by:
Michael T. Childress
Tobacco's importance to the Commonwealth of Kentucky cannot be adequately understood by simply reciting the statistics on the number of tobacco farmers or tobacco's contribution to the state's gross product. Although these numbers are, in themselves, quite impressive, they do not reveal the extent to which tobacco is interwoven into the basic fabric of the state's history, culture and ethos. Indeed, tobacco is much more than a $1 billion a year economic activity that employs nearly 100,000 Kentuckians.
Tobacco is, in fact, an essential element in the cycle of Kentucky life, and forms an important thread of continuity with previous generations. While the technology surrounding the tobacco industry has changed, the basic activity has remained fundamentally the same for generations. In the same way that his great-great-grandfather spent his spring preparing plant beds and his winter stripping tobacco, today's tobacco farmer is connected in an intimate and fundamental way to his ancestors as he engages in the same activities, frequently cultivating the same land, and sometimes even using the same tobacco barns.
Kentucky's social, economic and cultural fabric, however, is beginning to show the strain from the increasing pressure placed on tobacco by several forces. As a way to help finance national health care reform, proposals have been made to substantially increase the federal excise tax on cigarettes. This could, if enacted, significantly reduce cigarette consumption, and thereby accelerate its downward trend in the United States. Moreover, while cigarette exports have experienced annual 15 percent increases for five of the last seven years, this trend will assuredly slacken as international competitors continue to produce high quality burley at low prices. Domestic content legislation, which took effect in January 1994, will help to stabilize tobacco quotas in the face of these pressures. At the same time, however, this legislation could result in a loss of jobs if value-added operations, like cigarette manufacturing, are moved to foreign locations to escape the requirements of the legislation. Meanwhile, research and development into extended uses for tobacco offer a ray of hope that innovative uses will spur new industries and cushion the downward pressure on tobacco quotas.
The purpose of this research project is fivefold:
An extensive survey of the existing literature on the issues pertinent to the future of tobacco was conducted. Then, tobacco experts throughout the country were interviewed and asked to complete a questionnaire (7 experts were farm organization leaders, 6 were U.S. Department of Agriculture experts in the production and marketing of tobacco, 5 were university faculty with specialized knowledge of tobacco, 2 were economists working for (Kentucky) state government, 2 were agriculture specialists within (Kentucky) state government, 2 were with a tobacco advocacy and research organization, 1 was a private agriculture consultant, 1 was a tobacco warehouseman, and 1 was anonymous). The interviews and surveys were conducted during the spring of 1994.
The data collected from the interviews and surveys were used to identify the factors affecting tobacco and to estimate their likely outcome over the next 10 years. Multiple scenarios regarding Kentucky's future burley quota were constructed based on the anticipated trajectories of the factors affecting it. This method helps to identify the points of leverage in the tobacco system (i.e., which factors have the biggest impact on the system and which factors can be changed) so that recommendations can be offered to policymakers on courses of action.
The alternative scenarios generated in this analysis focus principally on future quotas and implicitly assume that price support levels will remain relatively static. This is because growers have typically shown a preference to maintain price at higher levels and accept lower quotas when faced with pressure to accept either lower price support levels or lower quotas. This has not, however, always been the case, and the experience of the mid-1980s illustrates how growers have been willing to accept lower price supports in one instance. Indeed, many in the tobacco industry have suggested that the same could happen during the mid-1990s.
As a result, these alternative scenarios should be viewed as what could happen to future quotas given circumstances and expectations prevalent during the spring of 1994. These scenarios should not be viewed as the definitive and inclusive range of all possible outcomes. Obviously, if the Chinese market suddenly opened in a significant way to non-Chinese cigarettes (currently the Chinese market is largely closed to U.S. cigarette imports) then quotas in ten years could be at least as high as they are today -- or even higher. At the same time, if the Food and Drug Administration (FDA) takes action to significantly regulate cigarettes, then quotas could be substantially lower in ten years than those estimated in this analysis. Likewise, other events could occur, like major changes in the tobacco program or price support level, that could significantly alter the course of events. Presumably though, the probability of some of these events occurring should be implicitly captured by the "delphi approach" of soliciting expert opinion. For example, an expert forecast of future cigarette exports would certainly reflect the anticipation of changes in the status of the Chinese market access to U.S. produced cigarettes.
While there are many possible outcomes over the next decade for Kentucky's burley quota, this analysis suggests that significant structural factors will likely depress Kentucky's basic burley tobacco quota by around 40 percent over the next ten years -- resulting in the loss of 10,000 to 24,300 jobs. Moreover, a decline of this magnitude is likely to occur even without a significant increase in the federal excise tax on a pack of cigarettes. The economic and social impact will be felt unevenly across Kentucky, with certain "tobacco dependent" communities especially hard hit. Nevertheless, Kentucky's policymakers can mitigate the potentially deleterious consequences of a declining burley tobacco quota.
