Return to Virginia Business - November 2002

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— Danville ponders its post-tobacco future

by John Peters

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For hundreds of years, tobacco and peanuts have been the icons of Virginia’s farmlands. Native Americans taught English colonists their worth, helping save the Jamestown experiment from economic ruin. Tobacco was quickly deemed so valuable that one of the very first laws passed by the very first General Assembly in 1619 was one establishing price supports for the leaf. Four centuries later, Virginia’s peanuts won distinction by being represented by one of advertising’s most beloved and enduring brands — the dapper Mr. Peanut sporting spats, a monocle and a top hat.

Today, both crops are in serious jeopardy and, as incredible as it may seem, might vanish altogether. The cause of their demise? Growers became fatally dependent upon federal programs designed to save their grandfathers during the Great Depression nearly 70 years ago. For generations, federal government quota programs made peanuts and tobacco exceptionally lucrative by defying the dynamics of free market pricing. Now the programs are on their way out, and perhaps the farmers are, too.

As the end looms, the impacts across the Old Dominion will be tremendous. From the sandy peanut fields of Southampton County to the once-proud, red brick tobacco auction buildings of Danville, local economies are about to go into turmoil. Peanut buying houses and shelling operations are shutting down, tobacco auctions are closing, farmland will go to market by thousands of acres, farm equipment dealers will go bust and banks will suffer. Peanut-dependent communities such as Courtland and Franklin will be particularly hard hit because of a convergence of higher growing costs and typically lower yields per acre on Virginia farms.

The effects on the state’s economy could be huge, representing billions of dollars. Philip Morris USA, for instance, buys Virginia leaf and operates one of the world’s largest cigarette plants in Richmond. The company prices its contribution to the Old Dominion economy at $1.7 billion. Tobacco growers themselves produce crops worth $124 million and the dollar amount is much more when secondary businesses, such as equipment, fertilizers and banking are factored in. Peanuts represent $60 million annually, and that’s just the value out the farm gate.

The demise of peanuts and tobacco is especially ironic because political sentiments in growing areas are traditionally conservative with voters backing free enterprise, low taxes and limited government. Yet, those areas have survived for years primarily on the largesse of big federal government programs that in a different light might be tarred as socialistic. The federal government began price supports for tobacco, peanuts and other crops in 1938 just after the Great Depression. By setting the poundage that could be sold per acre, the government kept supplies away from the market that could have been sold, thus boosting prices. Besides seeming quaint, this view flies against today’s current economic wisdom of letting markets prevail and accepting the result.

Originally, the intention for creating price supports was altruistic. Tobacco farms were and still are the smallest per acre in the U.S. Without price supports, the logic back in the Depression went, hundreds of thousands of leaf growers would be bust and swarm to welfare lines in cities. Big tobacco companies, meanwhile, would swoop in and buy up their tobacco fields for pennies on the acre. A similar theory went for peanuts.

Problem was, Franklin Delano Roosevelt’s programs were conceived as temporary measures. They involved most crops, but in time programs for corn and wheat ended as farmers got back on their feet. Price support schemes for peanuts and tobacco survived for decades thanks to strong lobbying by the South’s contingent in Congress. In time, quotas took on a life of their own, becoming a transferable rent. They could be sold or passed on like an heirloom to a relative who may or may not actually farm the land. Indeed, a review of U.S. Department of Agriculture records shows that in Dinwiddie County about one third of all tobacco quotas are held by individuals who don’t even live in Virginia, but in spots such as Brooklyn, N.Y., Las Vegas or Chicago.

The weight of all of this is clearly evident to Darrell Jackson as he squats down and takes a closer look at his Henry County tobacco plants. Deer have chewed up 140 of the 6,500 tobacco plants he crammed into the single acre allotted by a government program for tobacco this year. It was a battle Jackson fought all summer, trying to keep his most profitable crop from becoming a wildlife salad bar.

Yet he knows that the damage is nothing compared to what Congress might do. Five different bills are floating around the halls of Congress, all of them taking aim in some form or fashion at the tobacco quota and price support system that makes leaf many times more profitable to grow than virtually any other crop in the region. Farmers average $700 to $1,000 per acre so a 50-acre tobacco quota can net a farmer from $35,000 to $50,000 a year, says Gary Bullen, a tobacco economics specialist at the Department of Agriculture and Resources Economics at North Carolina State University in Raleigh. “Fifty acres of tobacco is enough to support a family,” he says. “There have not been many crops anybody can say that about.” The flue-cured areas east and west of Danville typically have allotments of from 50 to 100 acres. Such farmers can net up to $100,000 a year. Air-cured tobacco brings less because quotas have to be smaller due to the steep topography of the mountains where the leaf is grown. With so much to lose, those farmers and those dependent upon their crops are in a tense holding pattern, waiting to see what Congress will do.

Peanut growers already feel the pain. On May 13, their quota system that restricted supply to prop up prices came to an end. They are struggling with nearly a 30 percent drop in the government supported price this year for their crops, which are primarily in-the-shell Virginia peanuts. They’re sold as gourmet items in gift tins at tourist spots such as Colonial Williamsburg and The Virginia Diner in Wakefield. Landowners are looking at the end of the quota system that allowed them to charge at least double rent for land that carried a peanut quota with it. The federal government is now buying up quotas at 55 cents per pound.

