Senate Agriculture, Nutrition and Forestry Committee
Chairman Dick Lugar, U.S. Senator for Indiana

Date: 9/11/97

Opening Statement for U.S. Senator Dick Lugar, Hearing on Tobacco

Almost all Americans are now aware of the costs smoking imposes on our society. It is a preventable threat to the health of millions of Americans.

It is especially important to help young people from starting to smoke. If Americans do not begin using tobacco in their teens, they are unlikely to do so later. If they do start, they may find it hard to stop. They, their families and society will pay a heavy price.

This hearing will examine the proposed settlement of tobacco-related issues negotiated by tobacco companies and state attorneys general. As written, few if any portions of the settlement would be under the jurisdiction of this committee. However, many Senators believe that the settlement should provide transitional assistance to tobacco growers. Such provisions would, of course, be our responsibility.

I have doubts about the settlement as a whole. It may suffer from an overly regulatory, bureaucratic approach when something simpler would work better. I will ask our witnesses whether a large increase in the federal excise tax on cigarettes -- perhaps $2 a pack -- might be more effective in deterring young people from smoking.

If Congress does pass tobacco legislation, the needs of tobacco farmers should be taken into account. The tobacco price support program is important to many local economies.

No doubt some farmers would like the current program to continue without change. It is not clear whether this is desirable or possible in the long term.

Farmers may speculate whether the American people will tolerate government support for growing tobacco if Congress is passing legislation to settle claims that stem directly from its use. They should also consider that most other farm programs underwent the most radical change in six decades just last year -- change that is welcomed by the producers of the other commodities.

If settlement legislation made tobacco companies' legal position more secure, they might feel less need to seek the support of growers. How might that affect their views on the tobacco program in the future? How certain are growers that the program itself will be economically sustainable? For example, are they confident that the quality differential of U.S. over foreign tobacco will always remain? Are they confident that manufacturing will never move offshore?

The tobacco program operates at no "net cost" to the Treasury. If growers decided after passage of settlement legislation that they wanted a change in their program, there would be no federal money to pay for it.

The settlement presents an opportunity to make substantial change in the tobacco program. If Congress approves the settlement, I believe we should use it to provide a fair deal for tobacco farmers.

I favor a buyout of production quotas -- either a one-time payment or a series of payments to compensate quota-holders. This payment should be established in a way that is reasonable but generous. For growers who lease quota rather than own it, I favor temporary transition payments, perhaps similar to the "Freedom to Farm" payments now being made to corn and wheat growers. These growers' production costs will decline because they will no longer have to lease quota. However, the end of the quota system could mean the price they receive would also decline, justifying the transition payments. For the same reason, transition payments to quota-holders may also be appropriate.

With the buy out, the government should remove itself from the business of managing tobacco production. The market should set prices. As under "Freedom to Farm," a market-clearing loan program for a few years might be necessary.

We should also explore whether any transitional assistance to rural communities is necessary, since many of these communities are dependent on tobacco production. In addition, we should look at whether the existing stabilization cooperatives may have a continued role in helping farmers market their tobacco for the best price.

A farmer in southern Indiana with three acres of tobacco would hold about 6,600 pounds of quota. Today, he would obtain annual revenue of about $12,700 and incur out-of-pocket costs of about $7,300. Clearly, he could not depend on tobacco for his whole livelihood. Most likely, he would also produce some corn and soybeans and probably holds an off-farm job as well. But the $5,400 a year return over his variable costs would be an important part of his income.

Under a buy out, he might continue to grow tobacco if he wished, but it would now be subject to market swings. To compensate him for the end of the quota system, the settlement funds would pay him a certain amount for each pound of quota.

Annual lease rates for tobacco have averaged about 40 cents per pound per year recently. Based on this rate, $8 per pound would be a reasonable calculation of the quota's value. Recent sales of quota have averaged substantially less than this figure, in part because of the tobacco program's uncertain future.

I do not know if this is the right figure or not, and will listen to those who argue it should be less or more. Using $8 per pound as an example, the southern Indiana farmer with three acres of tobacco would receive a payment of about $52,800.

We will hear much more detail about different proposals for assisting tobacco growers next Thursday, at our second hearing. Today's hearing is focused on the overall settlement, and our distinguished witnesses will help us understand it.

I have talked about a buy out today, however, to establish a context for our discussion. All of us on this committee want to take action that is helpful to tobacco farmers. We recognize the equity that has been built up in the quota system and its importance in rural communities. At the same time, we want public policy to be clear. The use of tobacco will remain a matter of grave health concerns and personal choice, but it should be discouraged for young citizens. Our witnesses today will give their own views about the best way to do that.