Testimony: Senate Committee on Agriculture, Nutrition, and Forestry
September 18, 1997

Issues in a Buyout for Tobacco Growers

by

Bruce L. Gardner
Department of Agricultural and Resource Economics
University of Maryland

Summary

The basic idea of a buyout is simple: the U.S. government's tobacco support program would be ended, and the farm participants in this program would be compensated for their loss of benefits. Proponents of the program will ask, why end it? Opponents will ask, why pay compensation for the loss of benefits?

The answer to the first question is that while the tobacco program has been successful in stabilizing the tobacco market, and the program's cost has been largely shifted from taxpayers to the industry, the detailed regulation of production has created needless inefficiency in the economic organization and location of production. Moreover, the support of prices has constrained tobacco exports and induced imports, further reducing demand for U.S. tobacco. High-cost, highly regulated tobacco growing, with declining product demand, is not sustainable. Such economic costs were good reasons for the market-oriented reforms for grains and cotton in the 1996 Farm Act, and they are good reasons for deregulation of tobacco growing, too.

On the second question, the reason for a "buyout" approach which pays farmers for giving up the regulatory approach is again related to the treatment given to producers of other crops in 1996. Producers of other crops were compensated, so fairness suggests compensating tobacco growers, too. There are however several analytical issues that have to be addressed in detail before a buyout can be seriously proposed, and they are not easy ones:

1. What would be the effects of ending the tobacco program on tobacco production, prices, smoking and health, farm income, and other variables?

2. How would a buyout be implemented?

3. How much would a buyout cost, and where would the funds come from?

4. Are there really net economic gains to the nation, and if so how large are they?

My tentative answers are:

1. With the quantities of flue-cured and burley tobacco not subject to marketing quotas, and the support price eliminated, U.S. tobacco production would increase. Supply and demand parameters suggest about a 10 percent increase in U.S. tobacco output in the first year marketing restrictions are lifted. Longer-term increases would be larger. The large majority of the U.S. increase would be exported as tobacco leaf and products, and some of the rest would replace imported tobacco in U.S. production of cigarettes. The farm level price of tobacco would fall by about 10 percent in the short run, and cigarette consumption would rise slightly, by about one quarter of one percent. The rise in cigarette consumption is small in both the short and long run because so little of the cost of cigarettes is accounted for by the cost of tobacco. U.S. smokers spend almost $50 billion annually on cigarettes which contain about $2 billion worth of U.S. tobacco, so when the price of tobacco falls 10 percent, the most consumers can save is $200 million or less than one-half of 1 percent of the price of cigarettes, even if the tobacco price decline is fully passed on to smokers by cigarette sellers.

At the level of farm production of tobacco, net income would fall. My estimate of the decline is about $200 million annually, but the incidence would be very different for two groups of people: owners of marketing quotas and growers. Growers typically own some quota, but also lease quota, so they are members of both groups. Quota owners would lose the entire value of their quota, in annual rental terms more than $500 million per year for flue-cured and burley combined. But growers would be better off as producers of tobacco, by perhaps $300 million annually, partly from growing more tobacco for increased net exports, which an end to production restrictions would bring, and partly due to lower costs when growers are able to consolidate tobacco production in larger acreages in the lowest-cost locations.

2. Implementation of a buyout involves determining the value of quotas and the timing and amounts of payments to each quota owner. I believe the best means of implementation would provide payments that varied by county. In each county, lease and sales data for quota and tobacco land would be used to estimate the average value of quota in a base period, say 1995-97. This amount would be paid over a period of several years, perhaps 7 as in the 1996 Farm Act.

The funds needed could be collected by raising the cigarette excise tax or by earmarking additional funds in the tobacco industry settlement, if the settlement comes to pass.

3. What would a buyout cost? Using a U.S. average capital value of quotas of $3.00 per pound, 1.6 billion pounds of quota would cost $4.8 billion. Over 10 years, about $500 million annually would be needed. This amount could be raised by increasing the cigarette tax by less than 2 cents a pack.

