Tobacco growers brace for competition
Danville, Va. — Starting next month, America's remaining tobacco growers will be totally exposed to the laws of supply and demand.
The very last buyout checks, totaling about $916.5 million, go out in October to about 425,000 tobacco farmers and landowners. They're the last holdovers from a price support and quota system that had guaranteed minimum prices for most of the 20th century, sustaining a way of life that began 400 years ago in Virginia, when the leaf became the chief cash crop of the Jamestown colony.
Cigarette makers will ha
ve paid $10 billion to compensate growers for surrendering their quotas. Growers got another $5 billion from the companies as part of their 1998 settlement of state lawsuits over smoking-related health care costs.
When the last checks are cashed, surviving growers will be on their own, forced to find profits in a tremendously competitive global market. But those who remain in the business are thriving right now: Many are producing more leaf than they have in years, and enjoying higher prices as well.
"I'm not in this for nostalgia purposes," said Steven Barts, a fourth-generation tobacco farmer in Chatham, Va. "The day we're not making money is the day we're not doing it."
Many growers took the money and got out, figuring that without guaranteed profits, there was little point in remaining in a dying industry. The number of tobacco farms dropped from 124,270 in 1992 to 16,234 during the last federal crop census in 2007.
But the U.S. tobacco crop is still worth about $1.5 billion, the same as a decade ago, and production is stable, growing less than 2 percent over the last five years.
"The people who can hang on can make a substantial living," said Harry Lea, a leaf dealer and tobacco warehouse owner in Danville, a onetime industry hub where tobacco fortunes in the 1800s built ornate Victorian mansions on a "Millionaire's Row."
Danville still has a huge R.J. Reynolds smokestack in the middle of town, but it hasn't been used for years. Most of its warehouses are empty, and unemployment has soared since anti-smoking laws and health campaigns prompted a continuing 3 percent to 4 percent decline in U.S. cigarette sales. Only 18 percent of U.S. adults now smoke, down from 42 percent in 1964, when the U.S. surgeon general's historic report linked smoking with cancer.
While local economies suffer across America's tobacco country, cigarette makers remain profitable. They are competing for a dwindling market, but getting higher prices with lower production costs, using newer, high-speed manufacturing equipment.
Making a pack of 20 cigarettes costs about 27 cents, and they sell for an average of $5.80. Even after taxes, there's plenty of profit to be had.
Consolidation also is aligning costs with demand.
Reynolds American Inc. promises $800 million in savings through its proposed $25 billion merger with Lorillard Inc. The deal would create a formidable No. 2 U.S. tobacco company behind Altria Group Inc., which owns Philip Morris USA, maker of the top-selling Marlboro brand.
U.K.'s Imperial Tobacco would become No. 3, buying Lorillard's Greensboro, North Carolina, factory and some of the combined company's brands. But Reynolds and Altria would form a duopoly, together commanding 85 percent of the U.S. cigarette market. That could leave growers with fewer outlets to sell to, and an anti-trust review is pending.
Chris Haskins, who owns about 50 acres of tobacco not far from Danville, would prefer to have more competition among cigarette makers. But he and other growers are more concerned about global tobacco trends and the advent of e-cigarettes.
Nearly 50 percent of some kinds of U.S. tobacco is exported to countries where consumption is declining less sharply.
U.S. shipment volumes fell nearly 3 percent to 285 billion cigarettes last year, while global volumes fell slightly more than 1 percent to more than 5.71 trillion cigarettes, according to market researcher Euromonitor International.
"Without the export market we'd have a continually shrinking volume," Barts said.
Virginia tobacco is still in demand and maybe always will be. Tobacco companies prize the "bright leaf" grown on Virginia's nutrient-rich Old Belt, which produces a mild, light and aromatic taste when smoked.
But tremendous growth in electronic cigarettes is a threat because most of their nicotine is extracted from tobacco in China, said Will Snell, an agricultural economist and tobacco expert at the University of Kentucky.
Some farm groups are lobbying to have these new devices taxed and regulated like other tobacco products, and pushing their makers to use nicotine from U.S. tobacco.
"At this point, there's very little benefit to U.S. tobacco growers" from e-cigarettes, Snell said.
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