..It's just that we won't be growing as much in 1999 as we did last year.

The 17.5% reduction in the U.S. basic quota is the most prominent change in the 1999 tobacco program. And it comes on the heels of a quota reduction in '98.

The total 1999 U.S. quota is 666.2 million pounds - the smallest flue-cured quota in the history of the tobacco program. The next smallest quota was 707 million pounds in 1987.

There are several factors. They are:

1.    A perceived permanent decline in U.S. cigarette consumption due to higher cigarette prices and
       increased restrictions on smoking and the sale of cigarettes.

2.    A reduction of cigarette manufacturer inventories in response to lower cigarette consumption, and

3.    A depressed export market - for both U.S. leaf and U.S. cigarettes.

Cigarette manufacturers hold 18 to 24 months of tobacco usage inventories. As future usage is forecast to decline, manufacturers can reduce their inventories and still hold 18 to 24 months worth of usage.

The depressed export market is due in large part to the economic slow down in important export regions such as Asia. But this decline in both cigarettes and leaf exports may be temporary, and could recover with a recovery in the global economy.

..Future flue-cured quotas will likely average 10-12% lower than they did in the past 8 to 10 years. This is based on the expectation that exports will recover and the manufacturers inventory adjustment will be settle down.

If cigarette and leaf exports recover, future flue-cured quotas will likely fluctuate around a pivot point of 750 to 775 million pounds. Over the past several years, the U.S. flue-cured basic quota has fluctuated around 850 to 875 million pounds - ranging from 800 to almost 1 billion pounds.

Tobacco is still a profitable alternative.

Producers who rent a large part of their quota have the greatest financial risk. The price of quota usually goes up when we have a quota reduction - which effectively increases production costs of those who lease quota.

While those who own quota have less risk - those smaller operators have still another option. Should the quota rental price get too high, they may want to consider renting their quota to other producers.

U.S. flue-cured tobacco generated about $1.4 billion in farm revenues in 1998. Gross farm revenues from the crop in 1999 may be reduced by at least $250 million as a result of the quota decline. Agribusinesses and rural communities where tobacco is grown will be adversely affected by the quota decline.

Bill Givan

1/99

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