to adjust production and price levels quickly in the midst of changing world market conditions.
In conclusion, the Tobacco Program and industry is at a crossroads rights now. Changes are desperately needed or we will continue to see declining quotas and income, escalating lease rates, and possible future elimination of the program with limited or no compensation.
[The prepared statement of Mr. Snell appears at the conclusion of the hearing.]
Mr. EVERETT. Dr. Brown.
Page 48 PREV PAGE TOP OF DOC
STATEMENT OF A. BLAKE BROWN, PROFESSOR, AGRICULTURAL AND RESOURCE ECONOMICS, COLLEGE OF AGRICULTURE AND LIFE SCIENCES, NORTH CAROLINA STATE UNIVERSITY
Mr. BROWN. Thank you very much. I appreciate the opportunity to address this distinguished committee. I hope the information I share with you will be useful as you contemplate the future of U.S. tobacco policy.
My comments will concern Flue-cured tobacco primarily. I will briefly give some background information, then I will address several points that I believe are important to consider in a potential tobacco buyout.
Tobacco is the Nation's 6th largest crop in terms of cash receipts; Flue-cured tobacco accounts for about 60 percent of U.S. tobacco sales and is grown in 6 States. The relative importance of tobacco in the southern region is even more pronounced if net returns from tobacco are considered as a share of net farm income. Furthermore, tobacco has trailed only cotton as the southern region's most important export commodity.
According to the 1997 Census of Agriculture, tobacco is grown on about 89,000 farms, and given the uncertainty thatfacing the tobacco industry, most tobacco farmers have tried to diversify their income base. Since the 1997 census, much structural change has occurred in most of the Flue-cured tobacco-producing region. Changes such as nitrosamine-free curing of tobacco and contracting have accelerated the rate of the consolidation of tobacco farms.
Many smaller and part-time tobacco farmers will transition to other enterprises given sufficient opportunity.Even more pronounced is the number of tobacco farmers nearing retirement age. For many tobacco farmers, most of their assets are tied up in land and tobacco quota. As such, their ability to retire or transition to other enterprises depends on the stability and value of land and tobacco quota.
Page 49 PREV PAGE TOP OF DOC Under the U.S. Tobacco Program, tobacco farmers agree to restrict supply via marketing quotas in exchange for minimum price guarantees. Since U.S. Tobacco has historically garnered significant market power in the global market, these supply restrictions have been effective in substantially raising the price of U.S. tobacco above the price of other tobaccos on the world market. Health concerns, the master settlement agreement, increases in excise taxes have all resulted in declines of U.S. tobacco use by U.S. manufacturers. Furthermore, U.S. declines in U.S. cigarette exports have also contributed to this decline.
Just as significant is the intense competition from foreign tobacco producers, particularly Brazil. Brazilian tobacco producers have over the past two decades improved both quality and quantity, now making them a larger producer and exporter of Flue-cured tobacco.
As closer substitutes to United States Flue-cured tobacco have developed and the market share of U.S. Flue-cured has declined, the supply restrictions imposed by the Tobacco Program have become less effective. This change has resulted in smaller quotas in order to try to maintain price. Ironically, since smaller quotas result in an even lower share of world market, the supply restrictions have become even less effective in raising the price above world market prices.
Elimination of the Tobacco Program would result in much structural change as tobacco farming is allowed to adjust to market conditions. The Tobacco Program froze the geographical location of Flue-cured tobacco in the late 1930's, and since then the cost of production has changed in different areas. With elimination of the program, production would expand, and price would decline significantly. These factors would accelerate the pace of consolidation of farms.
Farmers would experience significant adjustment costs as they transition to this new world. Many farmers would transition to other enterprises. Some farmers would successfully grow tobacco at competitive prices, if allowed to do so. The value of quota would disappear.
Page 50 PREV PAGE TOP OF DOC An important component of a tobacco buyout is to provide compensation to tobacco growers and quota owners who have come to depend on the value derived from tobacco quota. Adequate compensation would allow farmers at retirement age to retire or provide other quota owners to move to replacement income. Adequate compensation would also assist tobacco growers in transitioning to other enterprises or transitioning to a globally competitive market for tobacco. This compensation would also cushion the impact on tobacco-dependent communities.
With regard to a postbuyout market for U.S. Flue-cured, the turmoil and land reform movement in Zimbabwe and the consequent movement of Flue-cured tobacco production from that country could provide a unique opportunity for U.S. Flue-cured growers. International leaf markets and cigarette manufacturers are in the process of trying to decide how to reallocate Zimbabwe's market share. In the presence of the current supply restrictions, most of this market share will go to Brazil. If a market-oriented program were to replace the current quota system, then a substantial portion of this market share could be reallocated to the United States Flue-cured growers. Thus, farmers that remain in tobacco farming and the rural economies that they live in will benefit from a tobacco buyout that includes a market-oriented postbuyout program that allows U.S. Flue-cure production and price to respond freely to competitive market signals.
In conclusion, let me make one other important point, I think. In keeping in mind both compensation and a postbuyout program, I think both should facilitate adjustment in tobacco-dependent communities. While structural changes occurring as a result of elimination of the current program will be costly, attempting to impede market forces will also be expensive and ultimately may prove unsuccessful. Helping quota owners, growers, and their communities adjust to market forces while funds are available to facilitate this adjustment should be one objective of a tobacco buyout. Thank you very much.
[The prepared statement of Mr. Brown appears at the conclusion of the hearing.]
Page 51 PREV PAGE TOP OF DOC Mr. EVERETT. Thank you, Dr. Brown. I appreciate it.
I will begin the questions. And for the Members, we will have a second round if we don't get through the first round.
Let me address this to any member of the panel. And, Mr. Wooten, you might be particularly interested in this question since you are both a quota holder and a producer.
I understand why a buyout is needed. I think we all understand that. And one thing that we don't want to see is the foreign market share to get to increase over here. But the one question I have is why do most proposals not only pay the quota holder for the loss of the asset value, but also the renter or actual grower who simply rents the quota? In my mind, the grower would receive his benefit from not having to pay quota grant and from a program, if the Congress decides tobacco growers need some type of program after a potential buyout. Why should we pay both?
Mr. WOOTEN. As I said in my statement, tobacco production is a very capital-intensive farming enterprise. Our tobacco farmers have had to invest in not only the very expensive equipment to grow this crop of tobacco, and I justyou know, some of our farmers are older or fast nearing retirement, who invested large amounts of money in equipment and in quota, and they need to be able to transition if they choose to transition out of tobacco production. They need to have some options if they choose to exit the industry.
Mr. EVERETT. Anybody else?
Mr. MOORE. Mr. Chairman, I think it needs to be noted that under most all of the proposals that we have seen, the phase II funding from a master settlement agreement would be eliminated. Growers participate in that phase II funding, so if that money was taken out, they would need to be compensated for what they are going to be losing on that side. And that funding goes on for I believe it is 9 more years.
Page 52 PREV PAGE TOP OF DOC Mr. EVERETT. Then why shouldn't we offer a producer buyout program or a buyout payment if he will agree to give up producing tobacco?
Mr. WOOTEN. Restate your question, Mr. Chairman, if you would.
Mr. EVERETT. I would be happy to.
For the reasons you have stated, particularly you, Mr. Wooten, why don't we offer a producer a buyout program if he will give up producing tobacco? In other words, the heart of the question is this: Why should we pay a quota buyout to a producer that is going to go back producing tobacco?
Mr. WOOTEN. The price of tobacco isif there is a buyout, the price of tobacco is going to fall dramatically because you are going to take the value of the quota out of that tobacco, the price of the tobacco. In many cases, that producer out there may not even own it. He won't have to pay the rent. But he doesn't own any quota, either, so he has gotthere is going to be an economic loss to him that certainly needs to be
Mr. EVERETT. But he won't be renting that quota any longer. If he is not renting the quota any longer, would that offset the drop in tobacco costs, is what I am asking.
Mr. WOOTEN. Not exactly. I am not sure.
Mr. EVERETT. Well, the reason I am askingthese are hard questions, and I understand that, but I want us all to understand that what we are trying to do hereand I am fully supportive of itwe are going to meet some tough opposition, and these are some of the questions that you are going to get or we are going to get later on.
Mr. WOOTEN. And I fully understand that.
Mr. EVERETT. But please keep what I have said in mind there, because I think that might be a sticking point, especially to our budget-minded folks.
Dr. Snell or Brown, either one. Where do the numbers $8 per pound for the owner and $4 for the grower come from? One of the things we did during the peanut debateand while we didn't make everybody happy, and we know that, and we wish we could have, the fact of the matter is our focus was to try to preserve the industry in this country. Now, does the $8 and $4 reflect the actual value of the quota?
Page 53 PREV PAGE TOP OF DOC Mr. SNELL. These numbers actually evolved back when we were discussing the McCain legislation as part of a national tobacco settlement. I think both Dr. Brown and myself do have data to support that the long-term value or the traditional value of quota has been roughly in the neighborhood of 40 cents a pound. Certainly today, with the distortion caused by phase II and some of the other compensation packages, that value has gone up, but typically the value quota is 40 cents a pound. And that figure came into play in terms of the economic value of quota
Mr. EVERETT. Excuse me. Is that annual rent, 40 cents?
Mr. SNELL. It is annual rent. And back in 1998, when this body was discussing the issue, that 40 cents a pound was discounted into perpetuity to give an $8 a pound calculation in terms of the value of quota.
Mr. EVERETT. OK.
Mr. SNELL. Thank you very much, Mr. Chairman.
Mr. EVERETT. Mr. Chambliss.
Mr. CHAMBLISS. Thank you, Mr. Chairman.
Dr. Brown, you mentioned your testimony with regard to a postbuyout program that provides a grower with some insurance against extreme downside price volatility as desired, and you suggested we could fund this safety net through an assessment, once again, on U.S. tobacco sales. Are youand where you are talking about the general tax revenues, revenue increases would not have an effect on this type of buyout proposal. Are you suggesting that the recent increases of taxes on tobacco at the retail level that have been imposed by Congress have not had any effect on sales?
Mr. BROWN. No, sir. They certainly have had an effect on sales. I think in general most economists, including myself, have been surprised that the effect on cigarette consumption has been less than we would have expected though.
Page 54 PREV PAGE TOP OF DOC Mr. CHAMBLISS. But would you expect that that trend will continue if we continue to put user fees or taxes on retail products? Is it going to have the effect of declining sales?
Mr. BROWN. Well, of course, it is difficult to say what we might see in the future. But what we have seen since 1997 is that cigarette prices have increased from $1.97 per pack on average to above $3.50 per pack on average, and I believe that in general this would have exceeded the increases in Federal excise taxes, the cost of the MSA, and maybe todaywe would have to look at the recent State tax increases, but at least as of last spring have even exceeded those.
So there seems to have been sufficient margin put into that. And we have seen consumption decline, as I mentioned, considerably less than we would have expected, given that sort of cigarette price increase, because that is a tremendous increase.
Mr. CHAMBLISS. All of which, in my opinionI think there is general agreement among us Members of Congress in tobacco-growing areas, substantiating why we need a buyout. If we continue to see declining sales, it is all the more reason to move in that direction.
I have seen bits and pieces of your MSA analysis. Could you give us a thumbnail sketch of what your analysis of the MSA has shown.
Mr. BROWN. Sure. I would greatly appreciate that opportunity, too, because I think there has been some gross misrepresentation of those results that perhaps you all have heard about.
First of all, I was asked by the North Carolina Tobacco Trust Fund Commission, that is one of the phase I commissions in our State to assess the impact of the MSA on tobacco growers and quota holders and the economy in general.
Thiswhat we found was that the MSA resultedin the Flue-cured areas, not just in North Carolinain about a 116 million-pound decline in annual purchases. And the finding of the study was, was that phase II funds, if they are carried out to completion, are more than adequate to compensate for that 116 million-pound decline.
Page 55 PREV PAGE TOP OF DOC And, of course, that still lease close to 800 pounds of Flue-cured tobacco that would have to be addressed under a buyout. I believe that is what most of the buyout proposals placed the level to be compensated for at.
So the impact of the MSA is a separate issue. And, of course, if you eliminate the phase II funds, then you eliminate the money that would have been compensating for even this decline due to the impact of the MSA.
Mr. CHAMBLISS. OK. Thank you very much.
Thanks, Mr. Chairman.
Mr. EVERETT. Let me call on Mr. Bishop and also apologize to him. I should have called on him first since I started the questioning. But what we will do is call on Mr. Bishop, and then call on Mr. Etheridge, and then Mr. Jenkins to get it back into the order it should be in.
Mr. BISHOP. Thank you very much, Mr. Chairman.
I would like to ask our distinguished panelists to comment on the impact of FDA regulations as we consider the buyout, what impact it is going to have on the overall industry, what impact, if any, it will have on individual farmers, on warehouses, how that will affect the industry and the various aspects of it.
It seems as if just a few years ago everybody was against having any form of FDA regulation, and thought it was totally bad and would certainly kill the industry. Now, there seems to be some more openness to that consideration. And that is the first part of the question.
The other part of my question is, would you comment on whether, in the context of what we are going to do with the buyout, it would be better to proceed with a buyout and at some later point come back and look at the issue of FDA regulation; or whether do you think it is imperative that they, both of those issues, be considered at this time in this particular context?
Page 56 PREV PAGE TOP OF DOC Mr. MOORE. Well, we have been told by most people involved in this that it is going to be very difficult to achieve a buyout without some form of FDA regulation. We are very much opposed, and in most of the bills that we have seen, it says that FDA will not come to the farm.
But I think that we all realize that if FDA does have regulatory authority, they will eventually regulate things that do affect the farm. And we are very cautious of that, but we are willing to look at any FDA regulations, and it is according to what the FDA regulations say.
And we would ask thatyou know, when FDA regulations are considered, that they treat all companies equally, that they be fair to everybody, and that theyif they are a part of this buyout, that that is one way of funding this buyout.
Mr. WOOTEN. This whole debate over FDA is largely, from our standpoint, a manufacturers' issue that has very distinct differences between the multinational manufacturers that are involved in manufacturing cigarettes and also in marketing cigarettes.
We have worked with all of these interests, understanding that the primary concern of the farm community has been to seek a buyout to provide some stability and some certainty to the future of the tobacco-growing business. That has been the main concern of the farm groups.
I think it is highly unfair to drag the farmers and the farm leadership and put us in the middle between warring giants out here on this issue of FDA. Obviously, I agree with Mr. Moore. The likelihood of FDA regulation not having ultimately some impact on the agronomic aspects of producing tobacco areit is going to be there. But I think, first of all, the multinational manufacturers need to reach some consensus of agreement on where they want to be on the FDA.
As far as the buyout, or the FDA regulation, I think they are going to be part and parcel. I don't think, from my standpointfrom our standpoint, for thisa bill of this magnitude or an effort of this magnitude to move forward, there will need to be a consensus among all of the people that have introduced bills; and there will need to be FDAa resolution to this FDA issue in both Houses of Congress if we are going to move forward in a bipartisan way and make this happen.
Page 57 PREV PAGE TOP OF DOC Mr. BISHOP. OK.
Mr. SNELL. Well, I think certainly it is very much a political issue. Obviously, the health groups are going to play a big role. And I think we have heard from the farm member panelists that there is no doubt that the farm groups, as well as the health groups are going to have to work together on a consensus, along with the manufacturers on this particular issue.
I agree with Mr. Moore and Mr. Wooten that while they may not be directly implemented on the bill in terms of farm level impacts, that certainly will have some indirect impacts. I think, for the most part, our farmers are aware of that and willing to look at whatever piece ofthe type of legislation that is put forward in terms of FDA and make a decision at the end of the day whether or not they will continue to support that FDA regulation in lieu of potentially losing out on a buyout.
Mr. BISHOP. Dr. Brown.
Mr. BROWN. Well, I think, first of all, this is mainly a manufacturer issue. Of course, it does have indirect effects at the farm level. I think we have already seen a number of those impacts, either from the increased litigation that we see against cigarette manufactures or the potential of FDA regulation. And that, in particular, being that both contracting and, I believe, baling of tobacco have a great deal to do with increased accountability of the product from the farm level through to the end retail product.
It is not clear to me what additional effects you might see at the farm level if you had FDA regulation. And, of course, that depends mostly on the nature of that regulation if it were to come to be.
Mr. BISHOP. Thank you.
Mr. EVERETT. Mr. Etheridge.
Page 58 PREV PAGE TOP OF DOC Mr. ETHERIDGE. Thank you, Mr. Chairman. And let me thank each of you for being here today and for your testimony thus far. And let me give a special welcome to two North Carolinians, friends from North CarolinaMr. Wooten from Farm Bureau, and Dr. Brown, who is from North Carolina State and an outstanding professor, who has given great service to our State and to this industry.
Dr. Snell, you mentioned that 50 to 75 percent of the growers would possibly exit production following a buyout. Is that a Kentucky figure or a Burley figure throughout; do you know?
Mr. SNELL. This was a survey that I gave out to county extension agents across the State of Kentucky; and we are still collecting results from that survey, and the variation in the percentage depended upon the particular buyout proposal or buyout options contained in that bill or in that survey.
Obviously, with some sort of safety net program put in place, the smaller percentage, the 50 percent level, was the amount of growers that the county agent would anticipate in their county would exit.
If you go more towards a free market economy without any type of government controls or safety net, then we would anticipate a larger percentage.
Mr. ETHERIDGE. That is to 75. That was my next question.
Dr. Brown, do you have estimates or guesses as to what percentage of North Carolina Flue-cured tobacco growers might voluntarily leave the business after a buyout, whether there were a safety net or if there were not a safety net?
Mr. BROWN. I think the same sort of figures clearly also hold for Flue-cured. I think you could easily say that we would see the exit of 50 to 75 percent of the growers in the absence of a Tobacco Program. Let me try to put that in a different perspective, though.
Page 59 PREV PAGE TOP OF DOC I think the other way to look at that is, if you have the current program to continue, over a period of the next few years we will also see the exit of 50 to 75 percent of our tobacco growers as they decide that they have no choice but to retire or quit production, even under the current system.
I think the difference that a buyout brings is that it would allow them to transition either to retirement, if that is the age that they are at, or it would allow them to transition to some other enterprise, on-farm or off-farm, with some financial resources to do that. And in the absence of a buyout, then they will have to transition out of tobacco production anyway, because of the tremendous consolidation we are seeing, but they will lack the financial resources to do so.
Mr. ETHERIDGE. Thank you.
Mr. Wooten and Mr. Moore, assuming those numbers are accurate, can you share with us what kind of impact that would have on agriculture in general, let's say in North Carolina and in Kentucky, if that number should be leaving the farm?
Mr. WOOTEN. Well, North Carolina is the third most diversified State in the Nation, agriculturally speaking. It is stillagriculture is still the largest industry in our State, and for that number to take the resources that have beengone into tobacco production over the years, if you take the capital, expertise, the equipment, the land and convert that to other agricultural enterprises, it certainly would have an impact on those other enterprises that are currently operating in our State, and in other States. So I think we have got to be careful as we transition into other commodities and other agricultural enterprises that we don't destroy those markets and those production capabilities for those people that are already in there.
Mr. MOORE. I would echo what Larry said. We, in Kentucky, are trying to transition some people into other enterprises now with our phase I Master Settlement money. Our general assembly has dedicated 50 percent of the money that is coming into Kentucky from the Master Settlement Agreement to go to agricultural enterprises. We are using that money to transition and to promote other enterprises, other than tobacco in Kentucky. And we would hope that these funds that come through a buyout would go to thatwould go to farmers that would transition into other areas of production.
Page 60 PREV PAGE TOP OF DOC Mr. ETHERIDGE. I want to try to get one more question in, Mr. Chairman.
Can any of you tell me what the world price of Burley is today? I would like to get back to Flue-cured today. And if the program were eliminated, how close we will get to the world price, and how that will affect U.S. tobacco?
Mr. SNELL. There is no really world price for tobacco because it is a commodity that differs by quality. Some of the lower prices, grower prices, out there in the world market for Burley may be 30, 40 cents a pound. If you would look, that would be tobacco from maybe some of the African nations. If you look at Burley tobacco in South America, that has some quality benefits to it, or quality characteristics, probably closer to U.S. Burley than any other Burley out there in the world market; then those grower prices typically would range from 50 cents up to a dollar a pound on the grower side.
But a volatility from year to year, and certainly a quality variation results in the differences of prices across markets.
Mr. ETHERIDGE. Thank you, Mr. Chairman. I will reserve for the second round.
Mr. EVERETT. Thank you.
Mr. JENKINS of Tennessee. Thank you, Mr. Chairman.
Dr. Snell, we know, and all of you have spoken about the elimination of the lease costs, which in Tennessee this year is probably 65 to 70 cents per pound.
Is that a good figure for Kentucky?
Mr. SNELL. On average, our surveys indicate around 65 cents. But certainly we have growers that are paying 80 cents a pound or even higher for the right to grow that pound of tobacco.
