ent tobacco program, as was done in the 1980=s. If historical relationships between price and quantity sold are still valid then quotas would be expected to rebound over 3 to 5 years after the price support reduction. Return per pound (rental rates) and total returns to quota would decline. Grower earnings on management and fixed assets would increase as the quota increased. However, this scenario is dependent on whether or not historical price/quantity relationships still hold. Some degree of market power is still required for this option to have the desired effect of increasing quotas. Market power would continue to erode with the likely results being additional program modification after a number of years. Such an option could include changes in regulations or compensation designed to move quota from non-growers to growers. This could alleviate policy dilemmas where non-grower quota owner and grower interests conflict.
3. Lower price support to close to the free market price of tobacco with significant modification of the tobacco program. Lowering price supports to below the price that U.S. tobacco would sell for with unregulated production likely would cause exports to rebound and domestic cigarette manufacturers to increase use of U.S. tobacco even if U.S. tobacco has little remaining market power in the world tobacco market. Price would decline to the free market price for tobacco, probably in the range of $1.10 to $1.30 per pound for U.S. flue-cured tobacco. U.S. tobacco production and sales would increase significantly. Expanded U.S. tobacco production would take world market share away from foreign tobacco producers, such as Zimbabwe with little effect on total tobacco consumption.Maintaining price supports at some level below expected market price would provide a safety net for farmers when world tobacco prices fell unexpectedly. This would be an important feature of this option, since world tobacco prices can be very volatile. Figure 1 illustrates the volatility of Zimbabwean versus U.S. tobacco prices. 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 f