TOBACCO May 5, 1997 Approved by the World Agricultural Outlook Board =============================================================== TOBACCO is published four times a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. TBS-238. Subscriptions to the printed version of this report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #TBS, $18/year. ERS-NASS accepts MasterCard and Visa. =============================================================== Summary This March, U.S. tobacco growers indicated their intention to plant 807,000 acres of tobacco, 10 percent more than was harvested in 1996. Reacting to an 8-percent increase in the effective quota, flue-cured growers indicated they would plant 452,700 acres, 9 percent more than last season. Burley growers, with a 22-percent gain in effective quota, are planning to set 312,500 acres, 14 percent more than in 1996. A crop with average yields should produce over 1.7 billion pounds, farm sales weight, compared with 1.5 billion pounds in 1996. Increased production will likely offset lower beginning stocks to increase supply in 1997/98. Price supports for 1997 will rise 2.0 cents per pound for flue-cured and 2.3 cents for burley. Price supports for other types are up from 4.3 to 6.6 cents per pound. Before the marketing season begins, the United States Department of Agriculture (USDA) sets grade loan rates for the various kinds of tobacco receiving support. The flue-cured and burley no-net-cost assessments have again been set at relatively low levels in 1997. On January 1, 1997, off-farm stocks of U.S.-grown leaf were down 1.6 percent, and stocks of foreign-grown leaf were up 4.5 percent from a year earlier. With an anticipated increase in domestic use that more than offsets a small decline in leaf exports, total use of U.S.-grown tobacco in 1996/97 will increase from a year earlier. Consequently, October 1, 1997 carryover stocks of all U.S.-grown tobacco will probably decline. Cigarette output rose 2 percent in 1996 to an estimated 760 billion, the highest level ever. Domestic use was unchanged from 1995, and exports increased. U.S. smokers consumed an estimated 487 billion cigarettes in 1996, about the same as a year earlier. However, annual consumption per person 16 years and over declined from 2,415 to 2,390 cigarettes. Per capita consumption is expected to continue declining in 1997, but total consumption may not change much. Cigars consumption increased 18 percent and snuff also gained in 1996, while consumption of smoking and chewing tobacco fell. Use of cigars will increase in 1997, and snuff consumption is likely to increase also. Use of most other tobacco products is expected to continue declining. The value of U.S. leaf and tobacco product exports in 1996 declined slightly because of lower export prices for tobacco leaf and cigarettes. The value of exports exceeded imports (arrivals) by $5.3 billion, down from last year's record $5.9 billion. The tobacco trade surplus was down 10 percent from a year earlier. Cigarette exports rose 5.5 percent to 244 billion pieces, and exports of unmanufactured leaf gained 5 percent to 486 million pounds. Export leaf volume may increase further in 1997 due to greater U.S. production and low world stocks, although increased global production may dampen the increase somewhat. Higher flue-cured production in 1997 will in a large part determine exports during the last half of the calendar year. In 1996, unmanufactured tobacco imports (arrivals) advanced 64 percent to 720 million pounds. The increase reflects higher cigarette production and higher imports under the tariff-rate quota. Imported leaf accounted for about 29 percent of total U.S. leaf stocks on January 1, 1997, slightly more than a year earlier. Disappearance of U.S.-grown flue-cured tobacco in the current marketing year is forecast up from last year's 875 million pounds. Domestic use, tempered by slightly lower exports, accounts for the additional use. Disappearance in 1996/97 will likely exceed marketings, so carryover stocks at the beginning of 1997/98 will be slightly diminished. Production in 1997 will likely increase from 1996's 910 million pounds. Disappearance of U.S.-grown burley tobacco in 1996/97 is expected to increase from 1995/96's 551 million pounds, mostly due to higher domestic use. Burley sales this season totaled 525 million pounds, about 9 percent greater than last season. The U.S. burley carryover next October 1 may decline 6 percent from the previous year. USDA set this season's burley marketing quota at 705 million pounds, 74 million pounds greater than last season. The 1997 effective quota, which reflects last year's over- and under-marketings, totals about 880 million pounds, a record high since poundage quotas were established for burley in 1971. Prices for the 1996 crop were higher for all types. Accordingly, individual 1997 farm acreage allotments were increased 2.5 percent for Kentucky-Tennessee fire-cured and 12.5 percent for Virginia fire-cured. Allotments for dark air-cured types gained 5 percent and Virginia sun-cured 15 percent over the previous season. Allotments were steady for Wisconsin binder tobacco. Acreage allotments unused in recent years were adjusted downward. Tobacco Products Domestic Cigarette Use Steady; Exports Gain Slightly U.S. cigarette consumption in 1996 is estimated at 487 billion pieces, the same as in the previous year. Price increases, higher State taxes, expanding regulation, and consumer awareness of links between smoking and disease combined to forestall any consumption gains. Per capita consumption continued to decline, sliding to 2,390 pieces per person (16 and over population), compared with 2,415 pieces for the same group in 1995. Premium brand cigarettes gained market share as economy (discount) brands' share of the market fell from 30 percent in 1995 to 28.5 percent in 1996. Cigarette retail prices increased in 1996 and rose above the level that existed prior to the price decrease that occurred in November 1993. Calendar 1996 exports totaled 244 billion cigarettes. Shipments to the European Union (EU-15) declined to near levels of 1994. Shipments to Japan, the second largest export market, rose by 6 billion. Shipments to the Newly Independent States (NIS)1/, primarily Russia, surged nearly four-fold. Cigarette volume gains were offset by slightly lower unit values, resulting in a lower total ----------------------------------------------------- 1/ Previously referred to as the former Soviet Union. ----------------------------------------------------- cigarette export value of $4,735 million. With the higher export volume and steady domestic consumption, U.S. production rose an estimated 2 percent to a record 760 billion. Domestic consumption in 1997 will likely be steady as increased number of smokers offset reduced consumption due to higher retail cigarette prices and continued expansion of smoking restrictions and prohibitions. Demand for U.S. cigarettes continues to rise worldwide. Higher exports are expected in 1997 but gains may not be as large as in the recent past. The annual Economic Research Service (ERS) survey of manufacturers indicated that filter-tip cigarette production increased to 98.2 percent of total output in 1996 from 98 percent in 1995. The gain was concentrated in the 80-85 millimeter filter-tip size, which made up about 64 percent of 1996 output (table 3). Cigarette Prices Increase Cigarette manufacturers raised wholesale prices for premium cigarettes $2.00 per 1,000 pieces in May 1996, and another $2.00 in March 1997. Current wholesale prices are still lower than the levels reached just prior to the August 1993 price cut. Wholesale cigarette prices were about