Page 61 PREV PAGE TOP OF DOC Mr. JENKINS of Tennessee. But as you looked into your crystal ball and you saw prices falling after any of these programs were enacted, you didn't tell us how much you anticipated that drop off might be, let's say, in 2 or 3 years. Do you have an estimate?
Mr. SNELL. Well, a lot of the proposals talk about providing a safety net near the cost of production, and our cost of production figures indicate somewhere around $1.30 to $1.35 a pound. I think that obviously depends upon the demand response to that price decline, because the companies, as I said, will have to provide that incentive to get the tobacco grown.
I don't necessarily buy the argument that U.S. prices will fall to the so-called world price. I do think that we will have an economic incentive provided by the companies. So I can see Burley prices maybe in neighborhood of $1.25 to $1.50 a pound.
Mr. JENKINS of Tennessee. That is about a 75 percent decline then in the price per pound. So if we have savedif we are a grower, which I am and have been for a long period of time, if we save 65 or 70 cents in our lease costs, but we lose 75 cents in the price of our product, we know that production costs continue to rise, that there has been a constant escalation.
Now, I think this committee needs to be extremely careful, and I do not want to be a part of making a situation that is bad even worse. But do you envision that that could be the outcome of this, if prices drop to the extent that you estimate?
Mr. SNELL. Well, keep in mind that not all growers lease tobacco. You have the situation in Kentucky where we had generally about 30, 35 percent of the tobacco leased. And I think it is a little bit higher in Tennessee. So, again, you have got a different cost structure for those that are leasing tobacco versus those not leasing tobacco.
Another thing that we have to take into consideration is that when we get this 50 or 75 percent of the growers exiting, that will probably be a higher cost for production growers, and therefore the more efficient growers may be able to survive in a post-program environment. But, again, as I said in my testimony, I think that the majority of growers cannot survive from the Burley standpoint without some type of safety net.
Page 62 PREV PAGE TOP OF DOC Mr. JENKINS of Tennessee. Well, even if we don't lease tobacco, if we lose 75 cents per pound, we are still going to bewe are going to have, as they say in the countryside, a ''world of hurt'' put on us, if that is the end result.
Now, you estimated that cost or that amount of price reduction in 2 to 3 years. What do you see out in 5 or 10 years?
Mr. SNELL. Well, as I mentioned, it really depends upon that demand response that we get from the price adjustment. The companies willif the fact is that we don't have enough tobacco being produced at $1.40, $1.50 a pound, then the companies will have to make a judgment whether they want to continue to have the U.S. Burley in their blends and, therefore, provide a price adjustment to provide that incentive for the grower to produce the crop.
Right now we are probably looking at Burley prices this year in the neighborhood of $1.95 to $2 a pound. And, again, if tobacco prices would fall to $1.50 a pound without the program, you still have some of those growers out there that have been paying this 70 or 80 cents a pound to grow their crop that may be economically able to sustain the lower prices.
Mr. JENKINS of Tennessee. Well, do you think the prospect exists that we could be, as growers, worse off after the passage of any of these bills?
Mr. SNELL. I think in the short term the buyout compensation packages do provide a compensation level for those who want to get out of the industry, that they will undoubtedly be better off. But I think what most of us at this table are concerned about are those that want to stay in the business after the buyout; and that, I think, again depends on how you structure the buyout.
But without some sort of safety net and maybe some means to control production, that the majority of growers will not be better off in that post-buyout period compared to where they are today.
Page 63 PREV PAGE TOP OF DOC Mr. JENKINS of Tennessee. Do you think the provisions that are in Congressman Fletcher's bill are adequate to provide that safety net?
Mr. SNELL. I think, as we have talked about this morning, that there are probably some good points in all of the different bills. I am not going to sit here and advocate any one bill over the other. But I think what I am hearing from our firm leadership in Burleythe growers in the Burley regionis that they would like to have some sort of safety net there to prevent them from the price volatility that could occur without a Tobacco Program.
Mr. JENKINS of Tennessee. Thank you, Dr. Snell.
Mr. EVERETT. Mr. Lucas.
Mr. LUCAS of Kentucky. Thank you, Mr. Chairman.
Mr. Moore, you had talked about in your testimony, you raised a concern about the small family farms, particularly in the eastern part of the State.
And FSA numbers our regions, seven regions, from one in the West to seven in the East. And I think in your testimony there are about 14,000 farms in the western region, and one, two, and then there is three times that many in the east, which sends a pretty strong message.
I too am concerned about that, because I represent a lot of those people in that part of the State. Would you care to elaborate a little bit more about that, because this is a very serious problem in our State?
Mr. MOORE. Well, I don't think there is any question, Congressman Lucas, that if we don't have some kind of system in place that keeps the tobacco in the traditional growing areas, that tobacco will exit eastern Kentucky and northern Kentucky where you are at, and go to the larger fields and larger economic units of western Kentucky. I don't think there is any question about that.
Page 64 PREV PAGE TOP OF DOC And that is a concern not only to the farmers in that region, but to the whole economic stability and the culture of that region. And that is a real concern. And that is the reason we say we need toin the Fletcher bill, that the Fletcher bill keeps tobacco in the traditional growing areas. And that is a major component of it for us.
Mr. LUCAS of Kentucky. Yes. From my point of view, that is just a must, that we must do that to protect our people from that part of the country.
Dr. Snell, you are obviously recognized as the authority and the expert in our State. Peopleyou are the go-to-go for that. I would give you this opportunity, if you would, while you have these folks here, to talk about anything in general that you might like to talk about, that has not been covered, or if you would like to reiterate some points.
What would you emphasize to us in this whole situation?
Mr. SNELL. Well, I think during all of the debate, again there is a lot of discussion and different proposals out there. But at the end of the day, we have to realize that the people behind me, as well as in the other rooms, that the alternative of doing nothing is pretty severe, because we are going to continue to see, in many aspects, declines in quotas, escalating lease prices. We are going to continue to lose out in the world market.
So, as you know, with farmers in our regions as well as myself working with those individuals, we care about their future. And thatI know that those members, all of you have farmers from your area that are important constituents, and certainly we have to work together and try to come up with some type of compensation package, as well as a program or environment out there in the future that will allow them a livelihood.
I think one important point that I would like to reiterate that Mr. Moore pointed out was that we still have this phase II program that probably will be eliminated with a buyout, but it still has around $3 1/2 billion to $4 billion left. So while some of the compensation packages can be argued, the size of those packages, we have to keep in mind that the farmers will be sacrificing that if we have a buyout. So I think that is important to keep in mind as we talk about the level and the amount of compensation.
Page 65 PREV PAGE TOP OF DOC Mr. LUCAS of Kentucky. OK. Thank you.
There are some of us that are hopeful that not necessarily will we have a lame duck session, but if we doand that is probably a pretty high probabilitywe are hopeful that we might be able to get some legislation on the floor then. We might think that is an opportune time.
Again, just state for everyone here who might nothow late can we go and still not affect the plans for the next growing season before we come up with something, would you say?
Mr. SNELL. Well, as you know, farmers are always planning today for tomorrow. And one of the biggest concerns that we have out there is how all of this buyout discussion is affecting speculation on quota, on lease prices. And I think that is something that we will try toas the process has unfolded, try to prevent that speculation. But it is still there.
I think the farmers back home in our State, as well as you-all's States are very frustrated. It has been a very tough growing season this year. We have a lot of farmers who want to get out of the business; but yet at the same time, we have those that really care about the future of this industry. I think it is vitally important that we continue to work to put together some type of package and post-program, post-buyout program, that will sustain those individuals who want to stay in.
So it couldn't be any sooner for the people back home.
Mr. LUCAS of Kentucky. Thank you, Mr. Chairman.
Mr. EVERETT. Thank you.
Mr. HAYES. Thank you, Mr. Chairman.
Dr. Brown, excuse me for not recognizing you earlier. I want to switch over for a minute and talk about some of the alternative uses of tobacco that North Carolina State and Georgetown are working on. Would you bring some of the panel members that may not have heard about that up to speedor Larry Wooten, either one. I would like both of you to comment. I am encouraged about the potential there.
Page 66 PREV PAGE TOP OF DOC Mr. BROWN. Well, I have to admit, I am not an expert in that area. I think that is coming from some of our life science departments who are working in that area. But I think there have been, over the years, a number of attempts and quite a bit of work to derive pharmaceutical uses from tobacco. And it is my understanding that those continue, and that those are efforts that may bring to fruition, some products that come out of that.
I think the only problem that we have in that area is, that generally takes a fairly small number of acres to supply most of those pharmaceutical and specialized uses. And so while that is certainly something that we definitely need to continue to pursue, it would affect probably a fairly small number of farmers.
Mr. HAYES. Probably an unfair question. Let me comment on it a minute.
There is some unlimited potential that tobaccoand I am going to be careful not to tell you more than I know, which won't take long; but the tobacco plant has unique properties to produce high quality protein. It has been done with embryonic and other human cells before. So there is all kinds of potential, from my perspective, to use these proteins in medical research to replace very scare, very expensive human cell research.
So NC State has been instrumental, on the agricultural side, working with Georgetown on the medical side, again to give some more strength and viability to the tobacco industry.
Larry, would you comment on that?
Mr. WOOTEN. Well, as Dr. Brown said, tobacco is a very versatile plant. It will beit is important now, and I think it will continue to be important in terms of bioresearch, particularly biotechnology research and its uses.
I would agree with Dr. Brown exactly, that up to this pointand let me just reiterate ''up to this point''the acreages of tobacco used forin the biomedical, nutraceutical, all of those different biotechnologies, certainly in no way come close to the amount of acreage that is currently being used to supply the cigarette and smokeless tobacco industry.
Page 67 PREV PAGE TOP OF DOC Mr. HAYES. Absolutely. And thank you again for your testimony.
We want tocure cervical cancer is specifically what we are working on. Certainly there is no limit to the things there. But I want to make sure that the public is aware that there are other uses that we were working very diligently on with all groups, growers, et cetera.
Mr. Chairman, thank you. I yield my time.
Mr. EVERETT. Thank you. We are now going to go into a second round, and we will start with Mr. Etheridge.
Mr. ETHERIDGE. Mr. Chairman, thank you, and I won't use all of my time. I just have one question of Dr. Brown, if I may.
You mentioned in your testimony that the relative cost of production in different regions has changed since the 1930's, and that elimination of the program would cause tobacco to move into those areas. For Flue-cured tobacco, where are the low-cost areas of production as opposed to the high-cost, if you could share that with us?
Mr. BROWN. Well, the lowest cost production areas would be in the eastern part of the State, in your district, as well as insouthern Georgia, I believe, has some areas that are low-cost areas, which we would see if, you knowand I think this is very crucial, the timing of such a plan, that if this plan occurred within a reasonable amount of time, then you would have opportunities for these companies to try to reallocate some of the production that is being lost out of Zimbabwe, which has been a prime competitor.
It would be an opportunity for Flue-cured producers to regain some of that market share as companies decide how they are going to reallocate that flavor-type Flue-cured production between Brazil and the United States.
So we would not see an exit, though, of some of the higher cost areas like the Piedmont of North Carolina, or even the Piedmont of Virginia, because there are flavor differences even within those regions, and companies also want to diversify their risk in terms of weather-related risk.
Page 68 PREV PAGE TOP OF DOC Mr. ETHERIDGE. Thank you very much, Mr. Chairman. I yield back.
Mr. EVERETT. Thank you.
Mr. JENKINS of Tennessee. Thank you, Mr. Chairman. I would like to go back to Dr. Snell. I am not picking on you, Dr. Snell. I live very close to east Kentucky, have many relatives there. My wife lived in a place called Harlan, Kentucky, for many years, and I know you to be sturdy people who can take the load and carry.
Mr. SNELL. Thank you.
Mr. JENKINS of Tennessee. But I want to, in response to a question about the value of the quota, you explained how the $8 figure was arrived at and said that it was based upon the valuethe going rate for leases of 40 cents per pound.
Now, under the traditional definition of market value, a willing buyer, a willing seller, we can now conclude that the market value of that poundage is in the neighborhood of 65 to 70 cents per pound.
So my question is, should we now go back and reevaluate that pound of quota, based upon the escalation from 40 cents up to 65 or 70 cents per pound?
Mr. SNELL. Well, the adjustment in those lease prices, Congressman, has been due to a couple of factors. One is the tremendous quota cuts, as Mr. Moore alluded to a while ago, that we have had over 50 percent of our quota cut; and obviously, reducing the supply of quota, you are going to increase the rental value for that quota.
But another thing that has somewhat distorted rental rates has been the phase II program. As growers have anticipated getting those compensation values from producing the crop, they have had an extra incentive to rent at higher prices, knowing that they were going to get that compensation level.
Page 69 PREV PAGE TOP OF DOC And as a result, I think as we look at, to me, the traditional value of quota, if you take out that distortion of the phase II, then also we have had TLAP dollars that have played into impacting lease prices. To me, again, more of a long-term economic value of quota on an annual basis is somewhere around that 40, 50 cents a pound.
Mr. JENKINS of Tennessee. But you don't question that you have a willing buyer and a willing seller in this marketplace, do you?
Mr. SNELL. Undoubtedly. Again, you have had these other values as well as the buyout discussion that has caused those willing buyers out there to pay higher prices, so your assertion that both the rental rates as well as, quote, sales, in terms of that price have gone up in recent years.
Mr. JENKINS of Tennessee. Well, of course you would have that in any transaction. I mean, certainly the purchaser of land, if he is going to pay $2,000 an acre, would like to buy it for less, undoubtedly. But if market conditions are suchwhatever they are, require him to pay $2,000 an acre, then he becomes a willing seller under the definition of market value.
So you don't think we need to go back and revalue the quotas?
Mr. SNELL. Well, one issue that I tried to bring to the table when this discussion arose a few years ago is, a lot of people who don't account or don't have a feeling that they can justify the $8 a pound, go back and look at what quota is actually selling for in the marketplace. And my response at that point is, in Kentucky and I would imagine the same thing in Tennessee, that value is causing about 1 percent of the quota to be sold. So obviously the existing quota holders have a higher value for that quota, and as a result, they are not willing to sell that valuethat quota at current market prices.
So, again, I think to economically justify that value base, you have to look at a normal, traditional return for that base. And again that 40 cents a pound was a figure that we used back in 1998 to justify that base.
Page 70 PREV PAGE TOP OF DOC Mr. JENKINS of Tennessee. Thank you, sir.
Mr. EVERETT. Mr. McIntyre.
Mr. MCINTYRE. Thank you very much, Mr. Chairman.
I want to thank all of the panelists, and especially the work that you do at the Farm Bureau. We know how widespread the support for the Farm Bureau isI know obviously in North Carolina, but also in the other Statesand I know that we have representatives here from several States, also have several friends that have come up from South Carolina, right across the border from where I live, in the border belt tobacco market.
I want to thank all of them and all of you gentlemen for your time today and the importance of your testimony, and in helping us crystallize the message that we do need a buyout. With the principles that have been set forth, we trust that we are going to be able to work together to get us one.
Thank you, Mr. Chairman.
Mr. EVERETT. Thank you. I too want to thank this panel. Your information has been very valuable to us.
And at this point we will call the next panel. That will be Mr. Johnson, chairman, South Carolina Agriculture Commission; Mr. Schafer, president, Indiana Tobacco Growers Association; Mr. Jenkins, tobacco farmer, representing the Virginia Tobacco Working Group; Mr. Aiken, tobacco farmer from Tennessee; and Mr. Vickers, tobacco farmer from Nashville, GA.
While the panel is being seated, let me point out that we are going to have, probably, a vote in the next 10 or 15 minutes. And hopefully, there will only be one of those votes, and we won't interrupt you too long.
Let me again remind the panel that we strictly enforce the 5-minute rule. We don't mean to be rude, but this is the only way that we can get through these meetings when we are discussing issues that are so important to the producers and everybody concerned.
Page 71 PREV PAGE TOP OF DOC So, Mr. Johnson, if you will start. Thank you.
STATEMENT OF ALBERT M. JOHNSON, CHAIRMAN, SOUTH CAROLINA AGRICULTURE COMMISSION, GALIVANTS FERRY, SC
Mr. JOHNSON. Thank you. Mr. Chairman. Before I start my speech, I have something here I would ask the chairman to put in record. It is approximately 7,000 signatures from the States of Georgia, Florida and Alabama, supporting the McIntyre bill. Also in here is some letters written from some city and county officials supporting that bill also. So I would request it be put in.
Mr. EVERETT. It will be made part of the record. Please proceed.
Mr. JOHNSON. Thank you, sir.
My name is Albert Johnson. I am the chairman of the South Carolina Agriculture Commission, also a tobacco farmer from Horry County. I would like to take this opportunity to thank you for allowing me to speak at this hearing. I would also like to thank Congressman McIntyre for getting the ball rolling on the tobacco buyout legislation.
The first problem we are facing in tobacco production is the current quota system. This quota system has been in existence for over 50 years, with only a few modifications made to it.
As you know, this world has changed drastically in the last 50 years. The time has come for a quota buyout. The growers and allotment holders must be compensated. Compensation will pay both groups for their loss of assets, and the key to survival of family farms in the Flue-cured tobacco-producing States lie within a buyout as well.
This summer, South Carolina producers fought to overcome two major disasters. The first was a severe drought. The second one was the farmers who sold on the auction system. Only about 50 percent of the tobacco sold at auction has been purchased by manufacturers and leaf dealers, causing undue hardship to these family farms, forcing many out of business or into bankruptcy.
Page 72 PREV PAGE TOP OF DOC The scenario I just gave you will cause more large quota cuts or higher assessments on the producers, thus decreasing their profitability even more. Of all of the bills introduced in the House of Representatives, the McIntyre bill is the most inclusive, most realistic, and has been cosponsored by five of the six Congressmen from the State of South Carolina.
Also the South Carolina Agriculture Commission voted unanimously to support the McIntyre bill. This bill does several things to help tobacco producers and the rural communities they live in.
It gives farmers the opportunity to exit tobacco production, if they wish; protects farmers who continue to grow with the Federal Crop Insurance Program; and it also protects rural communities and the infrastructure by limiting production to the areas where they are now produced.
Gentlemen, I humbly ask you to help resolve these problems as soon as possible. All businesses must plan for the future. But with the problems tobacco producers are facing, they are unable to plan for their future. We must have and deserve closure on this issue in order to allow these farmers to continue their way of life.
And let me just say that words cannot describe, if you haven't walked in these farmers' shoes, what they are facing. I beg this committee to work together to move legislation through the House Agriculture Committee on to the floor and help these people. Thank you.
[The prepared statement of Mr. Johnson appears at the conclusion of the hearing.]
Mr. EVERETT. Thank you. Mr. Schafer.
Page 73 PREV PAGE TOP OF DOCSTATEMENT OF MICHAEL SCHAFER, PRESIDENT, INDIANA TOBACCO GROWERS ASSOCIATION, MADISON, IN
Mr. SCHAFER. Chairman Everett, thank you, and the members of the Committee on Agriculture. Thank you for giving me this opportunity to speak to you about the issues that lie heavily on the hearts and minds of tobacco growers.
Also, I would like to thank Congressman Baron Hill, whose interest and understanding have demonstrated immensely how uplifting and greatly appreciated it has been for him.
I am a tobacco grower from the historic and rural community of Madison in southern Indiana on the Ohio River. Tobacco has been a stable commodity of my community and its economy for nearly 200 years. I raise Burley tobacco, as well as corn, soybeans, hay, and beef cattle. I have been involved in tobacco organizations for many years now.
Through these organizations I personally know and understand the implications and hopes of a tobacco buyout. Again, thank you for allowing me to share with you the situation of the small growers in America. And if I could, I would like to talk about a little personal experience as a tobacco farmer.
I came from a family of five children with two stay-at-home parents. My dad went to the 8th grade. My mother graduated from high school, no further. And they were both able to see all five of their children receive college degrees and become solid citizens.
The process by which Burley tobacco grown is going to show about this. It requires intensive labor. It is usually conducted by small groups, in our case, usually three to five people, often without noisy machinery. This social period, or social time, or whatever you want to call it, created and allowed for a near-perfect modern term, we use now, called ''quality time'' between my parents, my brothers, my sisters, my uncles, my friends, and it helped create an appreciation of what people are. It installed moral values in myself and my siblings. It installed a work ethic; it will be with me as long as I live.
Page 74 PREV PAGE TOP OF DOC And I want you to feel, or at least as I feel, how this crop that we produce, a commodity that is used in many ways, but we are just producing somethingwe arereally our product is good people doing things that help our society as we develop intomy two sisters are nurses, one sister is a business major, my brother is an agriculture economist.
It produces more than tobacco leaves, and I am proud of that; I think we should be proud of that. But as time changes, these persons badly need this buyout. And hundreds of my neighbors have encouraged and enumerated to me in many ways how important this is for the community that we have represented here, the previous speakers and yourselves, to come together with a sense of understanding, a sense of comprise where necessary, to make this happen soon.
