or 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 level is a function of what policy makers consider Afair.@ If the value of quota disappears some farm groups and legislators argue that since the tobacco is permanent legislation, quota owners should be compensated for all potential future lost income from quota where quota is assumed to generate income into perpetuity. This is how the $8 per pound of quota figure was arrived at during the tobacco settlement debate of 1998. Others argue that compensation should only be for a set time horizon of lost quota income or that market values of quota should be used. Finally, some groups may argue that market prices paid for quota reflect the risk of program elimination and consequently no compensation for quota is warranted.
Market values of quota are determined by buyers and sellers based on several criteria. The first factor is the expected annual income from owning one pound of quota. In the past this annual income has been the difference between the expected market price for one pound of tobacco and the cost of producing and selling one pound of tobacco (less the cost of the quota). This difference or expected income is represented by the rental rate. Expectations concerning future Phase II payments or potential government payments associated with quota ownership have caused much uncertainty in the quota market and have inflated quota values. Currently, expectations of annual income from quota seem to include future rental value plus some expectation of Phase II or other payments.
The second factor is how much, if any (and when), the quota is expected to decline or increase in quantity in the future. When the national quota is set each year, the quantity of quota owned by an individual will increase or decrease by the same percentage as does the national quota. Thus, in a situation of expected decreased demand for tobacco (for example, due to a tobacco settlement or increase in cigarette taxes) future quantities of quota would be expected to decline having a negative effect on current quota values.
The third factor infl