Senator Urges Buyout for Tobacco Farmers

From Bloomberg News

The chairman of the Senate Agriculture Committee is proposing that the tobacco industry pay farmers $15 billion to stop growing tobacco as part of the national tobacco settlement.

Sen. Richard Lugar (R-Ind.) said Friday that tobacco price supports and federal growing quotas should be phased out within four years, with farmers given financial incentives to shift to other crops or to reduce their tobacco acreage.

President Clinton and tobacco state lawmakers from both parties have insisted on help for the farmers, and some form of Lugar's proposal is almost certain to be part of national tobacco legislation. The estimated $15-billion cost would come on top of the $368.5 billion in the original proposed settlement.

"This legislation will get government out of the business of encouraging tobacco production," Lugar said in a letter this week to other senators. "However, it will provide a fair and generous transition for tobacco growers."

The federal government currently issues quotas to farmers limiting the amount of tobacco they may grow and sell each year, and then setting a minimum price for tobacco. Lugar's plan would pay farmers either a lump sum or three annual payments to surrender their quota and would end mandated price supports.

The tobacco settlement, if enacted into law, is expected to reduce demand for tobacco in the U.S., dropping the price of tobacco--and potentially harming a potent political constituency for lawmakers from tobacco-growing states.

Tobacco state lawmakers, including Lugar, Sen Jesse Helms (R-N.C.) and Mitch McConnell (R-Ky.), said almost immediately after the settlement was announced that they would seek to ensure that tobacco growers are compensated for any loss of business or for the cost of switching crops.

Tobacco is currently the sixth-largest U.S. crop, generating more than $2.5 billion a year for growers in 16 states, according to the Agriculture Department. North Carolina is the largest tobacco-growing state, followed by Kentucky, South Carolina, Tennessee and Virginia, according to the USDA.

Currently, the U.S. issues quotas allowing farmers to grow 1.7 billion pounds of tobacco, according to the USDA.

These quotas are combined with a price support program guaranteeing farmers a set price for their tobacco. Tobacco companies and tobacco buyers are free to purchase as much tobacco as they want but must pay a minimum price for what they purchase.

Lugar's joint elimination of quotas and price supports is designed to ensure that as U.S. smoking rates decline and demand for tobacco decreases as the settlement is implemented, farmers have an incentive to switch crops.

The decline in production would presumably offset the drop in demand, easing the price decline for farmers who wish to continue growing tobacco.

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