I also would like to comment, we have no one from the FDA on the panel. But I have worked extensively the last few years with a dialog, with persons that want to make our society better. And I think we need to get involvement in FDA that is reasonable, allows the farmer to produce a product that he is so proud of, and yet do it in a manner that is consistent with the benefit of all society.
So, again, I would like to thank you for this opportunity to speak. And Iand Mr. Chairman, I just don't know how I can emphasize to you how important this way of life is, and it is changing, and we need to move on with this buyout, this transition to improve or continue to allow this way of life to go on. Thank you.
[The prepared statement of Mr. Schafer appears at the conclusion of the hearing.]
Mr. EVERETT. Thank you. For Members, we do have a vote, but we do have time for Mr. Jenkins to get his 5 minutes in. Mr. Jenkins, if you would proceed, please.
Page 75 PREV PAGE TOP OF DOCSTATEMENT OF JORDAN M. JENKINS, TOBACCO FARMER, REPRESENTING THE VIRGINIA TOBACCO WORKING GROUP, BLACKSTONE, VA
Mr. JERRY JENKINS. Mr. Chairman and members of the subcommittee, I thank you for the opportunity to appear before you today. I am Jerry Jenkins, a tobacco farmer from Lunenburg County. I represent the interests of the Virginia Tobacco Working Group, which is made up of all of the tobacco producer policy organizations in the Commonwealth of Virginia. These include the Virginia Farm Bureau, the Virginia Tobacco Growers Association, Concerned Friends for Tobacco, Allies for Tobacco and the Southwest Virginia Agricultural Association.
On their behalf, I will convey our shared observations, conversations, concerns and recommendations to address those areas provided in your letter of invitation that are relative to those of us that grow tobacco.
The Tobacco Program is a personal issue to anyone who makes a living and supports a family, as a tobacco farmer. It has protected the producer against severe price fluctuations and provided the industry an adequate and reliable supply of tobacco of world-class quality.
It has been modified several times in order to provide support to an entire industry for nearly 8 decades. However, we must be realistic. The current Tobacco Program is not sustainable for the future, and comprehensive changes in the program are needed.
In this regard, I will share with you our thoughts and recommendations concerning the tobacco buyout, modifications to the program, and other political realities that beset the Tobacco Program today.
Moreover, we have worked with members of the public health community over the past several years, and continue an effort to promote public health, and at the same time, sustain our small family farms.
Page 76 PREV PAGE TOP OF DOC Why a tobacco buyout? First, our production opportunity has dramatically declined as a result of the Master Settlement Agreement, whereby tobacco manufacturers have been forced to increase prices for tobacco products, reduce inventories and purchase lower quality imported tobacco in order to pay for this agreement.
Also, and I think this is very important, the stated long-range goal of the Master Settlement is reduction of tobacco consumption in the United States. In addition to lower domestic demand, we have experienced a decline in our export markets due to price competitiveness. These factors have caused a significant loss in quota equity, loss of income to growers, and carry with it a negative impact on the entire tobacco-producing community.
Second, permanent legislation enacted in the 1930's has created a quota asset that can be produced, owned, leased, shared, bought or sold. Its equity value has increased over time, and it is a major part of quota owner's retirement. And I think every speaker has brought this to your attention.
Likewise, producers who own, lease or sharecrop have a substantial capital investment in bonds, equipment, et cetera, that are associated with producing tobacco, and much of this equipment or items are specialized and no good for anything else.
Therefore, to offset the effects of the Master Settlement Agreement, make our tobacco more competitive on the world market by taking quota values, the cost of production, and indemnify the asset value of tobacco quota, we recommend quota compensation and producer transition payment, or simply stated, a buyout.
This must include the following: Quota owners should be paid $8 a pound for basic quota, producers receive $4 per pound produced, an additional $2 for those who cease production, and payments to quota owners and producers made over a 5-year period.
Why do we need a program modification or program at all? We know that the current Tobacco Program is not sustainable, but it is critical that we maintain some form of supply management and price stability for producers. Without one, history has shown that there will be a massive production shift to large production units that will grow as much tobacco as possible at the cheapest price. This would mean the end of the family farm, and many communities where tobacco is grown today would be devastated.
Page 77 PREV PAGE TOP OF DOC While many commodities have moved away from the supply limits approach, I believe it is still appropriate for tobacco. There is no other farm product where the ultimate goal of the government is to increase the cost of the product to the consumer and eventually eliminate the product.
The free market is not so free to tobacco farmers when, essentially, only a few buyers control the market. Tobacco farmers cannot take advantage of price risk management afforded other commodities by the Chicago Board of Trade or the Chicago Mercantile Exchange, and to force individual growers to contract with multinational conglomerates can only lead to economic servitude.
[The prepared statement of Mr. Jenkins appears at the conclusion of the hearing.]
Mr. EVERETT. Thank you very much, Mr. Jenkins. The remainder of your testimony will be put in the record.
The hearing will be recessed while we go for this vote.
Mr. EVERETT. We will resume the hearing. Will the hearing room please return to order? Mr. Aiken, if you will please begin your testimonyand we are still under the 5-minute rule.
STATEMENT OF JEFF AIKEN, TOBACCO FARMER, TELFORD, TN
Mr. AIKEN. Mr. Chairman and committee members, good afternoon, and thank you for the opportunity to share my concerns with you regarding the current buyout proposals affecting tobacco. I share my concerns on behalf of the tobacco growers and quota owners in my home State of Tennessee, and particularly those in the district represented by Congressman Jenkins where I farm.
Page 78 PREV PAGE TOP OF DOC I am a producer of Burley tobacco and rely on that crop for a profitable diversified farming operation. We also produce corn and hay on our dairy and beef cattle farm. My 45-acre Burley production is larger than average in Tennessee, but there are many larger growers across the State. While size of operation may affect the opinion toward buyout proposals, I believe I can include the concerns of both the larger and smaller growers and quota owners in my comments.
I know of no other legal crop that can provide the level of income that tobacco has traditionally afforded farming operations in our State. Producers have made an investment in the production of tobacco through No Net-Cost Program and its related expenses. In addition to the grading fees, no-net-cost assessments, marketing costs, and normal production expenses, there is another major non-value-added expense I have to pay: the cost of acquiring quota to maintain sufficient levels of production to sustain my farming operation. The quota cuts over the past few years have greatly inflated this cost.
In 1998, the basic quota for Burley tobacco production in Tennessee was nearly 111 million pounds. In 2001, the basic quota for Tennessee Burley was less than 57 million pounds. Obviously, since quota determines the ability to produce and sell, our earning capability has been essentially cut in half since 1998. At a time when production costs continue to rise, our production is reduced and quota availability is limited, resulting in increased quota lease costs. Added to the economics of this situation is the quota buyout debate. As a State board member of the Tennessee Farm Bureau Federation, I am subjected to contact from various producer and quota owner interests and hopefully have a broader viewpoint of the buyout discussion.
As we look at the various proposals that have been offered for consideration of the buyout mechanism, we should remember there is no perfect approach. In looking for the most appropriate plan, however, it should be one that provides adequate compensation from the viewpoint of the recipient. Adequate compensation is widely accepted at the $8/$4 level referred to in many different proposals and discussed as far back as the McCain legislation prior to the Master Settlement Agreement.
Page 79 PREV PAGE TOP OF DOC It should be one that is not unreasonably demanding of the funding source.
Considering the offset of MSA phase II dollars for the manufacturers and the level of wholesale price increases since 1998 that exceed the estimated amount to recoup the cost of the MSA, the manufacturing sector appears capable of addressing the costs. It should be pointed out that the result of legislation reducing the price support level would result in cost savings to the manufacturer/buyer and will help U.S.-produced tobacco regain market share in the global market.
Seldom is it discussed but clearly understood by tobacco farmers that an acre of tobacco production returns approximately $4,000 before expenses to the producer. Federal, State, and local governments receive an estimated revenue of $45,000 per acre from excise taxes on cigarettes. No other crop is treated the same. Partial use of existing tax on tobacco products to facilitate a buyout mechanism would not seem inappropriate.
Has a fair and uniform distribution of funds for all quota tobacco. Compensation for quota reductions and program equity changes should be clearly defined and not diminished after support for the legislation is developed.
It should also be the result of input from grower quota owner and the manufacturer buyer sectors, and address as needed program adjustments.
Resources of time, travel, and negotiation have gone into the various buyout proposals, but some have not reflected the total industry input. The Master Settlement Agreement phase II agreement is a good example of the mechanism established absent the input of the grower sector. It has resulted in an inadequate compensation level that has essentially passed through the hands of the grower and been a catalyst in rising lease costs.
H.R. 5035 is a bill that meets that criteria. A bipartisan supported bill with a payment mechanism very similar to the bill heavily lobbied by our largest customer and leading manufacturer, H.R. 5035 has the support of numerous groups in the Burley, Flue-cured, and dark-fired areas of production. The reason it garnered such support is the consensus-building effort from the various interests within the industry.
Page 80 PREV PAGE TOP OF DOC [The prepared statement of Mr. Aiken appears at the conclusion of the hearing.]
Mr. EVERETT. Thank you very much, Mr. Aiken. We will make sure the rest of your statement gets in the record.
STATEMENT OF LAMAR VICKERS, TOBACCO FARMER, NASHVILLE, GA
Mr. VICKERS. Mr. Chairman and committee members, I am here today to talk to you today about tobacco buyout. I am Lamar Vickers from Nashville, Georgia. I am the president of the Berrien County Farm Bureau, vice chairman of the Berrien County Board of Education, and a member of the Georgia Tobacco Growers Association. I serve on the Georgia Farm Bureau, Tobacco Advisory Committee, and I serve on the Georgia Commission of Agriculture, Tommy Irwin's Tobacco Advisory Committee. I have a wife Ann, and three kids: Denita, Bradley, and Cynthia.
I farm in Berrien County with my father Eltonwho is retiredand my brother. Tobacco has been a way of life on our farm. It is what pays the bills. We had bought tobacco quota as an investment for the future. It was going to be my retirement. It was like a C D or 401(k) plan. Over a period of 3 years, beginning in 1998, our quota was cut about 50 percent. Not only did we lose half of our quota, but we also lost half of our yearly income. Imagine trying to pay your bills with half your income lost. It will not work.
We, like all other tobacco farmers, had to restructure loans and try to make it work with a lower cash flow. Prior to the quota cut, we had bought more land and put in irrigation. We were able to grow higher-quality tobacco before 1998, and it was a good investment until we lost our tobacco income.
Page 81 PREV PAGE TOP OF DOC I am a third-generation farmer, but it looks like I could be the one to lose the farm if things don't change soon. We are farming on equity that we and our forefathers built up over their lifetime. Times are so bad that many farmers have been sold out over the past few years. If we don't get a buyout soon, many farmers that are left won't be able to farm next year.
Farmers have come together with a lawsuit to try to get some financial help in order to stay on the farm. The Georgia Farm Bureau and the Georgia Growers Association are in favor of the buyout. We are ready to lay our differences aside and join together and move forward with the buyout. I am here before you today, asking that we bring closure to the buyout this year so that farmers can make plans for the future. I would like to see my children and grandchildren be able to have the opportunity to farm if they so choose. Without a future in growing tobacco, this will not be possible.
The impact of the quota cut in Berrien County since 1998 has been a little over 3 million pounds, which translates to a lost income to the farmer of $5 million a year. This is a great economic impact for a small populated county of 16,200.
We have been talking about a buyout for the past 4 years. Farmers have been told the time is not right. We believe the time is now. Many farmers have just been holding on by a thread, hoping for a buyout, and time is not on their side. Time is running out.
I am here before you today, asking you for help in solving our problems. The way of growing and marketing tobacco is going to change. Farmers don't like change, but the time has come for change in our Tobacco Program for the betterment of us and our children who want to keep up the farming tradition.
It is also imperative for us to become more competitive in the world market which is in the best interests of everyone in the tobacco industry. Georgia farmers want the quota buyout price to be $8 a pound for the owner, $4 a pound for the producer. It would take this to allow us to survive another year. Then each farmer will have to decide whether he will continue to grow tobacco or pass it on to a younger grower.
Page 82 PREV PAGE TOP OF DOC The average age of the tobacco farmer in Georgia is 60 years old. Some are ready to retire, and we need a plan to address this. Many growers like me are looking for a future in growing tobacco for a profit. We need a safety net, a base like the new Peanut Program has now. But most importantly, we need $8 a pound for the quota holder, $4 a pound for the producer.
I see a future in growing tobacco if we work together to solve our problems. Again, we need $8 and $4, and a base to grow tobacco with a safety net to ensure that the cost of production is covered in case of a bad crop year or low tobacco prices. Tobacco needs to continue to be grown in traditional tobacco growing counties, and the safety net program would be a No Net-Cost Program to the taxpayers, like it is currently. Now is the time to let us move forward and let us work together, both Flue-cured and Burley States, to accomplish this by the end of the year.
To make a long story short, there is no other crop that can consistently replace tobacco revenue for the farmer. The program has kept the value of a pound of tobacco up so that we can grow it up profitably. However, the Master Settlement Agreement between the States and the tobacco companies has caused instability in the production of tobacco. The best thing to do in my opinion is to buy out the quota owner and pay the farmer a settlement to offset his losses as well.
As for alternative crops, what do you do? Come up with another crop or crops that starts another government program that will face scrutiny in the future? Any crop grown without price support and production control will not provide stable income to the farmer.
So again, I am in favor of a buyout of the system even if it means an increase in taxes.
[The prepared statement of Mr. Vickers appears at the conclusion of the hearing.]
Page 83 PREV PAGE TOP OF DOC Mr. EVERETT. Thank you for your testimony, Mr. Vickers.
Let me say that I have spoken to members of the panel, and I don't know when we have been impressed more with the testimony that we have heard from this panel. We are very impressed with it. And what we have decided to do, rather than ask questions to this panel, we want to give each of you, beginning with Mr. Johnson, an additional 2 minutes to add anything that you would like to add to your testimony.
So Mr. Johnson, if you will begin, I would appreciate it.
Mr. JOHNSON. Thank you, Mr. Chairman. Before I start, I would ask thatit has been brought to my attention that approximately 3,500 more signatures supporting the McIntyre bill is on the way up.
Mr. EVERETT. So approved.
Mr. JOHNSON. Thank you.
Gentlemen, it isyou know, it is hard to talk about your own problems. And we as farmers and tobacco farmers have a series of problems, and it is a little bit embarrassing to say that your neighbors are going to lose the family farm, as the gentleman that just spoke about it has been in the family farmthe family for three or four generations. But I am just telling you, the urgency out there is unbelievable. If we don't get a buyoutthe United States Secretary of Agriculture will announce quotas December 15 by law, and normally we start the process of leasing quota from quota owners in January. This is just going to be unbelievable, what can happen. The pressurewe are looking at a quota cut for this coming crop year. That is going to force farmers out of business.
Another thing that has been questioned about the growers receiving compensation. And I can only speak from the State of South Carolina, but I think these numbers are pretty accurate across all the Flue-cured States. We have got approximately $2 and 3 or 4 cents coming to the growers from the phase II Master Settlement, and they are willing to give that up. So in essence, $4, they are only going to get $2 because they are giving up $2 and 15, 20 cents, thereabouts. So I just want you to understand that they have already got a bird in the hand of $2 with the phase II payments. And
Page 84 PREV PAGE TOP OF DOC Mr. EVERETT. We read you loud and clear. Thank you.
Mr. JOHNSON. It is just very, very tough on the families out there.
Mr. EVERETT. Thank you, Mr. Johnson. Thank you very much.
Mr. JOHNSON. Thank you.
Mr. EVERETT. Your time has expired.
Mr. SCHAFFER. Thank you, Mr. Chairman. I appreciate the opportunity to speak again. As I mentioned about our growing more than just tobacco leaves, I would like to also includewhere we live, I am quite involved with many, many local community activities. And because of the cutback, these communities are suffering in some cases at even a greater level than we as farmers are. And if we channel these payments to the farmers the same way they have been, the farmers will spend them in the communities and the communities will remain viable as they have been foryou know, in fact, my little town 200 years ago was the largest town in Indiana; now it has 20,000 people, and Indianapolis has over 1 million.
But this is such a good way. The cost, like we indicated, the produceror you indicated in your questions, the producerwhy would you pay him, and yet he would stay in production? Well, we do need to understandor at least to mehalf of the producers, or more, will remove themselves from production. And they have got the equipment, they have got other capital costs. And, if nothing else, they are training over the years and they have got to retrain themselves.
So I think not only do the quota holders need this compensation, but if we can understand that producers need it for various reasonsand in all cases this money will go to the communities, to the hardware store.
And my time is about gone, so you can get me on a question. Thank you.
Page 85 PREV PAGE TOP OF DOC Mr. EVERETT. Mr. Jenkins.
Mr. JENKINS of Tennessee. Well, I would like to reiterate what has already been said here. And it is really surprising to me that of all the people we have heard today, the stories have been just about the same. The seriousness I think is recognized in all quarters, and the severity of the situation. A lot of people associate tobacco with big money, but that stops at a certain level. You don't see it on the farm.
Now, a question was raised about the $8 value quota. And something I would like to add: I would agree that probably you could justify a higher value now. But we have felt in the growing community, we would be lucky to get 8; let us don't try to push things is the reason why it stayed at 8. And if you used the same logic that Doctors Blake and Snell used at the beginning, I think you could justify higher than $8 as being a real value of quota.
And the $4 to the producer, even if he is going to quit or even if he is going to continue, has raised a lot of questions. I think the $4 there is to pay that producer for investment in equipment, and all he is saying is that a lot of tobacco is being rented where the quota owner really contributes nothing but the quote or signature; the producer is furnishing land, labor, and equipment. And whether he continues to grow tobacco or not, he has got to use up or pay for that equipment.
So we think that $4 thereand the fact of buying the truck and still getting to drive it home, he is going to need all the help he can get when he determines to continue to farm tobacco in a new environment of lower prices and less market opportunity.
Mr. EVERETT. Thank you, Mr. Jenkins.
Mr. AIKEN. Thank you, Mr. Chairman.
I realize that probably I am fortunate to have a Congressman, Mr. Jenkins, that is a tobacco grower, producer, and quota owner, and therefore understands the plight that we are facing. And Congressman, I appreciate all your efforts and time on behalf of the tobacco producers.
Page 86 PREV PAGE TOP OF DOC I also am a fourth-generation farmer, have enjoyed the farm life. My father's advice to me was to work hard and it would not be a problem to make it. I went to the University of Tennessee, and one professor said that hard work would not cut it anymore; that you had to manage better and market better.
I think I have worked hard, I think I have managedI think I have tried to market my products in a better way. And the fact is, I am still seeing it pretty tough.
My responses as to a question earlier as to why growers should be involved in the buyout or paid: Since 1997, my family has survived up to that point by growing more tobacco each year. The margin of profit stayed the same, so you just increase production to hold your profit level at the level that you need it.
After 1997, with the quota cuts, that was impossible to do. So the profit of margin remains the same, but I have not been able to increase my level of production. So I think that growers from that standpoint have been affected and will be affected in the future.
Again, it has been a privilege to be here, and I thank you for the opportunity. Thank you.
Mr. EVERETT. Thank you. I will point out for the record that Mr. Lucas and Mr. Etheridge were raised on tobacco farms.
Mr. AIKEN. Yes, sir, I am aware of that. Thank you.
Mr. EVERETT. Mr. Vickers.
Mr. VICKERS. I would like to say that there is representation here from all the growing areas, and it seems to me that we all have the same problem. I didn't realize that everyone was in the same boat as I was until we got here today.
Mr. EVERETT. Is there any comfort there?
Mr. VICKERS. It is a little comforting. But I would like to reiterate the urgency of this. And I understand you all know it, because like the guy said a while ago, it isdown in Georgia and Florida, we done planting for another year. It is not long before we go to the fields and go to turning tobacco land, preparing seed beds for year-end greenhouses. And we are operating with so much uncertainty in our future. We can't buy new equipment, which we all are in dire need of, because we have been operating, like I said, talked a little while ago, on the equity that we had bought up over the years. And we have been holding off on investments that we needed to have made that we can't make because of so much uncertainty in our future.
Page 87 PREV PAGE TOP OF DOC And that is not really fair to me nor my family, because there is no better way of life, I don't believe, than on the farm to raise a family. We all love it. If you see someone coming down the road, it is not like it is in Washington; they are coming to see you at my place.
So you all press forward. We are willing to work with most anybody. We are kind of like a rubber band at times, we are flexible. You have to be to work on a farm. And thank you all for giving us the opportunity to come today and speak before you all.
Mr. EVERETT. Again, I want to again thank this panel. Every member has told me how much this panel has meant to them in their testimony. And also the overwhelming message that I get is the urgency, and also the fact that you are willing to work to get this thing done and to try to reach a compromise, which is going to be very difficult for us here. I don't want to make you feel like it is going to be an easy road. It is not going to be an easy road at all. But thank you again for your testimony and for appearing here today.
I will call the next panel now, please.
