Thousands of farmers stopped growing tobacco after deregulation payouts

The number of tobacco farmers has dropped, and the remaining growers are dealing with the recent loss of a decade-long cash infusion ordered by the U.S. government — but those who remain are better positioned to grapple with foreign competition than they were 10 years ago, industry analysts say.

Farmers who held the rights to grow tobacco received $9.6 billion over 10 years from a federal assessment on tobacco manufacturers that Congress designed as a consolation prize to soften the blow for the sudden deregulation of tobacco growing.

The payments — funneled quarterly by the U.S. Department of Agriculture from tobacco manufacturers to growers — expired Sept. 30, 2014.

Yet, even after that assessment's expiration, U.S. tobacco farmers are poised to compete with foreign growers, according to a report released in June by research firm IBISWorld.  It projects that the U.S. tobacco farming industry’s annual revenue will rise at an average annual rate of 4.2% over the next five years.

For about seven decades, dating back to the Great Depression, the government imposed production limits on individual tobacco farms but guaranteed an artificially high price for the crop. The policy maintained order in the tobacco growing business for years and kept many small farmers alive.

But over time, foreign growers swiped market share away from U.S. tobacco farmers, selling their crops to manufacturers at a lower price.

When Congress voted in late 2004 to eliminate the government's involvement in the industry, it was viewed as a way to normalize the price of tobacco and make U.S. tobacco farming more competitive in the long run.

Analysts say the move did what it was intended to do — make the industry more competitive on a global stage by fostering consolidation and allowing farmers to cut the prices of their crops.

“Ultimately, deregulation helped spur revenue and profit growth, while helping the tobacco industry acclimate to international competition,” IBISWorld concluded in a June 2015 report.

Exports currently represent about 63.6% of revenue for U.S. tobacco growers, up from 59.8% in 2004, which was prior to deregulation, the report said.

IBISWorld also estimates $144 million in profit on $1.9 billion in sales this year for U.S. tobacco farmers. The growth is fueled primarily by exports to countries where smoking is more socially acceptable, such as China and Russia.

"Tobacco growers gain revenue and profit by offering a competitive price on their product, thus earning higher revenue totals," the report said.  "They no longer rely on artificially inflated domestic prices for their source of revenue."

Blake Brown, a North Carolina State University agricultural economist, said deregulation made the surviving growers more competitive. “Exports were declining," he said. After deregulation, "they did stabilize and actually increase.”

The ranks of U.S. tobacco farmers plummeted in the decade since the federal government stopped imposing an artificially high price and production controls on tobacco crops.

The assessment, called the Tobacco Transition Payment Program (TTPP), was designed as compensation for farmers who were facing an immediate drop in tobacco crop prices, which had previously been federally controlled.

“It was a way to sunset the program without drastically hurting the farmers who benefited from it,” said Will McKitterick, a senior analyst for research firm IBISWorld who left the firm in August, in a recent interview.

But as expected, many farmers decided they could not sell tobacco at a profit any longer, and they dropped out.

Regardless of their business plans, owners of the federal rights to grow tobacco — a right distributed through a USDA mechanism called quotas — received compensation through TTPP based on the total pounds they were allowed to harvest.

Many used the cash to retire, including thousands of farmers who owned the rights to grow tobacco but had already stopped doing so. Others used the cash to expand by acquiring other farms or investing in new technology.

The average farmer received $17,358 over 10 years from TTPP, according to a study by NCSU's Brown. Tobacco manufacturers such as Altria Group, Reynolds American and Lorillard paid the bill.

As economists expected, the number of tobacco farmers plunged by 51.5% in the year after the legislation took effect in 2005, according to research firm IBISWorld.

The number of U.S. farms that grew tobacco or had the right to do so under federal quotas was 56,879 in 2002, according to U.S. Agricultural Census data. Today, there are only about 4,268 farmers growing tobacco, according to IBISWorld.

Deregulation impact

Congress voted to eliminate the regulations as part of the Fair and Equitable Tobacco Reform Act of 2004, which created TTPP.

Before 2005, the U.S. Department of Agriculture strictly regulated tobacco farming, limiting production and imposing an artificially high price. It was an anachronism traced back to the Depression, when the government took actions to prop up farmers.

“A lot of our crops are subsidized by the federal government, but by 2005 it was seen as a little less palatable for the American taxpayer to be subsidizing tobacco,” McKitterick said.

Most of the farmers who exited the tobacco business were small players. For many of them it was just one of several crops they planted, according to U.S. Agricultural Census data.

“It provided compensation to tobacco farmers to help them make the changes they needed to make going into a totally unregulated, no-supply-control, no-price-support situation for their products,” NCSU's Brown said.

Cashing in

About one-third of the recipients securitized their 10-year stream of payments by selling their TTPP rights to investors in exchange for a lump-sum payment upfront, according to Brown's study.

Brown said that financial institutions viewed the tobacco payments as a bulletproof source of income because of Big Tobacco's addictive hold on consumers’ pocketbooks.

Some farmers reaped a windfall. The top 10 percent of tobacco farms received 75% of TTPP payments through 2012, according to Environmental Working Group data reviewed by USA TODAY. Nine farms had received more than $1 million through 2012.

It was particularly lucrative for states where tobacco fields are primarily concentrated: North Carolina and Kentucky, whose farmers received $392 million and $247 million, respectively, according to Brown’s estimates.

“It was a very important source of income for these rural communities,” Brown said. “In fact, it was probably one of the largest single injections of cash ever in these rural communities.”

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.