Table Of ContentOUTLOOK FOR THE TOBACCO MARKET AND
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flUECURED TOBACCO PROGRAM
Y4.AG 8/1:103-55
Outlook for the Tobacco Market and... ?TTSjr^
BEFORE THE
,
SUBCOMMITTEE ON SPECIALTY CROPS
AND NATURAL RESOURCES
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
FEBRUARY 21, 1994, LUMBERTON, NC
Serial No. 103-55
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Printed for the use of the Committee on Agriculture
U.S. GOVERNMENT PRINTING OFFICE
80-186 WASHINGTON : 1994
ForsalebytheU.S.GovernmentPrintingOffice
SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402
ISBN 0-16-044887-5
•J
OUTLOOK FOR THE TOBACCO MARKET AND
FlUE-CURED TOBACCO PROGRAM
Y 4. AG 8/1:103-55
Outlook for the Tobacco llarket and...
?T"lVrr^
BEFORE THE
SUBCOMMITTEE OX SPECIALTY CROPS
AND NATURAL RESOURCES
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
FEBRUARY 21, 1994, LUMBERTON, NC
Serial No. 103-55
f/Oy f 6 J994
Printed for the use of the Committee on Agriculture
U.S. GOVERNMENT PRINTING OFFICE
80-186 WASHINGTON : 1994
ForsalebytheU.S.GovernmentPrintingOffice
SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402
ISBN 0-16-044887-5
COMMITTEE ON AGRICULTURE
E (KIKA) DE LA GARZA, Texas, Chairman
GEORGE E. BROWN, Jr., California, PAT ROBERTS, Kansas,
Vice Chairman Ranking Minority Member
CHARLIE ROSE, North Carolina BILL EMERSON, Missouri
DAN GLICKMAN, Kansas STEVE GUNDERSON, Wisconsin
CHARLES W. STENHOLM, Texas TOM LEWIS, Florida
HAROLD L. VOLKMER, Missouri ROBERT F. (BOB) SMITH, Oregon
TIMOTHY J. PENNY, Minnesota LARRY COMBEST, Texas
TIM JOHNSON, South Dakota WAYNE ALLARD, Colorado
BILL SARPALIUS, Texas BILL BARRETT, Nebraska
JILL L. LONG, Indiana JIM NUSSLE, Iowa
GARY A. CONDIT, California JOHN A. BOEHNER, Ohio
COLLIN C. PETERSON, Minnesota THOMAS W. EWING, Ilhnois
CALVIN M. DOOLEY, California JOHN T. DOOLITTLE, Cahfornia
EVA M. CLAYTON, North Carolina JACK KINGSTON, Georgia
DAVID MINGE, Minnesota BOB GOODLATTE, Virginia
EARL F. HILLL\RD, Alabama JAY DICKEY, Arkansas
JAY INSLEE, Washington RICHARD W. POMBO, California
THOMAS J. BARLOW III, Kentucky CHARLES T. CANADY, Florida
EARL POMEROY, North Dakota NICK SMITH, Michigan
TIM HOLDEN, Pennsylvania TERRY EVERETT, Alabama
CYNTHIAA. McKINNEY, Georgia
SCOTTY BAESLER, Kentucky
KAREN L. THURMAN, Florida
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
SAM FARR, California
PAT WILLIAMS, Montana
BLANCHE M. LAMBERT, Arkansas
Professional Staff
DiANNE Powell, StaffDirector
Vernie Hubert, ChiefCounsel and Legislative Director
Gary R. Mitchell, Minority StaffDirector
James A. Davis, Press Secretary
Subcommittee on Specialty Crops and Natural Resources
CHARLIE ROSE, North Carolina, Chairman
SCOTTY BAESLER, Kentucky, TOM LEWIS, Florida
Vice Chairman BILL EMERSON, Missouri
SANFORD D. BISHOP, Jr., Georgia JOHN T. DOOLITTLE, Cahfornia
GEORGE E. BROWN, Jr., Cahfornia JACK KINGSTON, Georgia
GARY A. CONDIT, Cahfornia BOB GOODLATTE, Virginia
EVA M. CLAYTON, North Carolina JAY DICKEY, Arkansas
KAREN L. THURMAN, Florida RICHARD W. POMBO, Cahfornia
DAVID MINGE, Minnesota TERRY EVERETT, Alabama
JAY INSLEE, Washington
EARL POMEROY, North Dakota
CHARLES W. STENHOLM, Texas
COLLIN C. PETERSON, Minnesota
SAM FARR, California
HAROLD L. VOLKMER, Missouri
(II)
CONTENTS
Page
