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OUTLOOK FOR THE TOBACCO MARKET AND \M 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 m i:oi 16 '"««SKSgS?. 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 marketing 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 several 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 impact upon growers. At the production level, a force of change impacts one or more of the determinants of income; that is, price, average cost of production or quantity produced and sold. These impacts 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 legislation. Currently, about 40 percent of tobacco used in domestically produced cigarettes is imported. The 1993 amendment requires U.S. major domestic manufacturers 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 certify 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 assessment, 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 assessment 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 exceed 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 tobacco companies purchase an equivalent quantity from the tobacco associations, an amount equivalent to the amount that they imported 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 penalty. 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?