[Senate Hearing 108-519]
[From the U.S. Government Publishing Office]
S. Hrg. 108-519
THE NECESSITY OF A TOBACCO QUOTA BUYOUT: WHY IT IS CRUCIAL TO RURAL
COMMUNITIES
AND THE U.S. TOBACCO INDUSTRY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON PRODUCTION AND PRICE COMPETITIVENESS
of the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
APRIL 13, 2004
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
Available via the World Wide Web: http://www.agriculture.senate.gov
______
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COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
THAD COCHRAN, Mississippi, Chairman
RICHARD G. LUGAR, Indiana TOM HARKIN, Iowa
MITCH McCONNELL, Kentucky PATRICK J. LEAHY, Vermont
PAT ROBERTS, Kansas KENT CONRAD, North Dakota
PETER G. FITZGERALD, Illinois THOMAS A. DASCHLE, South Dakota
SAXBY CHAMBLISS, Georgia MAX BAUCUS, Montana
NORM COLEMAN, Minnesota BLANCHE L. LINCOLN, Arkansas
MICHEAL D. CRAPO, Idaho ZELL MILLER, Georgia
JAMES M. TALENT, Missouri DEBBIE A. STABENOW, Michigan
ELIZABETH DOLE, North Carolina E. BENJAMIN NELSON, Nebraska
CHARLES E. GRASSLEY, Iowa MARK DAYTON, Minnesota
Hunt Shipman, Majority Staff Director
David L. Johnson, Majority Chief Counsel
Lance Kotschwar, Majority General Counsel
Robert E. Sturm, Chief Clerk
Mark Halverson, Minority Staff Director
(ii)
C O N T E N T S
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Page
Hearing(s):
The Necessity of a Tobacco Quota Buyout: Why it is Crucial to
Rural
Communities and the U.S. Tobacco Industry...................... 01
----------
Tuesday, April 13, 2004
STATEMENTS PRESENTED BY SENATORS
Dole, Hon. Elizabeth, a U.S. Senator from North Carolina,
Chairwoman, Subcommittee on Production and Price
Competitiveness, Committee on
Agriculture, Nutrition, and Forestry........................... 01
----------
WITNESSES
Panel I
Burr, Hon. Richard, a Representative in Congress from North
Carolina....................................................... 03
Etheridge, Hon. Bob, A Representative in Congress from North
Carolina....................................................... 04
Panel II
Crews, Sam, President, North Carolina Tobacco Growers
Association, Oxford, North Carolina............................ 11
Flye, Bruce, President, Flue-Cured Tobacco Cooperative
Stabilization, Battleboro, North Carolina...................... 10
Parrish, Keith, Executive Director, National Tobacco Growers
Association, Benson, North Carolina............................ 14
Wooten, Larry, President, North Carolina Farm Bureau, Raleigh,
North
Carolina....................................................... 07
Panel III
Bunn, Tommy, Executive Vice President, Leaf Tobacco Exporters
Association, Raleigh, North Carolina........................... 17
Haymore, Todd, Director, Universal leaf Tobacco Company, External
Affairs, Richmond, Virginia.................................... 21
Panel IV
Charville, Gene, President, East Carolina, Farm Credit, Raleigh,
North
Carolina....................................................... 25
Herring, Wallace, Senior Vice President and Manager of
Agribusiness, First Citizens Bank, Clinton, North Carolina..... 27
Taylor, Dallas, Senior Vice President, Wachovia Corporation,
Raleigh, North Carolina........................................ 29
Panel V
Langdon, J.H. Chairman, Johnston County Board of Commissioners,
Angier, North Carolina......................................... 32
Scarborough, Allen, Manager, State Affair, Bayer Crop Science,
Raleigh, North Carolina........................................ 33
----------
APPENDIX
Prepared Statements:
Bunn, J.T.................................................... 52
Charville, Gene.............................................. 64
Crews, Sam................................................... 49
Dole, Hon. Elizabeth......................................... 38
Flye, Bruce.................................................. 43
Haymore, Todd................................................ 58
Herring, Wallace............................................. 68
Langdon, James............................................... 73
Parrish, Keith............................................... 45
Scarborough, Allen........................................... 76
Taylor, Dallas............................................... 70
Wooten, Larry................................................ 41
Document(s) Submitted for the Record:
Alliance for Health Economic and Agriculture Development..... 80
Matthew Myers, President, National Center for Tobacco-Free
Kids....................................................... 85
John R. Seffrin, Ph.D, Chief Executive Officer, American
Cancer Society............................................. 107
Star Scientific, Inc......................................... 98
Henry West, President, Burley Tobacco Growers Cooperative
Association................................................ 95
M. Cass Wheeler, Chief Executive Officer, American Heart
Association................................................ 100
THE NECESSITY OF A TOBACCO QUOTA BUYOUT: WHY IT IS CRUCIAL TO RURAL
COMMUNITIES AND THE U.S. TOBACCO
INDUSTRY
----------
TUESDAY, APRIL 13, 2004
U.S. Senate,
Subcommittee on Production and Price Competitiveness,
Committee on Agriculture, Nutrition and Forestry,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:08 a.m., at
the Central Tobacco Marketing Exchange, Smithfield, North
Carolina, Hon. Elizabeth Dole, [Chairwoman of the
Subcommittee], presiding.
Present: Senator Dole.
STATEMENT OF HON. ELIZABETH DOLE, A U.S. SENATOR FROM NORTH
CAROLINA, CHAIRWOMAN, SUBCOMMITTEE
ON PRODUCTION AND PRICE COMPETITIVENESS,
COMMITTEE ON AGRICULTURE, NUTRITION, AND
FORESTRY
Senator Dole. Good morning, ladies and gentlemen. As Chair
of the Subcommittee on Production and Price Competitiveness on
the Senate Agriculture, Nutrition and Forestry Committee, I am
pleased to call this subcommittee hearing to order.
When I was elected to the U.S. Senate, I chose to serve on
the Agriculture Committee and to Chair this subcommittee
because I wanted very much to help advance one of the chief
issues from my campaign. That issue, of course, is tobacco
quota buyout.
This hearing is not intended to repeat what has been
examined in previous hearings. The Senate Agriculture Committee
held several hearings on the tobacco buyout when the issue
first came to national attention in 1998. This past year, the
House Agriculture Committee held a hearing focusing on the
positions of the growers, the companies and the public health
community.
Their positions are important, obviously, and those who
wish will have the opportunity to submit comments for this
record any time before the end of this week.
The real purpose for the hearing today is to examine this
issue from a different vantage point, to look at it from the
perspective of the long-term viability of the tobacco farm
family and the rural community that depends on tobacco
production.
In the year 2003, farm receipts from tobacco sales were
less than $600,000,000; a decline of over $500,000,000 as
compared to 1997. That equates to a $1.1 billion hit on North
Carolina's economy at current quota levels. The decline in our
tobacco industry will continue to cause a negative ripple
effect across our state.
Tobacco production is crucial not only to our farmers and
our leaf dealers, it also affects our equipment dealers,
chemical dealers and so many others. Under the status quo, we
are simply exporting economic progress to Brazil and other
developing countries when in fact we could be doing a better
job here if only given the opportunity.
I look forward to the testimony of two of North Carolina's
Congressmen, our farm leaders, the leaf dealers, financial
institutions, one of the major players in crop protection and
the Chairman of the Johnston County Board of Commissioners; all
of whom will provide their valuable insight on the need for a
tobacco quota buyout from their particular area of expertise.
Before we move to the panels, let me give a brief overview
of where the buyout stands in the U.S. Senate. As all of you
know, this past year, the tobacco state members of the Senate
for the very first time were able to come together on a
consensus bill that was placed on the Senate calendar and we
were very proud of the fact that we were together on that
legislation.
Given the current make-up and interest of the members of
the Senate, and perhaps most importantly given the rules of the
U.S. Senate, the object was to attach the buyout to FDA
regulation after that piece of legislation was marked up in the
HELP Committee, which is the Health, Education, Labor, and
Pensions Committee in the Senate.
Because a deal could not be reached with the public health
community, an FDA bill was never reported from the Committee,
ending our hopes of passing a tobacco buyout coupled with FDA
regulation on the Senate floor before the end of the first
session.
Considering the quota cut that was looming at the time and
the necessity of getting this buyout achieved, we led an effort
to try and get a buyout attached as part of the end of the year
consolidated spending bill called the Omnibus Bill.
Because a bill had not passed on the floor of either
chamber--the House or the Senate--in the final analysis there
just was not enough support to get it included in the Omnibus
Bill.
That effort did raise the profile of this issue
significantly, and we remain committed to leaving no stone
unturned as we move forward this year.
Now, it is my goal that our hearing today will help keep
this issue on the front-burner and provide those skeptics in
non-tobacco states an opportunity to see a different side to
this issue than perhaps what they've been witness to so far.
At this point, I would like to introduce the Subcommittee's
first panel, my colleagues on the House side, Congressman
Richard Burr, who represent many of the smaller tobacco farmers
in this state from the fifth district, and Congressman Bobby
Etheridge, a tobacco farmer himself whose district we are in
today.
They will present their views on the tobacco buyout and any
other comments they'd like to make regarding the status of this
important issue in the House of Representatives.
[The prepared statement of Senator Dole can be found in the
appendix on page 38.]
Congressman Burr, welcome.
STATEMENT OF HON. RICHARD BURR, A REPRESENTATIVE IN CONGRESS
FROM NORTH CAROLINA
Mr. Burr. Thank you very much, Senator Dole, and more
importantly, thank you for holding this important hearing and
for inviting Representative Etheridge and I to testify before
you on the status of buyout legislation in the House of
Representatives.
If I could also, let me thank the audience. It is wonderful
to see that you understand the importance of this issue to this
state--to every community, to the families that make up those
communities and at some point in this process, we will rely on
you to really be the push that hopefully helps us push this
legislation over the goal line.
As you and many others know, Senator Dole, several months
worth of effort--starting in January with a core group of
tobacco state members--recently culminated in the introduction
of H.R. 4033, the Fair and Equitable Tobacco Reform Act of
2004.
The lead authors of the legislation, which was introduced
with thirty-five original co-sponsors, are Representative Bill
Jenkins of Tennessee and North Carolina's Mike McIntyre. It's
now at 38 co-sponsors, including seven North Carolinians, and
we expect to pass the Fletcher co-sponsorship total of 42 when
we return to session.
The teaming up of Representative Jenkins and Representative
McIntyre is significant. They are the Chair and the ranking
members, respectively, of the Specialty Crops Subcommittee of
the House Agriculture Committee, which has jurisdiction over
the tobacco issues, including quota buyout proposals.
H.R. 4033 is the first quota buyout bill Representative
Jenkins has sponsored or co-sponsored. H.R. 4033 proposes to
pay quota holders $7 a pound and active producers of tobacco $3
a pound over a 5-year period.
It would do so by diverting revenues from the Treasury up
to a ceiling that is determined by the total revenue received
by the government through the tobacco taxes. The payments would
be based on 2002 quota. Estimates place the total buyout
payments under the Bill at approximately $9.6 billion; unlike
previous quota buyout bills, though; however, H.R. 4033 would
not result in the termination of phase II, meaning that
approximately $3 billion in phase II checks would continue to
be mailed.
