Tobacco Industry Regulations In The United States

In recent years, the lower raw material costs and cheaper labor of the harvesting and curing stages of tobacco in Brazil, Taiwan, or the Philippines have transformed these countries into large centers for tobacco growing and exportation (Halich and Snell, 2007). Mostly outsourcing tobacco leaves and labor for low prices abroad, these farms have gradually decreased their investments in the United States. The declining demand for tobacco in the U. S. has been detrimental to tobacco producers, and while the livelihood of U. S. tobacco farmers decreased, the government had to compensate for the low profits of tobacco farmers with increased quotas (Halich and Snell, 2007).

For almost seventy years, U. S. farmers had used quotas as collaterals for loans, thus obtaining new resources to invest in their harvest the following year.

However, the system was “inefficient” for the tobacco corporate giants, who did not find low-enough prices to buy in the United States (Brown, 2005; Rice, 2004). In fact, it was not convenient for the Big Three; it was not convenient for the federal government, who had to give assistance to farmers; and it was most of all not convenient for the farmers, who had to invest in quotas, inputs for production and labor despite the plummeting market-value for tobacco and decreasing price support. In this context, the government introduced the TTPP in order to reduce the burden of quota payments to farmers (Rice, 2004). Under the TTPP, farmers growing tobacco have to produce specifically for the supply chains of major processors, wholesalers, and retailers, rather than selling commodity crops locally to the highest bidder. In this typical “contract farming” arrangement, the grower was not faced with the quota production constraints, but had to follow the exact customer specifications of their buyer. In contract farming, the grower provides the land, the buildings, the equipment, and the labor.

The company provides the “management direction” (i. e. , makes all the decisions) and the market outlet. This often results into a new requirement for the grower to respect the various conditions of the buyer, in terms of management practices, chemical and fertilizer applications, disease control, curing management, and market preparation (Barlett, 1989; Durrenberger, 1998; Qualman, 2001). Under the contract system, there is no longer a market where the government can purchase tobacco rejected by the companies (Halich and Snell, 2007). The contract system does not guarantee a buyer nor even an established set of prices in the market, as prices will be relative to supply and demand. Contracting growers merely have a legal agreement with a buyer which states that the company will purchase their crop as long as they fulfill contracting terms, along with a pre-marketing price determined solely by the contracting company. In this sense, growers have greater burdens and greater risks as buyers become more selective in their purchases (Halich and Snell, 2007).

Given the competitiveness of the global market, these conditions largely benefit tobacco buyers. On some level, the system may also benefit in some relatively minor way those tobacco growers that can endure these challenges and meet their buyers’ requests given their large land holdings. But small farmers find almost no benefit in this legislation. As Halich and Snell argue, future income for farmers:

Will have to be earned in a marketing environment characterized by a concentrated group of buyers with market power and against very competitive tobacco producers from other countries and from other traditional and nontraditional growing areas in the United States. Consequently tobacco growers will have to pay a lot more attention to cost-cutting measures (along with quality) if they are going to survive and prosper in the post-buyout era (Halich and Snell, 2007).

Not surprisingly, leading manufacturer of cigarettes in the United States and the largest purchaser of U. S. grown tobacco Philip Morris supported the tobacco quota buyout. “Quota leasing over the years has added costs and weakened U. S. tobacco growers' ability to compete with foreign markets. Elimination of this cost should make U. S. tobacco more competitive and stimulate demand, though there can be no guarantee in this regard” (Szymanczyk, 2003). “Eliminating the quota system and establishing an open marketplace where tobacco farmers are permitted to grow tobacco in any quantity should bring more stability and certainty to the grower community” (Szymanczyk, 2003). With these words Philip Morris explained the goal of the buyout: less subsidies and higher competitiveness (i. e. , lower tobacco prices and decreased income for growers). In fact, Philip Morris played a major role in the buyout.

On July 15, 2004, the Senate passed bipartisan legislation that would provide the U. S. Food and Drug Administration (FDA) with effective authority to regulate cigarettes and other tobacco products. The legislation gave FDA the authority to impose performance standards for the manufacture of cigarettes and their promotion. The provision was “supported” by Altria Group, parent company of Kraft Foods, the world’s second largest food company, and Philip Morris, the world's leading cigarette manufacturer. Philip Morris supported the FDA regulation and in fact it wanted more:

We had hoped legislation eliminating the Federal Tobacco Program would also include provisions for regulation of tobacco products by the Food and Drug Administration (FDA). The lack of regulatory authority by the FDA is a huge disappointment, not only for Philip Morris USA, but for all of those who hoped to see a coherent, comprehensive national tobacco policy in this country. The failure to pass this legislation with all its benefits to consumers, public health and all legitimate participants in the tobacco industry is a significant step backward in the effort to reduce the harm associated with tobacco (Szymanczyk. 2003).

In contrast, Philip Morris competitor Reynolds American lobbied extensively against the FDA regulatory authority, because this authority would have given the FDA power to drastically limit how and where manufacturers advertise and sell products, and it would have likely protected Philip Morris’ market share by limiting Reynolds' advertising. In these plans, there was little about the farmers! The bill was merely meant to create the conditions for the large merchants to buy tobacco at lower costs. This was sold as an improvement for big farmers, but amounted to nothing but a “fair compensation to tobacco quota holders” so that they could leave tobacco and “retire with dignity” as Senator Dole desired.

The result of the buyout was not surprising: although there are yet no official data about the number of farmers who left tobacco after the buyout, growers say that most quota owners and growers used the TTPP to “take the money and get out” (Rice, 2004). North Carolina tobacco economist Brown predicted that the buyout would lead almost 60 percent of small farms in North Carolina to use the money from the buyout to abandon tobacco (Brown, 2005). Such a result was also supported by the fact that not all farmers were given compensation for their quota: “one-third of the buyout money is going to 10 percent of the owners, some being paid over seven dollars million due to the size of their quota holdings, most experts predict that these huge farms will prosper after the buyout because of their size” (Penkava, 2004). However, smaller farms will most likely start to disappear (Penkava, 2004).