The Tobacco Buyout and the Outlook for 2005

1
The Tobacco Buyout and the Outlook for 2005

• Blake Brown, Professor
• Agricultural Resource Economics
• North Carolina State University

2
Where we were headed.Flue-Cured Quota
Projected 26 cut in 2005 national quota
3
Quota Owner Payments

• 7 per pound of quota.
• Based on the basic quota amount in 2002
• Paid in equal annual payments over 10 years
  beginning 2005
• Paid to owner as of the date of enactment
  October 22, 2004
• If you die, payment goes to your estate

4
Producer Payments

• Based on the 2002 effective amount of a
  particular quota
• If a producer produced the quota for 2002, 2003
  and 2004, the producer receives 3 per pound of
  effective 2002 quota
• Payment is spread over 10 years in equal annual
  payments

5
Producer Payments

• If a producer produced the quota in one out of
  the 3 years 2002, 2003 and 2004 then he receives
  1 for each pound of 2002 effective quota
• If a producer produced the quota in two out of
  the 3 years 2002, 2003 and 2004 then he receives
  2 for each pound of 2002 effective quota
• Payment is also based on the producers share of
  the risk in producing the quota

6
Securitization

• The stream of buyout payments may be assigned to
  a financial institution
• Banks and others will offer you a lump sum
  up-front in return for your stream of buyout
  payments
• The up-front lump sum will be less than the sum
  of the payments
• BE CAREFULSHOP AROUND AND USE REPUTABLE
  FINANCIAL INSTITUTIONS

7
Taxation

• Quota payments will likely be taxed as long-term
  capital gains
• Grower payments will likely be taxed as ordinary
  income
• Like-kind exchanges may allowed with quota
  payments
• Be sure to set aside enough money for the tax
  liability.

8
Administration

• USDA is developing rules for implementation
• Payments will be made as soon as practicable.
• USDA-FSA likely will be the agency making the
  payments
• Appeals will be made through the county committee
  and a National Appeals Division

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Who pays for the buyout and how

• Quarterly assessments paid by tobacco product
  manufacturers and importers
• Assessment is based on a companys market share
  of the domestic sales of tobacco products
• 96.331 of assessments paid by cigarette
  manufacturers and importers

10
Tobacco Loan Pool Stocks

• Stocks will be transferred to the Associations
  (Flue-Cured Stabilization, Burley Coop, Burley
  Stabilization, etc.) based on the amount of
  no-net-cost funds in the association divided by
  the list price of the stocks.
• The association is responsible for disposing of
  the stocks redeemed.

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Other CCC stocks

• Stocks in excess of the transfer to the
  associations will be disposed of by CCC as
  determined by the Secretary of Agriculture
• 500 million is allocated for disposal of stocks
  and administration of the buyout.

12
Prices in 2005

• Flue-Cured Contracts
• 1.35 - 1.50 average across stalk positions
• Incentives for quality and upper stalk tobacco
• Crop throw will significantly affect the average
  price
• Burley Contracts
• 1.40 - 1.55

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What to expect

• Total flue-cured acreage will decline in 2005
  production may also decline, but not as much as
  acreage.
• Many farmers will exit this year This is a year
  of farmer selection by contracting companies
• Consolidation and specialization of farms into
  medium sized units
• Some of the remaining farmers could pick up some
  additional acreage

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U.S., Brazil and Zimbabwe Flue-Cured Production
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Simulated US Flue-Cured Production after Program
Elimination
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Simulated Flue-Cured Price after Program
Elimination
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A Year of Transition

• What are my
• Personal and Family Goals?
• Strengths and Weaknesses?
• Threats and Opportunities?

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Sources of InformationUSDAwww.fsa.usda.gov/to
bacco/NCSUwww.ag-econ.ncsu.edu/extension.htmU
niv. of TNhttp//apacweb.ag.utk.edu/tobacco.html