Finally, the bill would limit tobacco production post-
buyout to traditional tobacco counties plus contiguous
counties, similar to the Georgia model in the McConnell Buyout
Bill.
The impact of H.R. 4033 on North Carolina's economy,
particularly in tobacco communities, would be tremendous.
Estimates by agricultural economists put the total economic
impact of the Bill for North Carolina at $6.1 billion over 5
years as farmers and quota holders pay off debt, diversify
crops, obtain training and education, or simply spend more on
goods and services for their families.
It is believed that this new economic activity would
support more than 11,000 jobs--many of them in areas where
employment opportunities surely are lacking. As a 9-year
representative of tobacco country in the House, I am fully
aware of the dire situation facing our state's tobacco families
and communities.
Introduction of H.R. 4033 represents one step in our effort
to alleviate some of the problems facing tobacco production in
our state and a great deal of work still needs to be done. To
be fair, that work has been and will remain an uphill effort.
If it were easy, we would have finished the process months, if
not years, ago.
We are working on a number of fronts to get this proposal
moving through the Agriculture Committee and to the floor of
the House for consideration. We are pursuing opportunities for
the Bill to be considered as a stand-alone measure, but we are
also working to identify possible vehicles for the buyout to be
attached to. Our efforts in the house have been focused more
around what we can't do than what we can do.
Our leadership has indicated that they will not move any
buyout that is perceived to increase taxes, so we had to
eliminate user fees, assessments, increase in the Federal
excise tax and other options. Taking care of this particular
issue gives us the bonus side effect of allowing Phase II to
stay intact.
They also indicated to us that FDA was a non-starter in the
House of Representatives, so we had to remove that from
consideration. They told us last year's efforts were too
expensive, so we had to come down on the payment level. We have
worked to overcome those hurdles, and I believe that H.R. 4033
presents us with an excellent alternative to tries that we have
had before.
Is H.R. 4033, at $9.6 billion, a smaller buyout than what
we would like? Absolutely. Would we prefer to be able to offer
quota holders and farmers $8 and $4? Certainly.
Unfortunately, the political and economic realties we face
prevent either from having a chance. Politics is the art of the
possible and I, for one, would rather get the buyout done than
spend time lamenting the fact that the buyout couldn't be
bigger. The situation on the ground in tobacco communities is
too desperate for fantasy, and we simply can't afford to let
the perfect become the enemy of the good.
Our effort here is to jumpstart the legislative process. It
has been stalled for far too long. We have identified some
technical and definitional corrections that need to be made in
H.R. 4033, but we firmly believe those issues and potentially
some of the others mentioned above can be resolved in a
conference with the U.S. Senate. We need to get to conference
first.
Senator Dole, thank you for the opportunity to be here. I
would be happy to answer questions that you might have. Thank
you, very much.
Senator Dole. Congressman Etheridge.
STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN CONGRESS
FROM NORTH CAROLINA
Mr. Etheridge. Thank you, Madame Chair, and Senator Dole,
let me thank you for holding this Subcommittee hearing and
issuing the invitation for myself and Representative Burr to
join me today. As a Johnstonian who grew up just down the road
on a tobacco farm, welcome you to my hometown here, and having
driven over this morning from Harnett, where Faye and I own
some property and have a tobacco farm, we really appreciate
this opportunity to talk about an issue that's important to the
people in this audience today and a lot of others who aren't
here today.
As you mentioned, last July, the House Agricultural
Committee held a hearing and testimony from tobacco growers,
from companies and from the health community on the possibility
of a tobacco buyout. The focus of that hearing, as you know,
was to hear about the issue at that time and starting to move a
piece of legislation.
The focus of this hearing today is why a buyout is
critically important to rural communities, and I commend you
for that. It's important. I do want, though, to applaud you for
having the hearing and looking at the broader scope of this
issue.
A buyout--or even more importantly, the failure to pass a
buyout--would impact banks, agri-business, rural towns and
communities and even county government. The entire economy and
the infrastructure of rural North Carolina could be transformed
by the billions of dollars that would be made available from
the investment of a buyout payment.
This hearing and the testimony that you will hear later
today will broaden and talk about those benefits. I commend you
for holding the hearing and thank you for it.
I also want to talk briefly about the buyout efforts in the
House during this Congress. Five tobacco buyout bills have been
introduced in the House of Representatives. These bills differ
widely in how much each farmer would be paid, or quota holders,
whether there would be any kind of safety net for farmers in a
post-buyout world.
Unfortunately, none of these, as you have already heard
from Congressman Burr, have anywhere. Everyone here wants to
know. Why can't we pass a buyout? That is really why you are
here today. You want to know how Congress can pass a bill that
will give relief to the farmers in North Carolina.
There are people in this audience and some have already
mentioned it to me, why in the world can we pass a bill to send
billions of dollars to Iraq that help put that country back
together and we can't have just a little bit of money to help
our farmers here in North Carolina and across the southeast who
are hurting or are in deep trouble.
I believe, and I would think you and Congressman Burr would
agree, that the single biggest obstacle to passing buyout
legislation is really the lack of political leadership at the
highest level. We can plan and fuss and work all we want to,
but it's going to take leadership at the highest level--a
leadership, for one reason or another, that cannot help members
from tobacco producing states answer our most difficult
question and that is how to pay for a buyout.
The bottom line--and Congressman Burr talked about it, we
all want to talk about it--that is really, the ultimate issue.
The Senate buyout plan introduced by Senate Majority
leader, Whip Mitch McConnell and yourself last year, and I
commend you for it, answered this question and what it wanted
was an assessment to be paid by the tobacco companies. That was
enacted.
This is similar to the same user fee in the approach of a
piece of legislation introduced by then-Congressman Ernie
Fletcher and myself. Unfortunately, that bill was characterized
as a tax increase and did not get going, and I believe those
attacks against you and your approach were unfounded and
absolutely irresponsible. As your office so succinctly put it,
``assessments against the cigarette-makers are not a tax''--and
I happen to agree.
With our country facing a $521 billion deficit, finding a
budget-neutral way to pay for a buyout, I believe, strengthens
our argument for the passage of a piece of legislation this
fiscal year.
The Jenkins buyout bill mentioned by Congressman Burr would
pay for a buyout by using five cents of the current excise tax.
However, this approach has faced heavy criticism from the
Speaker already in, and Riley and Locall in Washington, and he
has said that ``we are not going to add to the deficit.''
``Well, if we aren't going to use that, and we aren't going to
use an assessment,'' my question is how do we get there?
Some authors of the Jenkins buyout legislation publicly
acknowledged that the leadership has told them that the $7 and
$3 bill that would provide funds for farmers in Georgia is too
generous--to the tobacco farmers and quota holders. Everybody
in this room would absolutely disagree with that statement.
Well, we started out much higher and now we keep getting
chiseled down and squeezed again.
If we can't raise excise taxes and if user fees and
assessments are unacceptable, and if the leadership opposes
using current excise taxes, what else is left for us? The
situation of tobacco farmers has deteriorated so badly and for
so long, that they desperately need the relief that the buyout
offers, regardless of the source of the funding. We have to
have some relief.
In my view, a viable buyout must have two components.
First, it must fairly compensate the farm families and quota
holders whose lives have been uprooted by the economic
catastrophe that we have faced now for the last several years.
Second, we must be able--and this is the critical piece--we
have to be able to get the votes in the House and the Senate to
pass this legislation and then we have to get the signature of
the President of the United States if we hope to get relief for
the people on the farm in our communities.
If a buyout meets these criteria, I have said from day one
I will support it regardless of who introduced it; regardless
of what part of the country they come from; regardless of what
their party affiliation is--and you would agree with that. It
doesn't matter. The fact is, we need to get the job done.
Anything else that we talk about or anything else is shown
is nothing more than window dressing. Our focus should be and
should remain on helping North Carolina's farm families and
making sure that they aren't forgotten one more time and we
just do a lot of talking. The tobacco companies have plenty of
friends to protect their interests in Washington. My focus is
on the farmer and I know, Madame Chair, that is what your focus
is, and I thank you this morning.
North Carolina is fortunate to have you engaged in this
issue. Our state also is lucky enough to have farm leaders, who
are fighting every day for a buyout this year. Let me take just
a moment, if I may, to commend several of them. I don't know if
they are here today or not.
Keith Parrish, who is a past president of the Tobacco
Growers Association, has walked the halls in Washington many,
many days and he continues to do it.
Larry Wooten and the Farm Bureau folks--they have been in
Washington almost every week to bring the attention to the
Members of Congress and to the National Association and Bruce
Flye and his Stabilization Team have been working to broaden
support for a buyout among the health groups in this country
whose support we are going to have to have if we are going to
get any legislation passed in Congress.
Finally, Sam Crews, the current North Carolina Tobacco
Growers Association President has kept the faith of his members
who, after facing year after year of disappointment, have
almost given up hope--but not quite. They are still there
fighting.
I look forward to reviewing all the testimony that comes in
today and thank you again for holding this hearing.
Tobacco farmers and quota holders are just barely hanging
on the edge of a cliff by their fingertips. This December, when
the tobacco community faces a possible thirty-three percent cut
in quotas--that just might be the last straw--and who's going
to be there to catch them? We can do it if we make this buyout
a top priority and we get the leadership focused and this
becomes part of their commitment when they need our vote for
something very important in the halls of Congress in
Washington, DC.
Thank you, Madame Chair. I look forward to any questions
you might have.
Senator Dole. Thank you very much. I will apply the usual
professional courtesy for my colleagues. There is no question
that to achieve a tobacco buyout, we must have strong
bipartisan support. There are many obstacles to overcome.
Everyone has a constituency they must report to. Our problems
have not arisen overnight, as we all know. It goes back for a
decade.
I want to thank both of you for your testimony this
morning. It is imperative that we accomplish a tobacco quota
buyout this year and I look forward to our continued work
together to reach this goal. Thank you very much for being with
us this morning.
Senator Dole. Now I would like to call forth the second
panel; Larry Wooten, President of the North Carolina Farm
Bureau; Bruce Flye, President of the Flue-Cured Tobacco
Cooperative Stabilization Corporation; Sam Crews, President of
the North Carolina Tobacco Growers Association and Keith
Parrish, President of the National Tobacco Growers Association.
Mr. Wooten, will you start, please, and we will proceed one
by one down the panel. Welcome.
STATEMENT OF LARRY WOOTEN, PRESIDENT, NORTH CAROLINA FARM
BUREAU, RALEIGH, NORTH CAROLINA
Mr. Wooten. Thank you very much, Senator Dole. North
Carolina Farm Bureau is pleased to testify today on this
critical issue of a buyout of the tobacco price support and
quota system. Senator Dole, I want to thank you for putting
your shoulder to the wheel on behalf of North Carolina's
farmers and quota owners in pushing for a reasonable buyout of
this badly broken system.
We recognize that this is not an easy issue to tackle. You
have made it your top priority and have worked tirelessly in a
bipartisan manner to move this issue toward a successful
conclusion. For this, all of us thank you.
The tobacco price support and quota system has been good to
farmers. I cannot say enough good things about the economic,
social and environmental benefits that this sound program has
brought to thousands of North Carolina communities since its
inception in the forties. Today, the program is not working for
farmers and the tobacco industry for the following reasons:
No. 1, the tobacco price support program was never designed
for the current intense world competition that our farmers face
today.
