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Public Statements

The Tobacco Market Transition Act of 2003

Location: Washington, DC

The Tobacco Market Transition Act Of 2003
Wednesday, July 30, 2003

WASHINGTON, D.C. - U.S. Senator Mitch McConnell today introduced a buyout proposal for tobacco quota owners and growers. McConnell led the effort to craft "The Tobacco Market Transition Act of 2003," which is supported by every senator from the six leading tobacco-producing states.

Senator McConnell delivered the following statement on the Senate floor:

"Mr. President: I rise today to introduce the Tobacco Market Transition Act of 2003. America's history is closely linked to tobacco. It provided the early settlers with a key crop for trade and barter, and it provided gentleman farmers throughout the colonies with livelihoods that sparked the first inklings of the dream of an independent country. Throughout this beautiful Capitol there are depictions of tobacco leaves signifying this crop's importance to the founding of this country. George Washington, Thomas Jefferson, and James Madison all raised tobacco. Almost no crop in the history of agriculture has provided so many with a living off of so little land.

"In agriculture, it is popular to speak about the importance of supporting the small farmer. In reality, the number of small farms has declined as competitive forces have forced most farms to consolidate and diversify to compete. Many farmers now must work second jobs in addition to farming just to get by. However, over centuries, small farmers with limited land have been able to carve out a living farming tobacco. The average acreage per tobacco farm is 6.7 acres—for my friends from the South and the Great Plains, you know that these are some small farms.

"In my home state of Kentucky, tobacco production is intimately connected to the history and the culture of the state. In fact, the basis of agriculture in the state of Kentucky has been inextricably tied to this crop. Home mortgages have been based on crops; loans for small businesses, and even children's educations have been funded through the performance of an individual's tobacco crop. It has been said that "A good crop is a good Christmas."

"At harvest time, families gather: sisters, brothers, aunts, uncles, cousins and children all set about the hard work of bringing in a tobacco crop. In the late fall, when the markets open for crop, entire communities hold celebrations and ceremonies. The marketing process along with the auctions has a particular significance, as the livelihood of an entire family is dependent on a good crop.

"Throughout Kentucky, tobacco has helped small communities construct schools and convention centers, it has supported local governments, and most importantly, it has supported the small family farmer. In Kentucky, tobacco is considered the 13-month crop; since there is virtually no time during the year that difficult and labor-intensive work is not required. Despite the difficult labor required, it has provided generation after generation with the opportunity to make a living.

"However, the very qualities that have allowed tobacco production to continue through the years have also led to the dependence of a culture, and a region, on this crop. There is no simple solution to the problems facing tobacco farmers, but there are clear steps that we can and should take to help these individuals transition into a new era.

"Most of the key tenets of the tobacco program were established by the Agriculture Adjustment Act of 1938. The program implemented a system of supply restrictions and price guarantees aimed at stabilizing tobacco prices and income. Under this program, farmers agreed to restrict supply via acreage/marketing allotments (or quotas) in exchange for minimum price guarantees. The levels of production were set each year to best ensure that the prices received for tobacco would meet or exceed the guaranteed price.

"These marketing quotas were originally divided among active growers, but this production right was then handed down to heirs or sold to others as an asset. As a result, much of the quota is now controlled by non-producers who rely on proceeds from renting or leasing this production right to growers. It is regarded as an inheritance and has been relied upon to support many seniors' retirements.

"In 1982, the first major modifications to the Tobacco Program were made, requiring the program to operate at no-net-cost to taxpayers. Since then, federal funds have been prohibited from being used for export promotion of American tobacco or research relating to tobacco production, marketing, or processing. As a result of many international and economic factors, the price supports have been reduced several times since the 1980's as well.

"Under the current program, levels of production are cut in an effort to ensure a stabile price. With lower consumption and increased foreign competition, the levels of quota have been cut significantly and farmers are paying much higher quota rents to continue producing.

"In 1998, I proposed a buyout of the Tobacco Program, but this measure failed due to a lack of support from grower groups and a lack of consensus among elected representatives from tobacco producing states. Since my effort in 1998, the programmatic decline of production has imposed severe economic hardships on tobacco producing communities. During a time when most agriculture production in this country has had to consolidate into larger operations to remain competitive due to economies of scale and foreign competition, tobacco farmers, faced with the same challenges, have actually been forced through this program to simply cut production. While manufacturing needs have only declined slightly, production quotas have been reduced by more than 60%. Such production cuts have forced domestic producers to vacate ever-larger amounts of market share to foreign producers. As a result, domestic production levels have not been this low since 1908.

"Despite financial help in the form of Tobacco Loss Assistance Payments, the crisis imposed by the program is plunging rural farm families in Kentucky and throughout the tobacco belt into poverty, bankruptcy, or simply eliminating the ability of entire communities to remain engaged in agriculture.

