Thursday, April 27, 2000

Farmers split on tobacco contracts

Some fear new ways threaten a way of life

By Susan Vela
The Cincinnati Enquirer

Pendleton County tobacco farmer Steve Wood places trays of young plans onto a float bed, where they will remain until they are large enough for planting.
(Patrick Reddy photo)
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        FALMOUTH, Ky. — When Steve Wood plants thousands upon thousands of burley tobacco plants this summer, the 39-year-old farmer will know that Philip Morris Cos., the largest purchaser of U.S.-grown tobacco, will buy his entire crop.

        He has the contract to prove it.

        It assures him that he'll have a guaranteed buyer when the selling season begins this fall, and that he could reap per-pound prices of up to 15 cents more than the government's support prices.

        To Mr. Wood, the possibility of those profits diminishes any sting from critics who say that Philip Morris' new contracting program will exacerbate competition between tobacco growers, squeeze out the little guy and possibly doom the present quota system, which was designed to protect tobacco farmers.

        “The system right now doesn't work right; it's not a fair shake,” Mr. Wood said. “The contract looks real attractive to me. I want to see how it works.”

        Philip Morris announced its controversial contracting program in February. Since then, many farmers have cautioned that contracts with cigarette makers may kill the quota system and price supports that are supposed to provide a safety net for growers.

It takes thousands of plugs to make a crop.
(Patrick Reddy photo)
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        Support prices, mandated by the U.S. Department of Agriculture, are the minimums that farmers receive from growers cooperatives, when tobacco companies are displeased with a farmer's crop or already have bought all the tobacco they need.

        The USDA also sets an annual quota, determining the amount of tobacco individual growers can grow and sell each year. The quota is based on the expected demand from tobacco companies.

        Farmers must own or lease a quota to grow tobacco. But, with no quota system in place, farmers anywhere and everywhere could plant the crop, which now reaps more profit per acre than most.

        In January 2001, growers will get to vote on whether to retain the quota system. Roy Griffith, president of the Ohio-Kentucky Tobacco Warehouse in Ripley, Ohio, warned that tobacco company contracts make that less likely.

        “If we get into contracting, we will lose our price support,” he said. “Without our price support, I don't think any burley farmer will be able to stay in business.”

        Mr. Wood expects his new contract to translate into Philip Morris paying him $1.90 for every one of the 30,000 to 40,000 pounds he hopes to grow, cure and sell this year. It'll be the same price averaged by most tobacco growers this past selling season. But for Mr. Wood and others who have signed contracts at eight specially designated tobacco warehouses in Kentucky and Tennessee, including the King Burley Tobacco Warehouse in Maysville, there is a definite advantage.

        They will nurture their tobacco plants for several months, bring their crop to auction and never fear that tobacco company buyers will turn up their noses at the bound leaves, leaving the Lexington-based Burley Tobacco Growers Cooperative Association to buy their tobacco at the support price, as as happened to 60 percent of Mr. Wood's 1999 tobacco crop.

        Mr. Wood also thinks his one-year contract guarantees him a future business relationship with Philip Morris and a foothold in a tobacco industry beset by quota cuts, multimillion-dollar settlements, anti-smoking sentiment and questions about the demand for U.S.-grown tobacco.

        Not bad for a high school graduate who every day rues giving up a college basketball scholarship to grow tobacco, as his father and grandfather did.

        “If you can't beat them, join them,” he says of the tobacco companies.

        “I have been raised up on a farm. That's all I know. That's the average tobacco farmer. What is that person to do?”

        Many fellow growers say farmers like Mr. Wood should resist.

        “It's going to probably put a lot of farmers out of the business,” said Lane D. Holt, 54, of Russell Springs.

        “That's going to (have) business calling the shots. When ... big business gets to where they can control everything, we just have to do whatever they say. I just don't think they should be calling the shots.”

