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Cost Estimates for Tobacco Equity Reduction Program Presented to President’s Commission (2001)

This document outlines the proposed Tobacco Equity Reduction Program (TERP) presented to the President's Commission on Tobacco in March 2001. The program includes mandatory quota buyouts and payments to growers to offset declining production. It aims to stabilize grower income and secure leaf supply, addressing the financial impact on quota owners and producers. The report discusses potential costs, including compensation structures, grower options, and factors influencing grower decisions. Overall, it estimates a maximum exposure of $20.9 billion for the U.S. tobacco industry.

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Cost Estimates for Tobacco Equity Reduction Program Presented to President’s Commission (2001)

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  1. Cost Estimates of Tobacco Equity Reduction Program For Presentation to the President’s Commission on Tobacco March 20, 2001

  2. Sub-committee Recommendations • Mandatory quota buyout to compensate quota owners for lost asset value • Payments to growers to compensate for declining production caused by non-market forces • Modifications to the Tobacco Program to continue stabilization of grower income and assure leaf supplies without creating a secondary asset • Includes all U.S. produced leaf except cigar type 61 and Maryland type 32 • A non-recurring payment not limited • Paid over a short period of time • Incentives to lessen tax impact and encourage community investment

  3. Compensation • Crop year 1997 is the base year for TERP calculations • Increase in quotas required significant additional investment by producers • Basic quota used for calculation • Payments: • $8 per pound to owners of every pound of quota • $4 per pound to producers for their share of production to be discontinued • $2 per pound to growers for their share of production to be continued plus the right to receive production permits

  4. Cost of TERP • Quota owners get $8 per pound • Growers can take either the $4 or the $2+permit option • Maximum possible exposure is $20.9 billion • Minimum possible exposure is $17.5 billion The $3.5 billion question:What proportion of growers will take which option?

  5. Million Pounds 1997 Basic Quota / Allotments • Flue-cured (types 11-14) 973.8 • Virginia fire-cured (type 21) 2.5 • Kentucky-Tennessee fire-cured 44.7 (types 22-23) • Burley (type 31) 704.5 • Kentucky-Tennessee air-cured 9.6 (types 35-36) • Virginia sun-cured (type 37) .2 • Cigar filler & binder 10.0 (types 42-44 &54-55) Total 1997 applicable quota: 1,745.3

  6. Annual Cost of TERP: By Percent of Growers Accepting Permits Cents per pack $ bil.

  7. Annual Cost of TERP: By Percent of Growers Accepting Permits Cents per pack

  8. Total Cost of TERP: By Percent of Growers Accepting Permits Cents per pack $ bil.

  9. Total Cost of TERP: By Percent of Growers Accepting Permits Cents per pack

  10. Total Cost of TERP: By Percent of Growers Accepting PermitsBased on 2001 Quota $ bil. Cents per pack

  11. Total Cost of TERP: By Percent of Growers Accepting Permits (2001 base) Cents per pack

  12. Total Cost of TERP: By Percent of Growers Accepting Permits (2001 base) Cents per pack

  13. What Determines Grower Decision? • Grower age • Existence of heirs interested in continuing tobacco production • Size of operation--too small or too big? • Contribution to family income • Potential for expansion • Financial condition of farm • Debt/Asset Ratio, Liquidity

  14. Virginia: Pounds by Grower Age

  15. North Carolina: Pounds by Grower Age

  16. Kentucky: Pounds by Grower Age

  17. Tennessee: Pounds by Grower Age

  18. United States: Pounds by Grower Age Total 1997 Production: 1,786 mil lbs

  19. Sources: • Census of Agriculture: http://www.nass.usda.gov/census/ • Tobacco Briefing Room:www.ers.usda.gov/briefing/tobacco • Tobacco Commission home page:http://www.fsa.usda.gov/tobcom/ • FSA Press Releases:http://www.fsa.usda.gov/pas/news/releases/index.htm

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