No. 2, the price support program was never designed for the
massive, large-scale farming operations that many of us have
today in this state.
No. 3, the tobacco price support program was never designed
to operate under the current marketing conditions, especially
contracting.
Last, the Federal tobacco price support program was never
designed to withstand the consequences of the Master Settlement
Agreement.
North Carolina's rural economy has taken many hits as
traditional industries, including tobacco, resize, restructure
and adjust to world economic realities. According to Dr. Blake
Brown, Extension Economist at North Carolina State, and Senator
Dole alluded to these numbers in her opening statement. North
Carolina farmers have seen a $500 million drop in annual farm
gate income from tobacco since 1997.
Barring a weather disaster, economists are forecasting
potential for another $200 million loss next year because of an
unprecedented forecast of another huge quota cut of around
thirty percent. These combined figures represent a $700 million
loss of equity that is used to finance farming operations.
Anyone who operates a business understands what happens when
the balance sheet reflects such a loss of assets.
I am sure that the panel of Ag lenders who will be up next
will address the impact of the loss of collateral on credit
worthiness and the ability to repay loans.
If--and I say if--the projected quota cut for 2005 would
come to pass, the Flue-Cured Tobacco Stabilization Coop will
again be under tremendous pressure to mitigate the impact. I am
sure that the Coop chairman who will speak next will explain
the difficulty and the consequences on that board of further
intervention.
In addition, quota cuts of additional sizes signal the end
of the United States being a reliable supplier of flue-cured
tobacco to the world market. We have steadily lost foreign
buyers due to high prices and low leaf selectivity.
Further loss of quota, ladies and gentlemen, I fear will
seal our fate. Our foreign customers are watching this buyout
issue very closely and they are being forced to make business
decisions on whether to remain customers of American leaf. Once
we have lost these markets for leaf tobacco, it will be
extremely difficult to get them back.
Additional quota cuts will cause the already high rent for
quota to further escalate--neighbor bidding against neighbor;
friend against friend for whatever quota there is left to rent.
We will see farmers forced to exit tobacco farming without an
option for orderly transition or have a safety net.
As we will have to consider massive restructuring of the
current program to salvage some stability for tobacco
producers, the question is who will win that political tug-of-
war--the east, the piedmont, the quota owners or the producers?
Tobacco quota impacts farmland values. The check-off funded
export promotion program run by Tobacco Associates is currently
running out of necessary funding. The check-off funded Tobacco
Research Commission that is so important to the future of this
industry is also hurting.
As assessments spiral out of control, the whole no-net-cost
infrastructure has become a house of cards and is on the verge
of collapse. All of you know that political realities make
Federal funding of these programs impractical. Where do we go
and what do we do?
The impending collapse of the tobacco price support system,
ladies and gentlemen, will be a harsh and financially
devastating occurrence for farmers and rural North Carolina. We
have plowed this row, Senator Dole, to the cliff and we can go
no farther.
Farmers were not at the table when the Master Settlement
Agreement was negotiated in 1998. The public health community
hoped that the Master Settlement Agreement would begin the
demise of tobacco and cigarette manufacturing. Senator Dole,
just the opposite happened.
Today, we have startup cigarette companies that are not
only growing but they are thriving and prospering using cheap,
imported tobacco and making minimal contributions to the Master
Settlement Agreement funds. Because of the impact that the
Master Settlement Agreement has had on the quota system, our
farmers all across tobacco regions in the southeast United
States are swallowing the economic consequences while state
governments and city governments balance their budgets with the
proceeds of the settlement.
Senator Dole, for there to be a future for North Carolina
tobacco farmers, our producers must be unfettered from a
program that I said earlier has been extremely beneficial to
this industry but has regrettably run its course. Farmers must
be allowed to compete and meet their customers' needs, and this
can only be obtained when we have a complete, adequately
funded, total buyout of the current tobacco quota system.
Adequate compensation for their investment in this program
will allow many farmers to exit the industry with dignity.
However, there must be a stable future for those farmers who
wish to invest in growing and continue selling tobacco.
Senator Dole, in conclusion, North Carolina Farm Bureau is
at your disposal any time, any where, any place to continue to
work in a serious way with any group--the cigarette
manufacturers, the leaf dealers and the public health community
and other farm organizations to make certain that farmers have
a future. Thank you for giving me this opportunity.
Senator Dole. Thank you. Mr. Flye.
[The prepared statement of Mr. Wooten can be found in the
appendix on page 41.]
STATEMENT OF BRUCE FLYE, PRESIDENT, FLUE-CURED
TOBACCO COOPERATIVE STABILIZATION, BATTLEBORO, NORTH CAROLINA
Mr. Flye. Thank you, Senator Dole. On behalf of the
membership of Flue-Cured Tobacco Coop Stabilization, I
appreciate the opportunity to submit testimony regarding the
economic plight of tobacco farmers and the future of tobacco
production in the United States.
In 1998, the Master Settlement Agreement attempted to
address the plight of our tobacco farm communities.
Unfortunately, neither tobacco farmers nor community leaders
were allowed to participate in these discussions. Tobacco
companies raised the prices of tobacco products to pay for the
Master Settlement Agreement and to protect their profits.
The very foundation of their prosperity--tobacco farmers
and their communities--were left out. A user fee to pay for the
tobacco quota buyout would help rectify this mistake.
Since then tobacco quota reductions of almost fifty
percent, skyrocketing quota rent and thousands of tobacco
farmers and their families are being pushed to verge of
bankruptcy. While the tobacco farmers' plight is serious, the
lack of action is killing our rural communities.
Our state and county governments are struggling with
declining revenues; our schools, churches and small businesses
are reeling and worst of all, our young people, our future
farmers, are leaving the farm in droves because they see no
opportunity.
For every tobacco farmer at risk of being forced out of
business, there are ten other people in the farm community who
are part of the farm economy, who are in danger of suffering
the same fate. Banks, grocery stores, fertilizer and farm
equipment dealers and automobile dealerships all depend on the
cash-flow from the tobacco economy. Tobacco farmers' problems
don't stop at the farm. They affect the entire community.
How do we justify a tobacco quota buyout? All the major row
crop commodities--corn, cotton, soybeans and peanuts. Peanuts
even have a quota buyout, a lower buyout, but we still have a
safety net for peanuts. They are all subsidized.
Tobacco is not subsidized and it is not part of the
Agricultural budget. Tobacco farmers pay for their program and
have paid a no net cost assessment to the government since
1982. Tobacco farmers pay for USDA inspection and they pay for
the losses on CCC loans.
The combination of a tobacco quota buyout and reasonable
FDA regulation of tobacco products which includes a listing of
the ingredients of cigarettes on the packaging so that our
young people will know what the risk is of what they would be
ingesting into their bodies--this will be good for the health
of our young people and good for our tobacco-producing
communities.
Only the U.S. Congress has the authority and the power to
set things right. The flue-cured tobacco production section can
no longer afford to wait until next year. We are possibly faced
with another huge quota decrease and increased no net cost
assessment in 2005.
If this happens before Congress can act, the economic toll
and human suffering will be catastrophic. Without immediate
action, Congress will bear full responsibility for the
devastation and ruin of an important sector of our economy and
the dashed hopes and dreams of thousands of farm families and
their communities.
We are pleading for our very survival, for the survival of
our communities. Only the U.S. Congress can intervene. Again, I
thank you for the opportunity to give this testimony.
Senator Dole. Thank you.
[The prepared statement of Mr. Flye can be found in the
appendix on page 43.]
Mr. Crews.
STATEMENT OF SAM CREWS, PRESIDENT, NORTH CAROLINA TOBACCO
GROWERS ASSOCIATION, OXFORD, NORTH
CAROLINA
Mr. Crews. Thank you, Senator Dole. Thank you for holding
this vitally important hearing. I am Sam Crews, a tobacco
grower from Granville County and president of the Tobacco
Growers Association of North Carolina. Additionally, my family
owns and operates a Stabilization Marketing Center, formerly an
independent warehouse, and also a farm supply business. My
remarks today will address all of these perspectives.
Many opponents have questioned the price of passing a
tobacco buyout. Should we not in fairness argue the price of
our failure to pass one? Every tobacco farm in North Carolina
is a small family business.
In my community of Oxford, the average size farm will grow
between 50 and 100 acres. These growers will modestly spend
$2,500 to $3,500 per acre in Granville County buying fuel,
fertilizer, crop protection inputs, labor, supplies, equipment,
etcetera.
On our farm, my brother Jimmy and I operate as a
partnership. Beyond our business operating expenditures, we
each spend tobacco income at a local grocery store, pay our
local utility bills, buy clothes and other necessities for our
wives and our school-age children. I have two children and my
brother has four.
We use tobacco revenues to trade vehicles with the local
auto dealer, secure various loans from the local bank. We also
give tobacco profits in the church offering plate as well as
donations to other important charitable causes.
All of these activities stimulate the local, rural economy
in Granville County. All of these have been negatively impacted
as our quota has evaporated. My point is that the tobacco
buyout or lack of one reaches far beyond the farm. The merits
for achieving a buyout are that it would be the single largest
contributor to saving the dismal economy of rural North
Carolina.
Nearly a decade ago the Tobacco Growers Association
advocated for a tobacco quota buyout realizing that in the
future increasing world production occurring while our domestic
costs of production were increasing would someday place us at a
competitive disadvantage. The future is now.
The 1997 U.S. flue-cure crop approached one billion pounds.
Two-thirds of that crop was produced in North Carolina. In
2004, we will grow the smallest crop in the history of the
tobacco program. In fact the entire U.S. production this year
will be nearly 200 million pounds less than we grew as a state
just 7 years ago.
In 1997, my brother and I grew 206 acres of tobacco. Our
independent warehouse sold five and a half million pounds at
auction with nearly one hundred percent being purchased by
traditional customers. The future for growing and marketing
tobacco seemed consistently dependable and optimistic.
This year we are reduced to 145 acres which if not for
purchasing quota or renting of neighbors' pounds who were going
completely out of farming, we would have been less than 100
acres. As for our warehouse, if it were not for serving as a
Stabilization Marketing Center, we would be completely out of
that business.
This year we may sell around 3 million pounds at the
marketing center in a building that we built to potentially
accommodate three times that volume.
How did we arrive at this seemingly irreversible situation?
In 1998, a congressional effort to pass a buyout was
overloaded--largely due to FDA regulatory efforts and a massive
price tag. The 1998 effort, which we refer to as the McCain
bill, was never passed. What occurred next none of us could
have imagined would ever happen.
In 1999, the major cigarette manufacturers entered into the
Master Settlement Agreement in order to avoid future individual
state litigation. The price of the MSA was over $250 billion.
Obviously it was funded on the backs of cigarette smokers who
chose to endure an undisclosed per pack increase.
The option for smokers has been to stop using tobacco, but
in more instances use a cheaper made, lower retail cost
product. Often that product contains little to no U.S. grown
leaf, which of course adversely affects our farms.
The option for cigarette makers was to find ways to lower
the costs of making a pack of cigarettes. Reports indicate
corporate downsizing and mergers as one management practice.
Many if not all of them have sought cheaper, offshore tobacco
resulting in a sharp and unprecedented decline in the U.S.
quota.