Other noteworthy findings from an informal survey of tobacco experts include:
Kentucky's policymakers and tobacco communities can simultaneously work to keep the burley quota as high as possible and attempt to cushion the blow of declining quotas by helping farmers diversify. Accordingly, we offer the following policy recommendations:
Work to enact legislation to have domestic content labeled on a package of cigarettes. Approximately 50 percent of Kentucky's burley is used in the production of cigarettes that are consumed in the United States. Unsurprisingly then, the level of domestic content in cigarettes exercises substantial influence over Kentucky's burley quota. However, the domestic content legislation that took effect in January 1994, which is designed to increase the level of U.S. grown tobacco leaf in cigarettes, will likely be ruled inconsistent with the free trade provisions of the General Agreement on Tariffs and Trade (GATT). Pressure will then mount on the United States to abolish this legislation. While some elements of this legislation might legally remain intact under Article 28 of GATT, many believe that this legislation is accelerating the movement of cigarette production "off-shore." One consequence of a "shift" from the United States to foreign locations is the likelihood that significantly less domestically grown tobacco will be used in cigarette production. The same desired end (i.e., increasing domestic content) can be achieved through market forces if burley groups can capitalize on their comparative advantage of higher quality leaf, but this can only be done if domestic content is labeled on a pack of cigarettes.
Create a consortium of tobacco producing states to market leaf exports. About 30 percent of Kentucky's burley is exported as unmanufactured leaf. As a result, the level of leaf exports exerts a major influence over Kentucky's burley quota. Until a few years ago, the federal government provided this service under the Market Promotion Program. The tobacco producing states should fund market promotion programs to achieve this purpose. Also, Kentucky should consider a Farm Bureau recommendation to provide funding for an economist "to study and determine potential foreign market areas for Kentucky grown tobacco" (Kentucky Farm Bureau Policies, 1994).
Fund research and development that is focused on extended uses for the tobacco plant. The tobacco plant holds tremendous potential as a source of high grade protein and as a tool for molecular biologists in bioengineering. While few believe that these extended uses will mature sufficiently over the next decade to significantly help tobacco farmers, there appears to be enough promise in these areas to warrant future research and development. Policymakers should encourage this type of research at the state's universities by ensuring that funding is channeled in the necessary directions.
Facilitate farm diversification. There is no single crop that can replace lost tobacco income. There are, nevertheless, opportunities available to farmers wishing to diversify. For example, conventional crops and livestock can be used to partially offset lost tobacco income. Moreover, supplemental crops and animal products, including, but not limited to, fruits, vegetables, aquaculture and specialty products can be pursued. A fundamental obstacle to farm diversification is a suitable infrastructure necessary for transporting, storing, and selling fruits and vegetables. Policymakers can help facilitate farm diversification by targeting rural development funds toward several different infrastructure investments. Some basic examples include coolers, storage facilities, and trucks to haul produce to markets. A specific example would include the proposed farmers' market in Northern Kentucky. By ensuring that projects such as this reach fruition, the state can play a positive role in facilitating farm diversification.
Develop a framework to increase local purchases. Over 70 percent of the food consumed in Kentucky is brought in from outside the state. A significant marketing effort would be required, but Kentucky's farmers can help satisfy some of this consumer demand if the proper framework is developed. Policymakers can help develop a framework to increase local purchases by facilitating farm diversification and funding programs like farmers' markets and fruit/vegetable cooperatives. Moreover, the state can also engage in a "Buy Kentucky" campaign to publicize the benefits of increasing local purchases. Some of the ancillary benefits would include increased agricultural sustainability, higher "vegetable income" for Kentucky's farmers, fresher products for Kentucky's consumers, and ultimately a strengthening of Kentucky's rural economies.
Work to develop farm commodity exports. In 1992, Kentucky exported $879 million in agricultural products, which is equivalent to 27% of the state's agricultural production. Unfortunately, while U.S. exports increased by 12% from 1991 to 1992, Kentucky's exports remained static. The largest increases on a national level were seen in wheat, soybeans, and live animals, and Kentucky has considerable opportunity for increased production in each of these areas. Accordingly, Kentucky's policymakers should ensure that Kentucky's agricultural strategic development plan, Ag. Project 2000: A Comprehensive Master Plan for Kentucky Agricultural Economic Development, receives adequate attention and support.
Focus attention on those communities especially vulnerable to a significant decline in the burley quota. Some geographic areas of the Commonwealth will suffer severe economic distress as a result of a significant long-term decline in the burley quota. State government should recognize that these communities are in need of special assistance and extraordinary consideration. There are many state government programs designed to create new jobs, to retain and upgrade existing industries, to provide for the deployment of new technologies for the purpose of enhancing workers' performance and competitiveness, and to reverse trends of prolonged periods of area dilapidation and economic decay. Policymakers should ensure that any programs designed to accomplish economic revitalization can be applied to the communities identified in this report as particularly vulnerable to a significant decline in the burley quota.
To obtain a copy of this report, contact the center.