this level in 1991. Cigar Smoking Increases; Smoking Tobacco Use Declines Use of large cigars (including cigarillos), continued its dramatic increase in 1996, gaining 18 percent through September, the latest data available. Production is the highest since the mid-eighties. Last year, U.S. smokers consumed about 2.5 billion large cigars. Production of small cigars ( those using less than 3 pounds of tobacco per 1,000 cigars) is estimated at 1.5 billion pieces, 4 percent above 1995. Overall cigar use should exceed 4.4 billion and is expected to continue ascending. Smoking tobacco consumption last year totaled about 14 million pounds, 1.4 percent below 1995. Sales (including imports) of pipe tobacco (the major category) and smoking tobacco for roll-your-own cigarettes both declined in 1996 (table 8). Smokeless Use Gains Slightly Output of twist chewing, cut smoking , and moist snuff advanced, offsetting declines in other categories of snuff, smoking, and chewing tobacco. Taxable removals of smokeless products showed gains in the same categories. Moist snuff taxable removals gained 5 percent (more than the previous year's gain), cut chewing rose 2 percent, and twist chewing was up 1 percent. Part of the rise in smokeless tobacco consumption probably results from substitution for cigarettes because of increased smoking restrictions. U.S. Exports and Imports U.S. Tobacco Trade Balance Falls The tobacco balance of trade the value of manufactured and unmanufactured exports less imports--declined in 1996 due to a surge in unmanufactured andmanufactured imports. The value of U.S. leaf imports jumped from $556 million in 1995 to over $1.0 billion dollars in 1996. Manufactured imports gained about 50 percent mostly due to imports of premium cigars. U.S. exports of unmanufactured tobacco and tobacco products were nearly constant at $6.6 billion in calendar 1996, slightly lower than 1994's record high. The total tobacco balance of trade surplus declined from $5.9 billion to $5.3 billion. Net leaf trade was half that of 1995. Both leaf and product export quantities advanced. Tobacco leaf export value slid 1 percent compared with the previous year. Cigarette export value gained due to higher volume despite lower unit values. The total value of cigarette exports rose as higher export volume more than offset lower unit values. The relative share of cigarettes going to Asia was unchanged. Some cigarettes which were shipped to Europe in 1995 and possibly transhipped to Russia were shipped directly to Russia in 1996. Overall shipments to Russia advanced 17.6 percent. The Bureau of the Census recorded 116 countries as destinations for U.S. leaf and product exports in 1996. General imports (arrivals) of unmanufactured leaf advanced 89 percent in value to $1,053 million, and tobacco product imports gained 52 percent to reach $279 million. With little change in export value, the trade surplus fell to $5.3 billion from the previous year's high of $5.9 billion. Until the surplus of $5.9 billion in 1995, the previous record trade surplus was $5.8 billion in 1994, and $5.7 billion in 1990 (table 10). Leaf Tobacco Export Volume Up Slightly in 1996 U.S. exports of unmanufactured tobacco in 1996 advanced 5 percent over a year earlier to 486 million pounds declared weight (220,446 metric tons), the highest since 1992 (table 11). Exports to Asia and Africa declined; shipments to Europe advanced 21 percent. On a farm-sales weight basis, total leaf exports declined 5 million pounds to 610 million pounds. Exports of burley, Maryland, dark fire-cured, cigar wrapper, and "other unmanufactured" leaf advanced. Flue-cured, Virginia fire- and dark air-cured, blackfat, and cigar binder exports declined. European markets, which typically buy more than half of U.S. leaf exports, increased their purchases 21 percent to account for 60 percent of total U.S. exports. Leaf shipments to Asia (including Middle Eastern countries) declined 12 percent. Japan and Germany were the leading buyers of U.S. tobacco in 1996. Japan decreased purchases 17 percent, about the same as last year, Germany also bought less. The Netherlands and Belgium were the third and fourth largest markets followed by the United Kingdom and Turkey. Tight supplies and high prices pushed calendar 1996 flue-cured exports down 8 percent to 249 million pounds. Burley exports gained 11 percent, to 115 million pounds. Unit values for both flue-cured and burley shipments were down for the calendar year. Maryland exports recovered, with a gain of 28 percent, to 4.6 million pounds. Kentucky-Tennessee fire-cured exports resumed a rising trend with an increase in volume of 23 percent. Virginia fire- and sun-cured and blackfat volume declined. Cigar wrapper exports gained. Shipments of stems and refuse, and other types both advanced. Exports of stems were 75 million pounds, up 75 percent, and other tobacco gained 9 percent to reach 25.5 million pounds. Imports Surge Through 1994, the domestic content rule required U.S.-manufactured cigarettes to contain 75 percent domestically-grown tobacco. After President Clinton signed the proclamation announcing the tariff-rate quota (TRQ), the domestic content rule was no longer effective, retroactive to January 1995. Total duty-paid imports of tobacco for consumption (duty paid) gained 59 percent in 1996 after falling 22 percent in 1995 and half that much in 1994. Import volume totaled 667 million pounds, compared with 419 million pounds the previous year. The TRQ, which became effective September 1995 permits higher imports than the previous domestic content rule. Foreign stocks were being replenished during 1996 after imports had been limited by the domestic content rule. The domestic content rule mandated a 25-percent limit on foreign leaf in U.S. manufactured cigarettes or imposed substantial penalties. Imports for consumption represent withdrawals from bond and duty-paid releases for immediate manufacture upon arrival. In 1996, the United States imported more cigarette leaf and stems and less cigar leaf. Cigarette scrap imports were nil, and cigar scrap imports fell. Cigarette leaf import volume (consumption) advanced 56 percent, with big gains for unstemmed burley, stemmed flue-cured, and other stemmed cigarette leaf. Stemmed flue-cured rose 131 percent, and stemmed cigarette leaf, not specially provided for (mostly burley), rose 228 percent. Oriental leaf was nearly unchanged. The drop in cigarette leaf imports in 1994 and 1995 followed increases the 4 previous years. Imports declined beginning in 1994 through September 13, 1995 because manufacturers faced stiff penalties if they exceeded 25 percent foreign content of total leaf and stems in U.S.