. Payments equaling support price minus market price could be made to tobacco farmers during periods when market price dropped below support prices. Tobacco would be allowed to clear the market at world prices. No cooperative would be needed to purchase tobacco not bringing support price. This option is similar to the loan deficiency payment feature of government programs for cotton, soybeans, and grains where a payment can be made to farmers when market prices fall below preset loan rates. This option is also similar to the European Union=s program for tobacco farmers.Some level of production controls might be desirable under such an option. If support price is set too high or production costs fall due to rapid technological change then production and consequently farmer payments could become large. Production controls would prevent production from expanding more than is desirable by policy makers concerned about program costs and by health advocates concerned about expanding U.S. tobacco production. Under such a program the right to produce tobacco only would be held by active tobacco growers.Such a program could not operate effectively with the only funding source being assessments on sales of tobacco. A continuing external funding source for farmer payments, as is the case with other farm programs, would be required. Quota and the associated economic returns as are known under the current program would be eliminated under this option. Total grower earnings on management and fixed assets would increase as production increased. Depending on how much price declined and how production rights were allocated under this option, considerable structural change could occur at the farm level, including significant consolidation of farms and changes in location of production.
4. Segment tobacco sales into export and domestic markets with different prices. Theoretically, returns to quota owners could be maximized by enforcing a quota on domestic sales of tobacco to force a higher price in the less price sensitive market for U.S. consumption and allowing greater sales and lower price in the more price sensitive export market. The U.S. peanut program has operated in such a manner for over 20 years. The problems associated with such an option are that strict import controls on tobacco must be enforced to prevent lower priced export tobacco or products made from export tobacco from reentering the U.S. Strict import controls are difficult to enforce and may be impossible to implement under the current rules of the World Trade Organization. These problems currently threaten the effectiveness and continuation of the U.S. peanut program.
5. Elimination of the tobacco program would result in substantial structural change in tobacco farming. Tobacco prices would fall toward the world price making U.S. tobacco more competitive in world markets. While tobacco production would increase, many smaller tobacco farmers, particularly those in geographical regions with the highest production costs, would leave tobacco farming. The end result would be fewer but larger tobacco farms producing more tobacco at lower and more volatile prices. Because of the growth in tobacco sales, cash farm sales from tobacco might grow, despite lower prices and lower net returns per acre. Kentucky and Virginia likely would produce less tobacco, while North Carolina, South Carolina, and Georgia likely would produce more tobacco.
Compensation for Changes in the Tobacco Program
There are many arguments for and against compensation to stake holders in the tobacco program if program changes are made. If the current program is maintained, grower earnings on management and fixed assets suffer. If price is reduced or the program is eliminated then the value of quota is reduced or eliminated. Cigarette manufacturers and their customers are the beneficiaries of price reductions.
If government officials or others decide to compensate growers and quota owners in the event of a change in the tobacco program then what compensation levels should be used? First and foremost, this lev