This tax would reverse the slight increase in smoking that ending quota restrictions would generate—the tax increase offsets the decline in the farm price of tobacco, leaving the demand for cigarettes roughly where it is under current marketing restrictions.

4. The net gains cannot be estimated with precision, of course. The most difficult issues, involving smoking and health, are placed to one side by setting up the buyout analysis so that the U.S. consumer price and consumption of cigarettes are unchanged. Taxpayers are not affected because the payments to growers are financed by the additional excise tax on cigarettes. The main change is that smokers and cigarette makers would be levied a tax to pay quota owners cash, rather than paying growers through the higher price caused by the tobacco program's marketing and production restrictions. Similarly, quota owners are just compensated for the loss of their quota rents, and neither gain nor lose. The gains to the nation are the gains to tobacco growers from an expanded export market and lower costs of production brought by their increased freedom of action. These gains, which I provisionally suggest are in the neighborhood of $50 to $200 million per year, are the nation's gains from a buyout.

An important transitional issue is the problems that are likely to arise in adjustment to a no-program situation, both for farmers who lose the stability of income provided by the program and for communities in which tobacco growing declines or even disappears in the absence of program protections. The latter problem may justify some form of adjustment assistance to particular areas as a use for some of the buyout funds. The former problem, of providing stability in market-oriented tobacco farming, could be addressed by appropriate private-sector insurance and storage businesses. The cigarette manufacturers might find it worthwhile to offer forward-priced contract or buying guarantees, as have been developing recently in other agricultural markets. The role of the Flue-Cured Tobacco Cooperative Stabilization and Burley Stabilization Corporations is worth special attention in this respect. Perhaps they could be privatized and perform the kind of functions that grain elevators and non-government marketing cooperatives now provide for other commodities.

The following provides more detail on the background and analytical basis for the preceding assessment. Background

The spirit of market orientation and deregulation that has influenced recent agricultural commodity policy, especially the FAIR Act of 1996, could be carried further in tobacco policy. One reason the tobacco programs—more specifically the programs for flue-cured and burley tobacco—have been largely left alone is that changes in the 1980s made these programs largely budget-neutral. Nonetheless, the programs remain effective in supporting tobacco growers' returns and regulating where tobacco is grown by means of marketing quotas, import restrictions, and price-support storage for stabilization purposes.At the same time, policies attempt to discourage smoking, and these policies are likely to be intensified. An important policy instrument for this purpose is the excise tax on cigarettes.

The issue considered here is the possibility of a "buyout" of the tobacco program, using increased cigarette tax revenues as the source of necessary government funds.Most of my analysis is addressed to whether a buyout can be made to work, and if so what the benefits and costs would be to growers, the tobacco products industry, smokers, and taxpayers. There is also however a prior question whether a buyout should be embraced even if it would work. Instead of buying out growers, why not just end the program without compensation? Views of the tobacco industry have become so laden with emotion that there appears no hope for this question being addressed dispassionately. Personally, I would support a buyout, if it could be shown to be workable and to generate net benefits to the nation. But the subjects here are the issues of consequences and practicability.

Consequences of Ending the Tobacco Program

The main effects of eliminating the tobacco program would work through increased tobacco production as marketing quotas for flue-cured and burley tobacco no longer constrain supply. More tobacco would be produced and sold, and the farm price of tobacco would fall. Tobacco would cost cigarette makers less and this would generate some combination of lower consumer prices of tobacco products and increased returns for tobacco manufacturers. With larger production and a lower price of U.S. tobacco leaf, U.S. tobacco and cigarette exports would rise, and imports of tobacco from other countries would decline (reversing the trend of recent years). U.S. growers' value of sales would go up or down, depending on the elasticity of demand for U.S. tobacco leaf. If the demand for tobacco is inelastic, the farm price would fall by a larger percentage than farm sales would rise, so the market value of sales would fall. It is possible that tobacco demand is elastic at the margin because of net export sales' responsiveness to price, so that the value of sales would increase. Even so, net income from growing tobacco would most likely fall. But the losses would accrue specifically to owners of quota. Growers who rent quota from others would gain. It is possible that the reduced costs of growers, when they are free to grow tobacco at the lowest-cost location and scale, would be large enough to offset the loss of quota value, so that net income from tobacco farming would increase.