Mr. Michael Szymanczyk, Chairman and CEO of Philip Morris USA; Mr. Thomas Payne, executive vice president, external relations, R.J. Reynolds Tobacco Holding, Inc., and Mr. Steve Watson, vice president of internal affairs, Lorillard Tobacco Company, Greensboro.
Mr. Szymanczyk, if you would start, I would appreciate it. Thank you. I remind you gentlemen of the 5-minute rule. Thank you.
STATEMENT OF MICHAEL E. SZYMANCZYK, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, PHILIP MORRIS USA, NEW YORK, NY
Mr. SZYMANCZYK. Mr. Chairman and members of the subcommittee, I am Mike Szymanczyk. I am chairman and CEO of Philip Morris USA. And on behalf of my company and its nearly 13,000 employees, thank you very much for giving us the opportunity to present our views here today.
Page 88 PREV PAGE TOP OF DOC I am proud that Philip Morris USA is here supporting a tobacco quota buyout funded by an achievable revenue source and that includes FDA oversight of tobacco products. We believe these two very important goals are inextricably linked. H.R. 3940 would establish a more market-oriented, more sustainable alternative to the current Federal Tobacco Program. It would also provide for comprehensive and effective regulation of tobacco products by the Food and Drug Administration.
The convergence of Federal regulation and the tobacco quota buyout presents an opportunity for us to work together to ensure that these complementary goals are joined to fashion a comprehensive, thoughtful, and effective national tobacco policy. Title I of H.R. 3940 would require that the Commodity Credit Corporation make aggregate payments to quota holders and active growers in excess of $15 billion over a 5-year period using a formula that has gained tremendous support in tobacco-growing communities.
Philip Morris USA has made it clear that if tobacco-growing communities support a buyout, so will we. We are working to support the plan put forward by Representatives McIntyre and Davis, which, in our judgment, is the only one that has a chance of actually being implemented and of actually providing the concrete buyout payments that the growing community wants.
There are three principal reasons why we believe this. First, the McIntyre-Davis plan is fully funded by a realistic revenue source. Buyout proposals with no funding source that seek to utilize existing revenue streams or that include new Federal taxes, in our opinion, simply won't get the job done.
Second, Representatives McIntyre and Davis have proposed a quota buyout that is truly a buyout, not merely a subsidy posing as a buyout.
Alternative proposals that would purport to eliminate the existing quota and price control system only to replace them with new ones are simply not reasonable, equitable, or achievable. These proposals raise questions, both of fairness to the farmers of other crops covered by the farm bill, and of our Nation's agreement to observe the subsidy caps imposed by the World Trade Organization. These caps, if exceeded, would result in reduced subsidies to all American farmers.
Page 89 PREV PAGE TOP OF DOC And finally, the McIntyre-Davis bill links the buyout to meaningful and effective regulation of tobacco products by the FDA to both reduce the harm caused by tobacco products and keep FDA personnel off the farm. There are strong supporters of both the buyout and FDA regulation, and by joining forces we believe that they can forge a majority.
I am also here to accept the responsibility for our role in the disputes and the misunderstandings and lack of resolve on tobacco regulation in the past. But for more than 2 years now we have actively urged passage of an effective and comprehensive FDA regulatory policy. And effective to us means a regulatory plan that is designed and funded in a way to truly accomplish its stated objectives:
First, encouraging the development under FDA's oversight of products that have a genuine potential to reduce the harm caused by smoking.
Second, empowering FDA to contribute further to harm reduction by creating mandatory performance standards that, while reducing the delivery of relevant smoke constituents, maintain the palatability of tobacco products. This will help avoid accelerating unintended consequences like the recent alarming proliferation of counterfeit cigarettes that aren't regulated and use little, if any, American tobacco.
And finally, ensuring that FDA's product standards will be respected on a nationwide basis.
Mr. Chairman, we know that the issues in both parts of this legislation are complex and controversial, but we pledge to work with anyone who wishes to join in this challenge, and commend you and your committee for these hearings as a critical first step. Thank you.
[The prepared statement of Mr. Szymanczyk appears at the conclusion of the hearing.]
Mr. EVERETT. Thank you. Mr. Payne.
Page 90 PREV PAGE TOP OF DOC
STATEMENT OF TOMMY J. PAYNE, EXECUTIVE VICE PRESIDENT, EXTERNAL RELATIONS, R.J. REYNOLDS TOBACCO HOLDINGS, INC., WINSTON-SALEM, NC
Mr. PAYNE. Good afternoon. I think the critical issue for the committee to consider is how do you make the active tobacco grower more competitive and more profitable both in the United States and internationally?
I think we all agree that the original intent and purpose of the Price Support Program has pretty much been stood on its head. The equity and protection that it afforded to growers has really now passed from growers to in essence nongrowing quota holders. It is less risky and more profitable to own quota than it is to grow tobacco.
Now, let me give you a few facts that you may or may not find helpful as you consider a buyout. USDA says that there are fewer than 89,000 farms where tobacco is actively grown. Now, not all those programsall those farms, are under the Price Support Program. The basic quota for Flue-cured and Burley this year is approximately 906,000,000 pounds. Now, of that poundage, USDA says approximately 63 percent is rented production. That is about 571 million pounds.
Think about that for a minute. Over half of the domestic tobacco produced here is on rented quota, the quota not owned by the guy or the family that owns itthat grows it. Now, of course, they pay rent on that, and USDA estimates that the Flue-cured average rent is about 55 cents a pound, and that for Burley it is about 62 cents a pound. So if you do back-of-the-envelope math, you have got rent payments of about 372 million pounds coming from active growers, their bottom line, their pocket, to nongrowing quota holders.
Now, as you look at a buyout, who is going to get the money? Who is going to get paid? And I have to look at the phase II payments that were made in 2001. And there are approximately 341,000 households nationwide that receive quota checks, in every State and the District of Columbia.
Page 91 PREV PAGE TOP OF DOC Let me give you two examples that really popped out at me:
There is a lady, I am sure she is a very nice lady, named Bambi Grisby. She lives in Niagara Falls, NY; she owns quota in Virginia. Last year, she got a check for a little over $1,300. I grew up in Pitt County, NC, and they apparently built a golf course down there called the Bradford Creek Golf Club. Last year, they got a check for $109,000 for quota that they own. I think it is safe to assume that Bambi is not commuting down to Virginia to produce this tobacco and that the boys are not stripping stalks on the 18th fairway down at the golf club in Pitt County. But if you break out now how those 341,000 checks are going to be paid, the top 1 percent of quota holders are going to get about 27 percent of the money. If you use $15 billion they are going to get about $4.2 billion. The top 20 percent are going to get about 68 percent of the money. That is about $10 billion.
Now, who is going to pay for this? That is the billion-dollar question. If others are right and I am misguided, and that the thing that makes an active tobacco grower more profitable and competitive is a buyout and elimination of the Price Support Program, then it seems to me that it would withstand the scrutiny of the authorizing and the appropriations process in the same respect that the Peanut Quota Buyout Program did. And we haven't heard a lot of discussion about that, and there are probably a whole host of reasons of why that isn't actively discussed.
But if you are looking for mandated user fees, excise taxes, whatever form you want to put it in, I want to refer you to Jasper Womack over at the Congressional Research Service. He did a great summary of the buyout proposals, and I would suggest that you give it a quick glance, if not a pretty detailed reading.
He said if you somehow reduced the price support level by 50 cents a pound to pay forand the manufacturers are required to paysomehow we could recoup all that money to our bottom line; and you are funding a $15 billion buyout, it would take 55 years for the companies to recoup that investment.
Page 92 PREV PAGE TOP OF DOC Over $88 billion has been paid by smokers either in the form of excise sales or MSA payments for 1999 to 2001 to some form of government, State or Federal. There is a lot of money in the pipeline.
To sum up, I urge you to go back and take a real hard look at the Price Support Program before we just chuck it over the side of the ship. This withstood a lot of criticism, inaccurate in large part, but it has also been in place and withstood the necessary modifications. Quota should be in the hands of active growers. Price support is designed as a safety net, not as a barrier to competition. I think we can do this within the Price Support Program to make active growers more competitive.
[The prepared statement of Mr. Payne appears at the conclusion of the hearing.]
Mr. EVERETT. Mr. Watson.
STATEMENT OF STEVE WATSON, VICE PRESIDENT, EXTERNAL AFFAIRS, LORILLARD TOBACCO COMPANY, GREENSBORO, NC
Mr. WATSON. Good afternoon, Mr. Chairman. Thank you for the opportunity to present the views of Lorillard Tobacco Company regarding Federal buyout legislation. My name is Steve Watson, and I serve as vice president for external affairs at Lorillard. I have submitted a written statement, and would ask that it be part of the hearing record.
Mr. EVERETT. All panel statements will be part of the record.
Mr. WATSON. Thank you, sir.
We commend the committee for holding this hearing. The issue of a Federal tobacco buyout has generated great interest among tobacco growers. And while Lorillard does not oppose a buyout, we have several concerns regarding the manner in which buyout legislation has been presented to the growers. In discussing this topic, we believe that Congress should not lose sight of the interest of those who wish to continue to produce tobacco.
Page 93 PREV PAGE TOP OF DOC Lorillard produces cigarettes in the U.S. domestic market only. The majority of tobacco leaf used in our products is produced by U.S. tobacco growers, and we would like to continue the use of mostly domestic leaf in our products. We have a great interest in a more stable, predictable, domestic tobacco leaf market, and we would think that the interest is similar to the interests of the tobacco farmers who want to stay in the business. Because of that, Lorillard supports the continuation of a Federal Supply Management Program. While the current program is clearly antiquated, we believe commonsense changes can be made to move in the rightthe right to produce tobacco into the hands of actual growers. This would significantly reduce the cost of production for growers and make U.S. tobacco more competitive in world markets.
For Lorillard it promotes stability. For smaller family farms, it allows them to stay in the business. And, as Jasper Womack of the Congressional Research Service noted in his report last month, if the Federal Supply Management Assistance Program were completely eliminated, the farmers most disadvantaged would be small- to medium-sized operations.
If the Federal buyout legislation eliminates the Supply Management Program, we believe there would be greater instability and dislocation in tobacco growing areas. The current crop presents a telling example why a Supply Management Program is needed. Growers continue to need a stabilizing force in years where weather conditions are severe. In addition, they continue to need a reserve stock level that cushions the ups and downs of the market. And we all benefit from a system that balances supply and demand.
Second, let me be clear: Lorillard strongly opposes linking buyout legislation to Federal legislation of tobacco products through the Food and Drug Administration. There are several very important reasons why Lorillard opposes FDA regulation, but for our purposes today we want to focus on the effect that FDA would have on those growers and their farms.
Page 94 PREV PAGE TOP OF DOC FDA regulation will change tobacco farming in many ways, and growers may not fully appreciate this. Each of the pending FDA bills would allow the Federal Government to mandate changes in tobacco leaf itself, and in many cases the best way to do this would be to change the way tobacco is grown. This could mean changes in tobacco seed, changes in cultivation practices, changes in the type of soil where tobacco can be grown, changes in the curing process, and other changes that none of us have even contemplated.
FDA regulations will impose significant administrative costs per farm that will likely drive small family farms out of business. This means FDA regulation will accelerate consolidation into larger farms; FDA regulation will make leaf exports less competitive; and we believe FDA regulation will inevitably drive the production of cigarettes for export offshore.
All this will significantly reduce tobacco farm income, and it will destabilize tobacco-growing communities and our supply of domestic tobacco leaf. Furthermore, we reject the notion that a buyout and FDA regulation are inextricably linked.
Lorillard is also concerned with any proposal that further raises tobacco taxes. Just this year, nearly 20 States have raised the State excise taxes, with increases ranging as high as $3 per pack. Taxes on more than 40 million tobacco consumers have nearly tripled in the last 6 years, and total payments made by the manufacturers to Federal and State governments have totaled over $88 million in the last 3 years alone. We do not support any proposal that unfairly targets consumers further.
In conclusion, Mr. Chairman, we believe that the debate on buyout legislation should focus on providing long-term solutions. Specifically, how can a Buyout Program change provide a more stable environment for those families who want to continue to produce tobacco and allow them to make ends meet? At the same time, we believe FDA regulation of tobacco is a very serious threat to the long-term interests of the farmers and manufacturers. It is our hope that necessary commonsense changes can be made to the Growers' Program. And please understand that Lorillard is willing to help be a part of the long-term solution.
Page 95 PREV PAGE TOP OF DOC At this time I would be pleased to try to answer any questions the committee may have.
[The prepared statement of Mr. Watson appears at the conclusion of the hearing.]
Mr. EVERETT. Thank you very much. We will begin with Mr. Jenkins.
Mr. JENKINS of Tennessee. Thank you very much, Mr. Chairman.
Mr. Watson, you didn't really go into detail about those changes that were going to be brought to the farm in the event that FDA gets out there. But can you envision any of those expensive changes, like retrofitting barns, to do certain things to the tobacco crop each year?
Mr. WATSON. Yes, sir. Let me be as specific as I can. When we talk about FDA and its impact on the farmunderstand, we deal with this issue quite a bit. When the public health community and others talk about wanting to regulate tobacco through the FDA, when they talk about the cigarettes, it is not the paper that they have a problem with and it is not the filter, it is the tobacco. And if you give the FDA the authority to regulate what is within the leaf, that is going to put them squarely on the farm and I think growers need to know that.
But when you talk also about what authority that might have in terms of how to impact growers and farmers, you have to understand that under the bills that I have seen thus far, particularly Congressman McIntyre's, that you would not have the abilityif they mandated a change, there would be no need for cost/benefit analysis to be done; there would be no need for technological assessments to be done. So these mandates could be done without any consideration as to what the cost might be to the farmer.
So, for example, if they had determined that there were certainly compounds that were in certain types of soil, they could make a change that no longer that soil could be used, or mandate certain changes that must be done as far as the pesticides in that soil or changes within the leaf.
Page 96 PREV PAGE TOP OF DOC Those are just a couple of examples of where I believe undoubtedly FDA would have a direct impact if that was linked to a buyout proposal.
Mr. JENKINS of Tennessee. Thank you, Mr. Watson.
I would like to address a question to all the witnesses and talk about a subject. You may all get up and run out when I mention it, but it hadn't been mentioned in this hearing. And I would like to mention the question of liability. You know, there are some who are suspicious out there in the world of agriculture that, quote, whatever is done in regard of a buyout could conceivably bring the liability aspect closer to the farm.
Now, I think everybody in the world of agriculture is sympathetic with your plight, is sympathetic with what you have gone through with respect to lawsuits. But as sympathetic as we are and as sympathetic as they are, we don't want to be in there with you. So, do any of younow, let us just talk about it on the front end. And I want to ask you, you represent three great companies, you have been down this road over a long period of time and for many years. But do you foresee anything that would be done in connection with the buyout to bring either the grower of tobacco any closer to the courtroom scene?
I have either been blessed or cursed, depending on how you look upon it, to have both practiced law and have grown tobacco. And I know a little bit about tobacco farmers and I know a little bit about lawyers. And the last thing in the world the fellow on the farm needs is to have to defend some lawsuits. Now, you talk about some real costs. I think that is the one thing could put the end to the family farm in this country.
Do any of you see, let me ask you, any prospect that this is going to bring the liability scene any closer to the farm either through the action of plaintiffs or through the action of tobacco companies in this case?
Mr. SZYMANCZYK. Well, Congressman, I will respond to that first, if that is OK.
Page 97 PREV PAGE TOP OF DOC Mr. WATSON. Sure.
Mr. SZYMANCZYK. I am not aware of anything. I am really not. In fact, I am a little surprised at the comment because I just have not seen anything about that that would cause me to believe that it leaves liability with the farmer. So I am not sure quite where you are coming from on it, but I can't speak to anything in particular that relates to liability in a buyout.
Mr. JENKINS of Tennesee. Well, as we say down in the hills of east Tennessee I just wanted to ''axe'' you.
Mr. SZYMANCZYK. I am not aware of anything.
Mr. PAYNE. Congressman, I left all the attorneys at home, so let me take a stab at this.
To the previous question as to what extent would FDA get on the farm, if you look at what has happened just currently with tobacco-specific nitrosamines and Flue-cure, reductionssignificant reductions in TSNAs, we have a method for doing that in Flue-cured; we don't have a method for doing that in Burley. So you could construct a scenario, not too far-fetched, that if FDA came in to Burley producers, you shall reduce TSN As the same amount that your Flue-cured brethren have. The No. 1 question is: Can they do it without significant expense cost? Number 2, would they have to certify that? And certainly, if they had to certify that production to a specific level, at a minimum you would have regulatory imposition of potentially civil fines, et cetera, et cetera.
I will have to leave it to the real-live lawyers to say to what extent would growers potentially be part of the causation stream, so to speak, in our ongoing existing litigation.
Mr. WATSON. Congressman, I also do not have legal background. And I certainly would never underestimate the creativity or the persistence of plaintiffs' attorneys in this country. And while I can't pinpoint directly how that linkage might occur, I definitely think we have made the case that when you introduce FDA and try to link it with the buyout, it complicates things. And I think it complicates it in many ways for the farmer. And could that potentially spill over into the litigation area? It could be.
Page 98 PREV PAGE TOP OF DOC Mr. JENKINS of Tennessee. My time has expired. But thank you, Mr. Chairman, and thank the members of this panel.
Mr. EVERETT. I am just curious if you made more money from your law practice or from growing tobacco.
Mr. JENKINS. Well, let me tell you, Mr. Chairman, I haggled with a tractor dealer one time over a period of weeks to get him down on the price of a used tractor, and he said to me in the final analysis, he says, ''Jenkins, you can make more money on one lawsuit than it takes to buy this tractor.'' and I said, ''You are absolutely right. But I don't use this tractor in the practice of law.''
Mr. EVERETT. Mr. McIntyre.
Mr. MCINTYRE. Thank you very much, Mr. Chairman. And thanks to all of our panelists.
For Lorillard, I would like to ask you a question. Do you favor a buyout for our tobacco farmers? Do you favor the threshold question that has been discussed today of a buyout?
Mr. WATSON. Congressman, we have never opposed a buyout.
Mr. MCINTYRE. Then the answer is yes?
Mr. WATSON. And so I think you can take from that that we would support a buyout. But what we have done, Congressmanlet me be clear about thisis we have set some conditions as to what we think are necessary if a buyout were to occur. And the reason we have set these conditions is because as a manufacturer that hopes to be in business for many, many years, we have to think about not only what the farm looks today, but what it will look 5 years from now, 10 years from now, 15 years from now.
So the conditions we have set forth is that
Mr. MCINTYRE. Let me ask the next question. I just wanted to make sure you did favor a buyout, and I understand your conditions and your testimony. My time is limited.
Page 99 PREV PAGE TOP OF DOC So let me ask you this, then. What method, of all the bills you have heard discussed todayyou have been here for all the testimony, correct?
Mr. WATSON. I have.
Mr. MCINTYRE. What methods do you favor to fund the buyout?
Mr. WATSON. We have not come out and publicly supported any particular bill.
Mr. MCINTYRE. OK.
Mr. WATSON. I have seen some legislation or some draft legislation that I think is going to be introduced soon that I have not talkedand I would like to talk with members like yourselves and Congressman Etheridge, who we value and respect quite a bit on the feasibility of those proposals.
Mr. MCINTYRE. All right. Do you agree that the $8 and $4 formula in most of the bills that have been considered or proposed is the proper amount of compensation for farmers?
Mr. WATSON. I couldn't say. I am not an expert on that. But at the same time, I think a part of that depends on what basis years you project that out to be.
Mr. MCINTYRE. Well, on the bills that have been proposed, do you agree with that formula? Or have you looked at that with the basis years?
Mr. WATSON. I don't know offhand which basis years are used for which bills that are being introduced at the same time. I guess it all comes down to how are you going to pay for it. We do not support the increase in the excise tax or user fee, which we consider to be another form of a tax increase to pay for it.
Mr. MCINTYRE. All right. For RJ R, do you agree with the $8 and $4 formula that is already in most of the bills that have been proposed as the proper amount of compensation for our farmers?
Page 100 PREV PAGE TOP OF DOC Mr. PAYNE. I am concerned about that, Congressman, and for a couple of reasons. Number 1 is the base year that is used. Number 2, if you look at what the value of quota is particularly inI believe the stats from USDA were Burley quota I think last year sold on average for $2.58 a pound. But there are others here that can better answer that than I can.
The concern I have, I guess, is based on the fact when Philip Morris bought our former sister company, Nabisco, they didn't pay the price of it 5 years ago or what they might think the price would be 5 years hence; they paid the fair market value right now.
I do think we are looking at a bit in a vacuum, because the $327 million that I referenced is money obviously that is going to those quota holders from the guys who are actually growing the tobacco. I think the question is how do you make active tobacco growers more profitable.
Mr. MCINTYRE. Do you have a specific figure, though, that you support?
Mr. PAYNE. No, sir.
And to go to your earlier question to Mr. Watson, we do not support a buyout that is intertwined with Federal FDA regulation.