Just as with tobacco growers, some peanut farmers who held those quotas have stopped farming, often renting out their quotas or passing them to relatives, which led to fewer farmers actually working the fields. “We have 1,500 peanut farmers in Virginia, but we have several thousand landowners,” says Russell Schools, executive secretary for the Virginia Peanut Growers Association. “We have four or five times as many landowners as we have farmers.”

The quota and price support system meant farmers would get a guaranteed income — averaging around $610 a ton over the past several years. That translates to a gross of about $1,000 an acre, according to Wes Alexander, a Virginia Tech extension agent in Southampton County. That’s considerably more than the $480 per acre averaged by cotton growers, and four to five times more than what corn growers ($250 per acre) and soybean ($200 per acre) growers get. Even when the $500 per-acre cost is factored in for peanut farmers, the crop can still be a veritable cash cow for those who grow it. That ended this year, Schools says, when Congress ended peanut quotas, although peanut growers are being propped up by other means.

As of the spring, landowners who are not actively farming will lose their quotas. The federal government is compensating those landowners at 55-cent-per-quota pound payable in a lump sump or spread out evenly over five years — quota holders’ choice. In 2003 the farmers holding a growing base will have to assign that base to a piece of land — which means the value of the base will again belong to landowners, not farmers. “This is another blunder that Congress made,” says Billy Bain, a peanut farmer in Dinwiddie County who is also serving as president of the Virginia Peanut Growers Association. “Congress wrote the bill as if every farmer owned the land he farmed.” Bain, like many farmers, rents most of the land he works. “I farm 3,000 acres, but only 275 is the family farm.” The rest of the land he leases and Bain says that not only will farmers take a hit in the pocketbook, but landowners will as well. “Last year we had 75,000 acres planted in peanuts,” he says. Because farmers knew changes were coming, the total acreage dropped to 56,000 this year in Virginia, and the number may trickle to nearly nothing in coming years.

Already, Birdsong Peanuts, one of the largest peanut shellers in the nation, has suspended operations at its shelling plant in Franklin and will eventually consolidate that work with another one of its plants in Suffolk — costing the town about 75 jobs. County agent Alexander predicts that at least two of the 10 farm equipment suppliers in Southampton County will go out of business.

Southampton and the other peanut-growing communities will suffer with the changes in the industry. In addition to the closing at Birdsong, there are rumors of other closings and plant sales. “I think that’s going to change the landscape of what the area looks like,” says Teresa Beale, an official at the Southampton County Chamber of Commerce.

What will be seen instead of acres of peanuts are “For Sale” signs. “There are several counties, in particular Southampton County, that are principally rural in nature next to a very, very heavily urbanized area,” says Jim Pease, an economist with the Virginia Extension Service at Virginia Tech. “The income that is being produced for farm families from peanut production is one of the reasons that county has been able to maintain its rural nature. The decline in profitability … is going to put much more pressure on the farmland down there to be sold for housing.”

In the tiny town of Capron, in Southampton County, already one giant “land for sale for development” sign has cropped up near the Virginia Peanut Grower’s Association office, where Schools is based. The sign sits alone, surrounded by a field full of peanuts. Schools says that if people start buying land to build houses, values could eventually climb, making it more difficult for peanut farmers to afford to stay in business. Shoving them out could be affluent Yuppies from Tidewater who might want a 60-acre farm where they could relax on weekends.

As well-heeled professionals move in, it doesn’t necessarily mean that peanut products will become scarce on grocery shelves. Besides imports of lesser-type peanuts from India, China and Argentina, which offer tough competition, Virginia faces competition from South Carolina, Georgia and Texas. Peanuts in Virginia are grown in a relatively small area — the state’s most southern tier — because it has the right type of sandy soil and the necessary long, hot growing season. Georgia and South Carolina have similar growing conditions and abundant land — more than is being used — and easy access to water for irrigation. Because of problems with insects, water and soil, Virginia peanut farmers face higher costs. With quotas gone, other states have a built-in advantage in production costs.

While the near-term future is obvious for peanut farmers, tobacco farmers are still in the dark. The tobacco industry has been taking a beating for years because of health risks and stronger foreign competition. These factors have helped mount political support to curtail tobacco quotas. Growers are feeling the pinch. For example, Haywood J. Hamlet, general manager for Dark Tobacco Sales Cooperative and the Sun-Cured Tobacco Marketing Cooperative, both based in Farmville, saw the quota for the two types of tobacco he handles cut 42 percent this year, down to 1.5 million pounds.

He’s not alone. Stan Duffer, secretary of the Virginia Bright Flue-Cured Tobacco and Dark-Fired Tobacco boards, saw his much larger operation take even bigger hits. His quota for flue-cured tobacco this year is 51.9 million pounds, while the quota for burley stands at 12.1. Both numbers represent a major drop. “In 1998, the quota for flu-cured tobacco was 72.5 million pounds,” he said. “In 1997, it was 86.8 million pounds.” The quota for Burley that same year was 26.4 million pounds.