Can we estimate these effects quantitatively? Tobacco policy and the tobacco market are too complex to analyze all aspects of the situation. The multiplicity of manufactured tobacco products, types of tobacco leaf, imports and exports of both raw tobacco and manufactured products, the reformulations of tobacco blends and non-tobacco inputs that ending the tobacco program would induce—all these complicating factors preclude precision in any estimates. Still, the essential supply-demand story that underlies the qualitative assertions made above can be quantified in a simplified analysis. First, consider only cigarettes (90 percent of U.S. tobacco products) and ignore other tobacco products. Second, consider only flue-cured and burley tobacco, and ignore other types. Third, concentrate on eliminating marketing quotas (neglecting other aspects of government involvement—tobacco import restrictions, price stabilization, extension services, crop insurance). There are also some analytical assumptions, discussed below.

Ending the tobacco program can be analyzed as a standard derived-demand problem. The relevant components of demand and supply are:

(1) The demand for cigarettes: QC = f(PC+T; Y) + g(PC; W) where f is the demand function for domestic consumption and g is the demand for cigarette exports, PC is the price of cigarettes, T is the tax on cigarettes, and Y and W are vectors of demand factors that we hold constant for purposes of the analysis—population, consumer income, advertising, exchange rates of the dollar for foreign currency.

(2) The farm-level supply function of tobacco: QS = h(PS; Z1) where PS is the price of tobacco leaf received by farmers, QS is the quantity of tobacco sold, and Z1 is a vector of supply-side factors held constant for the analysis—tobacco-growing technology, weather, and prices of inputs determined by the general economy, such as fuel prices and wage rates. Note that under existing programs, QS is not determined by this underlying supply function, because tobacco policy limits QS to , the quantity allowed by marketing quotas.

The cost (supply) of goods and services used in the production and marketing of cigarettes: (3) Pm = m(Qm; Z2)

where Pm is the aggregate price (cost per unit) of all marketing services used between the sale of tobacco leaf and the purchase of a pack of cigarettes, including transportation, manufacturing, advertising, and retailing, and Z2 is defined analogously to Z1. Qm is an aggregate index of these services, in units chosen such that PmQm equals the total cost of marketing tobacco, from farmers to smokers.

Equations (1) and (3), given the assumptions above, determine the domestic derived demand for tobacco at the farm level: Pd = Pc - Pm. In addition we need to account for the export demand for tobacco leaf:

(4) Qe = e(Pe; Z3) where Pe is the price of tobacco exported, Qe is the quantity exported, and Z3 is a vector of variables such as foreign production and the exchange rate. Equilibrium in the tobacco market requires PS = Pd = Pe. Assuming fixed proportions between QC, Qm, and Qd(=QS-QC), overall supply-demand equilibrium, in the tobacco and cigarette markets, is determined by these four equations.

The analysis here uses linear approximations to equations (1) to (4). The result can best be seen graphically, as shown in figure 1. The essential analytical trick is to be able to use the same quantity scale to depict the retail cigarette and farm tobacco markets, in the upper and lower panels, respectively. We use as quantity unit, pounds of tobacco leaf. This means we use as our retail quantity unit, not packs of cigarettes but the pounds of tobacco in a pack of cigarettes. USDA's Tobacco Situation and Outlook Report [April 1997, pp. 4 and 15] indicates that U.S. growers sold 0.95 billion pounds of U.S. flue-cured and burley tobacco, used to produce 758 billion cigarettes in 1996, and 0.50 billion pounds were exported. Moreover, $47.2 billion were spent by U.S. consumers on cigarettes, the value of cigarettes exported was $4.7 billion, and federal, state, and local excise taxes were $13.6 billion in that year.

