FLUE-CURED TOBACCO COOPERATIVE STABILIZATION CORPORATION

STATEMENT OF ARNOLD HAMM, ASSISTANT GENERAL MANAGER

U.S. SENATE COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

SEPTEMBER 18, 1997

Mr. Chairman and Committee members, I am Arnold Hamm, Assistant General Manager for Flue-Cured Tobacco Cooperative Stabilization Corporation. The Flue-Cured Tobacco Cooperative is the producer owned marketing association which administers the price support program for flue-cured tobacco farmers under contractual agreement with the United States Department of Agriculture's Commodity Credit Corporation (CCC). The cooperative makes loans with funds borrowed from the CCC to eligible farmers whose tobacco does not bring above the minimum price established for each grade at the auction market. The primary purpose of the cooperative is to provide a stable and orderly marketing system and assure farmers of a fair return for their efforts.

Gentlemen, flue-cured tobacco farmers are deeply concerned for their future. The proposed settlement between U.S. cigarette manufacturers and States' Attorneys General, we believe, is designed to reduce U.S. consumption of tobacco products by as much as twenty percent. This reduction in consumption, when realized, will have a negative impact on individuals who produce tobacco for a livelihood and their immediate communities. In your pursuit to treat as many of the involved parties who may feel the effects of this settlement as fairly as possible, I urge you to exercise extreme caution when addressing the issue of tobacco farmers and their economic viability.

The Federal Tobacco Program is the most successful commodity program ever implemented in the United States or, anywhere in the world. There are many reasons for this success, but the most important are: an equitable return for tobacco producers which allows for the viability of small family farms throughout the Southeast and many years of domination of the world production of cigarette tobacco. The U.S. Tobacco Program is a unique commodity program. It is the tobacco farmer who provides most of the capital to insure against potential taxpayer losses on borrowed funds. According to the Congressional Budget Office, USDA expenses for administering the Tobacco Program are approximately $16 million annually, which is more than negated by the Tobacco Marketing Assessment of approximately $30 million annually, paid in the form of a marketing tax by tobacco farmers and purchasers. There is a tremendous return on investment when one considers the regional benefits provided by the Tobacco Program. Those who depend on the economic stability that the Tobacco Program provides have overwhelmingly supported the Tobacco Program in previous farmer referendums. As a matter of fact, in the most recent farmer referendums, only those who share in the risk of production could vote. These referendums passed by over ninety percent.

The Tobacco Program consists of two key elements: production controls and price supports. Whether by intention or not, production controls, also known as quotas or allotments, have become an economic asset. It is estimated that the gross income produced from just flue-cured tobacco this year will directly infuse more than $1.75 billion into the local economies of the Southeast. When economic multipliers are considered, this amount has the impact of approximately $7 billion. After the tobacco farmer, the ultimate beneficiaries of this income will be local communities and local, state, and federal governments. In turn, tobacco price supports insure an equitable return for tobacco farmers' capital risk and management. In fact, whether or not a flue-cured tobacco farmer leases or owns all or part of the tobacco quota they produce, the production controls, coupled with price supports, insure the ability to earn income from tobacco production. This has created thousands of small business enterprises on which farm families depend upon for their principal source of income throughout their working career and their retire- ment years.

Over the years, the Federal Tobacco Program has been criticized by many groups. Free market advocates see the Program as an impediment to trade. Some health advocates are unable to separate the issues of tobacco production and the marketing of tobacco products. Even some purchasers of tobacco see the Program as a hindrance to their increased profitability. Many groups have tried to create disharmony between tobacco producer and tobacco purchaser regarding these issues. Let me make one thing perfectly clear before the following is considered: U.S. tobacco farmers, because of the level playing field created by their tobacco program, have a better relationship with tobacco purchasers than buyers and sellers of other commodities. The following is not intended to criticize tobacco purchasers, but to merely state some important facts.

There are currently four major direct purchasers of farm tobacco. The Tobacco Program offers tobacco farmers some protection from the potential effects of unregulated monopoly powers created by relatively few purchasers.

