Sunday, April 17, 2011

Tobacco subsidies, up in smoke.

My investigations into the food system generally result in depression and/or anger. When I decided to take on tobacco subsidies, I had a feeling it would at least ruin my weekend. Just goes to show, you never know the answer until you ask the question.

After the great depression, programs like farm subsidies and crop insurance were instituted to protect people (both growers and consumers) from volatile crop prices. The program for tobacco restricted the size and location of tobacco farms as well as the amount of tobacco that could be grown on any one farm. The idea was to regulate the supply of tobacco to keep the price steady over many years. If the price of tobacco fell despite the quotas, farmers could use their crops as collateral on a loan from the government. The loans were generally repaid over the next few growing seasons as the price rebounded.

In 1982, as people were learning that tobacco products are extremely addictive and lead directly to many forms of cancer, there was a public outcry. People did not want the government supporting tobacco farming with their tax dollars. The No-Net-Cost Tobacco Program was the result: growers and buyers shared the cost of a small fee added to all marketed tobacco. The fee was used to defray the costs of loans that were not repaid. Thus, although the loan program continued to help regulate the market and thereby supported tobacco farming in the US, it wasn’t costing the taxpayers money. At least, it wasn’t supposed to…

Administrative costs for the program remained the responsibility of the government. The government also paid tobacco farmers additional money in response to agricultural and natural disasters. In years when the prices of tobacco and other commodities were especially low, the government again authorized payments to farmers that came from taxpayer dollars. Administrative costs, and these extra payments, ran in the hundreds of millions. It’s a tiny fraction of the federal budget but still a lot of government money for a “no-cost” program.

Over time, domestic demand for tobacco continued to fall, causing the price to also fall. In response, the government reduced the quotas on tobacco production, thereby decreasing supply, in order to bolster tobacco prices. At the same time, however, tobacco farming from outside the US became increasingly competitive, and the US tobacco market suffered even more. It became clear that the old quota and loan system was no longer effective.

In 2005, President George W. Bush enacted the Tobacco Transition Payment Program (the “tobacco buyout”). The act eliminated regulations on the size and location of tobacco farms, crop quotas, and the loan program. Instead, starting in 2005 and continuing for the next 10 years, tobacco farmers receive a direct payment subsidy based on the amount of tobacco they grew in the years before the buyout. After this ten-year period, tobacco farmers will receive no financial assistance from the government.

With the money from the tobacco buyout, farmers can choose to transition to another crop, consolidate or expand their tobacco operations to become more efficient, or give up the farming business altogether. The buyout seems like a good way of transitioning farmers away from tobacco, but how much is it costing us?

Nothing. That’s right. The $10 billion that will be spent on direct payments to tobacco farmers is being paid by the manufacturers and importers of tobacco products. In exchange, these companies do not have to pay part of a health-based court settlement.

I wasn’t able to find any information on the environmental impact of more consolidated tobacco farms, and I don’t know if the buyout has increased cigarette prices or influenced demand for tobacco products. I do know that the government is getting out of the tobacco business and using the settlement against tobacco companies to do so. Overall, I can’t think of anything wrong with this, and that leaves me feeling surprisingly cheerful. If, years from now, it is shown that added sugar makes processed foods addictive and is unequivocally linked to severe health problems (as we already suspect), perhaps there will be a corn buyout. That would make me cheerful too.

(I did find this interesting article on the global environmental and ethical issues pertaining to tobacco farming. Lots of good reasons to no longer support tobacco farming, which I guess we don't!)

The USDA Farm Service page on the buyout
CRS Report for Congress on (pre-buyout) tobacco price supports by J. Womack
The NC State buyout site (assistance for farmers)
The EWG Farm Subsidy Database


  1. Wait, but instead they don't pay a health settlement? that seems like a con ...

  2. I had a hard time finding out how much the tobacco companies were required to pay in the settlement compared to the $10B they pay for this. It appears they still paid a portion of the settlement, but then the last payment went to the buyout instead. Also, I read that only a portion of the settlement was earmarked for farmers.

    It's possible that the farmers are no better off financially than they would have been if the companies had just paid out the settlement, but they probably aren't worse off either. I agree it seems fishy, but I don't see where anyone is worse off, and the government can end the subsidy program while helping farmers with the transition and avoiding paying a ton more money into the system.

    I also think it's telling that there was no big uproar about this (or at least none that lasted on the internet through the ensuing years). No claims of a sweetheart deal for the tobacco companies or sob stories about farmers getting screwed.

    Hopefully, someone who knows the situation better will read this and help us out. : )

  3. Hi,

    If you go to this URL you will see that Tobacco Farmers are still receiving subsidies.

    Roy Chesnut

    1. Hi Roy,

      Thanks for the link! As I described in this post, we are still in the 10 year period in which tobacco farmers are receiving subsidies as part of the buy-out, although these payments are not coming from tax-payer money. I would need to dig a bit deeper to understand exactly what the EWG is reporting, but my guess is that it is the buy-out program money. After 2015, we shouldn't have any federal money going to tobacco farming, regardless of who is supplying that cash to the government.


    2. Alyssa,

      Are you saying your research is not complete?

      The writing appears to gloss over the fact that there is double-standard in government's "health" initiatives (diet/nutrition/Prop29 in California) while appearing to be helping the root cause at least in smoking.

      Lastly, have you explored the possibility of these companies that fund $10 billion writing of their "help" amounts to get tax breaks?

  4. Nobody seems to be taking into consideration the economic impact this "buy out" is or could be having on the tobacco farmers. Particularly in States like North Carolina. Much of their economy relies upon tobacco farming. What's going to happen to them in 2015 when the payments are over and the farmers stop growing these crops? How much of impact is that going have on their economy?

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