In order to integrate the manufacturing and farm-level data, we express the price of cigarettes in terms of raw tobacco in those cigarettes. Thus, we get 800 cigarettes per pound of U.S. tobacco, and domestic and foreign spending on cigarettes amounts to ($47.2 + 4.7 - 13.6)/0.95 = $40 per pound of U.S. tobacco in these cigarettes, net of taxes. With 500 billion cigarettes consumed domestically, $13.6 billion in excise taxes average 2.7 cents per cigarette or 54 cents per pack. The 1996 average price received by growers for flue-cured and burley tobacco was $1.85 per pound, which we will round up to $2 for comparison with the similarly approximate retail prices. Finally, since marketing services, including returns to capital in cigarette manufacturing, exhaust the residual of consumers' expenditures after excise taxes and the cost of tobacco, we have the price of these all-inclusive marketing services (up to the wholesale level for exports and through the retail level of domestic sales) as 40-2 = $38 per pound of tobacco.

These prices and quantities are shown in figure 1 as the current situation from which we will analyze the elimination of marketing quotas. In the current situation, the maximum that manufacturers will pay for tobacco is the after-tax consumer price minus the costs of marketing, or $40 - $38 - $2 per pound. This gives us the (price-dependent) derived demand for tobacco. With competitive auctioning of tobacco leaf, the tobacco companies will end up paying this amount on average, which is shown in the lower panel of figure 1 at the 1996 value of $2.00 per pound. However, the farm-level supply of tobacco reflects costs of $1.65 per pound, roughly the average cost of flue-cured and burley tobacco net of quota costs according to USDA estimates (Glaze, 1996). The implied annual rental value of quota averages $.35 per pound, and this makes up the difference between the farm price and average cost of production. (Surveys of quota leasing give rates which may vary widely from county to county, in part because of restrictions on lease and transfer of quota, but the average lease rate appears to be in the 30 to 40 cent per pound range.)

The supply-demand analysis of ending the tobacco program proceeds by asking what would happen to all the prices and quantities we have been discussing when marketing quotas are eliminated. To answer this question, the only information we need is the relationship between quantity and price in each of the three functions (1) to (3) above. This information can be summarized as either the slopes (partial derivatives, P/ Q) or elasticities (1 / ( P/ Q) / Q/P) of the functions.

Using estimates available in the literature, I take the elasticity of domestic demand as -0.4 and export demand as -2.5, following Brown, Thurman and Dugan (1997), for both tobacco and cigarettes. Although this is even more speculative, I assume an elasticity of farm tobacco supply of 0.8. This elasticity is intended to incorporate not only added acreage but also the redistribution of production from high-cost to low-cost areas when quota restrictions end. The elasticity of supply of marketing services is unknown; I will arbitrarily use a value of 2.0, reflecting the likelihood that major input costs such as wage rates would not change appreciably because of changes in cigarette output, but the returns to capital invested in the industry might change appreciably.

Given these parameters, the results are as follows when marketing quotas are eliminated and output is established by farm supply-demand equilibrium. Production of tobacco increases 8 percent, and tobacco used domestically in cigarettes increases 0.3 percent (most of the increased production is exported). The farm price received by growers falls 18 cents (9 percent). Cigarette consumption increases by 0.1 percent, and the price of cigarettes falls by 13 cents per pound of tobacco (equivalent to 0.3 cents per pack of 20 cigarettes). Returns to tobacco manufacturers rise by 0.1 percent (assuming the reason the supply of marketing services slopes upwards is the fixed investment of tobacco product manufacturers).