U.S. manufacturers of tobacco products and export leaf dealers have exported U.S. tobacco production technology to third world countries. The infusion of production capital into these countries, coupled with cheap local labor, has created serious competition for U.S. tobacco producers. While American blend cigarette production has been increasing, cigarette manufacturing technology has changed. With the advent of filter tips, the incorporation of stems and scrap into consumer tobacco products, and the use of expanded or puffed tobacco, our tobacco production has declined between 20 and 30 percent over the past 30 years. During this same period, the farm price of leaf tobacco has remained relatively constant on a dollar for dollar basis, but sharply declined on an inflation adjusted basis.

In your efforts to address the future of U.S. tobacco farmers and the so called global tobacco settlement, please use caution when it comes to the Tobacco Program. The best possible economic solution for U.S. tobacco farmers is to continue to produce tobacco within a system that insures stability and equitable returns for their efforts. The elimination of the Tobacco Program by some form of phase out and compensation is not a reasonable approach for the following reasons:

Tobacco will continue to be produced in the United States although it is uncertain at what level. It is certainly possible to increase U.S. tobacco production. However, the ability to sell that increase depends on whether or not foreign tobacco producers can and would lower their prices to retain market share. It also depends on whether the additional tobacco produced can compete with the low quality tobacco generally produced in the rest of the world. Finally, it will also depend on whether or not significant international non-tariff and tariff trade barriers for U.S. produced tobacco continue to exist.

The unregulated production of tobacco in the United States would cause the U.S. price to drop by as much as one third, an amount considered to be the economic return to quota and some of the economic return to risk and management. Put bluntly, that third of the economic return would be transferred from tobacco farmers to the stockholders of tobacco product manufacturers or passed through to consumers of tobacco products. Even if tobacco farmers were offered some form of compensation from the $368.5 billion proposed settlement or increased cigarette excise tax, you would still be paving the way to cheaper tobacco world-wide. This is contrary to the public expectation of the outcome of the proposed global settlement.

Critics of the U.S. Tobacco Program often overlook the fact that in the world production of tobacco, U.S. tobacco farmers are providing a unique product that is not competing with the majority of other tobaccos produced in the world. The world demand for cheap, low quality tobacco has dramatically increased relative to U.S. tobacco production. This is an important point. U.S. produced tobacco is unparalleled in quality. Our quality is derived from our experience in production, the world's most efficient production system, and, most importantly, the world's most favorable soils and climate for tobacco production.

Without tobacco quotas and price supports, the economic return to risk and management, on a per pound basis, will significantly decrease. If production expands as some economists believe, the main beneficiaries will be the suppliers of production inputs and the purchasers of tobacco, not the tobacco farmer. Thousands of tobacco farmers will no longer be able to derive enough net income to support their families. Only the largest tobacco farmers will be able to survive these shifts in return and many tobacco farmers will be forced out of farming. For tobacco farmers who survive this shift, their capital investment will be at greater risk for far less return.

Gentlemen, I really don't know what is best for tobacco farmers regarding the global settlement, however, I do believe it is best for the tobacco farmer to continue to produce tobacco within the stabilizing effects of the Tobacco Program. In an attempt to remain competitive in the world market, our tobacco farmers substituted capital when labor became unavailable or too expensive. These investments in tobacco quota and production technology have enabled many thousands of tobacco farmers to provide for their families where few other agricultural substitutes exist. To tobacco farmers, these investments not only represent the ability to provide for their families but they also represent financial security in their old age.

I can think of no greater injustice to these individuals than to use part of the proposed $368.5 billion dollar settlement or additional cigarette excise taxes to dismantle the very program that lends stability to the whole agricultural economy of the Southeast. For five decades, the Federal Tobacco Program has given tobacco farmers what the cigarette manufacturers are now seeking, stability and predictability. Regardless of how you choose to address the issue of U.S tobacco production, please don't take away U.S. tobacco farmers' ability to provide for their families and communities.