Mr. MCINTYRE. On that point.
Mr. PAYNE. Or uses any other form of excise tax, mandated fee or user fee.
Mr. MCINTYRE. OK. On that point, on page 4 you state that you don't, quote, ''oppose all regulation per se,'' close quote.
Mr. PAYNE. Right.
Mr. MCINTYRE. Can you tell us exactly what kind of regulation you would support or be neutral on?
Page 101 PREV PAGE TOP OF DOC Mr. PAYNE. Well, without writing a bill right now, the bottom line for us is, at the end of the day are we still able to effectively compete for the business of adult smokers? And you have to understand that in the context of not only this existing market, but also thethe restrictions and eliminations of communications that was adult smokers was imposed by the Master Settlement Agreement. Let me give you this example.
If you were to run your own political campaign, and the only place where you could advertise your candidacy was at the polling booth, at town hall meetings that you held, in magazines and newspapers, you probably would say, compared to where you have been, that that is not in your definition effective communication with likely voters.
Now, positioned as you are with incumbents that you have high name I.D., your candidate has not been elected before, you might benefit from those selected restrictions on your marketingon the marketing of the communication.
But the bottom line, without writing a bill right now, Congressman, you can go to our Web site, it's RJRT.com. We have had it there for over 2 years. At the end of the day, can we effectively compete as a legitimate business and selling a legitimate product for adult consumers who choose to smoke? Meaning, retaining our own, trying to get some of Mr. Szymanczyk's, trying to get some of Mr. Watson's to switch over.
Mr. MCINTYRE. Thank you. And with my time expiring, would you be willing to provide us the list of the regulations you would be willing to support or be neutral on, since you have stated you do not oppose all regulations per se?
Mr. PAYNE. There are no bills introduced in Congress today, Congressman, that we support. Again, if you go to our Web site, we do list the seven major areas of regulation that we would support.
Mr. MCINTYRE. OK.
Thank you, Mr. Chairman.
Page 102 PREV PAGE TOP OF DOC Mr. EVERETT. Thank you.
Mr. CHAMBLISS. Mr. Payne, let me just expand on that one step further. Would you give us your opinion, your thoughts, on what FDA regulations, as they are proposed in the McIntyre bill, without even going to the extreme of the Kennedy bill, what would that do to your industry? What would it do your growers or to our growers?
Mr. PAYNE. Well, in the industry, it would have different impacts. As it relates to R.J.R., we do not believe that we would at the end of the daynot only when it was enacted, but 5 or 10 years down the roadbe able to effectively compete. If you look at Section 906 of the McIntyre bill, it does give the discretion to Secretary of HHS and the Commissioner of the FDA to impose whatever marketing and merchandising restrictions that they see fit, to the extent that they believe it would help reduce the level of youth smoking. Now, we all know in the context that we have lived since 1994 that there is virtually no restriction that can't be placed in the context of reducing youth smoking.
So you could take that out to a fairly extreme application if you wanted to. That obviously impacts smaller manufacturers for sure, but it impacts even the second-largest manufacturer. The gentleman to your left of me is the greatest competitor in the world. They have the best brand in the world. And if you are fighting against Marlboro, you want to be able to talk to a Marlboro smoker. I mean, that is the free enterprise system.
We are already in a very limited situation. To the extent that it is further limited, to the extent that you can identify, but then 15 years from now, only able to make a best guess about, you have to wonder to what the extent that goes to the viability of your business.
Now, if you look at sectionI believe 907 of the Congressman's bill, it talks about FDA implementing performance standards. This goes to the point that Steve was raising earlier. It is not unreasonable to think that within the next 10, 15, 20 years that we actually are able to produce a pure reduced-risk product.
Page 103 PREV PAGE TOP OF DOC But prior to that time, you may have FDA coming in and saying, Tommy, we want you to produce Camels that have only certain levels of nicotine. We want to reduce the level of nicotine. We only want you to use organic tobacco. Previous example. We only want you to use Burley tobacco that has 95 percent reductions in TSNAs, just like we have for Flue-cured today.
Although it is directed at the manufacturer, it is implemented at the farm. So I think it is a very short period of time after that bill would be signed into law that the Food and Drug Administration would be implementing its job and doing it with a very broad scope. I think it would have enormous and probably irreparable consequences, certainly for the manufacturers, and I believe it is naive to assume that it will not have the same consequences for the farmer.
Mr. CHAMBLISS. Are you referring from a growing standpoint, something like the barn retrofitting issue that we have been through recently?
Mr. PAYNE. Exactly. Fortunately that waswe were able to implement that on a voluntary basis. But, again, tons of research has been done on how you achieve the same result on domestically produced Burley. To date there has been no effective method, much less one that can actually be implemented, because of the different ways that tobaccos are cured.
So it is not unreasonable to think that FDA, within a short period of time, that is an easy place for them to go. But when they put their thinking cap on and they say we want, in essence, to go back to what Liggett has been doing, and the hubbub on engineered tobacco to produce no nicotine in Pennsylvania, they could very easily go down that path and have that implemented for all of the southeastern United States, Flue and Burley.
Mr. CHAMBLISS. Mr. Szymanczyk, in fairness, I want to give you an opportunity. What is the Phillip Morris position on what the impact of FDA regulations would do to our growers?
Page 104 PREV PAGE TOP OF DOC Mr. SZYMANCZYK. Well, I think you have to start with the thought of what is the impact of FDA overall, and then ultimately the impact of FDA on the manufacturer, and then the result on the farmer comes from the manufacturer. Because I think all of these pieces of legislation that I have seen that include FDA, specifically keep FDA off of the farm from a direct point of view. So I think any implication is related to what the manufacturer has to do.
I believe the real effect of FDA is to reduce harm caused by tobacco, and I think that needs to be done. And I think that product standards, some of the things Mr. Payne mentioned, like product standards, like good manufacturing practices for all manufacturers that bring products into this country, things like reduced-exposure products that can be developed where research is underway, are all things that can work to reduce harm.
When I will look at, for example, the FDA proposal that is a part of the McIntyre-Davis bill, what I see is very little that is focused on actual marketing of cigarettes, not much more than codifying what we are currently operating with in terms of the Master Settlement Agreement. Ninety-five percent of that proposal is related to reducing the harm of the product.
And I do think that thethe reduction of TS&As in the Flue-cured environment and the converting of barns is a great example of just what we can do and should do relative to reducing harm.
Phillip Morris USA put up $35 million to support the conversion of barns across the Flue-cured growing community, as did the leadership of that growing community, in order to move forward the standards for Flue-cured tobacco in an effort to reduce harm. I think that is a good thing for us to do. I have trouble understanding why we can't be rational and reasonable and have regulation that calls for things that we can do and challenges us to do more so that we can reduce harm caused by tobacco.
Page 105 PREV PAGE TOP OF DOC I think that ultimately is to the growers' benefit. I think that the American public, and in fact I know the American public favors FDA regulation, and having companies like ours in alignment with what the American public wants on a subject like tobacco I think can only help the grower that we buy our tobacco from.
And I would point out to the committee that we buy about 50 percent of the tobacco that is grown in this country. We have maintained, despite competitive prices around the world and a lot of foreign competition that uses much lower priced tobacco that they buy off-shore, we have maintained our content, high content of U.S. grown tobacco, because we value participating in this market and in this economy with these growers and want to continue to do that.
And that is why we are here supporting this buyout. But we want it to get accomplished. We believe for it to get accomplished it needs to be tied to FDA in order to have the breadth of appeal to people, and it needs to be simple and straightforward and funded so that it can haveit can meet the needs of the breadth of stakeholders that are going to be interested in it so that it can become a reality.
I have heard a lot of testimony today. I am glad that we went last. I am very happy that I had a chance to listen to our growers and how badly they need this buyout. I do think we should move forward on it, and I do think that what I have seen in the McIntyre-Davis bill represents the best chance of action soon.
So that is why I support it. I hope I have answered your question.
Mr. CHAMBLISS. Thank you.
Mr. EVERETT. Mr. Etheridge.
Mr. ETHERIDGE. Thank you, Mr. Chairman. Let me thank each of you for being here today and for your testimony and for all of the others who have been here, because it has been very instructive and helpful to all of us, because certainly during the day as I have stepped out I have met with groups of farmers. In varying degrees, farmers tell me they need $8 and $4, they want $8 and $4, they feel like we havesort of that is what they have heard, for whatever reason is out there. We have heard from the economists who tell us how it was put together.
Page 106 PREV PAGE TOP OF DOC But let me ask you a question, and I guess I will start with you, Mr. Szymanczyk, if I may. Because, according to your testimony that we have heard today and stuff I have read, the buyout that you are proposing and some of the others as well, but specifically yours, it provides no safety net for growers, makes it virtually impossible for a small farmer to stay in business, and puts control of purchasing tobacco squarely in the hands really of five companies, virtually.
For those farmers who know that they are going to get out of business, that is no big deal. They are out. But what about the people who decide they want to stay in? Should they be concerned?
Mr. SZYMANCZYK. Well, I think that is a good question, Congressman. Here is my view on it. First of all, we support $8 and $4, because the growers and the quota holders support $8 and $4. We believe that is the safety net, that in fact that is the right thing to do, that if you calculate it, it is in fact an aggressive amount of money.
When you look at, for example, the grower, it really amounts to about 10 to 15 times earnings, which is, when you are in business like I am, you look at that and you say, well, that is an aggressive buyout, and I think the same can be said for $8.
I am not in agreement with the notion that a free
marketand the McIntyre-Davis bill does contain growing to the current geographies, but it does allow it to move around within those geographies. But I am not in agreement that in fact that works against the small farmer. Today we contract with roughly 18,000 farmers. About 50 percent of our farmers are growing below 5,000 pounds a year.
We find that our smaller farmers often give us the best quality tobacco. They have tremendous pride in what they grow. So from our standpoint, in order to maintain our blend structures we wish to continue to buy across the bands that we buy now and across those communities and across those farmers that we buy now. We don't see a particular advantage to shifting that.
Page 107 PREV PAGE TOP OF DOC We also know that we have a quality supplier of cigarette products. Our products are on the higher end of the price scale. We value suppliers and long-term relationship suppliers. We look at our growers as a part of the family that contributes to the success of our company. We need them to be successful.
Mr. ETHERIDGE. I appreciate that. I don't want to cut you off, but I don't have much time. That being said, you andI won't go to the othersall of you know that this place doesn't always operate the way that we start things. We may start off with $8 and $4. My question to you is if it gets somewhere along the line and someone decides they are going to cut us to $4 and $2, I want to know if you are going to fight and turn your lobbying group loose to make sure that our farmers, because that is who I am here fighting forI realize we got to fight, too, but are you fighting to make sure that they get that?
Mr. SZYMANCZYK. Well, again my position on this is I believe it has to be a buyout, not a buyout and then a continuation of a program, but in the context of a buyout absolutely. I think that is what the growers want, and I am going to support that.
Mr. ETHERIDGE. Thank you, Mr. Chairman.
Mr. EVERETT. Mr. Lucas.
Mr. LUCAS of Kentucky. Yes, continuing on, Mr. Szymanczyk. Is thereyou know, I am of the opinion that we need to have a safety net for a long-lasting benefit after this buyout. And, of course, that is contrary to what you folksis there any middle ground or alternative that could protect or ensure some longevity for these folks that you can think of, or is there anycould you come off of the position you are in now that we could come up with some kind of supply management system?
Mr. SZYMANCZYK. You are addressing your question to me?
Mr. LUCAS of Kentucky. Yes.
Mr. SZYMANCZYK. I am sorry, Congressman. My fear here is that in looking at this, and I have to examine it in some detail, I don't purport to be a world trade expert by any stretch. But it seems to me that if we do a buyout, and then there are either production controls or floors, pricing floors or pricing supports, that we run into a problem here relative to agreements we have under the World Trade Organization and the caps that we have in terms of payments that we can make to growers.
Page 108 PREV PAGE TOP OF DOC And I also think that the minute it shifts from being a pure buyout, by leaving in place some sort of production control or price support system, that we being to run up against the fairness issue relative to the farm bill and the payment levels on pure payments at $40,000 a year, and our quota holders certainly have much more value than that at stake.
So I just have a problem with how you get to that. And mywhat I would encourage the Committee to do is focus on getting the buyout right. Get the buyout right, I believe, and then we don't have to worry about that. And I also can tell you, I expect to continue to buy a lot of U.S.-grown tobacco. I don't haveI don't see this as a means to having less purchase of U.S.-grown tobacco. I see it as an opportunity to get the farmers on their feet and then have them continue to grow high quality tobacco that we can use in our products. I think that will work for us.
Mr. LUCAS of Kentucky. I will kind of go back to what I did earlier in the panel, but I am almost obsessed with the idea of protecting the small tobacco grower. We have so much of that in the eastern part of the State where the terrain just does not permit large patches of tobacco.
Do you have any contributing thoughts as to how we might be able to protect those smaller growers who don't have the quantities for the efficiencies that they need to be productive against larger producers? Do you have any thoughts about that?
Mr. SZYMANCZYK. Well, I tell you what I find. I find that that grower, because sometimes they are smaller, as I said, they can grow higher quality crop. Their crop is cleaner, they have a high quality crop. When we get it, it is easier for us to process it. And so in that instance, we are willing to pay for that product. And we recognize that sometimes that small grower isn't as efficient.
And I think that really is driven by the market, by that small grower giving us the high quality, because we are willing to pay for the quality. And that would be my best offering. But I again go back to what I said before. If the buyout is right, I think that is less of a concern.
Page 109 PREV PAGE TOP OF DOC Mr. LUCAS of Kentucky. It would seem to me, though, that even the disparity in the quality, the price of the quality, wouldn't begin to make up the efficiencies that the larger growers would have. I don't know how much the range is between the lower and higher quality.
Mr. SZYMANCZYK. Although I would point out to you, Congressman, if that was true, then I would be buying a lot more off-shore tobacco today. That opportunity exists for me today. There is nothing that causes me to be in the market to the level that I am other than I want to be.
Mr. LUCAS of Kentucky. OK
Mr. SZYMANCZYK. That is why we are there.
Mr. LUCAS of Kentucky. Thank you, Mr. Chairman.
Mr. EVERETT. We are ready now for a second round, and we will begin with Mr. Chambliss if he has any questions.
Mr. CHAMBLISS. Mr. Szymanczyk, I envision, if FDA regulation is put in place, they are obviously going to be put in place for the FDA to control the growing, processing and manufacture of cigarettes in this country. So I think it is only logical to assume that within a short period of time, FDA is going to control not just the way we grow tobacco, but also the quantity of U.S. tobacco that is in your product.
So I think we can expect that it won't be long before 100 percent of your product is going to have to contain American grown tobacco. What would be your reaction to such a regulation imposed by the FDA that ensures that they have 100 percent control over all of the product that goes into your end product?
Mr. SZYMANCZYK. Well, let me make sure I understand what you are asking. Are you asking me would I support the FDA being on the farm?
Mr. CHAMBLISS. I am asking if you would support FDA ensuring that 100 percent of your product is American grown.
Page 110 PREV PAGE TOP OF DOC Mr. SZYMANCZYK. Well, I think in the context of a cigarette blend that would be acceptable to the U.S. consumer 100 percent might be difficult. I think certainly today we carry a high content of U.S.-grown. We are carrying todayof the Flue-cured and Burley tobacco that is in our cigarettes, 80 percent of it is U.S.-grown. But to have an acceptable blend, you have to add Orientals, for example, and some things like that.
But I guess my answer would be I would not have a problem with a high content of U.S. tobacco. I do think that has to be tempered with giving the consumer a product that they find
Mr. CHAMBLISS. Well, FDA right now doesn't have any control of that imported tobacco, and I am 100 percent certain that that would be one of their goals, ultimately, to get control over all of it. That is why I ask you that.
Mr. Payne, what would be the long-term effect of FDA regulations on your particular company? What is going to happen to you?
Mr. PAYNE. Well, I think ultimately, given the current market dynamics, that we would stand to be more harmed by FDA regulations, specific portions of FDA regulations, than certainly some of our competitors were, and specifically the Phillip Morris Company. Analysts have recently said that. And that is just because of the size, the market share, and the power of the Marlboro brand.
Keep in mind that since 1998, when the Master Settlement Agreement was signed, there is a whole category of low-priced cigarettes manufactured by hundreds of manufacturers. Their market share has grown from 2.83 to right about 9 and a half share of the domestic market.
They are accelerating their growth in the last 6 months by almost half a share point per month. So you have both a large player, a dominant player, and then a growing small segment that has a built-in price advantage by as much as about $15 per carton.
Page 111 PREV PAGE TOP OF DOC Now, why is that important? When you go into any convenience store in your hometown, you will see on the counter and blend the counter all of the price information about Camels, Marlboros, Newports. But the potential for either dramatically removing that or taking it to a point of where it is not effective communication is real, particularly under the Kennedy bill. He takes the FDA rules that Dr. Kessler proposed that the Supreme Court struck down, and he codifies those in his bill.
Certainly the restrictions we are already living under through the Master Settlement Agreement, if that was the limitation of the marketing restrictions, we are already there, but it won't be.
So it goes to the question of when you have four brands that you believe are good brands, how do you communicate that? How do I tell a Marlboro Light smoker that I have got a brand called Camel Turkish Royale and we would like for them to try that, or a new menthol product that a Newport smoker might try, or a Salem.
The fact that only one little portion
Mr. CHAMBLISS. Speed up. My time is fixing to be up. But do yougive us a bottom line.
Mr. PAYNE. Well, it is difficult to protect an absolute bottom line. We would be a smaller, less profitable company. That is the bottom line. It would be the same thing that happened with the McCain legislation.
Mr. CHAMBLISS. Thank you.
Mr. EVERETT. Mr. McIntyre.
Mr. MCINTYRE. Thank you. If you could just give some short answers to this, I have got two or three things I would like to ask the panel. To follow up, Mr. Payne, you just said we are already there, if it were to be that the only regulations were those already contained in the Master Settlement Agreement.
Page 112 PREV PAGE TOP OF DOC So if we are already there, if any proposed buyout bill in fact codified those rules contained in the Master Settlement Agreement, would that then be acceptable to your company?
Mr. PAYNE. Yes, if you don't have section 906 in your bill.
Mr. MCINTYRE. All right. The next question, because we want to work together to try to find common ground, as I know you have heard today in the interest of all of the
Mr. PAYNE. Let me modify that, Congressman. It is notI may have misspoke. Am I OK with those advertising restrictions? Obviously we have already agreed to them. Does that mean that I accept in the balance a FDA in the buyout? The answer to that is no.
Mr. MCINTYRE. Now, the next question would be, if each of you could tell us, I know to follow up on what Mr. Chambliss was asking, what percentage of domestic tobacco is currently part of your overall requirements? Phillip Morris has said 80 percent. Could the other two companies tell us?
Mr. PAYNE. I don't know on average what our content of U.S. leaf is. It has varied over the years.
Mr. MCINTYRE. Is it at least 75 percent?
Mr. PAYNE. I don't know, Congressman.
Mr. MCINTYRE. Would you say it is anywhere near that? Is it less than 50 percent?
Mr. PAYNE. I would be hesitant to give you a percentage, that it might be inaccurate. I will come back and supply it to you. But I am not in a position to say, as Mr. Szymanczyk has, that here is the percentage on average across our brands.
Page 113 PREV PAGE TOP OF DOC Mr. MCINTYRE. Do you have a best guess?
Mr. PAYNE. My best guess is that I will give you the answer as opposed to giving you an inaccurate answer.
Mr. MCINTYRE. Mr. Watson, do you know?
Mr. WATSON. Yes, sir. I mentioned in my oral testimony that we currently are using a majority of U.S.-grown tobacco in our cigarettes produced this year. I don't know what that exact amount is. I would be happy to give that.
Mr. MCINTYRE. Over 50 percent?
Mr. WATSON. Yes.
Mr. MCINTYRE. H.R. 3940 requires a labeling of domestic leaf content on the cigarette pack. Do you havedo any of you have a problem with that, labeling how much domestic leaf you are using?
Mr. SZYMANCZYK. No, sir, I do not.
Mr. PAYNE. I don't have a problem to the extent that you are able to sustain your trademarks.
Mr. WATSON. To be perfectly honest, I don't know that I haveI don't know that our company has taken a position on it. That is the first time I have heard it. I will be happy to get back with you on that.
Mr. MCINTYRE. One other point made by Mr. Payne that I wanted to follow up on, about the growing share of the discount cigarettes, I believe you said 2.5 percent up to about 9 or 9.5 share. There has been a huge shift, obviously as you have stated, towards discount cigarettes that don't use any of the advertising methods that you have said you are concerned about that would be restricted by possible FDA regulation.
In light of this fact that it is already occurring, and a tripling, literally, as you have pointed out, of companies that don't use any of those advertising methods, do you agree that this in fact shows that companies can compete effectively while still protecting kids from predatory advertising campaigns, since in fact it is already occurring?
