uencing the value of quota is how long the tobacco program is expected to last (i.e. how long farmers can expect an income stream from the quota). This factor is influenced heavily by the content and tone of any policy debate about the tobacco program at the time the market values are observed. Finally, the uncertainty surrounding the forecasts for the first three factors affects the discount rate used to calculate the current value of the expected stream of income from a pound of quota. (A discount rate is similar to an interest rate and accounts for the effects of inflation on the purchasing power of future earnings and the risk or uncertainty of achieving the expected outcomes for the first three factors.)
Since current market values of quota likely are distorted by expectations of payments associated with quota ownership, calculation of quota values may be useful. This can be done by determining some annual income level for the quota and some discount rate that reflects the risk associated with the future of the tobacco program. Current rental rates likely are also distorted in most states by expectations that growers will receive Phase II payments based on the quantity of quota grown. Thus, it may be reasonable to use a range of rental rates. Determination of the appropriate discount rate is also very speculative, so a range of discount rates should be used. A higher discount rate indicates greater risk of a reduction or loss of future income from quota (e.g. due to program elimination). Table 1 gives quota compensation values using rental rates of $0.40, $0.50 and $0.60 and discount rates ranging from 5 to 20 percent.
Table 1. Present value of annual quota income
If tobacco price is reduced to a level greater than the free market price, then quota income would not fall to zero. In other words rental rates would still be positive. If compensation were paid under such a scenario smaller payments could be justified since quota would still have value, albeit lower.
If the tobacco program were eliminated, then many tobacco growers would exit tobacco farming. Those that remained would probably have to make substantial changes in their operations. Farm groups and some legislators argue that tobacco farmers should not only be compensated for lost value of quota, but also for the costs and losses incurred with the transition out of tobacco or to production in a deregulated market. This was the justification given for the $4 per pound of quota grown compensation level discussed during the tobacco settlement debate of 1998.
Once a particular program option is chosen and policy makers determine what conditions for compensation are Afair,@ then economists can assist policy makers in determining compensation levels that meet the parameters and conditions set for Afairness.@