All across rural North Carolina, the absolute costs of the
settlement has been thousands of displaced tobacco farm
families. Indeed thousands of growers have witnessed business
foreclosures and today are struggling to make ends meet.
Additionally the once thriving auction warehouse business
like the one my family entered into, has been reduced to little
more than a dozen operators in the nations largest tobacco
producing state.
Our growers have scrambled to invent new ways to economize
their operations. The margins simply do not exist. For nearly
every grower, the 2004 crop will be the smallest ever produced.
Yet, the 2004 crop will be the most expensive I have ever grown
on my farm in Oxford.
Consider the recent spike in various input costs. Fuel is
at a record high. Adverse wage rates for guest workers are now
over $8 an hour. Many growers find themselves in an escalating
rental situation for leased tobacco pounds paying nearly twice
the rental rates of 1997. Finally, the marketing assessment fee
is double what it was just last year at 10 cents.
If the aforementioned erosion of my chance for
profitability isn't enough to test my optimism then last week's
newspaper report quoting Dr. Blake Brown did. Dr. Brown
predicts we could witness as much as a thirty percent reduction
in quota for 2005 if we maintain the status quo.
Senator I, nor any of my neighbors can endure such a
catastrophe.
Everything that I have described has occurred in just 7
years. The tragedy is that growers did not create this current
plight because of poor business decisions or bad management
practices. Unless sweeping changes are implemented, many more
will unnecessarily succumb to the unprecedented and
unpredictable increased pressures of simply trying to stay in
business.
Our challenge is not to simply rectify flawed policy. Ours
is a complex arrangement of situations bound together by the
Federal tobacco program. The program has served us well since
the 1930's but in today's global marketing economy, it is now a
deterrent to buying U.S. grown leaf. It is widely considered a
relic whose previous merit is obvious and appreciated, but
whose current incarnation is crushing us in the world market.
We have been greatly diminished as the world's supplier of
premium grown tobaccos. Customers say that our leaf is too
expensive relative to the world market. As a producer of that
leaf, I am confident that it is worth its price and I am proud
to deliver that value. However, as a businessman, I must pay
close attention to the characteristics my customer values. We
are dangerously approaching the reality of becoming a niche
leaf producer for one major manufacturer.
I become increasingly disturbed by the number of proud, yet
broke tobacco farmers that I personally know. For the past 2
years many of them hung on hoping for a buyout. A buyout that
would afford the opportunity to address debt and either remain
profitable or transition away from growing tobacco. Sadly, they
remain indebted and completely out of the tobacco farming
business.
Absent the achievement of an $8 and $4 tobacco buyout this
spring, I, too, may join the ranks of unemployed former tobacco
farmers. For too many of us, time has already run out. Please
do all that you can to advance and achieve the buyout in the
next several months.
On behalf of all NC growers, I thank you for your
leadership and attention on this matter.
Senator Dole. Thank you. Mr. Parrish.
[The prepared statement of Mr. Crews can be found in the
appendix on page 49.]
STATEMENT OF KEITH PARRISH, EXECUTIVE DIRECTOR,
NATIONAL TOBACCO GROWERS ASSOCIATION, BENSON,
NORTH CAROLINA
Mr. Parrish. I feel like I am sitting on the bench over
here. My name is Keith Parrish. I represent the National
Tobacco Growers Association as its Executive Director and also
am a lead plaintiff in the grower lawsuit for North Carolina. I
am most of all a tobacco farmer and quota holder from Benson,
North Carolina, and I thank you very much for holding this
field hearing on legislation that is critical to the future of
all tobacco growers, quota holders, consumers and manufacturers
in the American tobacco industry.
Tobacco growers and quota holders have lived under the
nation's quota--tobacco quota and price support system since
the 1930's. As everyone else has said today, the system that
was invented for a different time worked well for many years,
but it is now clearly broken. It is imperative that we work
together to create a landmark national initiative on tobacco.
American tobacco farmers support a buyout of historic
tobacco farm quotas and reasonable FDA regulation of tobacco
consumer products. The goal is a healthy future and the path is
fairness.
Although it is a product at the economic core of many
communities, today tobacco farmers are planting the smallest
crop in history. All predictions for the next year are even
more grim at a cut of thirty percent or more with a huge
assessment--some say close to 20 cents.
Due to the decline in tobacco production and the rising
costs associated with production, tobacco growers have farmed
our equity away. Today, entire farms are now growing houses
where they used to grow field crops. Our bankers are no longer
willing to gamble on the promise of a buyout. Thousands are
going out of business and the health of our communities are
going with them.
Two aspects of the buyout are important to help address
this point. First, we need the buyout to occur and occur now
without delay. Second, we need to phase in the impact of the
buyout on farmers who may be the smallest, the oldest, or the
ones who were unfortunate in the last growing season allowing
them to receive their money and their compensation in the
quickest possible time period. The most basic of rights--the
Federal marketing orders, inspections, FSA oversight--all of
these must be maintained. Our commodity should have the same
rights as all other crops.
The buyout compensation needs to be handled by putting the
money into the hands of the growers and quota holders. It is
the farmers and their families who largely populate most
agricultural towns and counties. They support retail
businesses, services, schools and church activities.
If you want an engine to generate a recovery and stabilize
these communities as we go forward from the buyout, the
compensation needs to be paid to the people who make their
living there, who raise their kids there, who farm there and
shop there.
The real issue, also, is a health issue, and it faces all
the communities in every state. Tobacco is legal commodity. The
demand for tobacco leaf is not going to disappear.
Increasingly, manufacturers are turning to imports. We can
choose to regulate tobacco and make it a safe product and have
it be produced here in the United States or we can have it
produced uncertified and imported in from Zimbabwe, Brazil,
China or Mexico.
One major manufacturer has been a main stumbling block in
preventing a buyout, and I find it very ironic that they
purchase most of their tobacco offshore and have a smaller
percentage of their tobacco in our cigarettes that are consumed
in America today. This is one of the reasons that we have had
so many cuts and been subjected to so much hardship in the
past.
We are embarking on a new set of national tobacco policies
and we need cooperation from all parties. Tobacco production is
unique and the policy covering it needs to reflect its
uniqueness, while simultaneously addressing the health
concerns. Reasonable FDA regulation of tobacco consumer
products is a non-grower issue.
U.S. tobacco growers are willing to accept any form of
safety or health check. Tobacco growers understand the Farm
Service Agency's system for tracking tobacco which is now in
place, is one that they are very familiar with in the past and
have used every day.
The point today is that the purpose of tracking will not
disappear--it'll change. Instead of tracking for quota, a new
health policy on tobacco products will require tracking for
health. We make a living growing tobacco, and as a business
person, we would welcome the checks and balances that would
enable us to grow a premier crop.
We are very proud of what we grow. We would like for all of
our consumers to know where our tobacco was produced and where
their cigarette manufacturers used the tobacco--where it came
from--it came from us. Because a governing organization already
exists, any new legislation would not require the need to
invent a new entity to register our crops and oversee their
certification.
With hundreds of thousands of class members, never in
history has there been such a large group of farmers and
growers and quota holders that have had the capability to speak
as one voice. Tobacco growers were not invited to the table for
the MSA, but now there is a unity of positions which has never
happened before. The path of fairness allows us to reach our
goal for a healthy future of tobacco production.
Our state stands to receive over $6 million. Just imagine
the economic impact for our rural counties. I would invite our
elected officials to think about this the only way it possibly
can work. It is a rare moment for you to accomplish a difficult
task--putting together a bipartisan coalition, including health
organizations, in a singular direction without political risks.
You can get it done. We need your help. We need your clear
leadership to come to our aid. We are looking to you to help
us. You are our champion. You are our Senator, and we thank you
for all that you have done. We appreciate the focus of your
attention on these very important issues that threaten the
future of America's growers and I appreciate this opportunity
to testify and deliver our views.
[The prepared statement of Mr. Parrish can be found in the
appendix on page 45.]
Senator Dole. Thank you very much. Now, as alluded to in
the testimony this morning, Blake Brown, our great agricultural
economist at N.C. State, just recently released his quota
forecast for the 2005 crop year based on fairly conservative
numbers and it is an eye opener, for sure. A thirty plus
percent cut. I would like your perspective on what a cut of
that magnitude would mean for your communities back home.
Let me start with Mr. Wooten. You are a native of Pender
County. What kind of impact is it going to have there?
Mr. Wooten. Senator Dole, this tobacco buyout--it's more
than an agricultural issue. It's an economic development issue
for all of North Carolina. As Mr. Parrish said a while ago,
when you take five to six billion dollars and spread it across
the state of North Carolina primarily in our rural communities
for over a period of 5 to 6 years--and tobacco money
traditionally turns over four times in the economy--you can see
what type of tremendous economic impact this will have not only
for agriculture, but for the rural communities, grocery stores,
the school boards and on and on and on.
I did a--I was just looking in six southeastern North
Carolina counties, the six southeastern counties of Bladen,
Columbus, Duplin, Pender, Sampson and Wayne, in 1997, total
tobacco income for those six counties was about $214 million.
In 2002, that income was roughly $147.3 million, a decrease
of thirty-one percent just in those six counties, so without
this tobacco buyout, more than the farm economy is going to
hurt, Senator Dole, in these primarily rural counties.
Senator Dole. Thank you. Mr. Flye, how is it going to
affect your home community of Battleboro?
Mr. Flye. Senator Dole, more farmers will go out of
business. It will affect the financing of the farmers, I
believe, and as I mentioned in my remarks, when we lose one
farmer, eventually a chain reaction is ten more people losing
their livelihood.
We'll see a smaller tax base, but higher taxes on farm
land. We'll see schools rejuggled and there will be less
students there; there will be more empty pews in our country
church. It will have a far reaching effect on our communities,
not just the farmers.
Senator Dole. Mr. Crews, you really answered this question
in your testimony. I am going to come back to you in just a
moment, but let me ask Mr. Parrish first--you are next door in
Harnett County, what is your take on the economic impact of a
cut of that magnitude?
Mr. Parrish. Well, if we don't get it, I wouldn't want to
be a politician that had to face election in November--I had
that in my speech--and I honestly mean no disrespect by that, I
honestly do not. It's a reality that farmers in Harnett County
and every county, I believe, in this state and all the other
states here and represented and there's people here from
Kentucky, there's people here from South Carolina, Virginia--
I've seen them here already. That's how much this thing means
to people.
In my community, I know that it is something that is going
to affect everyone in their heart. It's going to affect their
way of life; it's going to affect their churches, their ag
businesses--they're already so negatively impacted, they're
teetering on the edge of disaster, and I don't think they can
withstand what is going to happen here if we do not get a
buyout.
A buyout is a saving thing that farmers are looking for and
quota holders--everyone is hanging on for that one thing to
occur. We desperately need it.
Senator Dole. Mr. Crews, as President of the North Carolina
Tobacco Growers Association, your organization represents
communities all over the state. Now many in Washington, DC
wonder why tobacco farmers can't just transfer their equipment
and their land to the production of another crop.
Would you like to comment on that for the record, please?
Mr. Crews. Yes, Senator, thank you. Tobacco--a lot of
tobacco equipment is tobacco-specific--tobacco barns, I don't
know of any other use you could make of a tobacco barn. Also,
grain crops, vegetable crops--it doesn't seem to be any crop at
all right now in North Carolina that's very profitable, and
that's the major reason why we can't transition to another crop
without a buyout.
