Lexington, KY - Since 2004, tobacco producers have seen numerous changes as federal quota buyout legislation passed and the market changed forever.
This time of rapid transition continued, as factors such as international markets, the value of the U.S. dollar and new federal regulations took their toll on tobacco growers and manufacturers as well. Many producers saw reductions or complete losses of their growing contracts.
Will Snell, an agriculture economist at the University of Kentucky (UK) College of Agriculture, said those reductions really began last year.
"In reality, the beginning of this adjustment started last year when, for the first time since the tobacco buyout in 2004, U.S. burley supply going into the growing season was closely in line with anticipated demand. In response to an excess supply of burley tobacco in the world market, coupled with a lot of regulatory uncertainty, some companies actually pulled back contract volume in 2009," he said.
David Howard, a spokesman for R.J. Reynolds, confirmed that, saying the decline in contracts is a reaction to the market.
"There have been reductions essentially because we've got to keep supply in line with demand. It's no secret that cigarette volumes have been declining and have been for several years," he said.
Some growers anticipated the cutbacks, while others were surprised to lose their contracts.
Around this time of year, Todd Clark, a producer from Fayette County, is normally busy finishing up his planting of close to 85 acres of burley tobacco. That equates to more than 200,000 pounds.
Last year, he saw a bit of a change coming and dropped to about 60 acres. But these are anything but normal times in the tobacco market, and last February Clark was notified that his contract was not being renewed.
The action came as a surprise, even though he suspected he would face another decrease in contracted pounds this year.
"Certainly at the time I learned about this, I was a little bit in shock ... but since then, I'm looking at other things I was already working on," he said. "You have to evaluate where you are and what your next steps are, and you try to make moves to the future that, unfortunately, tobacco might not be a part of."
Clark is not ready to give up on tobacco. He will raise a crop this year. He has found a contract for 40,000 pounds and will grow additional acreage and sell it through other means. His farm also includes additional endeavors that help to offset those tobacco losses, including a hay and straw operation, a greenhouse in which tobacco plants are grown for other producers and a stocker cattle operation. Clark is also looking at a pasture-to-plate cattle business, as well as poultry and sheep.
Many of these ventures are a first for him, and Clark recognizes the fact that none of these can replace tobacco at this point. Many growers have opted to produce without a contract, and search for alternative ways to sell their crop.
The Burley Tobacco Growers Cooperative is one of those options. Brian Furnish, the co-op's general manager, said the contract situation is tough but noted not all producers faced cuts.
"There is a combination of things happening. Some people got increases and some people got cut. And we will be buying tobacco, but our board won't determine how much until November - until we see what we sold from last year's crop," he said. "We'll still be buying tobacco and helping farmers move as much as they can."
In 2009, the co-op launched the U.S. Growers Tobacco Company (USGTC) to give farmers yet another outlet in selling their crop when more conventional means are not suitable. Furnish said that option is a last one for producers to sell their tobacco, but it is an option nonetheless.
"That program went well this year. We didn't get a lot of tobacco, but we got some. And we've already sold about half of it, and the farmers have been paid, and they are pleased with that," said Furnish.
With such a tight market, quality issues have determined whether some producers continued or lost their contracts this year.
David Sutton, a spokesman for Phillip Morris (PM), USA and U.S. Smokeless Tobacco Company (USSTC), said the company decisions about contracts were based on demand as well as the quality of leaf growers were producing.
"We started looking at what we call the grower's scorecard, which is what the company and its growers work from on an annual basis," he said. "We looked at the performance of growers not only in Kentucky but across the growing region, and we looked at the fact that the company is no longer going to buy fourth- and fifth-quality tobacco. So if individual growers were delivering low-tier quality, those are the type of folks who would likely be impacted with either cuts in their contract or, indeed, not being offered a contract at all."
Sutton added that high-quality leaf is still the backbone of their cigarette blends, and PMUSA and USSTC still plan to buy more than $100 million worth of Kentucky tobacco from thousands of state growers.
"I'm focusing more on quality than I ever have before, because I feel like, if it is excellent quality, it will sell for a profit," Clark said. "A year from now, if the tobacco companies increase their purchase intentions, I think Kentucky growers will step back up quickly, but I would be concerned if I were the companies. Every time they do something like this, I see us diversifying more and more away from tobacco to the point that, eventually, we may not ramp back up and be into other things."
Many producers have indeed found other things to do, as the number of tobacco farms continues to decline along with the value of the crop despite some periodical surges.
"The value of tobacco production in Kentucky will likely fall below $350 million in 2010, compared to record-high post-tobacco buyout crops valued around $380 million in 2008 and 2009," Snell said.
Comparatively speaking, the value of the crop in the '90s averaged over $825 million, according to a 1998 report, with a one-year high of $950 million, the fourth highest on record.
"The number of farms growing the crop will continue to shrink in response to tobacco companies scaling down the number of desired contract growers, credit constraints, labor issues, deteriorating infrastructure and concerns over the profitability of non-contract production," Snell said.