WHAT IF: The Alternative to Tobacco -- is Tobacco ?
William Givan & J. Michael Moore
The University of Georgia(1)
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Many of the phone calls we're getting from County Extension Agents are requests for a program to discuss alternative enterprises. A lot of the major row crops grown are having trouble generating a positive cash flow. Flue-cured tobacco income is down due to the 45% cut in basic quota during the past three years. And peanut growers are feeling a cost-price squeeze.
Our response is to explain our approach to evaluating alternative enterprises
- (costs, guidelines for production, markets, competitive products, production
in other locations, etc). Then we hear the response, "Before you come,
see if you can find something that can be unique to our area"!
A Common Problem
We have lamented that in the midst of the vibrant U.S. economy of the past eight years, U.S. agriculture has experienced a depression the past 2-3 years - not a recession, mind you, but a full-blown depression.
An acquaintance at a recent field day remarked that "If agriculture
changes as much during the next five years as it has the past five years,
not many of us will be in business". I couldn't dispute this. But we
still wonder if forces somewhere will reverse and create a change in farm
commodity prices - and for tobacco growers create a change in demand for
our commodity.
Traditional Farm Programs a Result of Society's Problems
The 20th century began with an optimistic mood about the future of democracy. But World War I showed democracy could not guarantee peace, and the Great Depression showed that democracy could not guarantee prosperity. The economic collapse of the 1930's increased the appeal of totalitarian creeds -- planned economies- especially in Europe and Asia.
In the U.S., the "New Deal" was implemented during the 1930's - and along with it an Agricultural Adjustment Act that restricted farm output and set farm commodity prices above the free market price. Congress defined some "Basic Commodities" - defined as storable - and set parity prices for these commodities while setting limits on commodity output (tobacco was one of the basic commodities). During this era, some corn actually sold for a few cents per bushel. Some reported it was often burned for heat rather than burning firewood.
We have reasoned that farm programs are essential to a nation's well
being, as food is the first need of a people - followed by clothing and
shelter (the three basic needs according to our Civics class). These AAA
programs have been a boom to the U.S. economy. With the guarantee of a
price coupled with research to improve efficiency, U.S. farmers have continued
to increase output on the same amount of land. We have a problem of producing
more food than we can consume -- a problem many countries would like to
have. This has enabled us to move from a 30% farm population 50 years ago
to a current 2% farm population.
Time - and Values Change
As the 1900's came to an end, we witnessed the apparent triumph of democracy. Fascism has been stopped; and communism has been reduced to a whimper. We see many newly developed states of Eastern Europe - although many are struggling - and colonialism has generally come to an end.
With this has come a call for a return to free-trade, and an end to institutionally set restrictions on output and price. It hasn't all been accomplished, but is being touted in many countries, especially in the U.S.
In the midst of all this has come a call for an end to the farm programs
implemented over sixty years ago.
Changes; Some Fast and Some Slow
The 1996 farm bill was designed to be a 6-year transition legislation for the elimination of farm programs - to a free market for farm commodities. This legislation removed support prices for basic commodities and gave producers the flexibility to grow any crop they desired.
But someone forget to tell Congress - and the public -- how brutal a free market can be. Most major commodity prices are below production cost levels. The Freedom-to-Farm bill can't be blamed for the low prices. While the provisions of the bill have allowed prices to drop to levels not possible under previous legislation, the real cause is fantastic world crop production.
But Congress has responded with supplemental appropriations to prop up financially strapped farm operators. We are told farm payments were $22.7 billion -a record - (including $328 million to tobacco growers) in 1999 - far above those levels of earlier farm programs. This makes one wonder just how committed Congress is to removing all support from agriculture. Farm lenders tell us many loan repayments were made with government payments to farmers.
Further, the EU still annually spends $7 billion on agricultural export
subsidies, a small part of its total agricultural support programs. Other
countries around the world pay their farmers to produce products, whether
or not the market needs them. This is in contrast to U.S. initiatives and
puts American producers at a disadvantage.
A New Set of Values
The tobacco program requires only few public funds for administration, as tobacco growers fund the major costs of the program. But we are experiencing a social upheaval that treats the commodity as a "legal-illegal" plant. Although U.S. growers produce a superior quality leaf, the tobacco program sets the selling price above world market levels. Tobacco grown in most other countries sells at a lower price than the U.S. crop. If the idea of removing government support from agriculture continues, we may well see the program dismantled and a lowering of U.S. tobacco prices at some point in the future.