Page 114 PREV PAGE TOP OF DOC Mr. PAYNE. Well, Congressman, you are inaccurate that they don't use advertising. All you have to do is go look for a Bailey's
Mr. MCINTYRE. No. Don't use any of the advertizing methods that you said would be restricted by the FDA.
Mr. PAYNE. They do use those advertising messages at retail. They are not bound by the MSA restrictions. Their growth is driven by price. If I were able to profitably produce a carton of cigarettes where I could sell it for $15 less than Marlboros, my market share would be growing as well. So if the question is if I enjoyed that price advantage, and a similar cost structure, I didn't have to make MSA payments, would that be better off in terms of our earnings and profits? Certainly. But that is not the real world. I think it is, you can't say, simply because they have that huge price advantage, but don't advertise to the extent that we do, that therefore the restrictions that are in your bill are acceptable to our ability to compete against, not only them, but the largest competitor in the world.
Mr. MCINTYRE. In light of the time running out, I would like to just request, Mr. Chairman, so that we can come together and synthesize the concerns to get a bill that can pass Congress, that if each of our panelists today would please submit in writing a list of regulations that they would accept, so that we will know what these companies are willing to accept, so that we can then decide how that may play into a possible funding mechanism.
Thank you, Mr. Chairman.
Mr. EVERETT. We would ask you to do that in the next 30 days, please.
Mr. ETHERIDGE. Thank you, Mr. Chairman. And again let me thank each of you for being here today. And to my colleagues, I am going to be brief, because you have been here a long time, and a lot of folks have been here without lunch, all since early this morning. So I am not going to go, except for just one question I would like to ask. And this is really for the folks, the farmers and growers and, recognizing that, let's for the sake of argument assume that there were a buyout. Let's just assume that, whatever the number may be.
Page 115 PREV PAGE TOP OF DOC And forthe folks who own allotments obviously would be different thanwell, for folks who own allotments and grow, and you also have those who lease allotments. So my question comes to this.
Given that from all we have heard today about how the price of tobacco will fall with a buyout, because obviously you are taking the rent out or the lease payment out, give me your best thinking, starting to my left and to my right, if you want to answer it, what that will mean to the American tobacco grower, because this is what that is about. Will they grow more tobacco? If so, how much? Or will we be low enough not to compete with foreign tobacco, and we keep losing market share?
Mr. SZYMANCZYK. Well, I canthe best I can do, Congressman, is give you my instinct on it. It seems to me, that based on what I heard today from the economists, that we will have some growers who take a buyout and decide that they no longer want to participate. And it seems to me that that is a lowering of supply.
Mr. ETHERIDGE. I don't mean to interrupt you, but what I am really talking about is total U.S. tobacco.
Mr. SZYMANCZYK. Right. But I do think, and I am getting to that, the point is I think that some will drop out. Some will want to fill up that supply. And I think if it is a free market and quota, the cost of quota leaves the price, or much of it does, that the potential exists for actually the supply, or the amount that is grown, to expand because it is good tobacco and it can be sold on the world market.
And certainly tobacco grown here today is sold on the world market. So I would expect that there would be more tobacco sold on the world market and the potential for some expansion in terms of the total amount.
Mr. PAYNE. Hard for me to predict. Certainly there will be thousands fewer active tobacco farmers. Domestically I think it is likely that they will grow less tobacco. Whether they reach a price point that makes them competitive internally, that would be the critical issue there.
Page 116 PREV PAGE TOP OF DOC Mr. WATSON. I agree. I think it is difficult to predict. However, let me justtwo quick points to that. I think one depends on whether or not FDA is linked to the program, a buyout and, second of all, whether or not there exists a supply management system. There are some that have been saying that if you have no program, you have no restrictions or cap on supply, there is a natural event that will occur that will restrict the amount of tobacco that is produced.
And I would be cautious about accepting that theory. If you just look at the top six States that have quota, roughly about one-half of 1 percent of the usable farm land is presently being used to produce tobacco. There, of course, will be a flood of new opportunities and will take, and I do believe that it will create even greater problems in the long term without that type of safety net and mechanism in place to allow that supply to follow demand.
Mr. ETHERIDGE. Thank you.
Mr. EVERETT. Mr. Chambliss.
Mr. CHAMBLISS. From what you gentlemen just said, and of course you heard what our economists testified to earlier, is there agreement among the companies that when a buyout occurs that there is going to be a drastic reduction in the domestic price of tobacco to the grower?
Mr. PAYNE. That would be my opinion, Congressman. I think that they will be subjected to enormous procedures for overproduction. They will have no effective safety net. Contract prices will come down. And they have, too. They will inevitably come down. So I think the question is, at the end of the day, is their net larger, or is it the same or is it smaller?
I don't see a situation where their net profit becomes larger.
Mr. CHAMBLISS. Any disagreement with that?
Mr. SZYMANCZYK. I would disagree. My sense is that what we will see is that prices will come down, likely not to reflect the full savings from no longer paying quota, and that the market will expand for our growers in terms of where they are selling their tobacco.
Page 117 PREV PAGE TOP OF DOC Mr. WATSON. I think, Congressman, to a certain degree there is the economies of scale that come into play here. There is one company that owns and buys over 50 percent of the U.S. domestic tobacco, and they certainly will have greater leverage in determining those issues if there is no quota program out there than, say, we would have who have 8 or 9 percent of the purchasing power.
And I think that is another factor that has to come into play, is whether or not there is a supply management system that is necessary.
Mr. CHAMBLISS. OK. Thank you.
Mr. EVERETT. I am going to Mr. Lucas. But prior to that, let me just mention that we are going to have two votes in about 10 minutes, and I would ask that we would try to wrap this up and not have to come back.
Mr. LUCAS of Kentucky. Mr. Chairman, I will be brief.
You know, we have had a lot of good discussion here today and I think it has been very helpful. But I would just ask, if we had all of this discussion and we do anything, and we go out, say, 3 years from now where there is no buyout, nothing has changed, no restructuring, I would like each one, in 30 seconds or less to predict the plight of the U.S. tobacco farmer today. Start with Mr. Watson and go that way. If we do nothing over the next 3 years.
Mr. WATSON. Well, it is certainly our hope that something will happen, because we believefirst of all, understand that we need the U.S. tobacco farmer, and that is what we think the focus of a buyout ought to be, is about who wants to continue to farm and what is the farm going to look like 5, 10 years from now. We stand ready to support the farm and the person who wants to produce.
It is difficult to predict. We are under tremendous pressures. One issue that was brought up here is the proliferation of these minor manufacturers. And understand, in 1998 I think there was probably a handful of these minor renegade manufacturers. Today there are nearly 80 of these manufacturers.
Page 118 PREV PAGE TOP OF DOC These people are regional distributors and manufacturers. They use predominately cheaper foreign tobacco to put into their cigarettes, which allows them to sell it at less than $10 a carton, as compared to $75 a carton in New York City. That is a tremendous price differential, which is going to continue to exacerbate and put pressure on the price of U.S.-grown tobacco.
So I think that is another thing I hope that you would take into consideration.
Mr. PAYNE. Congressman, it is not only a question of doing nothing, but obviously a question of what you might do by doing nothing. I don't think there is any question that nongrowing quota holders will continue to collect hundreds of millions of dollars of rent from active growers. Their quotas will continue probably to decline. At what level I am not exactly sure.
The price support level will continue to prevent pure competitive engagement in the international markets.
Mr. SZYMANCZYK. Well, I think that the volume of tobacco sold in this country will continue to decline, and without being able to open up markets outside of this country the volume that the tobacco grower can grow will decline and the value of the quota will decline and number of farmers will decline.
I don't think there is any other way around that unless you break that cycle.
Mr. PAYNE. May I just add to that? I think it would be important to the Committee leaders to look at restoring funding for USDA and other government agencies to help promote the export of leaf tobacco. I mean, even in the situation where they have not had it for a period of years, obviously that has had an impact on quota as well.
Mr. LUCAS of Kentucky. Thank you.
Page 119 PREV PAGE TOP OF DOC Mr. EVERETT. Let me thank this panel and all panels. It may seem simple to some, but this is a very difficult problem that we face, with a lot of urgency and a lot at stake for a lot of folks. If it had been simple, a Tobacco Program would have been passed some time ago, and of course we know that is not what has happened.
One of the worst things that I feel like we can do, despite the urgency of the need to move, is to bring the wrong bill to the floor. I don't believe that will serve our growers or anybody else well, and I think it is essential that we get all of these different groups together and come up with a bill that maybe not everybody likes everything in that bill but this is something that we can pass, because the urgency to do so is there.
Without objection, the record of today's hearing will remain open for 10 days to receive additional materials and supplemental written responses from witnesses to any questions posed by a member of the panel.
This hearing of the Subcommittee on Specialty Crops and Foreign Agriculture Programs is adjourned.
[Whereupon, at 2:55 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Hon. Baron P. Hill
First, Mr. Chairman, I want to begin by thanking you for scheduling this hearing on the Federal Tobacco Program. I am very pleased that my colleagues on the Specialty Crops Subcommittee and I have this opportunity to examine the program and the potential for a buyout.
I also appreciate your inviting my colleagues and me to discuss our own plans to put together a buyout. We have all introduced our versions of buyout legislation over the last 17 months.
Page 120 PREV PAGE TOP OF DOC I am also glad to see so many tobacco growers here this morning, including Mr. Mike Schafer, the president of the Indiana Tobacco Growers Association and a constituent of mine. Thank you, Mr. Chairman, for inviting Mike to testify.
Clearly, the number of buyout plans that have been produced by Members of Congress and outside groups, such as the Presidential Commission on Tobacco, demonstrates the high level of interest among our constituentsthe tobacco growersfor a buyout. It also demonstrates the degree to which tobacco growers feel the price support program is no longer working the way it was intended.
Many people do not realize that tobacco is grown in southern Indiana. Whenever I walk into a tobacco meeting here on the Hill, I often think the other members must wonder why I am there. Certainly, Indiana tobacco production cannot compare with the amount of tobacco produced in Kentucky and North Carolina.
However, Burley tobacco is king in several counties in my congressional district, and I want to do my best to represent those areas. I have worked hard to get to know the tobacco growers of southern Indiana and their concerns. One thing they have made clear is their desire to get a buyout sooner rather than later.
For that reason, I introduced H.R. 1658, the Burley Buyout Act, or BUBBA, in the spring of 2001. BUBBA was the first piece of buyout legislation to be offered in Congress in several years.
At the time I introduced BUBBA, several Members of Congress told me they were not interested in discussing a buyout. They did not want to raise farmers' hopes to an unrealistic level, and they did not want to get blamed by those same farmers if a buyout did not occur in a timely manner. Some of my colleagues even laughed at me. Well, here we are, not even 2 years later, discussing the potential for a buyout.
I introduced BUBBA after talking to my tobacco growers on a regular basis over many months. Together, we concluded that Indiana growers were ahead of the curve in terms of wanting a buyout.
Page 121 PREV PAGE TOP OF DOC In additionand this is keymany growers told me they want a buyout even if it means ending the program. They know the program is no longer working the way it was intended to back when it began 60 years ago. They know it is time for a major review of how tobacco growing works in this country.
Now I gave this issue a lot of thought. It occurred to me that the perfect solution would be to let Indiana's tobacco growers opt out of the Federal program and let the growers in all the other States keep the program.
Our farmers in Indiana would love to step up to the plate and show the farmers in Kentucky and North Carolina and these other states what fine tobacco they can grow in unlimited quantities. But I do not think most of the other gentlemen sitting here in this room would take too kindly to that, so I did not pursue that idea.
Instead, I wrote a bill that gets the Federal Government out of the tobacco business entirely and lets the farmers grow as much tobacco as they want. BUBBA deals only with Burley tobacconot Flue-cured or other kinds of tobacco.
What BUBBA would do is fairly compensate both quota owners and active growers who have relied on the price supports for many years. Quota owners would be bought out at a price of $8 a pound, and growers would receive transition payments of $7.50 a pound over 5 years. In addition, $50 million a year over 5 years would be available in grants to tobacco-dependent communities. I do not address FDA regulation of tobacco or tobacco products in my bill.
The fundingwhich is, without a doubt, the No. 1 question we all face when we discuss the potential for a buyoutwould come from the budget surplus that existed at the time I introduced the legislation. Of course I realize that funding a buyout through a budget surplus is not an option at this time.
With BUBBA, I am pleased I was able to lay down a marker and generate new discussion among tobacco farmers and members of Congress. I believe one reason we are all here this morning is because of BUBBA.
Page 122 PREV PAGE TOP OF DOC I look forward to continuing to work on this issue in a bipartisan manner with my colleagues on this subcommittee and members like Ernie Fletcher, Virgil Goode and Mike McIntyre. We all care greatly about the future of tobacco in the United States, and we want to ensure there is a future for this crop in this country.
Again, Mr. Chairman, thank you for this opportunity to testify.
Statement of Hon. Ernie Fletcher
I thank the chairman, the ranking member and my colleagues for calling and attending this hearing today.
Over the past 7 years, Burley and Flue-cured tobacco producers have lost approximately half of their quota. With this extreme reduction in the availability of production rights, the cost to the producer of obtaining this right has spiked. As a result, farmers are faced with higher input costs, while at the same time compelled to grow less tobacco.
The Federal Tobacco Program has existed in approximately its current form since its inception in the 1930's. Its resilience is certainly due in equal parts to its effectiveness at protecting producers, and a political environment hostile to tobacco, where many are unable to separate our farming families growing a legal crop from the harmful effects of the manufactured product. However, this acute reduction in total production rights over the last 7 years have moved producers to a critical point where, despite the protection the Federal program provides and the acknowledgement of the difficult political environment, farmers are demanding a significant reform of the program.
Before you today, you will hear many perspectives and proposals regarding what type of reform is necessary and possible. As you listen to those testifying before you today, it is important to recognize that tobacco is unlike other commodities in two significant aspects.
First, it is confined in a Federal program that separates the right of production from those that produce the crop, and in the quota-right creates an equity that has become an artificial cost of production for most tobacco farmers in one way or another. Second, unlike cotton or peanuts, it is a crop that poses significant health risks for all of its consumers. These two realities must frame the debate and determine the course we must take.
Page 123 PREV PAGE TOP OF DOC To support family farms and to address those two unique qualities, any reform considered in Congress needs to meet the following criteria:
It must put the rights of production in the hands of the grower. It must maintain a competitive system of protection for those that will continue to produce and contain some mechanism to keep tobacco production in traditional growing areas. It must fairly compensate quota owners for the relief of their equity. It must provide assistance for the farmers and communities who must transition to the new program.
These elements are critical not only to ensure a fair and competitive program for farmers, but also to protect the public health.
In July, I introduced H.R. 5035, the Tobacco Equity Elimination Act, as my proposal for program reform. I am happy that this legislation already has many of the members of this subcommittee as cosponsors, including Mr. Hayes, Mr. Etheridge, Mr. Bishop and Mr. Lucas, and I look forward to working with them, the other members of this Committee, and my Colleagues here on this panel to develop and pass legislation that will address this critical need for our farmers.
H.R. 5035 addresses the concerns I have outlined, and is the legislation I believe would most effectively accomplish those goals.
First, it eliminates the value of quota and gives growers the right to grow.
The expense involved in obtaining the right to produce is a Government-created, artificial cost of production. It is the price producers must pay to purchase the right to grow tobacco, and, in most cases, is the most significant expense in the production of the crop.
While there are about 415,000 quota owners in the United States, there are only 81,000 tobacco farms. The time has come for the Government to address this cost it created and eliminate the equity and value of quota, and put the right to produce in the hands of active growers.
Page 124 PREV PAGE TOP OF DOC In H.R. 5035, the quota system is eliminated and replaced with a licensing system. Value is removed from the licenses by tying them to the grower and the county, requiring the licensee to be 100 percent at-risk in the production of the crop, and forbidding the license from being leased or sold.
It fairly compensates allotment holders for the elimination of their equity.
Since the Government created this equity, it is reasonably presumed that it has a responsibility to compensate its holders at a level that will provide those that depend on its rent for income a fair value.
H.R. 5035 provides current quota owners $8 a pound based on 1998 quota levels, with payments made in equal installments over 5 years. This number is derived from the approximate lifetime value of the quota right over its lifetime.
It provides transition support for growers who have had to bear the artificial costs of leasing and renting.
For our producers, who have lost revenue from the burden of this rent and will have to adapt to a new price support level, we must provide transition assistance. H.R. 5035 provides current growers $4 a pound based on 1998 quota levels, with payments made in equal installments over 5 years.
It recognizes that tenant farmers are often ''active producers'' of the crop.
In many cases the quota owner and the tenant share in the production and the risk of producing the crop. Tenants will need help to transition and to acquire their own capital when the right of production is put in their hands. Any buyout needs to recognize the way the role of these tenant farmers will change.
It includes all tobacco farmers.
Page 125 PREV PAGE TOP OF DOC Dark-type and other producers of tobacco other than Burley and Flue-cured should not be ignored. Their programs are often still acreage-based rather than a poundage-based production. A fair mechanism for converting their historic production to poundage for payments should be based on a farm average.
The level of support must be such that producers who no longer wish to grow tobacco can afford to leave.
If a grower decides to stop growing tobacco, the grower is eligible to receive another $2 a pound in addition to the $4 per pound payments. Any payments need to provide fair compensation so that farmers that wish to leave tobacco production can afford the capital to begin production in a new area.
It maintains a competitive price support level to protect farmers who will continue to grow.
All commodities have price support mechanisms that protect producers from critically adverse conditions. A new, more competitive, support level is established based on the cost-of-production of the crop.
It allows grower input in the regulation of the crop.
H.R. 5035 creates a Tobacco Advisory Board to advise the Secretary on price support levels, production levels and grading system reform.
It will provide a stable future for our farmers while promoting the public health.
This is not just a farming issue. It is an issue of public health. The user fee and price support will keep the price of tobacco products stable, which is believed to be the most effective determinant of their demand. The provisions providing adequate transition assistance and creating a licensing and price support system are not only critical to the long-term financial health and stability of our tobacco-growing communities, but are a part of a historic partnership between the public health community and the tobacco growing community that will be critical to accomplishing our mutual goals of assisting tobacco farmers and their communities while promoting public health.
Page 126 PREV PAGE TOP OF DOC To date, this measure has received strong support from both parties, major tobacco producing states and growers and health groups like the American Cancer Society and the Campaign for Tobacco-Free Kids. Congress should act now to help our tobacco growers and producers.
Thank you again for holding this hearing. I am committed to working with the members of this committee and my Colleagues in Congress to develop and pass legislation that achieves these goals.
Statement of Hon. Virgil H. Goode, Jr.
Mr. Chairman, thank you for holding this hearing today and for allowing me the opportunity to testify.
Since the consideration of the national tobacco settlement legislation in 1998 there have been discussions of a buyout for tobacco quota holders and producers. Many tobacco growers and quota holders in the Fifth Congressional District of Virginia have contacted me regarding the need and desire to have a buyout that improves the efficiency and competitiveness of U.S. tobacco production and compensates persons for their quota assets. The Virginia Farm Bureau, Virginia Tobacco Growers Association, Concerned Friends for Tobacco, and the Virginia Agricultural Growers Association have formed a working group to formulate their views on what the future of the Tobacco Program should be and what action should be taken to improve the well-being of farmers and their communities.
I have introduced legislation, H.R. 4753, which reflects some of the Virginia Working Group's core principles of a buyout and for a future tobacco production system. H.R. 4753 only addresses the issues directly related to the buyout and a system to replace the current Tobacco Program that enables family farms to continue to earn a living raising tobacco. Many of the quota holders and growers in the fifth District of Virginia have indicated to me their support for a buyout. However, those who grow and farm tobacco should have some protection. Just as there are measures in place that provide a safety net for other agriculture commodities, there needs to be a safety net for tobacco farmers. The various buyout proposals differ on the post-buyout landscape and how such a safety net, if there is any, should be designed.
Page 127 PREV PAGE TOP OF DOC What does seem to be consistent is the view that a quota buyout would help increase the competitiveness of U.S. tobacco by eliminating the expense of buying or leasing quota, thus enabling the support price to be lowered, which would make U.S. tobacco more competitive with the cheaper foreign tobacco. Recent years have seen a decline in tobacco consumption in the U.S. combined with an increase in the amount of tobacco that is imported. This has resulted in significant quota cuts for American tobacco producers. The growers that I represent in Southside Virginia have been growing some of the highest quality tobacco leaf in the world for hundreds of years. They feel that a buyout of the quota and subsequent drop in the production cost will allow them to market their high quality leaf more effectively against the cheap foreign tobacco.
I want to thank you again for holding this hearing and allowing grower organizations from Virginia and other tobacco producing states to express their views on this matter. I hope that we can work together to reach a consensus on the most effective way to improve the competitiveness of U.S. tobacco growers and ensure that tobacco dependent communities remain viable.
