Removal of government controls impact peanut and tobacco markets

An article in the December 2009 Amber Waves e-magazine produced by the USDA Economic Research Service got my attention. This article is entitled, ?Removal of Government Controls Opens Peanut and Tobacco Sectors to Market Forces,? and it was written by Erik Dohlman, Linda foreman, and Michelle Da Pra. The whole article can be found online at http://www.ers.usda.gov/AmberWaves/December09/Features/PeanutTobacco.htm.

In the 1930?s, the U.S. government regulated peanut and tobacco crops with the use of supply limiting quotas and price supports. This was done to insure a higher price for producers and to stabilize the markets.

While the regulation was beneficial, it put the U.S. at a disadvantage as far as efficiency and economic factors were concerned. As a result the government eliminated the peanut program in 2002 and the tobacco program in 2004. Since the producers owned the right to produce and sell the crops, the legislation paid money to buy out their contracts.

The buyouts provided temporary payments to the producers but the elimination of the quota system exposed producers to much greater market risks and brought about structural changes at the farm, regional and marketwide levels. It was unknown as to how the producers would adapt and what changes would lower prices and greater exposure to risk would do to farm number, their locations, and risk management strategies.

Many people are not aware that tobacco is grown commercially in Missouri. The six counties growing tobacco are Boone, Buchanan, Chariton, Clinton, Howard, and Platte. Eighty-five percent of the tobacco production comes from Platte County. Most of the tobacco is warehoused and marketed through Weston. Weston is a small community located in Platte County with a population of 1,631 at the 2000 census.

The impact on Missouri tobacco production has been documented by the Missouri Department of Economic Development. A report by its Missouri Economic Research and Information Center is written by David J. Peters and is entitled, ?Economic and Social Overview of Tobacco Producing Counties in Missouri.? This can also be found online at http://www.missourieconomy.org/industry/analysis/tobacco.stm.

The loss of acreage and tobacco produced will have a negative impact on producers, and agribusinesses that store, market, and those businesses who sell supplies to the farmers. Even in these tobacco producing counties, less than 1.5 percent of the total cropland is devoted to tobacco. Even with this small amount of acreage and relatively few tobacco producers, tobacco is a high value crop which can adversely affect these counties.

When the peanut quota program was implemented, the total cost of the buyout was about $1.3 billion in the United States which was funded by the federal government. When the tobacco quota program was eliminated in 2005, the buyout cost about $9.6 billion. These funds came from assessments on tobacco product manufacturers and importers.

While these producers affected by the buyout raised other crops, about 30 percent of the income of peanut producers came from peanuts and about 40 percent of the tobacco producer?s money came from the tobacco quotas.

Producers of both crops had to make a decision regarding their future with crops that had lower prices and greater risk. As you might expect, there was a reduction in producers and acreage. The number of tobacco producers fell by about 60 percent that first year after the buyout and the farms declined from 50,000 in 2004 to 15,500 in 2007. Peanut farms were reduced by about 3000 between 2002 and 2007.

Many of those who quit peanut and tobacco farming were older producers. Some delayed their retirement until the buyout so they could collect the additional tobacco and peanut transitional payments.

As one might expect, with the mass exodus of many older producers, those producers who were left increased their farm sizes to pick up some of the slack. The average sized peanut farm was 137 acres in 2002 and in 2007 was 227 acres. The same trend occurred with tobacco farms. In 2004, acreages for burley tobacco farms increased from 5 to 11 acres in 2007. Flue-cured tobacco farms during this same period increased from 33 to 84 acres.

Both peanut and tobacco producers reduced their risk by using contracts to lock in prices and by maintaining a diversified commodity mix.

As a result of the elimination of the quota for peanuts, growers could now produce them in different geographical areas. There was a migration of peanuts away from the Southwest and the Mid-Atlantic. In fact the Southeast region has increased its production from about half of the U.S. crop to about 75 percent.

Tobacco production has become more concentrated in the two largest tobacco producing states of North Carolina and Kentucky. North Carolina produces flue-cured tobacco and Kentucky has burley tobacco. In North Carolina, tobacco acreage has shifted closer to the coast where it is closer to the ports.

These programs are now market based and producers now have better efficiencies so that they can live with the lower prices.

University of Missouri Extension programs are open to all.

Dr. Michael R. Milam is an agronomy

specialist and county program director with

University of Missouri

Extension in Dunklin County.