-manufactured cigarettes. Also, ample stocks of foreign-grown leaf were on hand. General import volume of unmanufactured tobacco (direct entry plus placements in bonded warehouses for later factory use) gained 64 percent. Advances were seen in all the cigarette leaf categories except unstemmed flue-cured and scrap, cigar leaf, and stems. Cigar scrap fell, and cigarette scrap arrivals were nil. U.S. stocks of imported cigarette tobacco were up 5 percent on January 1, 1997, compared with a year earlier (table 15). Imported flue-cured stocks rose 10 percent, and burley stocks fell 1 percent. Oriental stocks gained 5 percent. Imported leaf stocks increased under the TRQ. Imported cigar leaf stocks rose 9 percent. Tariff-Rate Quota Activity President Clinton proclaimed a tariff-rate quota (TRQ) effective September 13, 1995, for certain types of imported tobacco, primarily flue-cured and burley. The proclamation also eliminated duties on Oriental and cigar wrapper, binder, and filler tobacco. The total quantity allowed under the tariff-rate quota is 332.6 million pounds, declared weight for the September 13, 1996 through September 12, 1997 year. Through March 16, 1997, 28.1 percent of the total quota allocation had been imported. The TRQ is designed to impact U.S. cigarette leaf tobacco imports, particularly flue-cured and burley type tobaccos, which are imported for the purpose of manufacturing cigarettes in the United States. Imports of cigarette leaf tobaccos (excluding Oriental) which exceed predetermined quota are now subject to an import duty of 350 percent ad valorem, although a draw-back provision allows most of the duty to be refunded if the imported leaf is re-exported in the form of manufactured tobacco or cigarettes. U.S. Tobacco Leaf Situation and Outlook Domestic Supplies Increase With marketings in 1996 up 6 percent from 1995, a smaller carryover lowered slightly the supply of domestic leaf for the marketing year (July-June for flue-cured and October-September for burley and other kinds) to 3.5 billion pounds, about 1 percent below a year earlier. On January 1, 1997, domestic leaf stocks were up less than 1 percent above a year earlier. However, by the end of the current marketing year, stocks are expected to be higher than the 2.2 billion pound carryover on July 1, 1996 (October 1 for burley and other kinds). With larger effective quotas in 1997, growers are expected to increase flue-cured acreage 9 percent and burley acreage 14 percent. With average yields, U.S. tobacco production could total 1.7 billion pounds, 12 percent higher than last year. Auction marketings of flue-cured gained 5 percent (table 25) in 1996/97. Burley marketings advanced about 9 percent. Production of Maryland, fire-cured and dark air-cured will likely gain some. Cigar tobacco production is expected to decline due to lower overall yields for cigar binder types due to poor growing conditions. All tobacco types other than Maryland, Pennsylvania filler, Connecticut binder, shade-grown wrapper, Puerto Rican cigar filler, and Perique are under quotas. Except for farms on which producers in recent years have planted or received planted credit of less than 75 percent of the farm's acreage allotment, 1997 tobacco allotments are increased 15 percent for Virginia sun-cured, 12.5 percent for Virginia fire-cured, 5 percent for dark air-cured, and 2.5 percent for Kentucky-Tennessee fire-cured tobacco. The allotments remain the same for cigar filler and binder tobacco. Acreage allotments unused in recent years were adjusted downward. USDA's Prospective Plantings report indicated that growers plan to set 807,500 acres of tobacco in 1997, 10 percent more than was planted in 1996. Last year, intentions were 2 percent less than the final harvested acreage. In 1995, intentions exceeded harvested acreage by 1 percent. In 1994, intentions were 2 percent higher than plantings, and during 1990-93, intentions were within 1 percent of the final harvested acreage. Costs Expected To Rise Production and marketing costs of flue-cured tobacco will probably increase in 1997 as costs of most inputs likely will rise. Total costs per acre (excluding land, quota, and the no-net-cost and marketing assessments) are expected to decrease 2 to 4 percent from a year ago. Similar increases are expected for variable costs. With higher quota levels, quota rental rates may likely have declined. Burley costs are expected to increase by a similar amount. Since lease and transfer of flue-cured quotas were eliminated in 1988 (except when a farm experiences a natural disaster), growers have used other options to obtain quotas. These options include: (1) cash or share renting the quota and growing the tobacco on the farm to which the quota is established; (2) purchasing quota; and (3) combining more than one farm into a single farming unit. To combine farms, the operator must have complete control over the entire farm operation. Also, the same accounting system and management must be used on all tracts. Furthermore, the rental agreement must last more than 1 year and include a rotation of one or more program, allotment, or other crops among tracts. Since 1991, burley growers can both lease and transfer and purchase quota within counties throughout the belt. Furthermore, since 1991, Tennessee growers can lease and transfer burley quota across county lines within the State. Price Supports and Assessments in 1996 Price supports are available to eligible growers through government loans to producer associations. To be eligible, producers must pay assessments to the no-net-cost account established by the associations. For flue-cured and burley tobaccos, producers and buyers share these assessments. Growers of other kinds pay the full amount. In addition, since 1991, growers and purchasers of tobacco under the price support program are required to pay a marketing assessment. Grower and buyer contributions equal to 1 percent of the loan rate are divided equally. Growers must also certify that any pesticides applied to the tobacco crop were EPA-approved and used according to label directions. To obtain price support for flue-cured tobacco, USDA requires growers to designate a warehouse where they intend to sell the tobacco. Growers of flue-cured tobacco approved marketing quotas through the 1997 crop in a mail referendum on January 1995. Growers of burley approved marketing quotas on their next three crops during February and March 1995. However, growers of Maryland, Pennsylvania filler, and Connecticut binder (types 51-52) will have no supports because they turned down marketing quotas. Virginia sun-cured growers previously approved marketing quotas, so price supports are available for their 1995, 1996, and 1997 crops. Growers of Virginia fire- and air-cured, Kentucky-Tennessee fire-cured, and Kentucky-Tennessee dark air-cured voted to accept marketing quotas for the 1997-99 marketing years in two referenda held on March 24-27, 1997. Growers of Wisconsin and Ohio filler and binder voted in March 1996 to accept quotas for the next three crops (1996, 1997, and 1998). Under the Omnibus Budget Reconciliation Act of 1990, the marketing assessment has been set at 1.621 cents per pound for flue-cured and 1.76 cents for burley (divided equally for growers and purchasers). The marketing assessment ranges from 1.169 cents per pound for Wisconsin binder to 1.623 cents for Kentucky-Tennessee dark fire-cured tobacco (table 20). The 1997 flue-cured no-net-cost assessment is 0.379 cent per pound; 0.1895 cent per pound for producers and 0.1895 cent per pound for purchasers. The no-net-cost assessment for burley tobacco is 0.24 cent per pound, divided equally between grower and purchaser. The Agricultural Act of 1949, as amended in 1986, requires that producers and purchasers share equally in no-net-cost assessments, to the extent possible, in maintaining the no-net-cost account for 1985 and subsequent crops of flue-cured and burley tobacco. No-net-cost assessments for the other kinds of tobacco will be announced later. USDA has set the 1997 flue-cured support level at $1.621 per pound, 2 cents above 1996, and the burley support at $1.76, 2.3 cents above 1996. The price supports for flue-cured and burley are calculated using the level of the preceding year, adjusted by changes in the 5-year moving average of market prices, excluding the highest and lowest (two-thirds weight) and changes in a cost-of-production index (one-third weight). For other types, maximum support rates continue to be based on changes in the average of the parity index during the 3 previous years compared with 1959. But loan associations can request reduced support if warranted by market conditions. Supports for other kinds of tobacco are up 3.0 to 4.2 percent in 1997. Tobacco Tested for Pesticides Pesticide use has been restricted on U.S. tobacco for many years. The Food Security Act of 1985 extended the adherence standards. It requires USDA to inspect U.S.