Senator Dole. Thank you, gentlemen, very much for your
testimony today. I appreciate it. Thank you.
Senator Dole. Now if the third panel will report to the
table, please. We will receive testimony from Mr. Tommy Bunn,
Executive Vice President of the Leaf Tobacco Exporter's
Association and Todd Haymore, Director of External Affairs for
Universal Leaf.
Mr. Bunn, thank you very much for being here.
STATEMENT OF TOMMY BUNN, EXECUTIVE VICE PRESIDENT, LEAF TOBACCO
EXPORTERS ASSOCIATION, RALEIGH, NORTH CAROLINA
Mr. Bunn. Thank you, Chairwoman Dole and other Members of
Congress for being here today and for the opportunity to
participate in this important hearing. I would like to say that
I am going to bring some good news, but unfortunately this is
not possible. As you have heard, this may be the toughest times
the U.S. tobacco industry has ever known.
This morning I want to talk about the Leaf Tobacco
Exporters Association's views on the state of our industry and
tell you what we think must be done to salvage our tobacco
industry in this country.
For decades, LTEA members and their companies have worked
hard to support the U.S. market, its growers, workers and
communities by making major investments in leaf processing
facilities within the tobacco-growing region. Today, we find
ourselves at a point where there is very little left to
support.
U.S. production of flue-cured and burley tobacco is
currently less than half the level it was just a few years ago.
The decline in production continues as the domestic market for
cigarettes fall. High support prices and the restrictive
provisions of the Federal tobacco program make it impossible
for U.S. growers to compete in the world market. During this
same period, other countries have progressively expanded
production.
This is not news to any of us that many of the problems in
the U.S. market have been brought about by numerous legislative
and legal battles during the last decade. Yet the greatest
impediment to recovery in the U.S. market remains inviolate and
unchanged--and that is the Federal tobacco program with the
artificial costs it forces on domestic leaf prices.
Simply put, the program has become so antiquated and
inflexible it is destroying the entire tobacco domestic and
export trade. Changes must occur. They must occur now if we are
to salvage U.S. flue-cured and burley production.
The unnecessary costs that result from the ``cost of
quota'' and the inherent rigidity in the program have
dramatically reduced the competitiveness of U.S. leaf in the
world market. Besides contributing to the large production cuts
of the last 6 years, this situation also has reduced the amount
of U.S. leaf exported into the world market. The number of
export customers has been dropping for more than a decade and
this list is rapidly getting shorter.
Most recently, we lost two important and long-time export
customers who decided not to purchase any U.S. flue-cured
tobacco, due primarily to the high costs of our leaf. It
doesn't stop there. While we continue to promise and promise
and promise these customers that U.S. price reform is just
around the corner, we now have been informed by the remaining
few export customers that they also are seeking less costly
alternatives to U.S. leaf.
Further declines in export sales will devastate the already
crippled domestic market by reducing our economies of scale for
producers and processors.
Leaf Tobacco Exporters Association endures the principles
of a buyout and we endorse the principles of a buyout because
we believe that a buyout can make U.S. tobacco more competitive
in the world market. However, we do have serious concerns about
some aspects of the various legislation proposals that have
been drafted for deliberation in previous legislative sessions.
We are most concerned about legislative language that would
retain the market distorting features of the current Federal
tobacco program that restricts production and inflates leaf
prices to uneconomic and non-competitive levels.
We believe that any buyout proposal has to be written with
the long-term interests of the grower in mind if the
legislation is to be economically viable. By growers we mean
those producers who intend to continue producing tobacco post-
buyout. All of us are feeling the constraints of our shrinking
market, but it is the growers who have been hurt the most by
the current program's free fall and unresponsiveness to market
conditions.
In the long run, growers will not be well served if some of
the worst features of that program are permitted to continue
hampering farm efficiency and compromising competitiveness.
I want to define LTEA's position on specific features of
legislation regarding a tobacco quota buyout and the Federal
tobacco program.
First and foremost, LTEA strongly supports any and all
efforts to make U.S. leaf tobacco more competitive in the world
market. We believe a buyout of the program is an essential step
in that direction. The cost of leasing quotas probably adds
fifty cents a pound on the average cost of U.S. leaf. The
current law places the U.S. growers at a severe competitive
disadvantage. There is no other tobacco-producing country in
the world that requires growers to pay for the privilege of
growing tobacco.
Too often, we make excuses for our high prices saying other
countries can pay low wages, they have government subsidies,
the currency exchange rates are against us. These so-called
justifications miss the point altogether. These are advantages
of our customers and our competitors--they are not reasons we
should fail to address the role of competitiveness in our
market.
Second, the interests of non-producing quota holders who
outnumber the active producers by more than ten to one, are
diametrically different from the interests of the growers.
Quota holders wish to maximize their income from quota rentals
and may be unconcerned if production is reduced as long as
their income stream is protected.
Quota owners have exercised a strong influence over the
Federal tobacco program for years and have often resisted
changes that they believed would reduce quota income.
As a result, needed legislative changes in the program have
not been made, and flue-cured and burley quota levels have been
reduced by more than half since 1998. Quota rent levels have
increased significantly and while good growers have been forced
to operate at production levels far below their optimum
efficiency.
This has contributed to the dramatic increase in quota
lease rates, as growers have bid against each other in an
effort to maintain an efficient scale of production. The
resulting non-value-added costs have also made it difficult for
U.S. growers to accept the lower prices that would be necessary
to compete in the world market.
Third, we believe that the only solution to the problem
today is dramatic policy change. We believe any legislation
that seeks to replace the market distorting features of the
existing program with new provisions that continue to limit
production and maintain support prices at unrealistically high
levels would guarantee a continued decline in the U.S. tobacco
production.
More important, it would represent the loss of a historic
opportunity to restore the competitive position of U.S. leaf in
the world market and provide U.S. growers a chance to stay in
business. This can only be done by freeing up efficient growers
to do the best job they can, unfettered by restrictions on
production and arbitrary floors on price.
Fourth, although Leaf Tobacco Exporter's Association is not
taking a formal position on legislative proposals regarding the
amount of buyout payments to quota holders and growers, we do
have strong concerns about the high cost of a buyout and the
financing of these payments through assessments, or user fees,
on manufacturers of tobacco products.
Certainly, any assessments placed on the manufacturers
would likely be passed along to the consumer, thus forcing the
price of U.S. tobacco products to rise and the demand for
tobacco products to continue to decline. The unintended
consequences of this financing mechanism would likely create
even more hardship on the U.S. growers by reducing the need for
domestic leaf.
Fifth, we also question the basis in some of these
legislative proposals for providing buyout funds to growers who
choose to continue producing tobacco because such payments
would be contrary to the World Trade Organization provisions on
agriculture.
Sixth, we fail to understand the rationale for allowing
quota owners and the growers to double-dip by receiving
payments for both their quota and their production and still
remain eligible to produce tobacco. We believe this concept has
no place in any buyout legislation; it doesn't make sense
because it simply costs too much.
Seventh, we believe that a post-buyout marketplace should
be characterized by free market supply and demand. We believe
U.S. growers should be free to produce tobacco according to the
domestic and international market demands. Allowing the cost of
U.S. tobacco to become competitive in the world market could
minimize the need for imported large volumes of foreign leaf.
In line with this, we also believe that buyout legislation
should not place restrictions on post-buyout tobacco production
areas. Growers who choose to continue producing tobacco and any
new growers who decide to enter the market should have the
flexibility to grow tobacco wherever the natural resources and
climate conditions would allow. We see no need for a Federal
oversight committee to place restrictions to protect a few
growers to the detriment of the industry as a whole.
However, Leaf Tobacco Exporter's Association believes that
if buyout legislation establishes a national tobacco board, it
must include provisions for leaf export dealer representation.
Some previous legislative drafts failed to recognize the
difference between product exporters and leaf exporters. There
is indeed a significant difference that must be addressed.
Finally, while FDA regulations of tobacco products is an
issue that primarily concerns the manufacturing sector, we are
strongly opposed to any type of FDA regulations that would
impose direct oversight on farms and leaf processing
operations. Costly and unnecessary government regulations will
further burden the tobacco growers and increase the cost of
U.S. leaf to our remaining foreign customers.
We also think it is impractical to try to regulate at the
farm and processing level. If manufacturers are required to
comply with FDA regulations, then it is the manufacturers who
should be responsible for issuing specifications to processors
and producers and monitoring their compliance.
This would avoid the confusion and the high cost that would
be inherent in trying to enforce multi-layers of compliance
across multi-levels of the industry. It is, we believe, the
only way such a regulatory environment can have any chance of
working.
For years now, we have been dismayed by the lack of
progress in making any substantive changes in the tobacco
program. Even with the failure of so many in our industry to
recognize the need for change at all. Now we all are suffering
the consequences of this inertia.
Tobacco policy must be changed now. All of the market-
distorting, non-competitive features must be laid to rest,
relics of a bygone era. We need a marketplace shaped by supply
and demand, one that will enable U.S. growers to produce
tobacco competitively for the domestic and international
markets.
Thank you for the opportunity to testify.
Senator Dole. Thank you.
[The prepared statement of Mr. Bunn can be found in the
appendix on page 52.]
Mr. Haymore, thank you for being with us today as well.
STATEMENT OF TODD HAYMORE, DIRECTOR, UNIVERSAL LEAF TOBACCO
COMPANY, EXTERNAL AFFAIRS, RICHMOND, VIRGINIA
Mr. Haymore. Thank you, Senator Dole. I do appreciate the
opportunity to appear before you and this group to give you
Universal Leaf Tobacco Company's position on a few issues.
Before I begin my formal testimony, please allow me to give
you a brief overview of Universal and the role that we play in
an industry that is so important to the economic vitality of
North Carolina and indeed the entire southeast. Universal is
the world's largest independent leaf tobacco dealer.
Put more simply, we purchase leaf from the growers, process
it and sell it to the manufacturers of tobacco products.
Universal's global headquarters is located in Richmond,
Virginia, but our U.S. operational headquarters is located in
Rocky Mount, North Carolina, and we now have the largest and
most modern leaf tobacco processing facility located just
outside of Nashville, North Carolina, just up the road here.
The leaf dealer sector, as you know, is often overlooked,
but we do contribute a great deal to the economy of North
Carolina. During the last flue-cured and burley processing
seasons, Universal processed in North Carolina about 120
million pounds of the flue-cured crop and about 110 million
pounds of the burley crop.
That translates to about twenty-seven percent of total
flue-cured crop sold last year and about forty percent of the
total burley crop sold. Let me make a note that we probably
would have processed more in our Nash County facility had we
opened on a normal July opening day, but because of
construction, we were forced to wait until mid- August, so
those numbers would have been a little higher.
Also, during the same time period, Universal employed more
than a thousand people in North Carolina and paid out more than
$20 million in payroll.
With these facts in mind, I want to stress that Universal
does play a key role in the U.S. tobacco industry and we are
quite proud of our long-time support of the domestic industry,
including our recent $130 million investments in the United
States, a little more than $100 million was spent right here in
North Carolina.
Unfortunately, if drastic change doesn't take place very
soon in the domestic tobacco industry very soon, there will be
little left for us to support and obviously, we do not want
that.
Senator today I am going talk a little bit about how the
current state of the domestic tobacco industry is impacting our
business and what we would like to see happen to change this
situation.
