Big Tobacco’s changing role

As he watched his 850-pound bales of flue-cured tobacco move through the grading and sales process at Philip Morris USA’s tobacco receiving station here, Donnie Clayton summed up the 2010 season.

“It was a tough, hot year,” said Clayton, a Person County, N.C., farmer and one of more than 200 tobacco growers in North Carolina and Virginia who deliver their cured leaf to the Danville receiving station, a former tobacco auction warehouse.

“I don’t see how the tobacco did as well as it did. I irrigated my crop three times.”

The drought and searing heat that damaged many crops in Virginia and the Southeast this summer did not spare tobacco, a crop worth more than $80 million in value for Virginia farmers. But tobacco — a tough plant in hot weather conditions — seems to have fared better than many other field crops this year.

“It was awful dry — too hot and too dry,” said Tim Shelton, a Pittsylvania County farmer who grows flue-cured and burley tobacco on contract with Henrico County-based Philip Morris USA, the nation’s top cigarette maker.

“We made an OK crop.”

While the weather was a tough problem this year, farmers such as Shelton also have been adapting to other changes. That includes a more pronounced role for tobacco companies in farm operations, part of a trend that farmers see as a signal of how the U.S. Food and Drug Administration’s regulation of tobacco products will affect them.

Tobacco farmers in Virginia were expected to harvest about 19,800 acres of tobacco this season, including flue-cured, burley and fire-cured varieties, down only slightly from the 20,150 acres harvested in 2009, according to U.S. Department of Agriculture estimates. Final numbers are expected in January.

The decline is far less than some farmers and industry observers predicted earlier this year when tobacco companies started offering contracts to farmers for the 2010 season.

Some had expected a drop in production of as much as 10 percent as cigarette makers cut back on leaf buying because of declining U.S. cigarette consumption and a 62-cents-per-pack increase in the federal excise tax on cigarettes that took effect in 2009.

The latest estimates indicate some farmers may have been growing tobacco this year on speculation that they would find a buyer, and some may have signed secondary contracts with tobacco companies, enabling them to grow more tobacco but at lower prices than those offered in primary contracts.

Tobacco production remains well below the nearly 29,000 acres that farmers in Virginia harvested in 2004, the year that Congress ended a 70-year-old federal supplyand price-control program for the crop.

Production in Virginia has held between about 17,000 acres and 21,000 acres for five years now, after many farmers left the business and took payments from an industry-funded $10 billion buyout of tobacco quotas.

The subsequent shift away from auction sales of tobacco to contract sales directly to cigarette companies and leaf merchants means that the farmers who remain are facing new demands.

“The quality is by far the most important thing,” said Sterling Wilkinson, a 25-year-old Mecklenburg County farmer who raises 280 acres of tobacco. “It is becoming more and more important every year.”

At the Philip Morris USA tobacco receiving station in Danville, graders closely inspect every bale that moves through the sales process.

Posters urge farmers to keep their tobacco clean of NTRMs, or non-tobacco related materials, which could include any sort of farm debris or other unwanted objects. Cellphones have been found in baled tobacco in a few instances.

“They want 100 percent clean tobacco, no matter what, and they make a big deal about it,” said Wilkinson, who sells his tobacco primarily to Philip Morris International, a separate company from Philip Morris USA that sells cigarettes only overseas but still buys U.S. leaf.

“It just cost [the companies] more money down the road to get [foreign materials] out of the tobacco.”

. . .

Altria Group Inc., the parent company of Philip Morris USA, also is building closer relationships with farmers.

The company has started a program with its contract farmers called GAP — or good agricultural practices — that seeks to improve on-the-farm production.

“It’s a good way to establish relationships with farmers,” said Becky Nichols, a grower representative for Altria. Nichols’ job includes making regular visits to tobacco farms in Virginia and North Carolina that sell leaf to the company.

“Before they put the grower representatives in place, if the growers had questions or concerns, they did not know who to contact with Philip Morris,” Nichols said. “They knew how to contact their receiving station operator, but they did not have a good line to anybody directly involved with Philip Morris.”

For farmers such as Shelton, the closer ties with cigarette makers are a change from the past.

A fifth-generation farmer, Shelton said his father and grandfather would have had “zero involvement” with the companies before their tobacco was sold. “The only thing [the companies] were interested in was the product we delivered,” he said.

Now, Shelton said the company’s GAP program means keeping detailed records of almost everything he does with his tobacco crop.

“We try to keep immaculate records on everything from our chemical usage to fuel usage to man hours,” he said. “It is a daily log.”

. . .

Among other things, farmers say companies are keen to reduce the residue levels of MH30, a chemical that is applied to tobacco to control the growth of blooms.

Philip Morris USA says the GAP program is about improving production practices and has nothing to do with the FDA’s regulation of tobacco products. Congress granted the agency that authority this year.

The FDA was not given regulatory power over tobacco farms, and Philip Morris USA says the agency has not implemented any regulations yet that would affect how tobacco is grown.

But farmers say they can see the trickle-down effects of regulation coming.

“I think all of this is sort of heading in the direction of FDA’s influence on the farm, even though the inspector might not be on the farm,” said Don Anderson, a Halifax County farmer and director of the Virginia Tobacco Growers Association.

“It has been a very common thing in Brazil and other countries for the [tobacco] companies to be highly involved in the production side of it. I just see us heading more and more towards that,” he said.

Shelton said he doesn’t mind the record-keeping and the goal of producing cleaner, higher-quality tobacco.

“I was in favor of my product being able to be identified positively all the way through the manufacturing process, so that if there is excess use of a certain chemical, it doesn’t show back on me,” he said. “That’s because I do it right, and I think everyone needs to be held accountable.”

For Shelton, who grows more than 225 acres of tobacco, rising costs of production are a bigger issue.

He said his labor costs rose about $2 an hour this year. “That’s a pretty big number for us,” he said. “Four years ago, we bought LP [liquefied petroleum] gas at 60 cents a gallon, and this year it was $1.60 a gallon.”

. . .

Yield — the amount of leaf that a farmer is able to squeeze out of every acre planted — can make or break a farm in a tough weather year like 2010.

Overall yields for tobacco in Virginia this year are expected to be about 2,300 pounds per acre, according to USDA estimates, less than the 3,000 pounds per acre that many farmers say they aim for to maximize returns.

“If you are fortunate enough to yield 3,000 pounds an acre, there will be a profit,” Shelton said. “If you average 2,200 to 2,400 pounds an acre, it is going to be close to break even.”

Prices paid for tobacco leaf — kept private by farmers and the companies for competitive reasons — seem to have fallen in a wide range this year, from lows of about $1 a pound to highs of about $1.95 a pound, Anderson said. He said farmers typically would need to make about $1.50 a pound to break even.

Infrastructure costs — including the costs of buying and maintaining farm equipment, curing barns and irrigation systems — also are becoming a big issue for farmers, Shelton said.

He said he recently looked into replacing one of his tractors.

“The tractor I was replacing was six years old,” he said, adding that he bought it for $69,000 and the suggested retail on that tractor this year is $149,000.

“I think that is going to be the big hurdle that agriculture — not just tobacco production, but all of agriculture — is going to be facing over the next 10 years,” Shelton said. “As this older equipment wears out, can [farmers] replace it, or are they going to have to get out and sell the land?”

By John Reid Blackwell

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