Tobacco buyout could saddle U.S. with tons of unwanted leaf
A congressional bailout of North Carolina and Kentucky tobacco growers could leave the federal government holding hundreds of millions of pounds of tobacco that cigarette companies don't want and the government can't sell.
That is considered the most likely result of two provisions quietly slipped into spending bills by powerful lawmakers from tobacco states, including North Carolina Sen. Jesse Helms and Kentucky Sen. Mitch McConnell, both Republicans.
Critics say the measures, which would let U.S. tobacco farmers grow even more of the controversial crop next year, is an example of wasteful government spending.
"The whole thing is obscene, even by Washington standards," said John Frydenland, an agriculture policy analyst with Citizens Against Government Waste, a tax watchdog group. "It really takes a lot of nerve to even try something like this."
The provisions would forgive loans totaling $635 million that were made by the U.S. Department of Agriculture to tobacco grower cooperatives to pay farmers this year. The measures would essentially make all that surplus leaf the property of the USDA.
Federal officials aren't sure what they would do with it but say disposing of it would be a huge problem.
"We've never faced anything like this," said Charles Hatcher, director of the tobacco and peanut program at USDA.
Each year tobacco grower cooperatives use USDA loans to buy surplus leaf and prop up the price of American-grown tobacco.
In theory the cooperatives are supposed to process the surplus and sell it later when supplies are tighter. USDA is supposed to adjust the amount of tobacco it allows U.S. farmers to produce each year, making reductions to account for the surplus leaf held by the cooperatives.
But the price support system hasn't done a good job of matching supply and demand in recent years. Flagging demand for tobacco worldwide has left the cooperatives holding hundreds of millions of pounds of surplus tobacco this year, most of it low-quality leaf rejected by big cigarette companies. With the budget provisions, the federal government would have to dispose of it.
The bulk of the loans -- about $510 million -- were made on burley tobacco, which is grown primarily in Kentucky. Another $125 million in forgiven loans was added for flue-cured tobacco, the dominant variety grown in North Carolina. The second provision was added by McConnell at the urging of Helms and other Tar Heel politicians, including Reps. Bob Etheridge and David Price, Gov. Jim Hunt and Agriculture Commissioner Jim Graham, all Democrats.
Congress has passed the burley tobacco relief measure. The flue-cured provision has not received final approval, but proponents expect it will be passed before Congress adjourns.
North Carolina lawmakers have been given assurances the aid will be included in an omnibus spending package with several other last-minute provisions that don't fit cleanly on other pending bills.
Aides to Helms suggested the omnibus bill may not pass until the final day of Congress. Lawmakers are struggling to pass several overdue spending bills and adjourn by this weekend.
North Carolina and Kentucky are the country's most prolific tobacco-producing states, each producing about a third of the annual U.S. crop.
Officials at the Flue-Cured Tobacco Cooperative Stabilization Corp. in Raleigh estimate the legislation will allow them to purge their books of about 88 million pounds of tobacco it bought last year.
"That would be a tremendous boost to the growers heading into next year," said Arnold Hamm, the co-op's assistant general manager. "It would get all that leaf out of the [USDA price support] program and let them grow more leaf."
The Congressional Budget Office estimated USDA eventually could recover nearly $250 million by selling the surplus leaf, but tobacco experts say that is highly unlikely.
"That seems awfully high, even under the most optimistic of circumstances," said Jasper Womach, an agricultural specialist at the Congressional Research Service, a policy analysis arm of the Library of Congress. "I think they are probably looking at a much more modest recovery rate, maybe 10 cents or less on the dollar. They very well might not be able to recover anything at all."
Experts say USDA has limited options for selling the leaf and might have to destroy it.
USDA could try to sell the surplus on the world market, but there is an oversupply of comparable tobacco worldwide. That means the surplus leaf would have to be deeply discounted to attract buyers. Even if buyers could be found, the fire sale of so much tobacco is likely to trigger a sharp drop in prices everywhere -- including the United States.
The agency also could find itself in violation of international trade agreements, such as the Global Agreement on Tariffs and Trade.
"It does seem to have a lot of potential GATT problems," said Will Snell, a tobacco economics analyst at the University of Kentucky in Lexington.
Another option could be selling the surplus leaf to U.S. cigarette companies such as Philip Morris Inc. and R.J. Reynolds Tobacco Co.
But that seems unlikely. First off, USDA probably will be limited to selling the surplus overseas by the final language in the budget provisions. Even if USDA isn't saddled with such restrictions by Congress, it might run afoul of its own rules that effectively prevent the agency from competing directly with farmers.
And even if the agency could somehow negotiate around those roadblocks, it is unlikely U.S. cigarette companies would have much interest in surplus leaf.
"The surplus leaf has already been picked over pretty good by the domestic cigarette companies," said Graham Boyd, executive director of the Tobacco Growers Association of North Carolina. "I can't really imagine any circumstances where they would be interested in what's left."
Tobacco growers say the surplus leaf should simply be destroyed.
"You're talking about some pretty trashy tobacco that just needs to be removed from the [USDA price support] program," said Keith Parrish, a Harnett County tobacco farmers. "It's going to cause problems for the farmers somewhere, somehow if it isn't destroyed."
But Frydenland, the tax watchdog analyst, said that shouldn't be an option.
"Think about it," he said. "Behind closed doors, McConnell and the rest of them agreed to spend $635 million in taxpayer money to directly subsidize a crop that kills people. How can the tobacco growers and their servants in Congress possibly justify something like that?"
McConnell's office declined to discuss the reasons for the legislation.
Helms spokesman Joe Lanier said flue-cured tobacco farmers "are entitled to some relief."
In recent years, he said, they've faced steep quota cuts, massive flooding from Hurricane Floyd and the Clinton administration's assault on tobacco.
"Family farmers have been caught in the middle of a war between the government and tobacco companies," Lanier said. "They're struggling to survive."
But Frydenland called it "pork politics in its purest form."
"This obviously helps people like McConnell with the tobacco farmers back home," said Frydenland. "It's buying a few thousand votes with taxpayer money, plain and simple. It's really a sorry thing to see."