Unfortunately, I must tell you that the domestic tobacco
industry is in serious decline, due primarily, we believe, to
the Federal price support program that has worked to price U.S.
leaf out of the world market and paralyzed good growers by
increasing the cost of doing business in the United States.
This, obviously, is having a detrimental impact on our
business as well, and these issues have an effect on everybody
in this industry as you well know. Let's look at some of the
cruel and sobering facts that are out there.
U.S. production of both flue-cured and burley crops is
about half of what it was just a few years ago--and obviously
it's been stated several times here today that we know from
internal and external data that we are facing a potentially
devastating quota for the flue-cured crop for 2005.
Exports--the only growth engine left for the domestic
market--are shrinking at a very alarming rate, and we believe
that both of these issues are directly related to the Federal
tobacco program. As a result of these problems, thousands of
growers have been forced to scale back their operations, reduce
work force, and take income cuts.
I don't need to say that; you are living it. You've made
the capital investments and have the equipment to produce a
crop twice the size you are today--yet many of you are making
probably bad long-term economic decisions today just out of
pure necessity to stay in business in the short run.
Growers, you are not alone. We are experiencing pain, too.
In the leaf processing and purchasing sector, consolidations
fostered again out of basic survival because of exports
shrinking, have made all three of the major independent leaf
dealers in the United States shut down major processing
operations and downsize work forces.
Universal alone has gone from having six processing
facilities in 1998 to just two this year, and we have seen our
U.S. employment level drop from approximately 8,000 workers in
1998 to about 2,500 this year.
Unfortunately, it is very likely this bad news will
continue to occur in our sector and throughout the entire
domestic industry unless the handcuffs of the tobacco program
are removed and good growers are given the opportunity to
compete effectively in the world market.
Now, you may be asking yourself, if the state of the
domestic tobacco market is so bad, why did Universal invest
$130 million in the United States? How could Universal make
such a significant commitment to the United States when the
future looks so bleak?
Yes, we recently completed a major modernization effort in
the United States by building a brand new, 1.2 million square
foot, state-of-the-art leaf tobacco processing facility in Nash
County and we expanded and renovated our Danville, Virginia
facility so that it, too, would have the most modern, up-to-
date leaf processing technology in the world.
Yes, that $130 million outlay represents the single largest
investment ever made by Universal in its processing facilities
and yes, we are very proud to have made these investments in
Virginia and right here in North Carolina. However, I am sorry
to say that we made these investments with little or no
confidence in the future of the U.S. market.
Rather, we made these investments because we needed to
increase efficiency in order to remain viable in the face of
smaller U.S. crops and the ever growing quality demands of our
customers.
We recognize that we took a substantial risk as the
fundamental problems facing our industry remain squarely in
place and so far, no one has really shown any true inclination
with wanting to deal with them. We felt like we had to make
these the decisions and investments in order to maintain our
position as the premier leaf dealer in the United States, even
if the export market completely collapses and we are only left
to service the shrinking domestic market.
What must be done to ensure the future of the domestic
tobacco industry?
We believe without a doubt the greatest challenge facing
the industry today is the need for substantial and immediate
change. We believe that the time has come to eliminate the
Federal tobacco price support program. Let me explain.
As you all know, the program has been historically one of
our greatest assets and one of the most effective and efficient
farm programs in the United States. Now, however, it has become
an albatross--clearly saddled with antiquated rules and non-
competitive prices, and as Tommy mentioned, it's become so
inflexible that it cannot react and effectively respond to
changes in the global or the domestic markets.
Many in the industry, including Universal, believe the
program has led to greatly inflated U.S. tobacco prices to the
point where the U.S. is simply no longer competitive in the
world market, and this is evidenced by the shrinking export
figures we have all seen over the last few years. Regrettably,
more and more foreign customers are turning away from U.S. leaf
and seeking cheaper alternatives from places like Brazil,
Malawi, and even China now.
Because of these reasons and others, Universal strongly
believes the only way for the U.S. leaf to be more price
competitive in the world market is to allow the market to work
without restrictions on prices or production.
That's why, in principle, we support a quota buyout and the
elimination of quota. The right to grow tobacco must be placed
squarely in the hands of growers if the domestic industry has
any chance of long-term survival and good growers must have the
ability to achieve economies of scale if they are to be able to
compete profitably in the world market.
The United States is the only country in the world in some
cases where growers have to pay for the privilege of growing
tobacco. This is wrong and it places the U.S. growers at a
severe competitive disadvantage to growers elsewhere in the
world. More importantly, we believe that the complete
elimination of the Federal price support system is absolutely
essential if the U.S. grower is going to be able to compete
effectively in the world market.
Any new tobacco legislation that emerges from the U.S.
Congress should not limit production or have measures that
support prices at artificial and non-competitive levels.
Instead, the production and price issues should be determined
by simple supply and demand economics.
Universal believes that a move to a free market system will
help to restore the competitive balance of U.S. leaf in the
world market and stabilize domestic leaf production. In fact,
we believe that it is the only step that can achieve these
important objectives and restore the economic viability of the
domestic tobacco industry.
These are just two of issues that Universal believes must
be resolved in the very near future, but we believe that they
are the two most critical and we will offer a more thorough
explanation of our beliefs on these issues for the record at a
later date.
Senator Dole, let me close my testimony by stating that
Universal has been--and remains today--a significant buyer and
the largest processor of U.S. tobacco. We have worked hard to
support this market, its growers, and its workers, and I
believe that our recent $130 million investment in Virginia and
right here in North Carolina lends full credence to our
commitment to this market.
We intend to be here for years to come processing U.S.
leaf--your leaf--in our state- of-the-art processing facilities
in Nash County and Danville, Virginia, but the time is fast
approaching when there may be very little for us to support and
that is why we believe changes obviously must come and must
come soon.
In some cases, the changes will be painful, but no change
at all is bringing a great deal of pain right now. To make
these changes, it will take strong leaders with the willingness
to make tough decisions in the short-term in order to have a
more prosperous long-term.
Senator Dole, I do applaud your leadership on this issue
and I thank you for bringing these issues to the attention of
your Congressional colleagues. Universal stands ready to work
with you to do and we know that reaching these goals is going
to be difficult, but we are ready to do it, we are ready to be
there with you.
Thank you again for having me here today.
[The prepared statement of Mr. Haymore can be found in the
appendix on page 58.]
Senator Dole. Yes, indeed, thank you very much. Now, Mr.
Bunn, you mentioned the trend that you are witnessing among
foreign buyers as it relates to U.S. tobacco production. How
far are we from the point of no return for these buyers?
Once they quit doing business with the American tobacco
farmer, is there any incentive for them to come back?
Mr. Bunn. Well, we have always been noted for our integrity
and quality and capability to be a steady supplier of tobacco
and a stable government--so while our prices may be different
than some of our competitors, we still have things to offer.
The problem is now the value of those are not being
considered because of our competitors and the price of their
tobacco is so much lower than the price of U.S. tobacco.
Senator Dole. From your perspective, what kind of business
decisions do you anticipate another thirty plus percent cut
will require your member companies to make?
Mr. Bunn. We will see some dramatic scaling back of
operations. In some cases, there may be consolidation of
operations, but certainly we would see the plants trying to at
least maintain some economies of scale in operation which would
mean short time operations perhaps even closing some factories.
Senator Dole. Mr. Haymore, as you reference in your
testimony, Universal Leaf has made a significant investment in
a processing plant in Nash County just up I-95 from here. Let
me ask you the same question that I have been asking each of
these witnesses, how is an additional thirty percent cut going
to affect Universal Leaf and what kind of impact is that going
to have on the new plant in Nash County?
Mr. Haymore. The first easy answer to that is with a thirty
percent quota cut, we are going to try to get as much of our
competitor's business as possible to make sure it's processed
in that facility, but a more, I guess, in depth answer is if we
are a volume driven business. If we don't have the volume to
run through the plant, it means less time to process, less
workers, less jobs.
To give you maybe a historical answer, Senator, just this
past year, because of less burley or fewer burley pounds than
we expected, we closed our Danville, Virginia--where we just
spent $30 million--we closed it 7 weeks earlier than
anticipated.
That was 7 weeks of payroll that didn't go out; 7 weeks of
time that folks didn't have jobs and quite honestly with a
thirty plus percent quota cut, we are looking at unfortunately
more of the same probably in both Virginia and North Carolina.
The biggest question mark is if nothing happens and we do
have this thirty percent quota cut, how long can we go just
scaling back operations before you get to a situation where you
must mothball or close permanently a facility. Obviously with
the investment we have made, we don't want that to happen.
Senator Dole. Thank you both very much for your testimony.
It's certainly been informative and it's very important to have
your testimony on the record. Many thanks.
Will the fourth panel please come forward? We have with us
today Mr. Gene Charville, President of East Carolina Farm
Credit; Mr. Wallace Herring, Senior Vice President and Manager
of the Agribusiness Department for First Citizens Bank; and
Dallas Taylor, Senior Vice President for Wachovia.
It's important to get the perspective of the financial
institutions on this important issue as well.
Mr. Charville, welcome.
STATEMENT OF GENE CHARVILLE, PRESIDENT, EAST CAROLINA FARM
CREDIT, RALEIGH, NORTH CAROLINA
Mr. Charville. Good morning, Senator Dole, and members of
the Subcommittee. I am Gene Charville and I am President of
East Carolina Farm Credit. We are an Agricultural Credit
Association serving the credit needs of agricultural producers
and rural homeowners in eastern North Carolina. Currently our
Association serves approximately 3,000 farmers and 500 rural
homeowners and provides approximately $700 million in credit.
I would like to thank you, Senator Dole, for your work on
behalf of the North Carolina farmers that we serve. Your
efforts to bring resources to bear on the agricultural and
rural development challenges facing our state are very much
appreciated by me, my farmer board members, and all of the
farmers and rural citizens we serve.
We are the largest farm lender operating in eastern North
Carolina and over fifty percent of the agricultural credit is
with our organization; and as a cooperative business, the
success of our business parallels the performance of the
farmers that we serve. Being a single industry lender, with a
loan portfolio that consists nearly entirely of agricultural
loans, our success is directly linked to the plight or
successes of our farmer/members.
Within that single industry that we serve, our business is
even further concentrated predominately in a few main
agricultural commodities. The largest commodity concentration
is tobacco. Over forty percent of our loans and commitments are
to farmers who rely on income from tobacco to pay their bills.
For East Carolina Farm Credit, this amounts to an investment of
over $300 million.
The future of our business is directly dependent on the
ability of tobacco farmers to be successful, build and maintain
their equity, generate profits, and repay their debts.
Eliminating the opportunity for growth or expansion limits the
ability of farmers to succeed. It affects the value of their
assets, the collateral they provide for loans, and the entire
rural economy.
The tobacco quota cuts that have occurred over the past
several years have diminished the ability of tobacco farmers to
succeed. Further cuts and the resulting instability could
adversely affect the quality of our loan portfolio and the
performance of our cooperative business.
Senator Dole, as someone who lives and works in rural
America, I see the very real needs facing our farmers and
communities. As you know, rural people face daily hardships as
they meet the challenges of living and working in a rural area.
The tremendous reductions in the tobacco allotment that
have occurred over the past few years have only added to these
hardships, making the challenge of surviving as a tobacco
farmer nearly impossible.