Rose, Hon. Charlie, a Representative in Congress from the State of North
Carolina, opening statement . 1
Witnesses
Brown, A. Blake, extension economist and assistant professor, department
ofagriculture and resource economics. North Carolina State University 10
Prepared statement 52
Bunn, J. Thomas, executive vice president. LeafTobacco Exporters Associa-
tion 16
Prepared statement 94
LetterofMarch 21, 1994 23
Caldwell, Robert H., president, North CaroHna State Grange 36
Prepared statement 133
Edwards, Lionel, tobacco specialist, North Carolina Farm Bureau Federation . 34
Prepared statement 128
Flye, Bruce L., president. Flue-cured Tobacco Cooperative Stabilization Corp . 40
Prepared statement 148
Graham, Jim, commissioner ofagriculture, StateofNorth Carolina 26
Prepared statement 121
Milby, David, vice president, LeafTobacco, Philip Morris U.S.A 24
Prepared statement 117
Parrish, D. Keith, president, Tobacco Growers Association ofNorth Carolina,
Inc 31
Prepared statement 123
Smith, Dallas R., Deputy Under Secretary, International Affairs and Com-
modity Programs, LF.S. DepartmentofAgriculture 2
Prepared statement 44
Snell, William M., agricultural economics, University ofKentucky 12
Prepared statement 77
(III)
OUTLOOK FOR THE TOBACCO MARKET AND
FLUE-CURED TOBACCO PROGRAM
MONDAY, FEBRUARY 21, 1994
House of Representatives,
Subcommittee on Specialty Crops
AND Natural Resources,
Committee on Agriculture,
Lumberton, NC.
The subcommittee met, pursuant to call, at 9:30 a.m., in the A.D.
Lewis Auditorium, Robeson Community College, Lumberton, NC,
Hon. Charlie Rose (chairman ofthe subcommittee) presiding.
Staffpresent: Keith Pitts.
OPENING STATEMENT OF HON. CHARLIE ROSE, A REP-
RESENTATIVE IN CONGRESS FROM THE STATE OF NORTH
CAROLINA
Mr. Rose. The hearing will please come to order.
The Specialty Crops and Natural Resources Subcommittee of the
U.S. House of Representatives Committee on Agriculture is here
today to have a public field hearing at the A.D. Lewis Auditorium
of the Robeson Community College in Lumberton, North Carolina.
The subject of today's hearing is to hear witnesses from the De-
partment ofAgriculture and from the tobacco farming and market-
ing industry, to talk to us about the outlook for the tobacco market
and the Flue-cured tobacco prog—ram.
We have three panels today the first panel is Mr. Dallas R.
Smith, the Deputy Under Secretary ofAgriculture for International
Affairs and Commodity Programs, U.S. Department ofAgriculture,
Washington, DC. He is accompanied by Mr. Larry Crabtree, the
Deputy Director ofthe Tobacco Division ofthe Agricultural Market-
ing Service, U.S. Department of Agriculture, Washington, DC; also
by Mr. Charles Hatcher, Consultant, Tobacco and Peanuts Divi-
sion, ASCS, U.S. Department of Agriculture, Washington, DC; Dr.
Robert Miller, Director of the Tobacco and Peanut Analysis Divi-
sion, ASCS, and Mr. Doug Richardson, who is the Acting Director
of the Tobacco and Peanut Division of ASCS. Some ofyou may re-
member Doug Richardson when he was the county manager for Co-
lumbus County at the county ASCS.
I want to thank all of you for coming. Dallas Smith is not only
the Under Secretary for Commodity Programs, but he is a native
ofColumbus County and we are very happy to have them here.
Mr. Smith, you may proceed.