-produced flue-cured and burley tobacco for improper use of pesticides. The pesticide residue sampling program for 1996 emphasized testing for proper use of maleic hydrazide (MH) for sucker control on flue-cured tobacco. The program revealed that MH residues declined substantially in 1996, sliding to 84.9 parts per million (ppm), from 100.3 in 1995; 103 ppm in 1994, and 117 in 1993. Burley test results are not available. Flue-Cured Disappearance in 1996/97 Likely To Increase Total disappearance of U.S.-grown flue-cured tobacco (types 11-14) will likely increase in 1996/97 from last season's 875 million pounds (table 25). During the first half of the marketing year (July-December 1996), domestic disappearance was 3 percent above a year earlier. Export volume was steady during the 6-month period. Domestic use may be lower during the second half of the marketing year (January-June 1997) than a year earlier because of increased imports of flue-cured under the tariff-rate quota. Domestic use for the marketing year may decline slightly from last season. During the first 6 months of this marketing season flue-cured exports to European countries increased while Asian countries took less. July-December exports were 185 million pounds (farm sales weight). January 1997 flue-cured exports were up 20 percent from the previous January, bringing the July-January total to 226 million pounds, 3.2 percent higher than the same period last year. Exports during the last 8 years have remained below the 1984-86 average because of reduced demand, ample supplies of foreign leaf, and a change in the classification that manufacturers declare for exports of processed or semi-processed blends. Manufacturers began declaring the blends as manufactured tobacco products in the mid-1980's, rather than as flue-cured leaf. January-June 1997 leaf exports will likely advance slightly from a year earlier, and will be somewhat higher or stable for the entire 1997 marketing year. Carryover May Rise Estimated disappearance in 1996/97 exceeds marketings. Consequently, the flue-cured carryover on July 1, 1997, is projected to decrease slightly from the 1,166 million pounds of July 1, 1996. After purchasing most of the pre-1994 loan stocks in 1995, well ahead of schedule, purchases from loan stocks by manufacturers and dealers in 1996 slowed to 70 million pounds. Remaining pre-1994 loan stocks of 78.4 million pounds are all committed for purchase. During July 1996-February 1997, 51.8 million pounds of tobacco were sold from loan (stabilization), compared with 19.1 million pounds a year earlier. By March 1, loan stocks had fallen 45 percent from a year earlier. Crop Projected To Rise in 1997 The national marketing quota for 1997 crop flue-cured tobacco is 973.8 million pounds, 11 percent over the 1996 quota of 873.6 million pounds. The basic quota is the highest since 1981 The effective quota is up about 8 percent due to undermarketings in 1996 and increased cigarette manufacturer purchase intentions. At about 1,020 million pounds, the effective quota is the highest since 1982. The effective quota is obtained by adjusting the basic quota by the Secretary's discretion (plus or minus 3 percent) and adding net under- marketings. The change from last year's effective quota ranged from a 0.5 percent decrease in Georgia-Florida belt, to a 13-percent increase in the North Carolina border belt. Based on the effective quota, somewhat larger marketings are expected in 1997. According to the March planting intentions report, 452,700 acres will be grown, 9 percent above last year's harvested acres. On this acreage, a normal yield would produce over to a billion pounds, or nearing 100 percent of the effective quota. In 1996, growers marketed 95 percent of the effective quota in spite of hurricane damage. The level is likely to be higher this year. In 1995 and 1994, growers marketed 101 percent of poundage quota compared with 100 percent in 1992 and 1993. The projected flue-cured marketings, plus anticipated carryover, indicates that the 1997/98 supply is expected to gain about 3 percent from the 2.1 billion pounds available in the current marketing year. This represents about 2.3 years' use, about the traditional benchmark level. Foreign Situation Canadian flue-cured auction markets lasted longer than the 90-day season of last year. As of March 22, the volume of flue-cured tobacco sold through the Ontario Flue-cured Growers Board during the 1996/97 season totaled 141.5 million pounds. The average price was Can$1.87 (US$1.36) per pound, compared with Can$1.66 (US$1.21) per pound for the season last year. Zimbabwe's flue-cured production in 1996 was about 444 million pounds, up 1 percent from 1995. Zimbabwe's flue-cured auction closed October 4, 1996. Prices averaged US$1.33 per pound, 37 cents above a year earlier. The higher price may reflect some drawdown in world supplies. Indications are that 1997 production may increase to around 519 million pounds (farm sales weight). Brazil's output of flue-cured tobacco in 1997 will be about 812 million pounds (farm sales weight), up from last year's 699 million pounds, but still below the 944 million pounds produced in 1993. Brazil's increased output stems from higher yields and increased plantings due to an expected rise in exports. Tobacco companies have been heavily involved in assisting production, thereby increasing yields. Burley Effective Quota Highest Ever The 1997 basic quota for burley totals 704.5 million pounds, 11 percent above 1996. Marketings in 1996/97 from 1996 crop tobacco totaled about 525 million pounds, 9 percent above 1995. Allowing for overquota and underquota marketings last season, the 1997 effective quota totals about 880 million pounds, 160 million more than a year earlier. This is the highest effective quota for burley tobacco since poundage quotas were established in 1971. This year's price support has been set at $1.76 per pound, 16.2 cents below the 1996/97 average market price. Around March 1, farmers said they intended to set 312,500 acres, about 14 percent more acreage than was harvested last year. Preliminary data indicate that in 1996/97, growers marketed 73 percent of their effective quota, the lowest percentage since 1989. They marketed 83 percent in 1995/96, 84 percent in 1994/95, and 87 percent in 1993/94. Of the two major growing States, undermarketings were somewhat greater in Tennessee than in Kentucky. In 1996/97, Tennessee marketed about 77 percent of its quota, compared with 88 percent in Kentucky. With normal yields, 1997 production will reach 650 million pounds, up 24 percent from 1996 net marketings. Quota should be sufficient to market tobacco produced in 1997. Supply Falls in 1996/97 The 1996/97 domestic supply was 1.42 billion pounds on October 1, 2 percent below a year earlier (table 25). The supply equals about 2.4 times the estimated disappearance, about the traditional benchmark level and in line with recent years. By last October 1, the total carryover held by manufacturers and dealers had risen 6 percent, but stocks held by cooperatives fell 34 percent. As in the previous season, the two grower loan associations took none of the 1996 crop, the fourth time there were no takings since 1945. About 54.7 million pounds of the 1994 crop and 232 million pounds of the 1993 crop were placed under loan. Stronger demand because of stable U.S. cigarette consumption and rising cigarette exports following a 