        Mr. Holt has joined a $69 billion antitrust lawsuit against Philip Morris Cos. and the rest of Big Tobacco: R.J. Reynolds Tobacco Co., Lorillard Tobacco Co. and Brown & Williamson Tobacco Corp. There are more than 520,000 plaintiffs in the suit.

        Their logic is this: Growers vote next January whether to keep the present quota system. If there's rumor of another quota cut — which would be the fourth cut in four years — contracting will seem even more attractive.

The one with the gold
        The vote to keep the quota system, which requires two-thirds support, would fail. The government then would be pushed out of the relations between growers and tobacco companies.

        Without the requirement of quotas, more growers would plant tobacco. That would lead to a glut of tobacco and prices plummeting below present levels.

        It would be a boon for tobacco companies, though.

        “The one with the gold makes the rules, and that's the predicament we're in,” said Danny McKinney, chief executive officer of the cooperative association in Lexington.

        He questions a contracting program that would entail Philip Morris employees grading the tobacco to determine its selling price.

        “That doesn't seem like the fairest way to do it. If I'm going to sell you something, there ought to be a more fair, equitable manner of appraising the product.”

        The USDA grades it now.

        Another mystery is how many growers will participate in contracts. Philip Morris officials are mum about how many growers they'd like to see sign on.

        But Mr. McKinney thinks the company plans to buy 95 million pounds — or about 30 percent of Kentucky's 2000 crop — through contracts.

        Right now, Mr. McKinney thinks Philip Morris has contracted only about 20 million pounds of tobacco.

        Growers can't survive without price supports, he said.

        “It's sort of like you go out and walk a tightrope every day, and you have the net under you. You know there's always that to fall back on. When that net's no lon ger there, the attitude when you step out there is going to be a little different.”

        Wayne Cropper, a May's Lick tobacco grower, is a board member of the Mason County Farm Bureau, which is discouraging growers from signing contracts.

        “We lose the (quota) program and the companies can give you anything they want,” he said.

        Philip Morris announced the pilot program about the same time that growers learned they would face a 45.3 percent quota cut in 2000.

        The company's lure includes a way for contract growers to ignore their contracts — if they don't like the grades and prices Philip Morris offers next fall, they can still sell through the auction system.

        “There really is very little risk to the grower,” said Kim Farlow, a Philip Morris spokeswoman.

        She noted strong interest in the pilot effort but could not say whether the program will continue beyond the life of the one- and three-year contracts being offered.

        She emphasized that Philip Morris' interest is in Kentucky tobacco. Its contract growers can sell at only eight warehouses — six in Kentucky and two in Tennessee.

        R.J. Reynolds, of Winston-Salem, N.C., recently began contracting with growers for flue-cured tobacco, in which a propane heating system cures the tobacco.

        Reynolds spokesman Tommy Payne said the motive was to experiment with heat exchangers to reduce carcinogens by 93 percent. R.J. Reynolds bought heat exchangers, about $5,000 each, for the growers as part of the contract.

        Contracting also has been used in the hog and poultry industries for years. But Will Snell, an agricultural economics professor at the University of Kentucky, warned that those programs usually have led to squeezing out small farmers.

        Scott Pope, owner of the King Burley Tobacco Warehouse in Maysville, could not resist when Philip Morris asked whether he'd like his warehouse to become one of the receiving stations for contract tobacco.

        “Whatever way the business changes, I hope to be a part of it,” he said. “It is just a different style of marketing system. To me, it was just inevitable.”

Tobacco in the blood
        Mr. Wood knows how farmers are. He understands their loyalties — how some will always go to the same warehouse or lease from the same person.

        But he also comprehends how many are like himself.

        Tobacco growing is in their blood. They want it to be a part of their future. They don't want to be left in the cold.

        He has done various things over the years to remain a part of this ever-changing industry: He has purchased cattle, built other people's barns and worked at tobacco warehouses. He's willing to sign a Philip Morris contract if it means he can still drive down Ky. 330 and come upon his family's property on the banks of the South Licking River and see tobacco growing.

        “You get that feeling of home, (like) that's where you're supposed to be,” he said.


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