That trend, both say, will most likely continue, prompting a continued move by several tobacco state congressmen for a federal buyout of the quota system. Under proposals being considered in Washington, owners of government allotments would get anywhere from $8 to $12 per pound in exchange for their quotas. Farmers leasing the quotas could get as much as $4 per pound. Bullen, at N.C. State, says a typical yield of tobacco is roughly 2,300 pounds per acre — meaning a farmer opting for a buyout proposal of $4 per pound would get nearly $9,200 per acre. A non-farming quota holder could see double or triple that.

The main sticking point is who will pick up the buyout’s tab. In the case of goobers, it should cost the federal government $1.3 billion, not exactly peanuts. Still, that figure pales in comparison to the vastly more expensive tobacco buyout proposals. Most estimates put the price tag at $16 to $20 billion. The buyout program could be paid from a new fee levied on cigarette manufacturers, presumably based on the savings they will enjoy once quotas are eliminated. At a congressional hearing in September, Philip Morris USA CEO Michael Szymanczyk said the only way to get approval for a buyout plan is for manufacturers to foot the bill. Officials from R.J. Reynolds Tobacco Holdings Inc. and Lorillard Tobacco Co., however, say they do not want to pay for a buyout.

Another sticking point is regulation by the U.S. Food and Drug Administration. If this proceeds, nicotine-packed tobacco would be reviewed and regulated by the FDA as a drug, although it is uncertain what this might mean for growers. Says one lawyer: “It could be something as simple as having to fill out paperwork, or it could mean something as absurd as having to put tobacco plants through performance tests … similar to medical companies testing drugs.”
Big Tobacco is split on FDA regulation. Philip Morris supports a bill introduced by Rep. Tom Davis, R-Va., and Rep. Mike McIntyre, D-N.C., which calls for FDA approval of tobacco products. Philip Morris contends such regulation will bring stability to the industry. R.J. Reynolds and Lorillard oppose such regulation.

FDA regulation of tobacco, says economist Bullen, is almost a certainty. Cigarette executives such as those from Philip Morris support FDA regulation, believing that they may have a hand in setting review standards for the leaf. Others opposing it fear it will solidify Philip Morris’ domination of the existing market. Philip Morris has about 70 percent of the domestic market.

Such uncertainties have beset Virginia’s tobacco growers ever since the Surgeon General declared cigarettes health risks back in the 1960s. Even though big cigarette companies have continued to prosper, Virginia growers and related businesses have seen their enterprises contract. Danville, for example, once had 17 tobacco auction houses and now has just one (see sidebar).

Already many tobacco companies have begun bypassing the old tobacco auctions, contracting directly with farmers instead. Tobacco companies sometimes pay slightly more than the government-supported prices for direct contract purchases. “They (tobacco companies) can control quality better through contract purchases,” says economist Bullen. Typically, contracts have the company paying the farmer a specified per-pound rate, but only if the tobacco is a certain level of quality. Bullen says that could be good news for the farmer. It is an incentive to do whatever necessary to make sure the leaf meets the highest quality levels and to beat competition from leaf growers in China, India, Brazil and Turkey.

Many of the Virginia communities where auction houses once stood have moved on, turning to other agriculture or business enterprises to fuel their economies. Although these communities still stand to see their economies affected by any change in the tobacco quota system, Bullen says the gradual decline in quotas has made tobacco a smaller and smaller part of the local economies. “Over the years they have already turned to alternative operations. They have started chicken and turkey-raising operations, turned to other sources of income.”

And outside of Virginia? Bullen says the story in North Carolina is the same. Even in the large tobacco-farming operations in the Piedmont farmers have been developing other operations, such as chicken and turkey farms, to take the place of declining tobacco revenue. Some states, such as Kentucky, might even benefit from the changes. Bullen says that the burley farmers in North Carolina and Virginia may find it cost prohibitive to continue growing since they are already limited by topography. Air-cured leaf growers in Western Kentucky, where flatter land makes for larger farms, might gobble up the allotments given up by their Old Dominion and Tar Heel counterparts.
Whatever changes await tobacco farmers, and the related local businesses in Virginia, those changes probably won’t take effect until at least next year. This season’s tobacco harvest is in, and Congress, loath to act on such a high-dollar proposition before this year’s elections, most likely won’t take up the issue until the next session. Until then the farmers will wait and work, planning next year’s crops and hoping that whatever Congress does will let most of them stay in business.

Despite the health risks, a Virginia without tobacco is a jarring thought since the leaf has played such a huge role in the state’s economic history for four centuries. Ditto peanuts. The crunchy legume has come to reflect the Virginia persona. In fact, Planters Peanuts, one of the best-known brands, was founded in Suffolk by Amadeo Obici, an Italian immigrant, in the early 1900s. Although Planters was long ago sold and moved from Virginia, its legacy remains — a trust left by Obici benefits the community and a major hospital in Suffolk is named for Obici’s wife. But farmers and others dependent upon peanuts and tobacco aren’t comforted by nostalgia right now. They are worried about the devastating effects these changes are having on their lives.

Return to Virginia Business - November 2002