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Friday, March 6, 2015 |  Madison, WI: 3.0° F  Fair
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Tobacco subsidies: The USDA rules and how they worked

Credit:Ellen J. Meany

In the early 1930s, the Great Depression threatened farm livelihood and with it the nation's food supplies. The federal government had to act. The Agricultural Adjustment Act of 1933, the first commodity price support legislation, included tobacco. Tested, its problems were addressed in the 1938 version of the bill which then stood until 2004.

Administered by the U.S. Department of Agriculture's Farm Service Agency, the tobacco program stabilized the price paid to farmers using a system of quotas that defined exactly how much farmers could grow, and when necessary, offered commodity loans that used current and future crops as collateral. The program balanced supply and demand, guaranteed a price, and held production below what it might have been, which translated to higher market prices that got passed along to the consumer.

If the price to the farmer didn't meet that set by the FSA, the Commodity Credit Corporation made up the difference, and arranged to store the crop as collateral. When it was finally sold the money was paid back to the CCC, with interest.

In any given year, the impact of the loan program on the federal budget was the difference between new loans made and old loans repaid. There were some good years and some bad, but in 2004, the last year of the program, loan activities were expected to net revenue in excess if $100 million.

In 1982, Congress had passed the No-Net-Cost Tobacco Program Act, which added an assessment on sellers and buyers to reimburse the CCC for any losses from the tobacco loan activities. This muted some of the criticism that taxpayers were subsidizing tobacco farmers, since the law required any losses of loan principal and interest be reimbursed from those assessments. Yet, the Congressional Research Service reports that when accumulated loans threatened the solvency of the no-net-cost fund, Congress forgave the no-net-cost requirement. For two years in particular, disposal of the tobacco cost CCC about $376 million (1986), and $661 million (2000). Ouch!

In 2004, the Tobacco Transition Program opened a five-year window for tobacco quota holders to escape the federal price supports. Quota holders who registered by November 2009 were eligible for payments based on the amount of leaf their land generated and sold in 2002 or 2003. The settled amount was $7 per pound, with the pay-out spread out up to 10 years, ending in 2014.

To be clear, the "transition" was away from the FSA structure, back to a free market approach. So while registered landowners receive payments to compensate for giving up exclusive rights to assigned land, now anyone can grow tobacco anywhere they please. The net effect has been a drastic drop in the number of acres of tobacco grown here, but the fact is those who still want to grow it probably will. And they'll make okay money doing it.

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