Statement of Hon. Mike McIntyre
Mr. Chairman, I would like to thank you and Mr. Condit, along with the members of the Subcommittee on Specialty Crops and Foreign Agricultural Programs, for agreeing to hold this hearing on legislation that is critical to the future of tobacco farmers and the tobacco industry in America. Across the Tobacco Belt; from farmers, to their families, to the communities that depend on tobacco as a means to support their way of life, the need for a change in the current Tobacco Program is clear.
In each of the tobacco producing states represented by the distinguished panel today: North Carolina, South Carolina, Virginia, Kentucky, Tennessee, and Indiana; the broad range of support for a tobacco buyout is overwhelming. Furthermore, the companies represented here today serve to reinforce the need for a fundamental change in the way our government addresses tobacco growing and production.
Page 128 PREV PAGE TOP OF DOC Changes brought about by direct contracting with manufacturers, pending and future litigation of the tobacco industry, and ever-increasing foreign competition make it clear that something must be done. In my home state of North Carolina, as in other tobacco producing states across the nation, tobacco is more than an agricultural product. The income generated on the tobacco farm has provided for college educations, helped build roads, supported local small businesses, built hospitals, and been the backbone of the local economy. For generations, tobacco production has been an integral part of our economy, and a way of life.
That is why the future of tobacco is so important to me and the communities who have come to depend on the income generated from tobacco farming.
But, the future of tobacco is in jeopardy. As tobacco quotas continue to shrink from year-to-year, and as the right to grow tobacco becomes more expensive, farmers and their families are desperate for a drastic new direction for the Tobacco Program.
That is why a buyout of the tobacco marketing program is necessary, and why I introduced H.R. 3940, the Tobacco Livelihood and Economic Assistance for our Farmers Act, or T-LEAF, in March of this year.
My bill provides for a buyout of the Federal Tobacco Program, provides an orderly economic transition away from the current price support system, grants limited regulatory authority to the FDA, and does so at no net cost to the taxpayers.
Under this legislation, tobacco quota owners would be compensated $8 per pound, and growers would receive $4 for every pound of tobacco produced.
In order to provide an orderly economic transition away from the marketing of tobacco based on quotas and price support, my legislation ensures that traditional tobacco-growing areas are maintained, so that the communities dependent on the money generated from the production and sale of tobacco continue to remain economically viable.
In addition, the FDA authority granted by my bill will establish fair and equitable regulatory controls over the manufacture, sale, distribution, and labeling of tobacco products. However, the FDA will not have the authority over tobacco farms or tobacco growers.
Page 129 PREV PAGE TOP OF DOC This legislation is not the be-all-and-end-all buyout proposal. And, as we move this process forward, I am very open and willing to continue working with my colleagues to produce the best bill that can pass the House. Our folks back home are in need of relief, and its time for the tobacco community to be united, including the tobacco companies. We need to resolve any differences, move forward, and bring all parties together behind legislation that can garner enough support to pass this chamber. This hearing is a good first step in that process.
For this reason, Mr. Chairman, I am grateful to you for holding these hearings, and I look forward to working with you and all the members of this Subcommittee, along with the distinguished members of today's panel, to enact this critical legislation. Our farmers, their families, and the economies of so many small towns and communities need us to act, and act quickly.
Statement of Sam Moore
My name is Sam Moore and I am a farmer from south central Kentucky. I am also president of Kentucky farm bureau. Chairman Everett and members of the committee, I appreciate you inviting me to make some brief remarks on the tobacco buyout today.
I've been active in farm bureau for over 30 years and I can recall many contentious debates on tobacco policy but none as important as the subject we are talking about today. When tobacco buyout legislation passes, it will determine the future of the tobacco industry in Kentucky thus the livelihood of over 117,000 tobacco farms my state.
When most people discuss the buyout issue all they want to talk about is money. I know it is on Congress's mind as you try to decide on the future of tobacco farm families. It is certainly on the minds of farmers at home. As I have traveled the state this year, I get asked two questions by producers everywhere I go: ''do you have my check?'' And, ''when is it coming?'' As we talk about the worth of tobacco quota, let me say that I certainly agree with economists from the university of Kentucky and North Carolina state on the $8 per pound figure for quota owners and $4 per pound for growers.
Page 130 PREV PAGE TOP OF DOC As you know, most of the current bills offer payouts over 5 years. As president of Kentucky farm bureau, what labors most on my mind is what happens in the 6th year when the payments stop coming. What happens to growers who want to produce tobacco after the buyout? Tobacco is so ingrained in farm families across Kentucky that there is a new generation of young folks hoping to make a living and provide for their families from producing a tobacco crop. Will they have protections or will they be strictly at the mercy of tobacco companies? Will tobacco production still be an option in their county? My goal is to get a buyout as soon as possible but also to ensure that people who work hard to produce a crop will have assurances that tobacco production with appropriate safety nets will continue to be an option for them.
Kentucky ranks fourth in the United States in total number of farms only because so many people in our state have tobacco allotments.
Many people looking at our state would say that only the flat ground in western Kentucky is suitable to agriculture production, but farmers in the hilly ground of eastern Kentucky have been able to stay on the farm because of tobacco.
Large tobacco farmers will prosper under most any buyout proposal. They have the land, expertise and resources to produce some of the best Burley tobacco in the world. My hope is that buyout language will allow those growers to expand slightly with world demand and put the tobacco in the hands of those who want to produce it.
The small family farm culture of eastern Kentucky is a tougher situation. Counties in eastern Kentucky generally have some of the highest poverty levels not only in our state but in the country. Industrial jobs are not as easy to obtain there as in other parts of the state which causes them to rely heavily on coal and tobacco. Our State FSA office breaks our state down into seven districts. District 1 is far west Kentucky and district 7 is far east Kentucky. Consider that districts 1 and 2 have a combined total of 14,816 tobacco farms, while district 7 alone has 20,547. If you combine district 6 and 7 you'll find 43,605 farms. I hope that gives you an idea of eastern Kentucky's small farms' dependence on tobacco. Tobacco adds around 150 million dollars annually to the economy of eastern Kentucky. A massive move of tobacco production out of eastern Kentucky would be devastating to that region.
Page 131 PREV PAGE TOP OF DOC I think it is vital that congress offers a buyout that maintains some type of safety net that will ensure that farmers will be offered a price for their crop that is at least equal to what it cost them to produce it and a plan that will ensure that tobacco does not completely move out of such dependant regions as to cause harm to the small family farms of Kentucky and other tobacco dependent states.
I hope that as you consider tobacco legislation you don't buy in to the sometimes popular beliefs of ending supply management and safety net programs. Rather I hope you will consider legislation that adequately compensates quota holders and growers who want to exit the business but also protects those growers who wish to continue growing tobacco.
Kentucky farm bureau believes that H.R. 5035sponsored by Congressman Ernie Fletcher and cosponsored by many on this committeeis the buyout plan that is fairest to growers. As you may know, it currently has 15 cosponsors from 6 states in both the Flue-cured and Burley producing regions. It is my hope H.R. 5035 will pass as soon as is possible.
The Fletcher bill was the result of a series of meetings of Burley, Flue-cured and dark tobacco leaders. Those leaders met on April 5 in Raleigh, North Carolina and came up with a set of consensus points for buyout legislation. Congressman Fletcher's legislation mirrors those consensus points almost identically. Therefore I think it is safe to say that H.R. 5035 most closely mirrors what tobacco farmers hope to achieve from buyout legislation. It is also noteworthy that Congressman Fletcher's bill is supported by the public health community.
I want to thank Congressman Fletcher and those members in this room who support his legislation for looking out for the best interest of tobacco farmers.
Members of this committee have a tough task ahead of them. While I understand that there are more urgent needs in our country than a tobacco buyout, I can't think of a more pressing need for Kentucky and the other states in the Tobacco Belt. Again as you consider buyout legislation, I urge you to consider the 6th year and years thereafter as much as you do the 5 year financial impact of such a plan.
Page 132 PREV PAGE TOP OF DOC Again Chairman Everett, thank you for inviting me to speak to the committee today.
Statement of Larry Wooten
Mr. Chairman, members of the committee, I am Larry Wooten, President of North Carolina Farm Bureau. I'm a quota owner and tobacco farmer from Pender County, North Carolina.
North Carolina Farm Bureau has been an advocate for agriculture since before the Federal Tobacco Program began in 1939.
As the largest general farm organization in the state, we represent diversified farm families in all 100 counties in our state.
Many of our members depend on tobacco for their livelihoods, but many more are reliant upon this crop to help sustain the economic viability of their local communities.
I thank the committee for holding this hearing to give our farmers an opportunity to comment and express their views on the challenges facing the future of tobacco.
Why am I here today?
Farmers are concerned about the long-term stability and survival of the Tobacco Program. In addition, direct contract sales, world competition to U.S. leaf, the continued erosion of farmers' equity in quota, and the general ill will toward government involvement in tobacco are all working to undermine survival of the current program - a program which has served us extremely well since the late thirties.
North Carolina Farm Bureau has spent countless hours working with our members on developing the future direction of the Tobacco Program.
Extensive discussions have focused on how to remove quota equity from the cost of tobacco production.
Page 133 PREV PAGE TOP OF DOC We've also focused on how to make our tobacco more competitive on the world market, while ensuring the stability of our tobacco growing communities.
To accomplish this goal, we believe an effective and sustainable plan must be developed to adequately compensate quota owners and provide transition assistance so growers can secure their future.
Farmers have invested their hard earned dollars buying quota. Tobacco quota is taxed as real property in most North Carolina counties.
The IRS treats tobacco quota as a capital asset.
Tobacco quota has economic value for farmers, communities and governments!
The Tobacco Program has provided a stable source of income for both farmers and communities. It has created this income in places where there are few viable economic development alternatives.
Mr. Chairman, numerous widows and retired farmers depend on income from tobacco quota. Instead of their retirement income coming from a 401-K, they've invested in a 401-QUOTA.
Pre-program experience demonstrates the price volatility inherent in free-market tobacco. With the number of purchasers of tobacco shrinking every year, farm families need an adequate safety net for several reasons:
Tobacco production is a very capital-intensive farming enterprise.
For tobacco production to remain stable and profitable in the future, a thoughtful plan must allow for viable marketing options for our farmers.
This plan must also provide for a stable supply of tobacco for the marketplaceboth foreign and domestic.
And, a successful plan must minimize price volatility by providing a mechanism similar to the counter-cyclical safety net provision in the farm bill.
Page 134 PREV PAGE TOP OF DOC In April of this year, North Carolina Farm Bureau hosted a meeting of tobacco organizations and interests from Flue-cured and Burley producing states.
These groups met in Raleigh for the purpose of developing a consensus to offer guidance to Congress on drafting legislation addressing the future of the Tobacco Program.
These consensus points, included with my written comments, contain ideas consistent with the needs of all growing areas.
Mr. Chairman, our growers have made one point loud and clear for me!
The number one priority of our growers in this whole debate is a solution that provides economic stability and allows them to plan for the future.
It is our belief that this future can only be assured by providing adequate compensation to quota owners and growers.
It should also allow U.S. tobacco farmers to supply world demand for quality American tobacco.
Mr. Chairman, committee members, thank you for your attention and the opportunity to testify here today on behalf of North Carolina tobacco farmers.
Statement of Steve Watson
Mr. Chairman, my name is Steve Watson. I am Vice President of External Affairs for Lorillard Tobacco Company. Lorillard is the fourth largest tobacco company, with its headquarters and major operations located in Greensboro, North Carolina. Lorillard's biggest brand is Newport, the second largest brand of cigarette sold in the U.S. Lorillard only sells cigarettes in the United States. It does not export its cigarettes. Our company has a long history of supporting U.S. tobacco growers.
Thank you for allowing me to share some observations regarding the tobacco grower buyout issue. We believe any discussion of this topic should be placed in the context of what is best for those individuals who wish to remain in the business of tobacco farming. The debate should not be driven by those who want to retire from tobacco farming and are seeking the largest payout possible. It should not be driven by those who have misled growers about proposals to let Federal regulators reengineer tobacco leaf. And the debate should not be driven by some in the industry that stand to increase market share under an overly restrictive Federal regulatory structure.
Page 135 PREV PAGE TOP OF DOC Lorillard Tobacco Company believes a future exists for family farm operations that produce tobacco under a modernized supply management program. The interests of these farm operations that wish to continue producing tobacco into the future should be driving any buyout debate in Congress.
We see three major issues that will determine what the future holds for tobacco farm families. The first is the buyout; the second is what an effective supply management program should look like; and the third is whether the Federal Government will be given authority to reengineer tobacco leaf and dramatically change tobacco farming operations.
As you know, the issue of a tobacco buyout has been a topic of wide ranging discussion for the last 5 years. Beginning in 1997, a $16 billion package of payments to tobacco growers was developed in the context of a massive tobacco regulatory proposal that would have imposed nearly $900 billion in costs on the tobacco industry. This proposal ultimately did not pass Congress. The subsequent creation of a $5.15 billion Phase II trust fund in 1999, followed by assistance to tobacco growers from the Federal Government in the form of T-LAP funds and forgiveness of debt on the ''99 crop, have provided substantial assistance to growers over the last 3 years. However, since last year's Presidential Commission report was released, advocates of Food and Drug Administration regulation of tobacco products have pushed hard to convince quota holders and growers that an additional $16 billion quota buyout is realistic and achievable.
Growers are being promised a buyout at levels that may be strongly opposed by non-tobacco farm state Members of Congress. In 1998, when the U.S. Senate was debating an $8/$4 buyout in the context of a larger, $900 billion tobacco regulatory bill, non-tobacco state Senators opposed such a generous farmer proposal. One conservative Republican Senator said during debate on the Senate floor that ''Nobody will have to stop growing tobacco. No one will have to give up their land, but we will give them a payment of $21,351.35 per acre'' That is almost 20 times the amount we pay every other commodity combined [under Freedom to Farm]' '' During that same ''1998 debate, a midwestern Democratic Senator said ''It is difficult for me in a State that grows corn, soybeans, wheat, barley and lots of other productsunder the Freedom to Farm Act they are getting substantially less than what tobacco farmers will be getting.''
Page 136 PREV PAGE TOP OF DOC The current buyout bills in Congress propose payouts that are multiples of what other commodities get under the recently passed farm bill. According to the Congressional Budget Office, new spending in the farm bill for all commodities will total $37.6 billion over the next 5 years. A tobacco buyout that pays 43 percent of what all commodities combined received under the farm bill would seem unrealistic.
In addition to facing the reality of what buyout payments might actually be, we have further concerns regarding what a buyout might mean for the stability of domestic leaf production. Lorillard continues to support a Federal supply management program that promotes stability for growers and manufacturers. Anyone who shares this goal must understand the enormous risks to any Federal Tobacco Program if buyout legislation is considered in Washington. It is one thing to discuss a buyout plan that promotes program modernization at the same time. However, a buyout plan that eliminates any supply management program will have devastating consequences for family farming operations. Indeed, the value of the current safety net should be abundantly clear given the status of the drought stricken 2002 crop in many tobacco growing areas.
In exchange for this uncertain gamble on the buyout, tobacco growers are being asked not to oppose Federal Food and Drug Administration regulation of tobacco products. Growers are being told that FDA is a manufacturer issue, and that they should not worry about it.
Several points must be made regarding this issue. First, tobacco growers have been very poorly informed of the risks they are taking by allowing FDA regulation to be associated with a buyout. Each of the pending FDA regulatory bills pending in Congressincluding those with buyout provisionswould allow the FDA to regulate ''components'' that occur naturally in tobacco leaf. This is not limited to tar and nicotine. It covers every known element or compound in tobacco leaf, including those which have existed in tobacco leaf for hundreds of years or which result from the types of soil in which tobacco is grown. None of the bills require the FDA to take into consideration the cost of reducing compounds, or whether feasible technology exists. If the only practical way to reduce compounds is to change farming practices, manufacturers will be forced to become super-regulators on the farm.
Page 137 PREV PAGE TOP OF DOC Lorillard objects to being forced to play this role on the farm. Lorillard objects to this unlimited new power to reengineer tobacco plants, with almost no regard to what such changes might do to leaf and taste quality. All of the pending FDA bills could force changes in tobacco seed, increased soil monitoring, new pesticide use mandates, changes in the curing process, and more. All will significantly increase record-keeping. Yet growers have barely been told about these changes.
Second, we strongly disagree with the suggestion that the grower buyout and FDA regulation must be linked. In our view, linking these issues makes a buyout less likely to occur, not more likely. It makes the debate potentially much more complex, lengthy, and partisan in Congress.
Not every manufacturer or public health group will tell you that FDA regulation will unleash forces that will drive down tobacco farm income. However, if manufactures are forced into the role of super-regulator on the farm, the administrative costs of dealing with 90,000 farms to assure compliance with FDA mandates will make U.S. tobacco less attractive. It will also likely accelerate the consolidation of farms and favor the largest operations.
In addition, it is impractical to produce leaf for export separately from domestically consumed tobacco leaf. However, even if leaf for export could be produced separately, FDA regulation will make leaf exports less attractive in world markets, driving down a key component of the quota formula. Also, FDA regulation will drive up the cost of manufacturing cigarettes in the U.S. Therefore, the volume of cigarettes for export will likely decline, putting further downward pressure on U.S. production.
FDA regulation will also make the industry less competitive. Some have portrayed the new marketing restrictions in the pending FDA bills as a mere codification of the Master Settlement Agreement. Yet several provisionslike a ban on self-service displays, new restrictions on retail advertising, corporate sponsorship bans, and othersgo well beyond the MSA and give new advantages to the largest manufacturers. These changes will make the marketplace for selling U.S. tobacco leaf less competitive.
Page 138 PREV PAGE TOP OF DOC Lorillard believes the buyout issue is politically complex, and linking it with FDA regulation only increases the complexity. While Lorillard does not oppose further discussions of reasonable alternatives, we strongly oppose any increase in Federal excise taxes for this or any other purpose. In 2002 alone, twenty states have already increased excise taxes, with increases of up to $3 per pack. Many more appear poised to raise their tobacco taxes in the near future.
To summarize, any legislation must focus on those who want to continue to grow tobacco. While Lorillard believes major changes are needed in a current program, we also believe that a supply management system is necessary. Finally, Lorillard will not support any buyout linked with FDA regulatory authority over tobacco. It is not in the interest of the farmer and it provides an unacceptable competitive advantage for one industry participant.
Thank you again for allowing me to share some of the views of Lorillard Tobacco Company on this important policy debate.
Statement of Mike Schafer
Chairman Everett and members of the House Committee on Agriculture, thank you for granting me this opportunity to speak to you about an issue that lies heavy on the hearts and minds of Indiana tobacco growers. I am a tobacco grower from the historic and rural community of Madison in southern Indiana on the Ohio River. Tobacco has been the staple commodity of my community and its economy for nearly 200 years. I raise 5 acres of Burley tobacco as well as corn, soybeans, wheat, hay, and beef cattle. I have been involved in tobacco organizations for many years now, serving on the Burley Tobacco Growers Cooperative Association Board of Directors and serving as president of the Indiana Tobacco Growers Association. Through these experiences, I personally know and understand the implications and hopes of a tobacco buyout. Thank you again for allowing me to share with you the situation of small tobacco growers in America.
Page 139 PREV PAGE TOP OF DOC Southern Indiana tobacco farms are similar in nature to the other Burley tobacco statesmost of these farms are small, averaging 154 acres with only 5 acres of that land being used for Burley. Tobacco is seeped into the fiber and fabric of these states. This plant was grown here as one of the first crops of the pioneer families who settled our land. Just as it supported those first struggling settlements, it has supported and sustained these states to great prosperity and economic strength.
The topography and geography of most Burley states dictates small and numerous farms. Because much of our farmland is on hillsides and valleys, no other crop can be raised on this kind of land while providing the same level of financial income. It has been our staple and our livelihoodone only has to look at the decor and columns in some of these great buildings in Washington, DC to realize the importance of tobaccothe same is true for Indiana.
Through price supports and a marketing quota system that limits both where tobacco can be grown and how much can be grown and marketed, Federal policy has protected farmers from the volatility of the marketplace. For years, the combination of price supports and the quota system made tobacco a highly profitable crop. However, given the quota cuts we have suffered over recent years, the program has kept more people in the system than necessary, resulting in highly inflated lease prices.
There is no question that there is a dire need for assistance to tobacco-dependent farmers and their communities. While other economic sectors in this country have been affected by factors such as reduced demand for products, increased foreign competition and the loss of share in global markets, few compare to the hardships tobacco communities have suffered. The amount of tobacco we can produce has been cut in half over the last 5 years, while over this same period; lease prices for tobacco quota have more than doubled.
Many tobacco farmers have few avenues of escape because they are economically dependent on their quota rights for both current and future income. Quota owners who actively produce tobacco often use their quotas as collateral for loans to improve or diversify their operations, and because of the assurances of the Tobacco Program, many have acquired more debt than they otherwise would have done. Those quota owners who do not actively produce tobacco rent their quotas to growers. When quota levels fall, as is now the case, lease prices go up, which further squeezes tenant farmers and increases their costs of production. And many older quota owners use their quotas as their primary source of retirement income instead of the employee retirement benefits that many workers in their country enjoy. Strong dependence on income generated from tobacco production is a fact of life for farmers and their communities in rural pockets of tobacco-growing states. Ironically, at the same time that Federal tobacco policy fosters economic dependence on tobacco, the Federal Government over the last few decades has actively discouraged use of tobacco products because of health concerns.