Farming or working in a rural community no longer offers
the appeal necessary to keep the next generation in the rural
areas where they were raised. The average age of our customers
is fifty-eight years old and that number has been continually
increasing for the past two decades.
At East Carolina Farm Credit, we have pursued numerous
programs to support and encourage young people to stay on the
farm. Despite these efforts, young people, the next generation
of farmers, are leaving the rural area. A buyout of the tobacco
quota program would help restore economic strength to rural
North Carolina.
Tobacco farming, for decades has been a stable and
profitable farm enterprise, but it has now become a myriad of
risk and uncertainty. The continuing reductions in the quota,
increasing operating expenses, marketing changes and an
uncertain future have all created a tenuous situation for
tobacco farmers, as well as for their cooperative lender.
Farmers today are faced with many of the same obstacles
that their fathers and grandfathers faced. They have no control
over the costs of the inputs they purchase and no control over
the proceeds they receive when they sell their crop, but we
have added yet another burden with the uncertainty of whether
there will be a buyout. Let's not continue with this burden on
an industry that is already stressed.
The good news is that adequate credit is still available to
tobacco farmers. With continued cuts and in the absence of a
buyout, credit restrictions will be inevitable. The quota cuts
of the past several years have financially weakened nearly all
tobacco farmers. Net worths have declined, earnings have eroded
and tobacco farmers who have worked hard and achieved financial
success are now fighting for their survival. Let's end this
downward spiral and let the tobacco industry start on a new
course in North Carolina.
East Carolina Farm Credit was established to fulfill unmet
credit needs for farmers and assure that a dependable and
reliable source of credit would always be available. East
Carolina Farm Credit has been fulfilling this need for farmers
since 1917.
Farmers still have these same needs for credit and for a
lender that understands their needs as they did over 85 years
ago. Let's give tobacco farmers the ability to continue to earn
a living.
Senator Dole, we are at a turning point. We can sit back
idly while we continue to see our tobacco industry slowly and
painfully decline, and with this decline a further erosion of
our rural communities and businesses that depend on a strong
rural economy. Instead, I hope that we seize the opportunity to
change the tobacco industry in a positive way.
Let's provide an equitable buyout of the tobacco quota
program. Doing so will strengthen eastern North Carolina, it
will strengthen the entire state, and it will do so in a way
that provides the farmers who are with us today, the farmers
that have built eastern North Carolina and its economy, a way
to make a transition.
Senator Dole, your interest and support on issues affecting
rural North Carolina, your strong support of the tobacco
industry, and your pursuit of a tobacco buyout are very much
appreciated. Again, thank you for your leadership on this vital
issue and for conducting today's hearing.
Senator Dole. Thank you. Mr. Herring.
[The prepared statement of Mr. Charville can be found in
the appendix on page 64.]
STATEMENT OF WALLACE HERRING, SENIOR VICE PRESIDENT AND MANAGER
OF AGRIBUSINESS FIRST CITIZENS BANK, CLINTON, NORTH CAROLINA
Mr. Herring. Thank you, Senator Dole for being here for
this very important event. I am Wallace Herring, Senior Vice
President and Manager of the Agribusiness division of First
Citizens Bank.
This morning I plan to speak from a business perspective
about the tobacco buyout and why we need to move forward with
it. Our company has a vested interest in what happens to our
tobacco farmers. In 1898, we opened our first office in
downtown Smithfield, primarily serving the farmers of this
community and then agricultural customers throughout Eastern
North Carolina.
Over the last century, our company has expanded to 337
offices in North Carolina, Virginia and West Virginia. While we
have expanded our products and services beyond agricultural
lending, we have never forgotten our roots.
At First Citizens, we have made a considerable commitment
to support this sector of our economy. We have a business
development team as well as a credit analysis group devoted
solely to farming and agribusiness. Many of our bank branches
are in rural communities where we provide financial services to
farmers, family members and companies who rely on agricultural
business for their livelihood.
Without question, tobacco has been a very important part of
the economy in these areas, including here in Smithfield. The
potential for a buyout looms heavy on the minds of many people,
especially the growers and the quota owners.
As we all know, a tobacco buyout and an end to the tobacco
program have been debated for many years. Many of us were
hopeful that some type of buyout would take place last year.
Obviously this did not happen. Our customers who operate
tobacco farms tell us they are frustrated with the continued
uncertainty over the buyout.
It's hard to make long-term decisions--should they finance
a new tractor or a barn, for example--when income is tight and
they don't know what to expect down the road.
Without a buyout, further quota cuts will continue to put
pressure on tobacco growers, owners and our rural economies. If
the forecast by an N.C. State economist, Blake Brown, who is an
expert on this issue holds true, the situation looks
increasingly dire, especially if we face the predicted thirty-
three percent cut in quota in next year and lose $200 million.
The bottom line is, unless we move ahead with a buyout,
tobacco growers will find it hard to stay in business. Some
farmers will turn to alternative crops to offset quota cuts and
decreased income. Others will sell their operations. Some will
turn to other lines of work. We all know good jobs are hard to
come by--especially in the rural areas of our state.
The current tobacco program not only hurts farmers, but it
also compounds the already distressed economic situation in our
rural communities. Many of these areas hard hit by the quota
reduction are struggling to discover a replacement for the
tobacco dollar, which sustained them for many years. Local
companies that do business with tobacco growers are finding
that it's hard to make ends meet.
As if this isn't enough, manufacturing plant closures and
job layoffs so common to our state in recent years are adding
to the economic woes in many of these rural areas. It's time to
end the uncertainty and make the buyout a reality, while we
still have the opportunity to help our farmers and their
communities.
A buyout would allow quota owners and farmers to make the
transition if they want to stop raising tobacco. At the same
time, it would stabilize the position of larger growers who
want to continue their operations. A tobacco buyout would also
make a dramatic impact on our state's economy. Growers and
owners would use their buyout payments to settle debts, pay
taxes, purchase equipment and supplies, invest in education or
diversify their operations.
The buyout's impact would spread to other businesses and
sectors, resulting in billions of dollars in additional
economic activity. According to a University of Tennessee
analysis, North Carolina could see an estimated $6 billion in
additional growth under the proposed House bill; $1.16 billion
in the first year of the buyout alone.
The economic activity would also significantly support the
creation of much needed jobs in our agricultural communities.
In other words, a tobacco buyout would help steady our state's
already fragile rural economy and significantly increase
business opportunities in these areas.
First Citizens is proud of the partnership we have built
with our agricultural customers over the last 106 years. That's
why we support this issue and understand how important it is to
the communities and businesses we serve.
I commend Senator Dole for her leadership and for putting
together this hearing. We must continue to keep the public
aware of agriculture's value to our statewide and local
economies. We must support our farmers and take steps to pass a
tobacco buyout. Thank you.
Senator Dole. Thank you. Mr. Taylor.
[The prepared statement of Mr. Herring found in the
appendix on page 68.]
STATEMENT OF DALLAS TAYLOR, SENIOR VICE PRESIDENT, WACHOVIA
CORPORATION, RALEIGH, NORTH CAROLINA
Mr. Taylor. Thank you, Senator Dole. On behalf of Wachovia,
thank you for inviting me to speak to the subcommittee today
and voice my support for a segment of Wachovia's customer base
that has been and continues to be very important to our
success.
My name is Dallas Taylor. I have been a Wachovia employee
for 38 years. All of those years have been spent in various
Wachovia locations in North Carolina. Most of my time with the
company has been spent providing loan and deposit services
directly to agricultural customers, including numerous tobacco
growers and quota owners. Currently, I work on the Risk
Management side of the bank. Although I am no longer in direct
contact with our customers on a daily basis, I am still part of
the team that looks for ways to add value through various
credit products.
Over the past several years, I have observed first hand the
plight of the farming community in eastern North Carolina.
Although change is inevitable within every segment of our
economy as business cycles ebb and flow, tobacco farmers have
struggled more so than other segments to keep pace with those
changes.
We have seen balance sheets erode in asset value and equity
value due to rapidly declining quota ownership. We have seen
tobacco growers' disposable income dwindle due to the fewer
acres grown which combined with rising costs leads to reduced
profit margins.
These changes have put more pressure on the grower to find
other sources of income to take the place of what was once a
thriving income source. With limited alternatives available, we
have seen the number of farmers steadily decline and fewer new
farmer startups.
The deterioration in tobacco farmers' financial conditions
often increases credit risk, resulting in increased bank costs
to maintain appropriate capital and increase loan portfolio
monitoring. In turn, this reduces the credit flexibility with
existing customers and prospective new customers.
Since its beginnings in the late 1800's, Wachovia has been
a friend to the agricultural community. The farmers and tobacco
growers are one of the economic engines in eastern North
Carolina. If the farmers are viable, they funnel money into our
economy through the purchase of products and services, and they
create and maintain a large percentage of jobs in this region.
As their financial institution of choice, we have a vested
interest in their ongoing success. If our customers thrive and
succeed, so do we.
In summary, the financial deterioration of tobacco growers
increases our cost to provide credit through higher credit
risk, reduces the credit flexibility available to tobacco
growing customers and impairs the financial viability of
lending to tobacco-dependent producers.
Based on our understanding of the various tobacco buyout
proposals presented to date, tobacco growers and quota owners
would be given the opportunity to better control their own
destinies as well as bolster their deteriorating balance sheets
and income streams.
This may give the tobacco grower the option to expand
existing operations, retire from farming or maintain operations
at the same level with less fear of further financial
deterioration due to quota cuts.
Wachovia is not here to directly support any kind of new
legislation--what we are in support of are our customers.
Again, thank you for this opportunity to voice our support for
valued Wachovia customers. We wish them continued success.
Thank you, Senator Dole.
[The prepared statement of Mr. Taylor can be found in the
appendix on page 70.]
Senator Dole. Thank you. Mr. Charville, East Carolina Farm
Credit obviously provides great service to the farm community
and your customer base truly is rural North Carolina. You
stated in your testimony just how important a tobacco quota
buyout is for that customer base. Keeping consistent with my
questioning, what kind of an impact will another substantial
cut in quota--like thirty percent--have on this customer base
from your perspective, and what other ways do you see this
impacting rural communities?
Mr. Charville. Continued cuts will have a tremendous impact
on our financial institution as well as our customer base. With
the cuts that have already occurred, we have seen the financial
strength of our customers decline; their net worths have been
reduced; their earnings abilities have been significantly
eroded.
To date, we have been able to continue to provide credit
and adequate credit is available, but with continued cuts, at
some point, the impact of that will be felt even more so from a
credit standpoint to the point that credit availability could
be lessened to the point that many wouldn't be able to obtain
credit to put their crop out.
The impacts on the communities would be significant. The
rural areas of eastern North Carolina--the rural communities
that are there today have been built by the tobacco industry
and sustained by the tobacco industry and continued cuts and
continued deductions would, we believe, lead to continued
reduction in opportunities available, less opportunities that
would keep our young people in the communities they were
raised, and just a weakening of the overall economy.
Senator Dole. Thank you. Mr. Herring, you mentioned a
general economic impact of the House buyout bill in your
testimony, and I understand that you've been involved in
agribusiness from the banking perspective for a long time. How
hard is it for tobacco farmers to get their credit extended as
compared to previous years?