15-percent decline in 1995/96 resulted in no loan takings. Manufacturers have agreed to purchase all pre-1994 loan stocks during the next 5 years. Higher marketings will probably boost domestic burley use. U.S. burley exports in 1996/97 through January are up. Japan and Germany are the leading importers. World burley production fell in 1995 because declines in Brazil, Argentina, Malawi, South Korea, the Philippines, Thailand, Mexico, and the United States more than offset increases in Italy and China. Despite smaller output, ample supplies, much at lower prices, hinder 1996/97 burley export prospects. Crop Volume and Value Up The value of 1996/97 marketings advanced on higher volume and price. Quality was lower due to weather conditions and widespread blue-mold. The most significant change in the composition of this year's crop was an increase in mixed stripped tobacco and no-grade offerings. The proportion designated as fair and low quality constituted 70 percent, lower than last year's 73 percent. Tan and reddish tan tobacco made up 87 percent of sales. Mixed leaf was 20 percent of sales, up 16 percentage points from last year and no grade leaf was 7 percent, up from 1 percent, bringing overall quality down. Virtually all tobacco went for the bid of $192 per hundredweight--about $6.70 higher than a year earlier. Markets opened on November 25, 1996, and the season ended on February 27, 1997, after 45 sales days. The closing date was set in conjunction with the opening date for the second year. Prices changed little when markets reopened after the Christmas holidays. Southern Maryland Prices Higher Maryland auctions for the 1996 crop of Southern Maryland (type 32) opened March 4, 1997, and closed March 27, after being open for 15 sales days. Quantity marketed was 9.4 million pounds, 18 percent below 1995. Prices averaged $1.92 per pound, up 25 cents per pound compared with last year. The 1996 Maryland crop was of improved quality due to better weather during curing. For the 1995 crop (marketed mostly in 1996), growers received $1.67 a pound at the Maryland auction. Since quotas do not apply, Maryland tobacco does not receive price support. In a 1982 referendum, growers rejected USDA grading and its required fee. Supply Increases Despite a 700-acre decline in harvested acreage, growers produced a 1996 crop 0.6 million pounds greater than the previous season, mostly due to better growing conditions. Yields increased from 1,350 pounds per acre to 1,500 pounds. In 1996, about 35 percent of total Maryland production was in Pennsylvania. Production was higher in both States. The Agriculture and Food Act of 1981 mandated penalties for growing and marketing Maryland tobacco in quota areas. However, quotas do not apply to Pennsylvania seedleaf tobacco and since seedleaf prices are lower, seedleaf growers have switched to producing Maryland tobacco. The supply for marketing year 1996/97 is larger than that of 1995/96. Last season's use of 14.7 million pounds was less than 1996 production (table 28). Farmers' March planting intentions indicate a 200-acre decline in 1997, and production will likely decrease proportionately. Supplies should therefore decline a little in 1997/98. Fire-Cured Prices Higher Kentucky-Tennessee fire-cured (type 22-23) auction prices advanced over last season. Demand has remained relatively strong because of the increasing demand for moist snuff. Farm purchases of types 22-23 rose, and prices paid at the farm were higher than a year earlier. Loan associations took less tobacco this year. Auction prices for types 22-23 averaged $2.11 per pound, about 9 cents higher than the year earlier season average. Less than 1 percent of the type 22-23 crop (71,000 pounds) was placed under loan. Auctions for Kentucky-Tennessee (types 22-23) began January 13 and ended on April 3. Quality was better than last year's crop with slightly more fine and less good tobacco. This season's auction prices were mixed, ranging from $2.29 per pound for the best wrapper and heavy leaf grades to $0.90 a pound for lugs. Auction volume increased along with higher average prices resulting in a gain in value for Virginia type 21 fire-cured leaf, and demand was good. Loan receipts declined from nearly 5 percent in 1995 to 1.5 percent this season. When sales ended on January 7 after 14 days, volume had gained 13 percent from 1995 and value gained 24 percent. Prices rose 14.9 per pound to $1.79. Output of snuff, which constitutes the principal domestic use of fire-cured tobacco, rose during the past year, and should continue rising in 1997. So far this season, leaf export volume has gained 4 percent over the previous year. For the 1996/97 season, total use should decline about 4 million pounds. Farm Acreage Allotments Up Individual farm allotments were increased 2.5 percent for Kentucky-Tennessee fire-cured and 12.5 percent for Virginia fire-cured. This year's U.S. allotment totals 17,013 acres for Kentucky-Tennessee fire-cured and 1,506 acres for Virginia fire-cured. Virtually all allotments of Kentucky-Tennessee fire-cured were produced in 1996 and 1995. For Virginia fire-cured, acreage harvested as a share of allotments in 1996 totaled 84 percent, compared with 83 percent in 1995. When compared with effective allotments (allows for productivity adjustments on leased-in acres) the percentages are somewhat higher. In 1997, acreage is projected to increase by 220 acres in Kentucky and Tennessee and 100 acres in Virginia, for a 2-percent increase for the three states. Dark Air-Cured Supplies Stable; Prices Higher Auction prices for the 1996 crop averaged 23 cents a pound higher for both Green River (type 36) and One Sucker (type 35). About 43 percent of the One-Sucker crop was sold in the country (at the farm). Virginia sun-cured (type 37) prices also advanced 23 cents for the season to a record high of $1.78 per pound. Total volume sold at auction was less than the 1995 crop, but higher prices boosted value. Quality was better than last season, contributing to higher prices. No dark air-cured tobacco was placed under loan. This season's supply of dark air- and sun-cured tobacco totals 35 million pounds, about 0.9 million less than last season (table 30). Most dark air-cured tobacco goes into plug and twist chewing. Output of both plug and twist chewing fell in 1996. Disappearance of dark air-cured tobacco is likely to be higher than the size of the 1996 crop, and carryover will decrease from last year. National Acreage Allotments Gain Despite higher 1996 production, lower carryin stocks will reduce 1996/97 supply from the 35.8 million pounds of 1995/96. Acreage allotments for growers of dark air-cured will increase from a year earlier. Total allotments for 1997 of types 35-36 are 4,273 acres, 5 percent above last year. Production in 1997 should be stable if yields are normal. Virginia sun-cured acreage allotments, at 114 acres, are up slightly from last season. Cigar Tobacco Demand Varies Between Types Most cigar tobacco producers received slightly higher prices for their 1996 crop than a year earlier (prices are no longer reported for wrapper tobacco). Most cigar leaf had been sold by early March, although Wisconsin binder markets may be open through mid-April. Wisconsin binder tobacco loan takings through early April were nil. Type 54-55 production gained about 200,000 pounds. Prices averaged $1.50 per pound for Wisconsin binder. Connecticut binder prices have risen in recent years because loan stocks have been liquidated, production has been down, and crops have been of good quality. Production in 1996 is expected to be up over 100,000 pounds. The Agricultural Statistics Board will release season-average prices and