Notice of Proposed Change in Price Support Differentials for Flue-Cured Tobacco, and Invitation to Comment

AGENCY:

Commodity Credit Corporation, USDA.

ACTION:

Notice and request for comments.

SUMMARY:

The Commodity Credit Corporation (CCC) is proposing to set price support differentials for the 2001 crop of flue-cured tobacco, that, because of market conditions, would provide a zero price support rate for tobacco that has not been cured in barns with an indirect heat source. In order that tobacco can be duly valued for price support purposes, farmers will, if the proposal is adopted, be required to certify whether their barns have an indirect heat source.

DATES:

Comments on this proposal should be received by December 27, 2000 to be assured of consideration and should be directed to the individual listed below.

FOR FURTHER INFORMATION CONTACT:

Charles Hatcher, Director, Tobacco and Peanuts Division, United States Department of Agriculture (USDA), 1400 Independence Avenue, SW., STOP 0574, Washington, DC 20250-0514, telephone (202) 720-0156 or FAX (202) 418-4270.

SUPPLEMENTARY INFORMATION:

Quotas for tobacco production are administered under the Agricultural Adjustment Act of 1938, 7 U.S.C. 1281 et seq. Where quotas for a kind of tobacco have been approved by producers of that kind of tobacco, price support is made available for that tobacco under the terms and conditions of Section 106 the Agricultural Act of 1949, 7 U.S.C. 1421, et seq. Flue-cured tobacco is one of the kinds of tobacco for which quotas have been approved. Regulations for governing price support and quotas for tobacco are found at 7 CFR parts 723 and 1464.

Price support is made available through non-recourse loans to farmers through a designated producer-member association, which in the case of flue-cured tobacco is the Flue-Cured Tobacco Stabilization Corporation (Stabilization). As such, the loans do not have to be repaid, but rather the tobacco is placed in Stabilization's inventory and Stabilization then attempts to sell the tobacco for the highest price possible. Losses on inventory tobacco are covered by assessments levied against all producers (and buyers) of flue-cured tobacco, irrespective of, in the case of producers, whether that individual producer placed any tobacco under a price support loan.

The average loan rate for the tobacco is set for each crop year under a formula which is set out in Section 106 of the 1949 Act, but, in making those loans, variations for location and other factors are made in the loan amount which is available for an individual lot of tobacco. Such variations in the price support level are known as “differentials”. They are provided for explicitly in Section 403 of the 1949 Act, which is found at 7 U.S.C. 1423. That section was suspended for commodities other than tobacco for the 1996-2000 crops by Section 171 of the Agricultural Market Transition Act (AMTA), Public Law 104-127, but remains in force for tobacco. Under the provisions of section 403 of the 1949 Act, the Secretary may (and the Secretary has done so consistently for many years) make appropriate adjustment in the support price for differences in grade, type, quality, location and other factors. The adjustments must, insofar as practicable, be made in such manner that the average support price for the commodity will, on the basis of the anticipated incidence of such factors, be equal to the national average level of support determined in accordance with section 106 of the 1949 Act. Using this authority, differentials are established each crop year for quota tobaccos, by kind.

This notice proposes to change the flue-cured tobacco price support differentials effective for the 2001 crop year to provide for differing valuations of tobacco based on the heat source of the barn in which the tobacco is cured. Specifically, it is proposed in this notice that the differentials for the upcoming crop year be adjusted so that flue-cured tobacco cured in barns which use a direct heat source would have a price support value of zero. For ease of reference, and for reasons which are explained below, those barns with a direct heat source will be referred to as “un-improved” barns and those with an indirect heat source will be identified as “improved” barns. However, those barns which have been built with an indirect heat source would, of course, be treated the same as those which have been converted, or “improved” by changing the heat source from a direct source to an indirect source.

The change in differentials set out in this notice is being proposed at the request of Stabilization, the producer-owned association. According to Stabilization, buyers in recent years have increasingly been concerned about flue-cured tobacco cured in barns with direct heat sources because of the desire of buyers to reduce nitrosamines which can form through direct heating. Due to those concerns and as part of a long-term effort to reduce nitrosamines, Stabilization has informed USDA that buyers will no longer, effective with the 2001 crop, buy tobacco cured using direct heat; that is, Stabilization has indicated that the market value of direct-heated tobacco is zero. Recently, however, by a joint enterprise between tobacco buyers and Stabilization, farmers have been provided funding to convert their barns from direct heat to indirect heat.