An Offsetting Cigarette Tax

Since eliminating the tobacco program causes more smoking and higher returns to the cigarette industry, one might consider increasing the cigarette tax to offset these effects. How large a tax increase would be required? Consider a cigarette tax increase just sufficient to restore the cost to manufacturers that had been reduced by the elimination of marketing quotas, i.e., 35 cents per pound of tobacco. With 800 cigarettes, or 40 packs, per pound of tobacco, the required tax increase is 35/40 = .88 cents per pack of cigarettes. However, since only 64 percent of U.S. cigarettes are taxable (using 1996 data), mostly because the rest are exported, the tax would have to be .88/.64 = 1.4 cents per pack. This tax would reduce the demand for cigarettes enough to restore the original smoking level. A tax larger than the 0.3 cents per pack (the amount by which eliminating quotas reduced the cigarette price) is needed to restore the original smoking level not only because some cigarettes are untaxed, but also because the incidence of the tax is partly borne by cigarette manufacturers, so one needs a tax larger than 0.3 cents to cause price to rise by 0.3 cents.

A Buyout

Eliminating marketing quotas and increasing the cigarette tax would each reduce the income of tobacco growers, and doing both simultaneously gives the growers a double dose of economic pain. Their annual loss from both changes just equals the annual rental value of quota. In figure 1, this loss is $.35 per pound times 1.45 million pounds, or $510 million per year (not attributing any losses to unused quota).

The loss, however, is not evenly spread among tobacco growers, and indeed it is an analytical oversimplification to assign the loss to growers. More precisely, the loss is borne by owners of tobacco marketing quota. Some of these owners are not growers. They are often retired growers, or spouses and descendants of deceased former growers. Correspondingly, many tobacco growers lease quota from others, and own little or none. For them, the rental value of quota is a cost, and eliminating the tobacco program eliminates that cost. Indeed, USDA's cost of production estimates treat the rental value of quota as part of costs of production (e.g., Glaze, 1996).

These considerations suggest aiming the buyout at quota owners, not growers. The form of such a buyout is also suggested: simply have the federal government pay the going market price for purchase of quota.

Two issues of implementation arise: how to finance the aggregate cost of the buyout, and how to distribute buyout payments among quota owners.With respect to the aggregate cost, we have already carried out the relevant calculations on an annual rental basis. The additional tax of 1.4 cents per pack of cigarettes just offset the annual quota rents. Of the 0.95 billion pounds of tobacco used for cigarettes, 0.7 billion pounds are consumed domestically. This yields about 28 billion packs consumed, which at 1.4 cents per pack generates $400 million, not quite enough to provide the $510 million annual loss to quota owners calculated above. The shortfall occurs because quota rents are received by growers for tobacco used in exported cigarettes which are not subject to the excise tax.

A complication is that a buyout must be a payment sufficient to offset quota rental values in the future also. Future rental values should be discounted, however, not only by the usual interest rate used in capitalizing investments or loans, but also because the capital value of tobacco quota has always been heavily discounted in the market. How do we know this? From prices paid for quota, when it could be legally bought and sold, and from prices paid for farmland with quota as compared to similar land without quota. For many years, estimates based on market data have indicated a sales value about 4 to 5 times the annual rental value. Grise (1995, p. 11) reports average quota values in North Carolina ranging from $1.50 to 4.50 in the past 20 years, with the higher values occurring in the 1970s. Using the mean of this range, or a capitalization rate of 5 on the upper end of the 30 to 40 cent rental value range cited above, the buyout would be predicted to end up paying $2.00 to $3.00 per pound or $3 to $4.5 billion. This requires 8 to 12 years of revenues from the 1.4 cent additional cigarette tax.

A further distributional issue is still more complicated. Both the lease rates and capitalized value of quota differ between flue-cured and burley tobacco, and between counties in each tobacco belt. There are places where quota is not used at all, and therefore reaps no returns to be bought out. Therefore, a buyout of, say, $2.00 per pound for all quota would be excessive in some counties and insufficient in others. Moreover, the value of quota varies from farm to farm within counties. Some small farms have retained and used quota to grow tobacco when their costs are so high that they would not pay $.35 per pound to lease quota, and in some cases may have been constrained by regulations from renting quota to others who would pay $.35. In these cases, $2.00 per pound would be an overpayment.