Mr. Herring. Tobacco has always been considered a very
stable source of income for our farmers. Reduction in that
source of income has already had an impact on many farm
operations by reducing their ability to service term debt, make
the needed investments in equipment and other capital
expenditures necessary to keep the operation viable.
As an agribusiness banker, I can tell you emphatically that
the tobacco income plays a big part in credit decisions in
rural eastern North Carolina on tobacco farmers.
Senator Dole. Are there other side effects of the current
economic decline resulting from the inflexibility of the
current tobacco program that aren't obvious to those who live
outside of tobacco dependent communities?
Mr. Herring. We feel that there are. We think that the
tobacco program the way it is now--the current program has made
some of the smaller farmers stay in business who would have
ordinarily gotten out or to convert to cash leasing their quota
to neighboring farms, which simply does not produce adequate
income to even consider any form of diversification that might
enhance their livelihood and their quality of living in the
rural environment.
Senator Dole. Now, if North Carolina were to get back the
annual $1.1 billion in economic activity it's currently losing
due to this broken Federal policy, how much of an impact would
that have on capital investments? How many new job
opportunities would that create in these rural communities?
Mr. Herring. Those numbers have been alluded to all morning
in these discussions. In a recent study conducted by Dr. Kelly
Tillen at the University of Tennessee, it is estimated that the
buyout will produce the $1.16 billion in income chained to
economic activity for the year 19005 with $789 million of that
going to the quota owners and growers. The remaining $371
million, more or less, would flow directly into the local
economies of these communities.
According to this study, the change in economic activity
would support more than 11,000 jobs in our state. North
Carolina would realize an increase of more than $6 billion
overall.
Senator Dole. Thank you very much for that answer. Mr.
Taylor, it's well known and been documented today just how
important tobacco is to the overall economy in North Carolina.
Our state ranks third in agricultural diversification and it is
the State's No. 1 industry. What kind of impact would a tobacco
buyout have on that part of the population that is not involved
in agriculture?
Mr. Taylor. Well, outside the tobacco industry, the cuts
that we have seen in the past few years certainly has a ripple
effect on the entire community--agribusiness, every business
that you can think of--car dealers, furniture dealers, anyone
who is in retail and it will have a tremendous impact in
reference to North Carolina, particularly eastern North
Carolina, as it would create jobs and provide a tremendous
amount of cash-flow into the population. As we have indicated
with consideration to balance sheets, it would go a long ways
to turning that tide and strengthen those--and that would have
a ripple effect throughout the economy.
Senator Dole. Thank you very much, gentlemen. Your
testimony has been most helpful. Thank you. I appreciate your
joining us.
Senator Dole. Will the last panel please come forward? We
have the Chairman of the Johnston County Board of
Commissioners, Mr. J.H. Langdon and Mr. Allen Scarborough,
Manager of State Affairs with Bayer CropScience.
Mr. Langdon, welcome.
STATEMENT OF HON. J.H. LANGDON, CHAIRMAN, JOHNSTON COUNTY BOARD
OF COMMISSIONERS, ANGIER, NORTH CAROLINA
Mr. Langdon. Thank you. Thank you, Senator Dole, for asking
me to be here today to participate in this event. We have heard
a lot of things today about how tobacco affects and what's
happening to affect our citizens in North Carolina--
particularly eastern North Carolina--and I would like to put a
focus on what we have done in Johnston County.
Johnston County is one of the fastest growing counties in
North Carolina, so we have a mix of things happening, but
tobacco is still an extremely important part of our economy in
Johnston County. In 2003, the estimated farm income from
tobacco was $35,363,561. The income was shared among an
estimated 550 active growers, probably the largest number of
producers in one county in the United States.
There are some growers who do not own quotas, but most
growers, well over eighty percent, own quotas and lease tobacco
quotas from other quota owners. Johnston County had the second
highest amount of quota in the state, Pitt County being first.
Tobacco has been a stable source of income and to some degree,
it stabilized our local economy over the years. Because the
crop was grown under the quota system with price supports,
growers have been able to make business plans and arrange to
secure resources necessary to do what they need to do in their
farming operations.
Tobacco has been profitable for growers and for quota
owners and because it's profitable, the quota has value, and of
course, that value has allowed farmers to purchase land and
paid for their equipment based on that value.
If we change that value, we make it very difficult for them
to maintain the level of living they have and to carry out the
kinds of things that they need to.
As we know, times have changed, haven't they? Eighty-three
percent of tobacco produced in Johnston County in 2003 was sold
under marketing contract. Since 1997, the quota in Johnston
County has dropped forty-seven percent--from 37 million pounds
in 1997 to 19 million pounds last year and in that same period,
the income from tobacco has dropped by forty-five percent from
$64 million in 1997 to $35 million in 2003, which the
projections have been mentioned a number of times today about
the thirty percent reduction in quota in 2005--that would be an
$11 million hit for Johnston County. This would significantly
impact our farmers and our quota holders.
Johnston County tobacco farmers and allotment holders need
the buyout and with the present tobacco program, quotas and
allotments are in a downward spiral. While quotas and
allotments become smaller, growers are suffering from the lack
of dependable source of income and the value of assets that
quota owners and producers have invested in is decreasing. A
buyout will compensate allotment holders for their investments.
This includes over 5,000 Johnston County citizens.
Most important, a buyout will help active growers
transition into other commodities and industries and we must
remember that money that comes from tobacco multiplies three to
five times.
When we say we are going to possibly have an $11 million
cut, you are looking at a tremendous cut in our local economy.
The ability of our people to work and make a living and to
carry on the things they need to carry on is really important
and Senator Dole, I hope you will continue to work hard like
you have for our tobacco buyout.
Senator Dole. Thank you. Mr. Scarborough.
[The prepared statement of Mr. Langdon can be found in the
appendix on page 73.]
STATEMENT OF ALLEN SCARBOROUGH, MANAGER, STATE AFFAIRS, BAYER
CROP SCIENCE, RALEIGH, NORTH CAROLINA
Mr. Scarborough. Senator Dole, I really appreciate the
opportunity to come and to give testimony for this hearing
representing a segment of the ag community, and the tobacco
economy, as well, and to the folks that are certainly vital to
our business as well, our partners in agriculture.
Bayer CropScience researches, develops, manufactures and
sells a broad range of innovative crop science products for
crop protection, biotechnology, seed markets; the turf and
ornamental and professional pest management markets; the
consumer lawn and garden markets.
You can see we are vitally diversified throughout crop
protection. Our U.S. business headquarters is in Research
Triangle Park, North Carolina. I myself live in Raleigh. We
employ about 400 people throughout this state and many more
throughout the U.S.
The success of Bayer CropScience is directly linked to the
economic health of U.S. agriculture and the producer community.
Our business is reliant upon the ultimate users of our products
and technology and, beyond our own work force, is partnered
with the distribution and retail businesses that sell, service,
and help to steward what we develop and manufacture. It's very
important throughout the entire chain.
The crop protection/production industry is affected by the
crop acreage under production. A drop in acreage directly
represents a reduction in the potential market for that crop.
It's a very simple analysis from my perspective certainly.
Additionally, the value of the crop to the grower also
determines the producers' input decisions affecting the
purchasing of our technology or our products.
In a simple analysis, if a market or other factors reduce
crop acreage and/or the value of the crop declines, then our
industry experiences reduced sales for that market. The impact
is also felt within the broader agribusiness community. We are
very much aware of that and tied directly to that.
For the agricultural industry, the basic manufacturers of
crop protection products, the wholesalers and the retailers of
input products and technology, from our perspective and our
interest, are the components most directly affected.
Of very important concern, the long-term economic viability
of the producer community will ultimately affect the continued
and future markets for agrichemicals and related businesses.
For tobacco, the acreages have declined and I hear different
reports, but certainly around forty percent since the late 90's
and we have heard support of that information this morning.
According to North Carolina State University, each lost
acre no longer receives chemical inputs worth hundreds of
dollars per acre. A continued decline in acreage and/or the
potential loss of producers would adversely affect crop
protection/production sales, but could affect the viability of
distribution and retail locations in such areas of these
losses. The bottom line of national suppliers such as us
certainly also is affected.
For our industry and the economic health of the region, it
is important that legislation support agribusiness by
supporting the producer community. Without that support, many
producers may leave farming altogether. Clearly, the loss of
producers would negatively affect the crop protection/
production industry.
Thank you very much.
[The prepared statement of Mr. Scarborough can be found in
the appendix on page 76.]
Senator Dole. Thank you. Mr. Langdon, you may very well
have the best overall perspective on this important issue as
Chairman of the County Board of Commissioners. As evidenced by
your testimony, you see the impact from all sides. You've seen
first hand how the decline in tobacco quota has affected the
County. How important is tobacco quota to the county tax base?
Mr. Langdon. It's very important, as you well know. The
ability to pay your taxes has a lot to do with what happens in
government and the services we provide, so the quotas and
tobacco being--because we are still a very rural county, it is
extremely important that we are able to maintain that base.
Senator Dole. Johnston County is the fastest growing County
in North Carolina--that makes your job all the much more
demanding. What are examples of services that would have to be
cut if the tobacco industry were to simply dry up or does it
mean that taxes would have to be raised?
Mr. Langdon. It would not mean that we cut services, as
much as it would be taxes would be a problem for the people. We
would hope that services that are important to our citizens we
would be able to maintain, but the ability of people to pay
local taxes is a very important effect of that, and it becomes
our board having to make decisions that could be really tough
on the services we provide.
Senator Dole. Mr. Scarborough, how much of an impact would
continued quota cuts, particularly the thirty percent cut
looming for the 2005 crop have on your local business and
tobacco areas and if you could also answer, what other
businesses that Bayer CropScience works with would be impacted?
Mr. Scarborough. Certainly, I alluded in my comments,
there's a simple calculation just on an acreage basis and
something that's occurred to me during this morning and should
have been more obvious certainly tobacco growers versus some of
the other row crops would probably have fewer acres under
production totally and to make up that difference in
diversification would require an extensive addition of acres--
at this point, if they are in a situation where they choose to
go to another crop, for example, and would require further
acreage to try to make similar economic grounds, if that
transition can't be made, it's simply a reduction in acreage.
The second part to your question is the partners and I also
alluded to that--the other businesses key to us in our industry
are the dealers, the distribution network as well as the
producers--and on a local basis, those are the folks that
service our products and help to get it on the ground directly
and it's sort an environmentally conscious to make sure that
the labels are followed to the best maximum usage--so it's an
acreage issue from the fact that local businesses and down the
chain with us going all the way to the grower as well as our
individual sales structure and support staff and research.
Senator Dole. Thank you. I want to thank all of the
witnesses who joined us today. Your testimony has been very
informative and will be an extremely valuable resource for us
as we continue to work with the other ninety percent of
Congress who are not from tobacco states to make this buyout a
reality.
Before I call the Subcommittee adjourned, let me take a
moment to thank Frank Lee and his staff who have allowed us to
use his warehouse and who went to great efforts to get all of
this arranged for us today. We are extremely grateful. Thank
you very much for being with us--all of you--today.
The subcommittee hearing is adjourned.
[Whereupon, the subcommittee was adjourned.]
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A P P E N D I X
April 13, 2004
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DOCUMENTS SUBMITTED FOR THE RECORD
April 13, 2004
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