Wednesday, September 19, 2007

Whacky Tobaccy

In 2004 the US junked its arcane and expensive program of tobacco quotas and subsidies with a 10 billion dollar golden handshake to the existing quota owners.

As yesterdays WSJ described the old situation: In 1938, Congress passed the Agricultural Adjustment Act, a New Deal-era law crafted to support the thousands of small farmers of all sorts who had been financially devastated by the Depression. The law guaranteed tobacco farmers in many states a minimum price for their crops. It allotted quotas to farms that produced tobacco at the time the law was enacted, which dictated how many acres they could plant. Tobacco buyers were penalized for buying from growers without quotas. Growers who didn't own a quota had to buy or rent one from those who did. The system propped up prices and limited production to narrow geographic areas and to plots of land rarely larger than 10 acres.

The dissolution of the system initially produced a notable fall in tobacco prices and a reduction in acreage devoted to the noble weed. But then.....

Predictions from some quarters that tobacco farming was headed for extinction in the U.S. proved incorrect. Today, farmers can grow as much tobacco as they want, wherever they want. Economies of scale have kicked in.

Arnold O'Reilly, for one, figured it made sense to grow even more. Before the buyout, he says, the tobacco he grew on his Hardinsburg, Ky., farm was selling for about $1.98 a pound, but he paid up to 80 cents per pound to rent a quota, knocking down his effective price to as low as $1.18. These days, he says, his tobacco fetches about $1.60 a pound, and there's no quota payment taking a bite out of it.

"Before the buyout I couldn't expand," he says. As a result, "we weren't competitive on the world market." Today he is growing 120 acres, double the 60 acres he grew just before the buyout. He has invested more than $300,000 in new farming equipment, barns and land. "I'm unlimited in my opportunities," says Mr. O'Reilly, 42. "I have nobody that can hold me back now."

This heartwarming story is similar to what happened in New Zealand when farm subsidies were eliminated.

I'll give the punchline to one David Ogden, a super-clueless academic (are there any other kind really) from Virgina Tech: "we are finding that farming can be done without subsidies".

Imagine that.