Economics of North Carolina

Randy Smith:

A North Carolina Tobacco Farmer

Randy Smith is a fourth-generation farmer from Deep Run in Lenoir County in eastern North Carolina. This season he has 1100 acres of land in cultivation.  He has four crops in the fields: 95 acres planted in tobacco, 400 acres in cotton, 350 acres in corn and the rest in soybeans.  Although he has more acreage in the other crops, Randy considers himself a tobacco farmer. When asked, he says that "there is no better crop than tobacco."

Randy attended Guilford College in Greensboro. While in college he had no intention of choosing farming as a profession. However, he began to realize what a good life farming, especially tobacco farming, had made for his parents. He saw that he had an opportunity to do the same thing for his own family. After spending two years apprenticed to his father Randy took over the family farm in 1983. "Now I d rather be a tobacco farmer than anything else," says Randy. "I make a good living, and it's a good feeling to see the crop through from start to finish."

Tobacco farming is a good deal different now than in his father's day, as all types of farming have become more mechanized. However, tobacco is still a labor intensive crop. Randy had to examine the trade-off between tobacco farming and other options that were open to him after his graduation from college. His brothers and sisters all became teachers. Randy knew he was the last one in his family who could continue the farming tradition. Also, he realized that farming would be more profitable than the other career options he was considering. Randy would never have become a farmer if it had not been his father's work. "Running a farm simply requires too much capital to start from nothing," he says. "The family land, equipment, and know-how made farming an option." In recent years Randy's family has been expanding the farm by buying up neighboring properties -- the neighbors have been getting out of the farming business. This year he's leasing 500 acres from a neighbor to go with the 600 acres his family has accumulated over the years.

This year has been a good one for Randy's part of North Carolina. The cool spring caused a slow start to the tobacco crop, but the rains in May and June led to a strong finish. Lenoir County farms, and Randy's farm in particular, are endowed with a sandy soil that is ideal for tobacco. These soils can absorb a great deal of rain. "The tobacco cures out pretty", says Randy, when the season is wet. The tobacco harvest occurs in August, and then September will be the corn harvest. Cotton will be harvested in late September and early October.

Hurricane Floyd tore through Lenoir County a few years ago, but Randy was among the fortunate survivors.  His farm is about 10 miles from the Neuse River and is relatively elevated.  As a result, only a fraction of his cultivated area was under water.  His neighbors, on lower land and closer to the Neuse, were inundated.  Randy was also fortunate in that he had already harvested his tobacco crop.  Much of it in fact was already baled and on display at the auction warehouse.  As the waters approached, he brought his tobacco home and packed it into empty trailers to keep it off the ground.  As a result, he lost little in that crisis. 

Randy and his family all work on the farm. (Well, not exactly. Two daughters have finished college at NC State, and another daughter is getting ready to apply to universities.) Randy also has two full-time employees. During the summer he hires five seasonal employees (June to end-September) to work on the crops. These seasonal workers are Hispanic, as are the full-time employees. The seasonal workers are provided with housing on the farm for the duration of their work.

The Economic Decision.
Each year, Randy must recalculate the acreage of land he wishes to put into his four crops.  He bases this decision on the yield and profitability of the crops in previous years.    In the old days under the quota system, Randy estimated that gross revenues from tobacco totalled $4750 per acre. Gross revenues from corn and cotton were $250 and $450 per acre respectively. However, harvesting tobacco is very labor intensive, requiring approximately 150 labor-hours per acre. Harvesting an acre of corn or cotton requires only a few hours. Thus, the revenue net of labor costs per acre was $1500 for tobacco while less than $200 for corn and less than $400 for cotton.

The quota system was dismantled in 2005, and since that time his return to growing tobacco has shrunk. He still estimates that tobacco is the most profitable use of his land, and in fact increased his acreage in tobacco by 17 acres. The attached figure depicts the revenues per acre from producing the three crops as well as an estimate of the revenue net of labor costs for each crop.  These figures include both the market price of the product and the governmental LDP supplement paid to farmers.

While the sale price of tobacco has fallen, the costs of growing and curing it continue to rise. The big cost increase this year is -- no surprise -- energy. Randy uses LP gas to fire his curing barns, and the cost of this has skyrocketed. As those costs go up and his sales price falls, he finds his profits squeezed. He anticipates that his total cost of producing a pound of tobacco this year will be close to $1.10.

He and his fellow farmers in Lenoir County are bullish on tobacco: production this year is anticipated to be up over last year. Randy has also made some investments to expand his capacity, including three curing barns, a "topper" and a fork lift. He didn't buy "new", though -- he purchased them from a farm in South Carolina that was closing. While North Carolina farms are expanding their production of tobacco, farms in other states are cutting back due to the increased competitive pressure.

The Tobacco Quota System.
In the old days, tobacco had a higher return than his other crops but Randy put only a small share of his land into producing it. If tobacco is so valuable, why didn't he grow more tobacco? He couldn't -- under the tobacco quota system, the amount of tobacco he could grow was strictly controlled. Randy grew as much tobacco as he was permitted and no more.