Page 140 PREV PAGE TOP OF DOC Squeezed by huge drops in demand for U.S. tobacco here and abroad, by aggressive competition from cheaper foreign-grown tobacco, by high costs to modernize their facilities and by modest price increases for their crops, tobacco farmers and their communities face a difficult and grim future. Even as prices for cigarettes rise, the tobacco farmer's portion of the retail tobacco dollar fallsfrom seven cents in 1980 to less than two cents today. As our income drops, many growers are simply going out of business. More than half of the tobacco farms that existed 25 years ago are gone.
The crisis facing these farmers and their communities requires decisive action to address the complex set of problems and needs associated with reducing economic dependence on tobacco and diversifying farming operations and local economies.
Suggestions and Recommendations
A suggested and highly popular solution to the problems plaguing America's tobacco farmers is a tobacco buyout. No doubt this is the number one topic at every feed store from Florida to Indiana. For several years now, the idea of a buyout has been flirted with and proposed a few times. Those first proposals were ahead of their time and the time was not right then, but it is right now. Never before have all of the forces, the major players within the tobacco community, lined up in rally and support of a buyout. Quite frankly, the farmers back home are demanding a buyout.
So what should this buyout look like? There have been several proposals suggested and bills filed. I do not want to talk about one specific piece of legislation, though I would be glad to voice my opinion on those if asked. Instead, I want to share with you as an Indiana tobacco farmer, what I think should happen in a buyout and how my tobacco operation should run after a buyout or transition.
As a tobacco farmer, the following represent essential elements that must be considered and contained in tobacco legislation.
Page 141 PREV PAGE TOP OF DOC Provide tobacco growers and quota holders with fair and equitable compensation for their quota, and put the right to grow in the hands of the active grower.
Quota is a government-backed asset that many people rely on for income. Elimination of quota warrants compensation for this asset. This will allow quota owners who are dependent on the income generated by their quota to be compensated. Growers would no longer have to pay to lease quota from owners of quota who do not want to grow or are not able to grow the crop.
Replace the current Tobacco Program with a new system of licensing, that eliminates the leasing and selling of quotas, and seeks to give farmers and their communities both short-term and long-term stability. Reaffirm that the USDA remains the lead agency for overseeing tobacco production.
A new system of licensing would effectively eliminate the equity involved with the leasing and selling of quota while preventing oversupply of tobacco and allowing tobacco production to remain in the communities that currently produce the crop.
Keep tobacco production in traditional growing areas, especially counties.
If tobacco production is permitted to move out of the traditional growing counties, concentration of production will occur resulting in cheaper tobacco and the loss of the crop income from the areas that rely on the income from the crop due to the topography of the farmland restricting alternative crops.
Provide mechanisms to lessen the impact of taxes (e.g., 401K-type retirement plans, tax incentives for reinvesting, capital gains treatment of buyout funds).
A buyout will result in a large influx of money over a relatively short period. Mechanisms to reduce the impact of taxes and incentives for reinvesting will allow these funds to be more efficient in reducing the dependency on the crop.
Most importantly, provide production controls and a safety net for future production.
Page 142 PREV PAGE TOP OF DOCIn the absence of production controls tobacco would be grown on much more efficient and larger farms. This would result in large quantities of cheap tobacco. Farmers with marginal cropland, that currently rely on the income from the crop, would no longer be able to compete, resulting in a devastating loss of income from these small communities.
The last point is one of the most crucial and debatable issues of the buyout discussion. There have been comments from some within the industry and even some within Congress saying that essentially ''you can't have your cake and eat it too.'' Some people believe that a buyout and a tobacco production controls program are impossible bedfellows. I do not believe that to be the case. For 7 years now, the Burley Tobacco Growers Cooperative Association, of which I am a director, has been working with the unlikely partner of the health community. This unique coalition has drawn criticisms and doubts, but in return it has only reaped success. Tobacco farmers have learned that the health groups and the anti-smoking advocates do not want to put us out of business. Through coalition building and education, the tobacco community and the health groups have reached a consensus upon which we can join together and work for the betterment of our tobacco farmers and public health. One of these consensus points is the strong support of the Federal Tobacco Program. In fact, health and tobacco representatives have been working together over the past year to specifically address the issue of a buyout and a program. The health groups have endorsed the legislation that includes production controls and price supports. With this kind of coalition, we think it is possible and necessary to educate others about the possibilities of life after a buyout.
I have full confidence that this kind of buyout can happen if we all work together. The tobacco growers, tobacco companies, health advocates, and of course, Congressional leaders must all reach agreement and consensus on the best buyout available.
There has also been much discussion about a tobacco quota transfer and FDA regulation of tobacco products. FDA regulation of tobacco products is inevitable. FDA regulates all products that consumers put into their bodies except tobacco products. It is only a matter of time before tobacco products are regulated. Many tobacco farmers are beginning to realize this and understand the importance of FDA when it comes to a tobacco buyout. The majority of tobacco farmers would and do support reasonable FDA regulation of tobacco products.
Page 143 PREV PAGE TOP OF DOC Without a doubt, there is so much going on in the tobacco fields and communities. One thing is certaintobacco farmers are hurting. We need real, effective, long-lasting help that will restructure and revitalize our tobacco communities and farming operations. To do that we need a fair buyout that promises us production controls and a safety net. Chairman Everett, the work you have undertaken here cannot be underestimated. Your leadership and willingness to listen, learn, and find solutions to many complex issues is the key to our forever changing the way in which we deal with the tobacco. Thank you for your leadership and thank you again for this opportunity.
Statement of Larry Vickers
Mr. Chairman and committee members, I am here to talk to you today about the tobacco buyout. I am Lamar Vickers from Nashville, GA. I am President of the Berrien County Farm Bureau, vice chairman of the Berrien County Board of Education, and a member of the Georgia Tobacco Growers Association. I also serve on the Georgia Farm Bureau Tobacco Advisory Committee and serve on the Georgia Commissioner of Agriculture, Tommy Irwin's Tobacco Advisory Committee. I have a wife Ann and three children, Denita, Bradley and Cynthia.
I farm in Berrien County with my father Elton who is retired and my brother Carlos. Tobacco has always been a way of life on our farm. It's what pays the bills. We had bought tobacco quota as an investment for the future. It was going to be my retirement. It was like a C.D. or 401K plan. Over a period of 3 years, beginning in 1998, our quota was cut by about 50 percent. Not only did we lose half of our quota but we also lost half our yearly income. Imagine trying to pay your bills with half your income lost. It will not work. We, like all other tobacco farmers, had to restructure loans and try to make it work with a lower cash flow. Prior to the quota cuts, we had bought more land and put in irrigation. We were able to grow a higher quality tobacco before 1998, and it was a good investment until we lost our tobacco income.
Page 144 PREV PAGE TOP OF DOC I am a third generation farmer, but it looks like I could be the one to lose the farm if things don't change soon. We are farming on equity that we and our forefathers built up over their life time. Times are so bad that many farmers have been sold out over the past few years. If we don't get a buy out soon many farmers that are left won't be able to farm next year. Farmers have come together with a law suit to try to get some financial help in order to stay on the farm. Georgia Farm Bureau and the Georgia Tobacco Growers Association are in favor of the buy out. We are ready to lay our differences aside and join together and move forward with the buy out. I am here before you today asking that we bring closure to the buy out this year so that farmers can make plans for the future. I would like to see my children and grandchildren be able to have the opportunity to farm if they so chose. Without a future in growing tobacco, this will not be possible.
The impact of the quota cut in Berrien County since 1998 has been a little over 3 million pounds, which translates to a lost income for the farmer of $5 million a year. That is a great economic impact for a small populated county of 16,200.
We have been talking about a buy out for the past 4 years. Farmers have been told that the timing was not right. We believe the time is right now. Many farmers have just been holding on by a thread hoping for a buy out and time is not on their side. Time is running out.
I am here before you to ask you for help in solving our problem. The way of growing and marketing tobacco is going to change. Farmers don't like change, but the time has come for change in our Tobacco Program for the betterment of us and our children who want to keep up the farming tradition. It is also imperative for us to become more competitive in the world market which is in the best interest of everyone in the tobacco industry.
Georgia farmers want the quota buy out price to be $8 a pound for the owner and $4 a pound for the producer. It will take this to allow us to survive another year. Then, each farmer will have to decide whether he will continue to grow tobacco or pass it on to a younger grower.
Page 145 PREV PAGE TOP OF DOC The average age of Georgia tobacco farmers is about 60 years old. Some are ready to retire, and we need a plan to address this. Many growers, like me, are looking for a future in growing tobacco for a profit. We need a safety net and a base like the new peanut program has now. But, most importantly we need $8 a pound for the quota holder and $4 for the producers. I can see a future in growing tobacco if we work together to solve our problem. Again, we need $8 and $4 and a base to grow tobacco with a safety net to insure that the cost of production is covered in case of a bad crop year or low tobacco prices.
Tobacco needs to continue to be grown in the traditional tobacco growing counties. The safety net program would be a no net cost program to the tax payers like it is currently. Now is the time to let us move forward. Let us work together, both Flue-cured and Burley states, to accomplish this by the end of the year.
To make a long story short, there is no other crop that can consistently replace tobacco's revenue for the farmer. The program has kept the value of a pound of tobacco up so that we can grow it profitably. However, the master settlement agreement between the states and tobacco companies has caused instability in the production of tobacco. The best thing to do, in my opinion, is to buy out the quota owner and pay the farmer a settlement to offset his loss as well. As for alternative crops, what do you do? Come up with another crop or crops and start another government program that will face scrutiny in the future? Any crop grown without price support and production control will not provide stable income to the farmer. So again, I'm in favor of a buyout of the system even if it means an increase in taxes on tobacco products.
In closing, just think back to what I said about your pay check being cut in half. Where would you be? That is where I am today.
I want to thank you for the opportunity to speak to you about my way of life and my concerns about the buyout of the Tobacco Program.
Page 146 PREV PAGE TOP OF DOCStatement of Tommy J. Payne
I am Tommy J. Payne, executive vice president for external relations at R.J Reynolds Tobacco Holdings, Inc. (RJR). I am pleased to be able to testify today and would like to thank the Specialty Crops Subcommittee for holding this hearing to review Federal tobacco quota buyout proposals. I would ask that my statement, including the attachments be made part of the official record.
As consideration of a Federal buyout of tobacco quota continues, I wanted to ensure that the Subcommittee knew RJR's opinion on the range of proposals and some other relevant considerations.
RJR has not taken a formal position on whether a buyout should be adopted. We have repeatedly stated that our concerns are centered on: 1) combining a buyout with adoption of noncompetitive, Federal regulation; 2) the mechanism for paying for the buyout; and 3) the competitiveness of remaining tobacco growers.
We are adamantly opposed to any form of Federal regulation, regardless of the agency of jurisdiction, which at the end of the day, further curtails our already limited ability to legitimately compete for the business of adult smokers.
Most certainly, Senator Kennedy's bill (S. 2626) is designed to impose serious limitations on legitimate competition that would benefit Philip Morris because of its dominant domestic market position. Philip Morris has over 50 percent of the U.S. domestic market with Marlboro alone accounting for approximately 37 percent market share. The brand is approximately five times larger than its next closest competitor, Newport. The Master Settlement Agreement signed with the states in 1998, included significant marketing prohibitions, restrictions and enforcement to the point that the only remaining forms of advertising are at retail stores where the product is purchased, direct to consumer through the mail or in age restricted venues, a limited number of magazines and/or newspapers and one brand name sponsorship annually.
Page 147 PREV PAGE TOP OF DOC In the context of the restrictions imposed by the MSA and the cumulative effect of thousands of state and local laws restricting the marketing and advertising of cigarettes, additional regulation that further restricts legal communication with legal consumers will disproportionately affect RJR, Lorillard, Brown & Williamson as well as the hundreds of other smaller manufacturers in the U.S.
The Kennedy legislation, for example, requires all retail/convenience store advertising to be black content on a white background. It bans sampling of product to adult smokers in age-restricted venues such as bars. It eliminates all brand sponsorship of events such as the NASCAR Winston Cup series.
It also grants the agency broad discretionary authority to impose new or additional regulations over a wide range of areas should it determine it is in ''the best interests of public health''. Many could argue that despite the ''prohibition'' of going on the farm, it is only a matter of time before FDA would impose directives directly related to the production of tobacco.
If you consider applying the same restrictions in terms of your own political campaigns and experience, the immediate and long-term impact is readily apparent. If you could only advertise your candidacy to voters at the polls (retail stores), rally's (age restricted venues and sponsorships) and selected newspapers (magazines), who is likely to derive the most benefit: an incumbent with high levels of name identification or the challenger?
Our specific opposition to the Kennedy bill does not mean that we oppose additional regulation per se. But to date, all of the bills that have been introduced have direct competitive consequences that only benefit Philip Morris and other proponents of FDA regulation who want to significantly reduce, if not eliminate, smoking by adults.
The second major concern we have regarding the buyout is how it is funded.
We oppose any increase in any form of excise taxes or user fees. Federal and state governments have collected over $88 billion from smokers in taxes and settlement payments from 19992001. In 2002 alone, seventeen states have further increased excise taxes by $3.2 billion.
Page 148 PREV PAGE TOP OF DOC Of course, it's not the tobacco companies that ''pay'' this money. It's the adult smoker that has an average annual household income of $42,000.
Attached is a chart showing who profits from the sale of cigarettes. As you can see, in 2001, Federal and state governments made approximately 15 times more per pack ($1.54) than RJR makes (.10 cents) per pack.
It is not a question of insufficient ''tobacco money'' being available, but rather one of priorities of how the money is spent.
In addition to existing Federal and state revenues from taxing cigarettes, the MSA Phase II payments of $5.15 billion were designed to offset any economic loss to growers and tobacco communities resulting from the signing of the MSA. A June 11, 2002 report by Drs. A. Blake Brown and Jonathan Perry of N. C. State University concluded that these payments are more than offsetting any economic harm caused by the MSA.
A certain consequence of increased excise taxes, user fees or other ''forms'' of payments by the manufacturers will be to offset, dollar-for-dollar, the Phase II payments. This is specifically provided for in the respective trust agreements each participating state agreed to.
I've also attached some figures on what percentage of payments certain quota holders might receive under a buy- out. The top ten percent will receive 67 percent of the funds, with the top one percent getting 26 percent. The bottom fifty percent would receive only 4 percent of the buyout funds.
With an $8/$4 buyout, the average payout for quota holders would be approximately $32,940 per acre based on 2000 acreage. When compared to the peanut quota buy-out or recently approved commodity program payments, these levels of payments will dwarf what other growers are scheduled to receive. For example, the peanut quota buy-
out will pay $1,687 per acre, rice will pay $569 and soybeans, $14.08.
Page 149 PREV PAGE TOP OF DOC Our third area of concern is how does all this effect the domestic tobacco grower post buyout and elimination of the tobacco price support program? Will they be more or less competitive?
In a presentation on June 17th, Dr. Will Snell of the University of Kentucky said, ''Put simply, the masses of current growers will not likely be able to survive in a non-program environment.''
He went on to note ''Without production controls, farmers typically will overproduce, prices will plummet, marginal growers will eventually have to depend on government payments to survivesomething that tobacco farmers cannot expect to see in the future.'' He also raised additional concerns particularly ''when you see peanut contracts, now without a program, being signed at well below the cost of production.'
The viability of those who continue to actually produce tobacco is all but lost in all the discussion about a buyout. Rather it is focused exclusively on when and how much the non-growing quota holder is going to get paid.
By best estimates, only about 1015 percent of those paid Phase II or any buyout funds are actual growers who put their money at risk to produce the crop.
We think the competitiveness of the grower, domestically and abroad, should be the primary issue in any discussion of a buyout or elimination of the price support program. That is currently not the case. Under the current proposals, an actual grower as compared to a quota holder will basically be left on his own. There will be no underlying price support program. They will be operating in a system more and more dictated by contract purchasing that will establish lower and lower purchase prices.
No issue involving the tobacco price support program is simple or without ample levels of politics. However, giving serious considerations to changes in the existing program to improve the competitiveness of active growers should be on the table for discussion.
Page 150 PREV PAGE TOP OF DOC Mr. Chairman, thank you for holding this hearing today. I look forward to continuing to work with you, and the other Members of the Subcommittee to enact a buyout that makes sense and improves the competitiveness of those growers who wish to continue growing tobacco.
Statement of Jeff Aiken
Good morning and thank you for the opportunity to share my concerns with you regarding the current buyout proposals affecting tobacco. I share my concerns on behalf of the tobacco growers and quota owners in my home state of Tennessee and particularly those in the district represented by Congressman Jenkins, where I farm.
I am a producer of Burley tobacco and rely on that crop for a profitable diversified farming operation. We also produce corn and hay, on our dairy and beef cattle farm. My 45 acre Burley production is larger than average in Tennessee but there are many larger growers across the state. While size of operation may affect the opinion toward buyout proposals, I believe I can include the concerns of both the larger and smaller growers and quota owners in my comments.
I know of no other legal crop that can provide the level of income that tobacco has traditionally afforded the farming operations in our state. Producers have made an investment in the production of tobacco through the no-net-cost program and its related expenses. In addition to the grading fees, no-net-cost assessments, marketing costs and normal production expenses there is another major non value-added expense I have to paythe cost of acquiring quota to maintain sufficient levels of production to sustain my farming operation. The quota cuts over the past few years have greatly inflated this cost.
In 1998 the basic quota for Burley tobacco production in Tennessee was 110,782,722 pounds. In 2001 the basic quota for Tennessee Burley was 56,931,773 pounds. Obviously, since quota determines the ability to produce and sell, our earning capability has been essentially cut in half since 1998. At a time when production costs continue to rise, our production is reduced and quota availability is limited resulting in increased quota lease costs. Added to the economics of this situation is the quota buyout debate. As a state board member of the Tennessee Farm Bureau Federation I am subjected to contact from various producer and quota owner interests and hopefully have a broader viewpoint of the buyout discussion.
Page 151 PREV PAGE TOP OF DOC As we look at the various proposals that have been offered for consideration of a buyout mechanism, we should remember there is no perfect approach. In looking for the most appropriate plan, it should be one that:
Provides adequate compensation from the viewpoint of the recipient. Adequate compensation is widely accepted at the $8/$4 level referred to in many different proposals and discussed as far back as the McCain legislation prior to the Master Settlement Agreement (MSA).
Is not unreasonably demanding of the funding source. Considering the offset of MSA Phase II dollars for the manufacturers and the level of wholesale price increases since 1998 that exceed the estimated amount to recoup the cost of the MSA, the manufacturing sector appears capable of addressing the cost. It should be pointed out that the result of legislation reducing the price support level would result in cost savings to the manufacturer/buyer and will help U.S. produced tobacco regain market share in the global market. Seldom is it discussed but clearly understood by tobacco farmers that an acre of tobacco production returns approximately $4,000 before expenses to the producer. Federal, state and local governments receive estimated revenue of $45,000 per acre from excise taxes on cigarettes. No other crop is treated the same. Partial use of existing tax on tobacco products to facilitate a buyout mechanism would not seem inappropriate.
Has a fair and uniform distribution of funds for all quota tobacco. Compensation for quota reductions and program equity changes should be clearly defined and not diminished after support for the legislation is developed.
Is a result of input from the grower/quota owner and the manufacturer/buyer sectors and addresses needed program adjustments. Resources of time, travel and negotiation have gone into the various buyout proposals, but some have not reflected the total industry input. The MSA Phase II agreement is a good example of a mechanism established absent the input of the grower sector. It has resulted in an inadequate compensation level that has essentially passed through the hands of the grower and been a catalyst in rising lease costs.
Page 152 PREV PAGE TOP OF DOC H.R. 5035 is a bill that meets that criteria. A bipartisan supported bill with a payment mechanism very similar to the bill heavily lobbied by our largest customer and leading manufacturer, H.R. 5035 has the support of numerous groups in the Burley, flue-cured and dark-fired areas of production. The reason it garners such support is the consensus building effort from the various interests within the industry. Again, we will not find the perfect solution for buyout legislation with so many different variables that every individual or entity cannot be totally satisfied. I believe the broadest support can be gained by H.R. 5035 and would ask for your favorable consideration of that particular approach to a buyout mechanism. I would further ask that you take whatever steps necessary to insure that the core personnel of the USDA/FSA tobacco division be maintained throughout changes that might occur as a result of buyout legislation due to the valuable expertise that exists in that group. We can and must address changes with vision rather than make reactive adjustments that may prove to create future problems. More importantly, we must make needed changes prior to the beginning of quota leasing next year.
Thank you again for your consideration of my effort to represent my peers.