If a mechanism could be designed to reveal each grower's true value of quota, a case-by-case appropriate buyout could be made. The difficulty of accomplishing this is heightened by the fact it is hard to see how a buyout could be voluntary in the sense that producers could choose to keep their quota. If some individuals could keep their quota, while other growers can sell all they like without quota, the remaining quota would become valueless. But if growers who are bought out are prohibited from growing tobacco or are restricted in their plantings, we haven't really deregulated tobacco production, and the buyout is pointless. In this respect, the tobacco program buyout would be unlike the dairy buyout of 1985-86 or voluntary crop acreage diversion programs, wherein farmers submit bids to the government. The situation is more like the transition payments of the 1996 FAIR Act, where the government determines how much program participants will receive, and farmers do not have the option of rejecting the payment and staying in the old program.

In this situation, the fairest operational procedure would seem to be a county-by-county buyout. USDA would use rental and sales transactions data to estimate the average value of quota for, say, the 3-year period 1995-97 in each county, and pay that amount per pound to each owner of tobacco quota in the county. Then the additional cigarette tax would be calibrated to finance the government's cost of the buyout over a legislatively determined number of years. The payments could be at the same amount each year, or could decline as the FAIR Act's payments do. If tobacco buyout payments are made over 7 years and decline such that the 7th year payment is half the first year's, the total amount should be increased by an appropriate amount to compensate quota owners for having to wait longer for payments.

Complications and Conclusions

In order to carry out the preceding calculations a number of assumptions had to be made. It is important to consider whether relaxing them would invalidate the approach. The first is that an important aspect of international trade has been neglected. In addition to exporting about 40 percent of our tobacco and 30 percent of our cigarettes, the United States imports about 30 percent of the tobacco used in cigarette production (USDA, Tobacco Situation, April 1997). Increased U.S. tobacco production and lower prices of U.S. tobacco might cause some substitution of U.S. tobacco for imported tobacco in cigarette production. However, current policy limits tobacco imports quantitatively, by means of a tariff that rises to a level that shuts off imports when an import quota level (triggering the "tariff-rate quota" or TRQ) is reached. A price of U.S. tobacco lower by 10 percent would reduce the demand for imports, but it might well not reduce the quantity of imports because the TRQ already reduces imports from the level world market forces would generate. However, the value of imported tobacco would be reduced. This means U.S. cigarette makers would pay less for imported tobacco, and this would cause a decrease in the cost of cigarettes. Both cigarette makers and smokers would benefit, in the same way they benefit from a lower price of domestic tobacco used in cigarette production.

Second, the supply-demand analysis assumes the tobacco industry is competitive. Actually cigarette makers are few enough that each of them has market power. They don't take cigarette prices as given, but set them in conjunction with advertising and other marketing decisions so as to maximize profits. What market power means is that the demand for tobacco reflects these decisions as well as the underlying smokers' demand function. Twenty years ago tobacco accounted for a significantly larger share of the pre-tax cost of cigarettes than it does today. Now a pack of cigarettes costs about $1.00 at wholesale price, of which 5 cents (5 percent) is the cost of domestic tobacco in the cigarettes. Twenty years ago, the wholesale price was about 25 cents a pack (about 50 cents in 1997 dollars, since the overall price level has doubled), and tobacco accounted for over 10 percent of the wholesale cost. The farmers' share of the retail price is about half the 5 and 10 percent figures, because retail cigarette prices are about twice the wholesale prices.

What imperfections of competition mean for the analysis of ending the tobacco program is that the extent to which increased tobacco production will translate to reduced prices, for both growers and smokers, is less certain. Still, even if the cigarette makers were pure monopolies, the demand for cigarettes facing them would have a negative elasticity, and it would be optimal for them to charge smokers less when their costs were reduced. Note also that the data used here to estimate the elasticities of demand were generated by the actual behavior of the industry, so to that extent problems of market imperfection have been taken into account.