(1)
STATEMENT OF DALLAS R. SMITH, DEPLTT UNDER SEC-
RETARY, INTERNATIONAL AFFAIRS AND COMMODITY PRO-
GRAMS, U.S. DEPARTMENT OF AGRICULTURE, ACCOM-
PANIED BY LARRY CRABTREE, DEPUTY DIRECTOR, TO-
BACCO DIVISION, AGRICULTURAL MARKETING SERVICE;
CHARLES HATCHER, CONSULTANT, TOBACCO AND PEANUTS
DIVISION, ASCS; DOUGLAS RICHARDSON, ACTING DIREC-
TOR, TOBACCO AND PEANUTS DIVISION, ASCS; AND ROBERT
MILLER, DIRECTOR, TOBACCO AND PEANUTS, ANALYSIS DI-
VISION, ASCS
Mr. Smith. Thank you, Mr. Chairman. I am happy to be here in
Lumberton today to discuss the different issues as they relate to
the tobacco price support program. As you mentioned, I have sev-
eral other people here with me from the Department ofAgriculture.
After my opening statement, these gentlemen will assist me in re-
sponding to any questions you may wish to ask.
Tobacco means much to our economy and its positive contribu-
tions to U.S. trade balance continued during 1993. Exports sur-
passed imports by $3.66 billion during the January through No-
vember 1993, period. Unmanufactured tobacco contributed $1.18
billion while cigarettes and other tobacco products added an addi-
tional $3.87 billion in export earnings. Cigarette exports during the
period totaled $3.57 billion. Flue-cured tobacco accounted for $640
million ofthe unmanufactured tobacco shipments. Burley and other
leaf tobacco added $537 million. The estimated farm-sales-weight
equivalent of the Flue-cured tobacco exported is 255 million
pounds.
I want to identify a number offorces ofchange with the potential
to impact the tobacco industry and particularly the potential im-
pact upon growers. At the production level, a force of change im-
pacts one or more of the determinants of income; that is, price, av-
erage cost of production or quantity produced and sold. These im-
pacts generate structural change as measured by numbers ofgrow-
ers, average size offarming operation and locales ofactivity.
Each force of change will exert unique impacts upon the struc-
ture of the industry. In some cases, the influence upon an income
determinant is predictable, while with others, the effect, such as in-
cidence, direction and magnitude, is not readily discernible.
Two major change items are: (1) tobacco imports and exports and
(2) changes in Federal excise tax rates.
Other forces are: (1) the continuing Federal budget deficit; (2) the
adoption of "no-smoking" areas, and declining social acceptance of
cigarette smoking; and (3) the continued erosion of U.S. market
shares to low-cost foreign producers. My statement today will con-
centrate on tobacco trade issues, including the minimum domestic
tobacco content legislation.
As you know, Mr. Chairman, both the 1993 Flue-cured and Bur-
ley auction markets experienced weak demand with the quantity of
tobacco being taken by the association pools the largest in 10 years.
There are several factors involved. The quality of the 1993 Flue-
cured crop was down and prices averaged less. Burley quality was
up a little and prices stayed about the same as 1992. With ample
supplies available overseas, purchases for export were down. Fur-
thermore, the U.S. manufacturers are reducing their inventories
due to declining U.S. consumption and uncertainty about the fu-
ture of Federal and State excise taxes. Cigarette companies are
also evaluating their options under the minimum domestic content
legislation.
U.S. unmanufactured tobacco exports for January through No-
vember 1993 totaled 414 million pounds, or 20 percent below the
same period of 1992. The large supplies overseas, averaging about
one-half U.S. prices, account for the lower export figures. Imports
of unmanufactured tobacco rose 17 percent in January to Novem-
ber time period in 1993 over 1992. Only in October and November
were imports below the same mont—hs of 1992. We note the gains
occurred in virtually all categories Burley, Flue-cured, Oriental,
and stems. Clearly, the rise in imports harms U.S. growers.
The Omnibus Budget Reconciliation Act of 1993, enacted August
10, 1993, amended the Agricultural Adjustment Act of 1938 to pro-
vide a 75 percent level of use of U.S.-grown tobacco in cigarettes
produced in this country, known as the domestic content legisla-
tion. Currently, about 40 percent of tobacco used in domestically
produced cigarettes is imported.