production data for the 1996 crop in May 1997. Overall, price support levels for this year's crop of cigar tobacco will rise 4.3 percent. Again this season, there are no price supports for Pennsylvania filler (type 41), Connecticut binder (types 51-52), or shade-grown tobacco (type 61). No-net-cost assessments for cigar binder types in 1997 will be announced shortly. High no-net-cost assessments for cigar filler types 42-44 and reduced demand for type 46 have essentially eliminated production of these kinds. Growers of cigar filler and binder (types 42-44 and types 54-55) voted to accept quotas for the 1996-1998 crops at referenda held in March 1996. Supplies Decline Total supplies of U.S. cigar tobacco for this season are down 11 percent from the previous season. Both production and carryin were down. Cigar filler fell 16 percent, binder supplies increased 5 percent, and wrapper supplies rose 5 percent. Cigar tobacco imports declined 9 percent, dipping to 61 million pounds in calendar 1996. Cigar wrapper arrivals were up, but binder and cigar scrap arrivals fell. Stocks of foreign cigar tobacco rose. On January 1, 1997, foreign leaf stocks totaled 87.9 million pounds, up 19 percent from a year earlier, and about 11 million pounds above 1996's foreign cigar leaf use. Domestic Use May Decline Slightly Until last year, demand for domestically produced cigar filler and binder had declined as demand for loose-leaf chewing and cigars fell. Skyrocketing production of cigars in 1996 increased use of some types. However, cigar leaf users continue to obtain most of their requirements from imports. Last year, about 73 percent of tobacco used to make cigars and loose-leaf chewing tobacco was foreign-grown. With higher use of cigars and increased loose leaf chewing tobacco use in 1996, U.S. cigar leaf use may rise for the third consecutive season. Use will probably exceed 1996 production, so carryover may fall from the 48 million pounds available at the beginning of 1996/97. Cigar Filler Acreage Lower; Binder About Unchanged For most farms growing cigar filler and binder tobacco (types 42-44 and 53-55), this year's acreage allotments were unchanged from a year earlier. The total effective acreage allotment is 5 percent lower because of adjustments for farms that have underplanted their acreage in recent years. Based on March planting intentions, cigar-type acreage is expected to rise about 3 percent from last year with stable quotas and relatively strong demand. No-net-cost assessments have not been set for the 1997 Wisconsin crop, but they will likely be suspended again because all loan stocks have been sold. Pennsylvania filler acreage is expected to increase slightly, and binder acreage is expected up 6 percent. Connecticut binder (types 51-52) acreage is expected to increase by 250 acres, over 4 times last year's gain, but Wisconsin binder (types 54-55) acreage probably will be unchanged because of continued stable allotments and prices. Shade-grown wrapper acreage will likely increase by 100 acres, and production may rise if yields are normal. Given average yields, cigar tobacco production in 1997/98 is expected to increase 9 percent from last year's crop. But, combined with a much smaller carryover, supplies likely will decrease. Special Article The Tobacco Program--A Summary and Update by Tom Capehart Abstract: Most tobacco production in the United States has been under a price support-production control program since the early 1930's. A number of changes have been made in the program, especially during the last fifteen years. Changes in the program from the early 1930's are summarized and more recent changes evaluated in this article. Keywords: Tobacco, tobacco program, price support. 1930 to 1981 The Federal Government has operated programs to support and stabilize tobacco prices since the early 1930's. As a result, risks to growers from seasonal and cyclical price changes have been lessened in the face of weather, production, and use variations. The Agricultural Adjustment Act of 1933 designated tobacco as a basic (storable) commodity, and cash payments were made to tobacco growers who restricted production (1933-35). After the 1933 legislation was declared unconstitutional, substitute legislation authorized payments for carrying out soil conservation practices (1936-37). The Agricultural Act of 1938 authorized marketing quotas, with a penalty for growers exceeding them. With two-thirds or more of tobacco growers voting approval of marketing quotas for their kind of tobacco, growers received price support up to 75 percent of parity. Parity price calculations used 1910-14 as the base period for most commodities, but August 1919-July 1929 was designated for tobacco. Despite many legislative changes since 1938, the authority to provide an adequate and balanced flow of tobacco through the marketing quota continues. The program is available for all kinds of tobacco except shade-grown wrapper and Perique. Excluding the 1939 crops, marketing quotas have been approved and in effect since 1938 for each crop of flue-cured, burley, and dark tobacco. Cigar binder and Ohio filler crops first came under quotas in 1951. Price supports have never applied to Pennsylvania filler and last applied to the Maryland crop in 1965 and the Connecticut-Massachusetts binder crop in 1983. In October 1942, Congress raised the support level to 90 percent of parity, which continued through 1948. The Agricultural Act of 1949 continued the 90 percent parity level and has been the authority for tobacco price support since 1950. Because of sharply increasing price supports, an amendment to the 1949 Act set crop support prices for 1960 at the previous year's level. The amendment also provided for subsequent price support changes to be based on the average parity index for the 3 previous calendar years compared with 1959 indexes. Under the loan program, a support price (loan rate) is established for each grade of tobacco. If the buyers are not willing to bid above the Government loan rate for any lot of tobacco, an eligible grower may receive the lot's designated loan rate less any overhead deduction to cover the loan association's administrative costs. The tobacco is then taken by a cooperative association. Under an agreement with the Commodity Credit Corporation (CCC), the association arranges for receiving, redrying, packing, storing, and eventually selling the tobacco under loan. Grade loan rates are based on recent trends in market prices, loan holdings, and the shares of particular grades received under loan. The weighted average of various loan rates must equal the overall support level for each kind of tobacco. Lease and transfer of flue-cured tobacco was permitted from 1962 to 1986 (leasing was discontinued in 1987, but reinstated only for natural disasters beginning in 1988). Acreage-poundage quotas for flue-cured tobacco were implemented in 1965. Lease and transfer of quotas and poundage quotas became effective for burley in 1971. Producers of flue-cured and burley were allowed to sell an amount up to 110 percent of their quota without penalty (changed to 103 percent in 1986), with marketings the following year to be reduced by the amount of any over-marketings. An administrative rule in 1974 provided relief at congested warehouses early in the marketing season by requiring each flue-cured producer, as a condition of eligibility for price support, to designate in advance the warehouse desired for selling. The warehouse had to be within 100 miles of the county seat where the farm was located. 