A third problem is that so many of the parameters used in the supply-demand model are uncertain, and the range of our uncertainty is quite large. Table 1 shows the gains to various interested parties under a range of parameter values. The left-hand column shows the "base case" that was described earlier. The estimated net gain to the United States is $40 billion annually. These estimates do not include the buyout, which is why the $510 million loss to quota owners is shown, equal to $.35 per pound on the 1.45 billion pounds marketed (no loss of rental value is attributed to unused quota). The buyout is set up to compensate quota owners for their loss by means of a tax that will slightly more than erase the gains of smokers and cigarette manufacturers, which they realize because of the larger tobacco supply when quotas end. This element of the reform program is essentially a transfer and it does not appreciably affect the national gains.

The gains and losses in the base case result from price and quantity effects of program elimination that are smaller than estimated in previous work, such as Sumner and Alston (1985) or Brown, Thurman, and Dugan (1997). Sumner and Alston in particular obtain much larger effects -- an increase of tobacco production of 50 to 100 percent and a reduction of 20 to 30 percent in the farm price of tobacco. The main reasons for these larger effects are that the program was more important in the early 1980s, which is the period Sumner and Alston were analyzing, and that they used higher values for demand and supply elasticities. They estimated the aggregate rental value of quota at $800 million to $1 billion in 1983, compared to $500 to $600 million used above for 1996. This reflects mainly the fact that the tobacco program has already been scaled back considerably from its earlier levels of support.

However, their higher elasticities may well be more appropriate than the values in the base case of Table 1. This would be especially true in the longer run, when importers of U.S. tobacco, competing exporters, domestic users, and producers would all have ample time to adjust to the absence of tobacco program constraints and price changes. To see what difference it would make, Table 1 also shows a "long-run" case with substantially higher elasticities (although still not as high as some that Sumner and Alston use). One reason for not using net export demand elasticities as high as theirs is that the tobacco import regime is more rigid than in the early 1980s. In particular, as mentioned earlier, the tariff-rate quotas on imports make it probable that imports would begin to fall as U.S. production increased, because there is presently excess demand for imports at the restricted level.) Perhaps the most surprising result of the high-elasticity case is that, while all interested parties do better than in the base case, the differences are not large. The net gain to the United States is substantially larger in percentage terms, but this is because the increase from a $40 million to a $220 million annual gain starts from such a small base. The third column of Table 1 considers a case in which supply and demand functions are even less elastic than in the base case -- it may be thought of as an extreme short-run case, when adjustment to new circumstances is costly and incomplete. Again, perhaps the principal surprise is how little difference these lower elasticities make in the gains and losses. This suggests that the net gains to the United States which the analysis produces, while small, are fairly robust -- over a substantial range of uncertainty about parameter values, net gains persist. Finally, attention should be paid to the problems that are likely to arise in adjustment to a no-program situation, both for farmers who lose the stability of income provided by the program and for communities in which tobacco growing declines or even disappears in the absence of program protections. The latter problem may justify some form of adjustment assistance to particular areas as a use for some of the buyout funds. The former problem, of providing stability in market-oriented tobacco farming, could be addressed by appropriate private-sector insurance and storage businesses. The cigarette manufacturers might find it worthwhile to offer forward-priced contract or buying guarantees, as have been developing recently in other agricultural markets. The role of the Flue-Cured Tobacco Cooperative Stabilization and Burley Stabilization Corporations is worth special attention in this respect. Perhaps they could be privatized and perform the kind of functions that grain elevators and non-government marketing cooperatives now provide for other commodities. However, the topic of short-run adjustment and future risk management raises many analytical issues that go beyond what can be adequately addressed here. My focus is rather on the new situation which would emerge, in terms of prices and quantities, under average conditions in a deregulated tobacco market.