In the meantime, however, because of these buyer preference and demands, producers, through their association (Stabilization), have requested that the price support value of the tobacco produced in un-improved barns be zero because otherwise, it is feared, the tobacco will go into the price support inventory, will not be marketable, and will produce losses that must be borne by all producers together in the form of the higher “no net cost assessments,” referred to above, which, under the terms of the 1949 Act, are designed to help assure that the tobacco program is operated at no net cost to the public other than the costs associated with price support programs in general. Since there is no indication that the market price of the tobacco will be greater than zero, this notice proposes adopting the suggestion of the producer association. However, in proposing to set the differentials at zero for tobacco produced in un-improved barns, the Department is not making a determination about the benefits of, or need for, barn improvement, or even whether the general trends in barn improvement are a good idea or a bad idea. Rather, the differential determination is made on the expected actual market price for tobacco produced in the un-improved barns, taking into account the assessment of that price being made by the producer association itself. It is realized, however, that this determination may involve difficulty for some farmers who do not, or can not, make the improvements to their barns despite the incentives being offered in the industry to make that change. For that reason, comment on this proposal is requested. While all comments are welcome and solicited, respondents should, in particular, address the question of whether tobacco in un-improved barns will, in fact, have a market value for the upcoming crop year. It bears emphasizing that irrespective of the outcome of the proposal set out in this notice, tobacco produced in direct-heated barns will still be, at least technically, eligible for price support in that the tobacco will meet the minimum requirement that tobacco must meet to generate a price support loan as set out in part 1464. However, of course, this will not be of much value to the farmer, in terms of loan access since the loan value assigned the tobacco would be zero, or, perhaps, close to zero Because this is strictly a price determination, it does not appear that any change to program regulations, such as the regulation at 7 CFR 1464.8 dealing with tobacco eligibility standards, needs to be made on an emergency basis to make the change set forth in this notice. Likewise, whether or not the differential proposal is adopted, this action will not prohibit tobacco from un-improved barns from being marketed to buyers which of itself would mitigate an error in determining the market value of the tobacco given that if the market value of the tobacco is greater then zero, producers will be free to market the tobacco at whatever price the market will be bear. Such marketings, if they do produce a return greater than zero, will at least indirectly benefit from the price support system because that system aids the market price of all tobacco by lifting the price for competing producers of the same kind of domestic tobacco.

In order to assure that there are no loan losses, the proposal will require certifications by producers of whether their tobacco has or has not been produced in improved barns. For these purposes, an improved barn would be any barn which has been retrofitted under the association's program or which otherwise have been built with, or improved to include, the technology that produces the market-preferred tobacco. In making this proposal, the Department wished to emphasize that it would be preferable if accommodations could be made within the industry to allow disadvantaged farmers extra time to complete barn improvements or to provide greater funding so that this change in market arrangements will produce less harm. To that end, the comments, which would include comment from the associations, and others interested in this issue, on whether there will be efforts made to provide for such assistance and on whether such considerations should be taken in consideration in setting the differentials. However, it should be understood that if the market value of the tobacco is indeed zero and despite that market value, no change was made in the differentials, this would mean not only that there would likely be loan losses but that because of those losses it would be necessary to increase tobacco assessments immediately (that is, for the 2001 crop) to cover such losses, as required by the 1949 Act. Such assessments could be considerable.

Following the receipt of the comments, the Secretary will take such action as may be warranted, taking into account the comments and any other information as may be relevant.

Proposed Change in Differentials for Flue-Cured Tobacco: Accordingly, it is proposed with respect to the 2001 and subsequent crops of flue-cured tobacco that the differentials for such tobacco provide (1) that the price support low value of tobacco produced in a barn without an acceptable indirect heat source for curing should be zero and (2) that producers should be required to certify in a manner acceptable to CCC whether their tobacco which is presented for a price support loan has been cured in a barn with an acceptable heat source. Such certifications may be tied to a program of barn improvement implemented by Stabilization as needed to assure a proper valuation of the tobacco for price support purposes.