The 1993 amendment requires U.S. major domestic manufactur-
ers of cigarettes to certify annually to the Secretary of Agriculture
the percentage of U.S.-produced tobacco in the total quantity used
by domestic manufacturers to produce cigarettes during the cal-
endar year. Under current conditions, affected manufacturers who
exceed the 25 percent foreign content limitation or who do not cer-
tify the percentage of foreign content used will be required to pay
a nonrefundable marketing assessment to the Commodity Credit
Corporation. In addition, affected manufacturers who exceed the 25
percent limit must purchase U.S. tobacco from domestic producer-
owned cooperative marketing associations in an amount equal to
the quantity of imported tobacco that was used in excess of the 25
percent limit. An amount equivalent must be divided equally and
purchased from Flue-cured and Burley stocks. Failure to purchase
the required amount of tobacco from the associations will result in
a penalty assessment equal to 75 percent of the average market
price for the respective type of tobacco for the total purchase short-
age.
Mr. Rose. Let me interrupt you there.
Mr. Smith. Yes, sir.
Mr. Rose. So over that, without reading it, is that in the law or
is that what the regulations are going to look like?
Mr. Smith. No, sir, that particular provision is in the law, the
requirement that if you do not purchase, there is a penalty assess-
ment, that is part ofthe legislation.
Mr. Rose. Do you anticipate that that will be changed in any
way by the regulations?
Mr. Smith. No, sir.
Mr. Rose. We had a hearing like this in October of last year at
the University of Kentucky School of Agriculture in Lexington and
the panel that you are on was essentially the same in Kentucky,
and the law passed on my birthday, August 10, 1993, and you have
been in the process of writing the regulations for it since then, and
you have had a public comment period, which I understand ended
February 11, is that correct?
Mr. Smith. Yes. There were two sets of regulations, one did end
on the 10th of February and I beHeve the other one did end on the
11th. —
Mr. Rose—. What do you well we can talk about this in a minute,
but under if you exceed the 25 percent foreign content limitation
or you do not certify the percentage of foreign content, you will pay
a nonrefundable marketing assessment to the CCC. Do you have
an idea now, is that in discussion as to how much that will be?
Mr. Smith. The marketing assessment for the 1994 crop has
been announced. I would like to ask Doug Richardson to expound
on that.
Mr. Richardson. The marketing assessment for this regulation,
called the domestic content, we have not determined as yet. We are
in the middle ofdoing the final regs on that now.
Mr. Rose. So what Dallas is talking about is the regular assess-
ment for the program.
But this specific assessment, have you got a rough idea—of the
range it would be in? Or you just cannot comment until what
have the recommendations been for that, or have there been any?
Mr. Richardson. There were about four commenters that com-
mented on that and they wanted us to be just absolutely sure that
we had the pricing that we use on the imports in the same rela-
tionship as we did on the domestic pricing used for Flue-cured and
Burley tobacco, not trying to compare green weight or the weight
the farmer markets his crop compared to processed weight.
Mr. Rose. All right, but that is not the real kicker in that law,
is it? I mean, that is not the major fine for violating the domestic
content provision, is it? Or is that
Mr. Richardson. The domestic marketing assessment will be the
difference between the
Mr. Rose. Hold, before you say that, the next paragraph of Dal-
las' testimony, he says "In addition, affected manufacturers who ex-
ceed the 25 percent limi—t must purchase U.S. tobacco from d—omestic
producer-owned co-ops" like Flue-cured and Burley co-ops "in an
amount equal to the quantity of imported tobacco that was used in
excess ofthe 25 percent limit."
Mr. Smith. Yes, sir, there are three parts to the compliance on
this particular issue. You have the no-net-cost assessment, you
have the marketing assessment and then the third part, which is
the one you are referring to, pertains to whether the domestic to-
bacco companies purchase an equivalent quantity from the tobacco
associations, an amount equivalent to the amount that they im-
ported above the 25 percent. If they fail to purchase that from the
association, the tobacco companies would be subject to a penalty at
75 percent of the average market price. That is a pretty stiff pen-
alty.
Mr. Rose. Well now would that apply, in your anticipation, for
all of 1994?
Mr. Smith. Yes, sir.
Mr. Rose. So if a company has brought in an excessive amount
of foreign tobacco in 1994, which is in excess of the 25 percent that
they could use in their domestically produced cigarettes, they
would have to buy an equal amount from the co-op?
