Sunday, December 10, 2000
Tobacco growers face hard choices
By Susan Vela
The Cincinnati Enquirer
The future's so dim that some tobacco growers might want to find a new line of work, tobacco analysts say.
They point to a historic multi-billion dollar jury award as the proverbial fork in the road.
In July, a Miami jury said that five large tobacco companies including the Big Three Philip Morris, R.J. Reynolds and British American Tobacco's Brown & Williamson must pay $145 billion to hundreds of thousands of Florida smokers suffering from diseases caused by cigarettes. It was the largest punitive damage award in U.S. history.
The companies don't want to pay but, if forced to do so, they are expected to raise cigarette prices even more, which could accelerate an already-slipping demand for their product.
Tobacco analysts foresee a range of possibilities for tobacco growers. The best-case outlook would entail small farmers being squeezed out by the big. The worst-case outlook would have tobacco companies turning totally to tobacco grown outside the U.S.
It would be a death knell throughout the eight-state burley belt, which includes Kentucky, Ohio and Indiana.
That could be the end of the domestic industry as we know it. That's one extreme, said David Debertin, a University of Kentucky agricultural economics professor.
The stark forecast comes at a time when burley tobac co growers are reaping record-setting prices.
The markets opened three weeks ago. In that time, tobacco companies have purchased about 138 million pounds of tobacco at $1.96 per pound. That breaks the 1996 record of $1.92 per pound. The markets will remain open through most of February.
In the meantime, the business remains quite profitable, Mr. Debertin said. The companies are doing quite well.
Tobacco analysts confirm that the Big Three's financial health was up and down this past decade and then took a turn for the worst when court settlements took a toll.
For example, well into the 21st century, tobacco companies will pay $206 billion to states because of tobacco's health-related costs.
Cigarette prices now average $2.85 a pack up more than a dollar over 1997. The tobacco companies raised the price to finance the settlement, analysts said.
Shareholders' on-going nervousness caused stock prices to plummet earlier this year. The fear was that any money that the companies made would go toward the companies' attorneys and those who had sued them.
The market was pretty negative, said Aaron Westrate, a tobacco analyst for an investment research firm in Chicago.
But stock prices, he said, are on the rise.
He doesn't think the tobacco companies ultimately will have to pay the $145 billion award that the Miami jury demanded. He has no idea, though, what will happen if he is wrong.
That literally is the billion-dollar question, he said. It is an extremely difficult thing to know what will happen if they have to pay. These companies have to raise prices to pay settlement costs. It's going to be a natural result.
Allen Harman of the Lexington-based Burley Tobacco Growers Cooperative Association knows that the success of the tobacco growers is tied to that of the tobacco companies.
How much tobacco is produced each year is determined by the companies' demand. And this year's quota of about 250 million pounds is approximately 65 percent less than the 1997 quota.
If their sales drop off, our sales are going to drop off, he said.
David Adelman, a tobacco analyst for Morgan Stanley Dean Whitter in New York, agrees that the worst is over for tobacco companies, but he doesn't know what it means for the growers.
The environment is becoming less hostile. I definitely think we're past the worst, Mr. Adelman said.
The cigarette manufacturers ... can raise their prices. That's a fact of life. It's obvious that farming doesn't have that flexibility. The farmers always have been very dependent on the tobacco companies.
Tobacco analyst Ann Gurkin of Richmond, Va., said it's the smaller farmers who will be most challenged in the next years.
It's farmer-by-farmer, she said. I would think the smaller farmers are more at risk than the larger. They face more economic risks.
The tobacco companies have and always will have an upper hand over farmers, said Richard Daynard, director of the Boston-based Tobacco Products Liability Project.
They generate huge amounts of income for their shareholders, he said. It's a great business. It's like being in the heroin business without having to worry about (the government) creeping up on you.
The industry has never taken care of the farmers. Once they've taken care of whatever the political crisis of the moment is, they go back to squeezing the farmers.
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