1982 to 1985 Three laws were enacted in 1982 and 1983 that substantially changed the program. Their adoption was impelled by a number of pressing concerns. Health groups and some members of Congress were concerned that the U.S. Treasury made outlays on a commodity statistically associated with various illnesses. Another concern among some growers and others was that many of the owners of tobacco quotas did not grow tobacco. Still another concern was that price supports were so high that U.S. tobacco was losing its competitiveness in world markets. The first law was termed the "No-Net-Cost Tobacco Program Act of 1982." The law, mandated by the 1981 Agriculture and Food Act, required that to be eligible for price support, producers of all kinds of tobacco, beginning with the 1982 crop, had to contribute to a fund or pay assessments to an account established by the cooperative association that makes Federal support loans available to producers. The funds are collected to cover potential losses in operating the price support program. The no-net-cost law was the first to authorize owners of flue-cured allotments and quotas to sell these rights separately from the farms to which the allotments were attached. The allotments and quotas had to be sold to actual active producers for use on other farms in the same county. The legislation also required corporations, utilities, educational and religious institutions, and other entities owning tobacco allotments, but not significantly involved in farming, to sell their allotments or forfeit them. The second law froze 1983 tobacco supports at their 1982 levels. The law also permitted the Secretary of Agriculture to reduce burley quotas as much as 10 percent in any year, if necessary, to control overproduction; previously, the maximum reduction permitted was 5 percent. The third law made further changes in the tobacco program, as follows: o Flue-cured supports for 1984 were again frozen at the 1982 level. In 1984, the support price for burley and other types was set so as not to narrow the normal price support differential between them and flue-cured. Procedures were established for calculating supports for each kind of tobacco in the future. o The lease and transfer of flue-cured tobacco quota was abolished beginning in 1987. o Imported tobacco, except for Oriental and cigar tobacco, must be inspected for grade and quality to the extent feasible. An amendment to the Food Security Act of 1985 required that imported tobacco be tested for pesticide residues similar to testing required for domestically grown leaf. o Beginning in 1986, the law required forfeiture of any flue-cured quotas assigned to a farm on which tobacco had not been planted (or considered planted) during at least 2 of the 3 previous years. o The last permitted announcement date for flue-cured tobacco quota was changed from December 1 to December 15. 1986 to 1987 Although three significant pieces of legislation were enacted in 1982 and 1983, major problems still existed in the tobacco program. These problems were addressed by the Consolidated Omnibus Budget Reconciliation Act of 1985. The Act, enacted in April 1986, affected the tobacco control programs as follows: o Beginning in 1987, after being lowered in 1985 for burley and 1986 for flue-cured, the annual flue-cured and burley price support was the level for the preceding year adjusted by changes in the 5-year moving average of prices (two-thirds weight) and in the cost of production index (one-third weight). Costs include general variable costs, but exclude costs of land, quota, risk, overhead, management, marketing contributions or assessments, and other costs not directly related to tobacco production. The Secretary can set the price support between 65 and 100 percent of the calculated adjusted change from the previous year. The procedure for setting price supports for any kind of tobacco other than flue-cured and burley was unchanged. o Flue-cured and burley quotas are now based on 1) intended purchases by cigarette manufacturers, 2) average annual exports for the 3 preceding years, and 3) the amount of tobacco needed to attain a specified reserve stock level (15 percent of the effective quota or a minimum of 100 million pounds of flue-cured and 50 million pounds of burley). Quota reductions were limited from 1986 to 1993. (The limit was extended to 1996 in subsequent legislation.) o USDA's discretion for setting flue-cured and burley quotas is limited to not more than 103 percent or less than 97 percent of the amount determined by manufacturers' needs and exports, and the reserve stock level. o The amount of flue-cured and burley tobacco that can be marketed without penalty was reduced from 110 to 103 percent of the farm marketing quota. o The latest announcement date for marketing quotas for any kind of tobacco, other than flue-cured and burley, was changed from February 1 to March 1. o Cigarette manufacturers are required to submit estimates to USDA of their flue-cured and burley purchases for the upcoming marketing year 15 days before the quota announcements are due. Any manufacturer that fails to purchase at least 90 percent of the tobacco it said it would purchase is subject to penalties. o Purchasers of flue-cured and burley tobacco pay the same amount to the associations as producers, to the extent practicable. o Loan stocks of 1976-84 crops were sold at discount prices over a 5-year period for burley and 8 years for flue-cured. The Agricultural Reconciliation Act of 1987 made further changes in the tobacco program. The most important change permitted limited lease and transfer of flue-cured tobacco quotas under disaster conditions. The law also reduced effective price support levels in 1988 and 1989. 1988 to 1995 The Drought Assistance Act of 1988 provided assistance to tobacco producers if their crop was lowered more than 35 percent by drought, hail, excessive moisture, or related conditions. The Disaster Assistance Act of 1989 provided payments if tobacco production was reduced more than 40 percent because of damaging weather or related conditions. For producers who obtained crop insurance in 1989 under the Federal Crop Insurance Act, disaster payments were available for losses exceeding 35 percent of expected production with average yields. Three pieces of legislation affecting tobacco were enacted in November 1990. Under the Omnibus Budget Reconciliation Act of 1990 for 1991-95 crop years, tobacco growers and purchasers of tobacco under marketing quota will annually be assessed 1 percent of the national loan rate on all marketings (0.5 percent each for growers and purchasers). The assessment is targeted to reduce the budget deficit. The marketing assessment has been extended through 1998. The Food, Agriculture, Conservation, and Trade Act of 1990 included the following provisions: o The Act authorizes the Secretary of Agriculture to invest trust fund reserves from the imported-tobacco inspection account in insured, or fully collateralized, interest bearing accounts, or authorize the Secretary of the Treasury to invest these funds in U.S. Government debt instruments. Fees, charges, and interest earned from the investment of such funds is added to the applicable appropriation account and available without fiscal year limitation. Interest earned is used to offset imported tobacco inspection fees. The Farm Poundage Quota Revisions Act of 1990 was designed to increase utilization of burley quota. Major features of the law are: o The sales of burley tobacco quota within counties was permitted beginning with the 1991 crop year. The buyer must be an active burley grower and the purchase is annually limited to no more than 30 percent of the existing quota of the buyer's farm, or 20,000 pounds, whichever is greater. Sales of poundage quotas have been permitted