In the wake of the Great Depression, the US Government established price stabilization programs for many crops grown in the US. One of the most successful of these programs was the system of price supports for tobacco. Many tobacco farmers had been forced out of business by a series of boom and bust cycles. The original idea of stabilization was to use a system of quotas and price supports to provide a type of insurance for these farmers. Restrictions on output would be enforced in order to provide US growers with the assurance that their tobacco would always bring a pre-established minimum price. The US Department of Agriculture estimated the demand for tobacco each year, and divided the crop among tobacco farms by distributing quotas representing the right to sell a particular amount of tobacco. The crops were sold at local auction houses, with Stabilization taking on any tobacco not sold for more than the price support.

Quotas were originally associated with a particular piece of farmland but farmers can buy sell or rent them. Prices for leased allotments varied by year and location. Randy Smith owned allotments for 35000 pounds of tobacco, and rented allotments for 100000 additional pounds. In the final year of the quota system (2004) he paid rentals of fifty to sixty cents per pound for the allotments he did not own.

This system was intended to balance supply and demand each year and to thus provide US farmers with a stable marketplace. It was very effective when the US controlled the world supply of high-quality tobacco. In recent years the quality of foreign tobacco has improved dramatically. Other countries, for example Brazil and Zimbabwe, have been selling high quality flue-cured tobacco for much less than US tobacco. Also, domestic buyers have decreased purchases by developing methods that require less US tobacco. The shrinking demand for US tobacco combined with increased production and quality of foreign leaf have led to problems for the tobacco stabilization program. In 1985, 1994 and 1999 large amounts of US flue-cured tobacco went unsold. Excess inventories arose because the quotas were too high. In all of these cases US tobacco companies were subjected to political pressure to purchase the excess crop.  The links from the main page of this case study illustrate the way in which the crisis played out during 1999.

The Tobacco Buyout and the End of the Quota System.
In October 2004 the US government passed tobacco buyout legislation. Tobacco farmers will receive $3.00 for every pound of tobacco they grew in 2002. Quota holders will receive $7.00 per pound of tobacco quota they held in 2002. These payments will take place in equal installments between 2005 and 2014. Randy's already received his first two installments. At the same time, the US government abolished the tobacco quota system and the price-support program that had been in place. There are no longer any restrictions on who can grow tobacco, or how much she can grow.

In 2004, the last year of the quota, Randy planted 55 acres in tobacco. In 2005, with no restrictions on him, he planted 78 acres. In 2006, he has raised that to 95 acres. Why not more? Randy gives two reasons. First, he's limited by the number of curing barns that he has. If he can't cure the tobacco, he can't sell it. More production would also give too much work to his present work force. Second, he's cautious. These are the first years of a new economic regime, and he wants to see how it unfolds.

The Rise of Contract Growing.
As Randy grew up, his father sold the tobacco each year through auctions sponsored by the Flue-Cured Tobacco Stabilization Cooperative (often called simply "Stabilization"). When Randy started in the business he continued that. Over the years, however, these auctions became less and less popular among tobacco purchasers as a place to buy tobacco. Three years ago Randy joined an initial group of farmers choosing to sell directly to a cigarette manufacturer under contract. Each year he signs a contract with that manufacturer. That corporation agrees to purchase the leaf that Randy can produce at a price specified in the contract -- if the quality of the leaf is excellent, the contract specifies a bonus for Randy as well. He was not alone among tobacco farmers in selling through contract -- Stabilization estimated that 90 percent of quota in 2004 was sold under contract, and auction houses closed throughout North Carolina. This trend continued in 2005.

Randy's contract specifies the quantity of tobacco to be purchased and makes the price received for the tobacco contingent on its quality. For highest quality tobacco, he'll receive $1.55 per pound; for the lowest quality, he'll receive $1.20 per pound. He received a shock when he brought in his first consignment of tobacco in 2005 -- the first bales of tobacco were judged to be of low quality, and he received a payment in the lower end of the range. Two days later, a second group of bales from that shipment were judged to be of medium-high quality and received a price in the upper half of the range.

The Master Agreement.
In 1998 the state of North Carolina, along with other states, reached a settlement in a legal case against cigarette manufacturers. This tobacco settlement was scheduled to deliver $4.6 billion to the state's treasury over the following 25 years, and the payoffs had begun. One product of this settlement was a North Carolina non-profit known as the Golden Leaf Foundation. It has been given a percentage of the settlement payout with the purpose of lessening injury to the state's citizens by reduced production of tobacco. One of the Foundation's first initiatives was to provide grants to tobacco farmers for improving their tobacco barns. The traditional barns, with drying racks for the tobacco and gas-fired burners to speed up the curing, were found to produce unacceptable levels of nitrosamines in the tobacco. Randy took advantage of this program to replace his 10 old barns. Each new barn cost $17000 (of which $7000 was the new system of burners), but the Golden Leaf Foundation's grants made this upgrade in his facilities an economic one.

The Master Agreement also included a payment directly to farmers for their losses. These payments were eliminated when the Tobacco Buyout occurred.

The future for tobacco-growing.
Randy is not pessimistic about the future of tobacco in North Carolina, but he tries to be realistic.  "I'll never have the opportunity to make the money my father did growing tobacco over his 40 years", he says.  He is convinced that his farm can be competitive with those in foreign countries, although he recognizes that many farms without his soil quality will be driven from the tobacco business by more open competition.  "US tobacco is still the highest-quality tobacco in the world".