All these changes point toward agricultural producers moving away from
supply control/legislated prices and having to negotiate available markets
for a selling point. This is a stark contrast to what we've had the
past 60 years.
What Are The Alternatives?
In Georgia we can document over 50 separate farm commodities for sale. But of the total $6+ billion annual cash farm receipts, over 70% is are generated by six enterprises. If we define an alternative enterprise as one not currently being grown on a farm operation, then there are a lot of alternative enterprises for consideration.
Lost tobacco income is hard to replace. Two years ago when we had about 44,000 acres of flue-cured tobacco in the state, tobacco ranked third among all crop enterprises. A few acres generated (and still does) a lot of cash flow.
If we evaluate common row crops, there is not enough total cropland in tobacco growing regions to grow commodities that will replace tobacco's income. All tobacco growing states have this problem.
Data in table 1 shows our estimate of acreage of three row crops commonly grown in the south needed to equal returns from one acre of flue cured tobacco. It is not an optimistic sight.
As most tobacco is irrigated, it would make more logic to compare irrigated alternative crops with tobacco. Cotton - with the price we used (70-cents) shows the most potential. The comparison of peanuts may look disappointing, but this crop is expensive to produce. And the non profitability of irrigated corn at first looks deceiving. But irrigated corn is an expensive crop to grow in the south. A yield of 150 bushels incurs expected total non-land production costs in the range of $3.00 per bushel.
So why are some of these crops still grown? Corn is often grown in rotation with peanuts. A review of producers records show the more successful operators achieve higher yields than the ones used here. We economists frequently state that the innovator - and the most efficient producer - are the ones making the highest profits - and are the ones most likely to stay in business. These crops are making money for some producers.
If a tobacco grower is a good grower, he likely produces more than an average tobacco yield. So we could expect this type producer to achieve higher than average yields of other crops and make a living.
But as all growers are not this efficient, it is highly unlikely all
current tobacco growers can produce other crops and have an income equal
to what they get from tobacco.
| Table 1. Estimated Crop Acres Needed to Generate Returns From One Acre of Tobacco ** | |
| DRYLAND CROPS | Number Acres |
| Cotton (650 lbs. @ $0.70) | 21.8 |
| Corn (75 Bu. @ $2.50 | not profitable |
| Soybeans (30 bu. @ $6.25) | not profitable |
| Peanuts (1.25 T. @ $450) | 88.7 |
| IRRIGATED CROPS | |
| Cotton (1,000 lbs. @ $0.70 | 6.9 |
| Corn (150 bu. @ $2.50) | not profitable |
| Soybeans (50 bu. @ $6.25) | 67.3 |
| Peanuts (1.75 T. @ $450) | 10.1 |
** Land and Quota Costs Not Included
Non Traditional Enterprises
So what if a tobacco grower wants to consider enterprises other than traditional row crops? Major items to consider are: production costs, available markets and investments required. A summary of some of these factors are shown in table 2.
All the enterprises shown here are specialty - many are made for niche markets. Growing vegetables is generally as expensive as growing tobacco, and large amounts of labor are required at harvest. Small pick-your-own operations will reduce harvest labor. But it magnifies constant managerial labor needed at harvest and necessitates other resources; such as liability insurance, water for drinking and rest room facilities.
Further, some of the alternatives require large amount of investment, and may involve more than a year to realize a return on investment.
And finally, the market is one that may have to be developed. If an operator can provide a high quality product that is in demand, or if a demand can be developed, then this operator is operating within the free market system and realizes returns generated by supplying the commodity or service.
The size unit of the enterprises shown in table 2 are small. This is
to encourage these type ventures to start out small. But these budgets
can be expanded if one is considering more large scale production.
| Table 2. Major Resource Requirements for Selected Enterprises | ||||||
| Enterprise | Unit | Land per Unit (Acre) | Labor Hours per Unit | Peak Labor Season | Years to Productivity | Investment Capital ($) |
| Broilers | 20,000 | 2.0 | 500 | --- | 7 weeks | 250,000 |
| Meat Goats | 25 does | 6.5 | 75 | Birth | 1 | 6,500 |
| Strawberries (PYO) | 2 acres | 2.0 | 575 | Harvest | 2 | 13,000 |
| Tomatoes | 2 acres | 2.0 | 135 Prod.