for flue-cured tobacco since 1982. o A farm that purchases quota is not permitted to sell any quota within 3 years of the last year of purchase. The total tobacco acreage permitted on a receiving farm cannot exceed 50 percent of the cropland in the farm. o Quota holders are required to lease, or attempt to grow, their quota 2 out of 3 years or forfeit the quota. This replaces the 1- out of 5-year plan. o Divisions of farm quota cannot be less than 1,000 pounds (except when the division is among family members or pursuant to probate proceedings). o The amount that could be leased to a receiving farm was increased from 15,000 to 30,000 pounds, thereby permitting individual farms to lease in the larger amount. o Lease and transfer across county lines was authorized in Tennessee. Tennessee burley producers approved such transfer in a Statewide referendum in January 1991. In December 1991, legislation was enacted to correct technical errors and clarify various provisions of the 1990 Food, Agriculture, Conservation, and Trade Act. It contained a number of provisions, including the repeal of the Tobacco Seed and Plant Exportation Act. This repeal lifted constraints on U.S. export of tobacco seeds and plants. Another provision permits lease and transfer of burley quota across county lines in Virginia. However, growers did not approve State lease and transfer in a Statewide referendum. Finally, the Tobacco Adjustment Act of 1983 was amended to exempt reporting requirements for tobacco used in cigars, pipes, and chewing tobacco and snuff in retail packages. In October 1992, an amendment to the Agricultural Adjustment Act of 1938 required that sale or lease of allotments between farms by producers of fire-cured, dark air-cured, and Virginia sun-cured tobacco be approved on an acre-for-acre basis. Previously, the law required a reduction in the allotmen transferred when the normal yield for the farm getting the allotment exceeded by more than 10 percent the normal yield of the farm releasing the allotment. The Omnibus Budget Reconciliation Act (OBRA) of 1993 (P.L. 103-66) contained a provision that required U.S. manufactured cigarettes to contain at least 75 percent domestically grown tobacco during each calendar year, whether for domestic consumption or export. Penalties were assessed manufacturers that exceeded the maximum allowed foreign content. The limit and penalties could be waived during natural disasters or because of low reserve stocks. In addition to the minimum content requirement, the OBRA of 1993 legislation imposes budget-deficit and no-net-cost assessments on importers. The rate for the budget deficit assessment is the same as for purchasers of domestic leaf, and the rate for the no-net-cost assessment is equal to the combined rates of fees collected from producers and purchasers of U.S.-grown flue-cured and burley leaf. Also, fees for inspecting all imported tobacco will be comparable to fees and charges fixed and collected for services provided in connection with tobacco produced in the United States. U.S. growers and purchasers of domestic leaf have paid special assessments equal to 1 percent of the average price support since 1991 to help reduce the Federal budget deficit. The new budget deficit assessment on importers applies to the 1994-98 crops and applies to all tobacco imported, including Oriental. Failure to remit the budget deficit fee will result in a penalty equal to 37.5 percent of the sum of the average price of flue-cured and burley tobacco for the immediately preceding year on the quantity of tobacco on which the failure occurs. The no-net-cost assessments cover projected losses in operating the tobacco price-support program. U.S. flue-cured and burley growers have paid no-net-cost fees since 1982, while purchasers have paid fees on U.S.-grown tobacco since 1986. Beginning in 1994, no-net-cost assessments are being levied on importers of flue-cured and burley tobacco. Noncompliance by importers to no-net-cost assessments results in a penalty equal to the average price of the tobacco involved for the preceding year times the quantity of tobacco which the failure occurs. The new act extended to 1996 a provision in previous law that limited the reduction in the national marketing quota for flue-cured and burley tobacco to no more than 10 percent of the amount of each quota in the preceding year. When determining the marketing quota for the 1995 and 1996 crop years, the Secretary of Agriculture can waive the 10 percent quota reduction limit if loan stocks exceed 150 percent of the reserve stock level. 1995 to Present President Clinton proclaimed a tariff-rate quota (TRQ), effective September 13, 1995, for certain imported tobacco, primarily flue-cured and burley. The proclamation also eliminated duties on cigar wrapper, binder, and filler, and Oriental tobacco. The TRQ replaced the domestic content rule (OBRA) of 1993, which was determined to be inconsistent with the General Agreement on Tariffs and Trade (GATT). GATT implementing legislation contained provisions ending the domestic content provisions once the President proclaimed a TRQ on certain types of tobaccos. The TRQ is the result of negotiations which conform to existing GATT requirements. Negotiations with supplier countries established a tariff-rate quota for imported flue-cured and burley tobacco as a GATT/WTO -consistent alternative. The TRQ places limitations on the quantities imported for consumption. Because of superseding agreements, Canada, Mexico, and Israel are not included under the quantitative restrictions. Imports above quota levels are subject to a 350-percent ad valorem duty. However, most of the duty may be refunded if the same tobacco imported is used to manufacture cigarettes that are exported. Imports under nine harmonized tariff subheadings during the period September 13 to September 12 of any year are limited to the following quantities: Million pounds (declared weight) Argentina 1/ 26.5 ------------------------------------------------------------------------------- 1/ Argentina's quota will decline to 24.3 million pounds on September 13, 1998, and to 23.7 million pounds on September 13, 1999. ------------------------------------------------------------------------------ Brazil 176.8 Chile 6.1 Guatemala 2/ 19.6 ----------------------------------------------------------------------------- 2/ Guatemala's quota will increase annually beginning September 13, 1996 to 19.6 million, 20.4 million, 21.2 million, and 22 million pounds by September 13, 1999. ----------------------------------------------------------------------------- EU-15 22.0 Malawi 26.5 Philippines 6.6 Thailand 15.4 Zimbabwe 26.5 Other 6.6 Total 332.6 Summary and Conclusions Many changes have been made to the Federal tobacco price support production control program--especially during the last dozen years. Changes have been made to increase the U.S. competitive position in world markets and significantly lower potential taxpayer costs for operating the program. Even though taxpayer costs are relatively small, the association between use of tobacco products and various diseases has spawned the introduction in Congress of several bills to eliminate the price support program. The implementation of the tariff-rate quota has brought the United States in line with the GATT/Uruguay Round accord. Imports have increased under the less restrictive TRQ and are expected to be continued at higher levels than were under the domestic content rule. However, U.S. growers may benefit from increased exports of leaf, and cigarette companies will not have the incentive to move production offshore that existed under the domestic content rule. END_OF_FILE