"In less than a decade the number of tobacco farms in the United States has declined from 123,000 individual farms to right around 90,000, with 44,000 of those in Kentucky. At the same time the annual value of domestic tobacco farm production has fallen from an average of $2.8 Billion per year during the 90's to $1.7 Billion in 2002. In Kentucky, tobacco represented 24% of total cash receipts for agriculture products during the 1990's. By 2001, cash receipts for tobacco dropped to 16%, and further quota cuts have continued to reduce the amount of tobacco that can be sold by producers.

"Imports have also had a significant impact as the quality of foreign leaf has improved, domestic production has been restricted, and the price of U.S. tobacco has been kept artificially high by quota rent costs. These factors have led to dramatic increases in the amount of imported tobacco, with imports increasing by 25% between 2001 and 2002 alone.

"Simply put, 165,000 of my constituents and 44,000 rural family farms in Kentucky are facing financial ruin due to the continuation of a program that we in the Congress have the power to change. In 1998, growers were divided on the issue and no consensus could be reached. Today, the introduction of this bill signifies the unified support of tobacco state Senators and growers to achieve the reforms.

"The Tobacco Market Transition Act represents months of hard work and negotiation. Such an undertaking has required input, debate and compromise over every element of the legislation ranging from the funding mechanism to the health consequence of the changes that we are proposing. It provides tobacco growers with a fair level of support for transition and tobacco quota owners with a fair level of compensation for their asset. We also worked to ensure that these payments are fully decoupled from current production, to avoid any possibility of trade implications.

"The changes we propose represent a radical shift in the way that tobacco production will occur in this country. The current tobacco program has outlived its usefulness, and now represents a hurdle and a threat to the economic health of communities in tobacco producing states. Therefore, it is important to end the quota system and do away with the strict production control price support system to usher in the necessary reforms.

"This legislation will provide $8/lb on 2002 basic quota for quota owners and $4/lb on effective quota for 2002 for growers over six years. The funds required will be obtained from manufacturers and importers of all tobacco products sold in the United States and shall total no greater than $13 billion. Many quota owners and growers would like to be compensated at higher levels, while many companies claim that the levels are too high. This bill represents our extensive efforts to take both the needs of the growers and the concerns of the companies into consideration.

"No longer will quota owners have control over the right to grow tobacco, a right that has been handed down from generation to generation regardless of their actual involvement with production. In doing so, this bill eliminates the increasing expense of quota rent, which has artificially increased leaf prices without any benefit to actual growers or manufacturers. This requires that these assets, assets that were created and given value to through government policies, be compensated. The impacts on the growers will be immediate and the reduced costs of tobacco produced in the U.S. will reduce leaf prices for manufacturers who utilize domestic tobacco.

"However, in our consideration of the problems facing the farmers and the manufacturers of tobacco products, it was essential to consider the adamant opposition of health groups to the unrestrained growth of tobacco throughout the United States. For years, tobacco production has been limited in both the area it could be grown and the amount that could be produced. Our proposal addresses these concerns by limiting tobacco production to traditional tobacco producing regions and providing a mechanism for producers to limit the amount of acreage grown for each kind of tobacco to historically established levels.

"The key difference between the programs of yesteryear and the reforms we are proposing today is the removal of the price guarantee for every pound of tobacco grown. Under this new system, production will reflect the market realities of the tobacco industry. This system provides key elements for tobacco dependent communities to transition out of tobacco production, while affording those who accept the risk, the opportunity to continue and compete in a shrinking and ever more competitive market. Should these individuals choose to continue, we have created in this bill the opportunity for growers to insure themselves—at no expense to the U.S. taxpayer—against disastrous market conditions that might emerge.

"In addition to the buyout of quota, transition payments to growers, and the new regulations governing tobacco production, this bill provides significant support to assist small tobacco dependent communities as they attempt to adjust to diminishing tobacco production.

"Mr. President, this legislation will not solve all the problems that face small tobacco farms, but it does set in motion a system of reform and transition that will allow these individuals and these communities a chance to continue or move into new industries. Such continuation or transition will not be possible without this legislation. These communities are suffering due to problems with a government program that we have the power to change. As elected representatives, we have a responsibility to fix these problems, improve the lives of thousands of small farmers and greatly impact the future of an entire region.

"I salute my colleagues from tobacco producing states for their hard work and willingness to compromise to reach this consensus legislation. It has been a long and difficult process, but this is only the first step in addressing this issue. For this exercise to have any meaning whatsoever, we need to enact this legislation and make these reforms as soon as possible.

"The worst thing that can happen is nothing. So, I ask my colleagues from all 50 states for their support of the Tobacco Market Transition Act of 2003."

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