160 Harv. |
Harvest | .5 | --- |
| Sweet Corn | 5 acres | 5.0 | 30 Prod.
300 Harv. |
Harvest | --- | --- |
| Turfgrass | 10 acres | 10.0 | 1,850 | --- | 2 | 42,500 |
| Catfish | 5 acres | 5.0 | 210 | --- | 1 | 35,000 |
| Horse Boarding | 10 horses | 20.0 | 325 | Winter | --- | 60,000 |
How To Evaluate
Any type of non-program enterprise involves risk - of capital, of labor, of land. But some principles apply to all prospective ventures.
IV. What market is available - and what is the expected sale price per unit? Don't take someone's word about what the commodity brought last year. Where is the market located? How large is the market?
V. Is production help available if needed? One never feels so helpless as when we need technical help and none is available?
VI. What resources do you have - and are any limited? Land, labor, capital and management are a farm's major resources. Stretching any of these beyond their limits creates problems.
VII. Don't forget off-farm restrictions. Water use, waste disposal and urban sprawl can individually - or all can affect a farming operation.
VIII. Finally, can someone else produce this commodity at
a lower cost? It may be many miles away, but if they can produce it
and ship it into your proposed market at a lower cost than yours, then
you will have trouble competing in this market.
Tobacco - Still a Good Alternative
While these figures don't look all that optimistic, there are instances where alternative enterprises have been successful. Many pick-your-own operations are going great. We are seeing an interest in "sweet" carrots in the state. The Vidalia onion pours a lot of dollars into a few counties in Georgia. But these operaions are local - they have limited markets - and they were generally developed.
Looking at what we have to work with, tobacco is still a profitable crop. Granted, our quota has been reduced. But we still have a program in place, so let's use this program. I can't think of any other use for our harvest equipment and curing barns.
But what if the program is eliminated? Most likely we'll go toward some type of contract marketing. Small growers may well be eliminated if contracts take place. But, there's still a chance we'll be paid some amount for our quota. I tell growers if this happens, and they are made "economic-whole", I suspect they'll continue to use these production factors and grow some amount of tobacco.
The secret to success here will be to raise the quality leaf the buyers
want. Leaf prices may decline over time as part of the price currently
paid under the program goes as the return to quota. But we know our production
costs. If buyers want a dependable source of leaf, they'll have to pay
a price higher than our costs of production.
BUT WHAT ABOUT CONTRACTING?
A recent report shows nearly 31% of total U.S. farm production is sold under contract - 22% under marketing contracts and 9% under production contracts. We are seeing an interest by some tobacco companies in the contract arena - marketing contracts. Contracting would seem to be one logical marketing alternative for tobacco in the event of a demise of the program - given the structure of the tobacco industry.
Any change of this magnitude spurs uncertainty. But there are some "knowns" about tobacco. First, it is still a profitable crop. Second, we know-how to produce a quality leaf. Third, there are no large-scale equally profitable alternatives to tobacco. Fourth, we have equipment in place to continue growing tobacco.
Contracting of this type falls under the topic of "Industrialization" of Agriculture. This, too, is a topic of suspicion, but industrialization is a product of the free market. We see bigger firms getting bigger and we just may have to accept this in the farm commodity market.
Why industrialization? The process is a means of the seller of the final
product getting a reliable source of raw product, and getting a reliable
quality of this product. The food (and related industries) is highly competitive.
Quality and price are important. The more production factors a company
can control, the more likley they can provide a consistent final product.
And by controlling more stages of production, they stand to gain a higher
percentage of the consumer's dollar paid for this product.
Some Parting Thoughts
The business world is a brutal world. Free market values have little place other than the idea of making profit But the best alternative for tobacco growers is to do the best job possible growing your effective quota. It's ok to look at some alternative enterprises. But if it's a new enterprise, start slowly. Hopefully, it'll develop into a successful niche commodity. In the short-run, "Ride the horse than brung you this far"!
1. Respectively, Extension Economist and Extension Agronomist, Tobacco, the University of Georgia.
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