[Senate Hearing 108-519]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-519

  THE NECESSITY OF A TOBACCO QUOTA BUYOUT: WHY IT IS CRUCIAL TO RURAL 
                              COMMUNITIES
                     AND THE U.S. TOBACCO INDUSTRY

=======================================================================

                                HEARING

                               before the

          SUBCOMMITTEE ON PRODUCTION AND PRICE COMPETITIVENESS

                                 of the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION


                               __________

                             APRIL 13, 2004

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


  Available via the World Wide Web: http://www.agriculture.senate.gov


                                 ______

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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                  THAD COCHRAN, Mississippi, Chairman

RICHARD G. LUGAR, Indiana            TOM HARKIN, Iowa
MITCH McCONNELL, Kentucky            PATRICK J. LEAHY, Vermont
PAT ROBERTS, Kansas                  KENT CONRAD, North Dakota
PETER G. FITZGERALD, Illinois        THOMAS A. DASCHLE, South Dakota
SAXBY CHAMBLISS, Georgia             MAX BAUCUS, Montana
NORM COLEMAN, Minnesota              BLANCHE L. LINCOLN, Arkansas
MICHEAL D. CRAPO, Idaho              ZELL MILLER, Georgia
JAMES M. TALENT, Missouri            DEBBIE A. STABENOW, Michigan
ELIZABETH DOLE, North Carolina       E. BENJAMIN NELSON, Nebraska
CHARLES E. GRASSLEY, Iowa            MARK DAYTON, Minnesota

                 Hunt Shipman, Majority Staff Director

                David L. Johnson, Majority Chief Counsel

               Lance Kotschwar, Majority General Counsel

                      Robert E. Sturm, Chief Clerk

                Mark Halverson, Minority Staff Director

                                  (ii)

  
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing(s):

The Necessity of a Tobacco Quota Buyout: Why it is Crucial to 
  Rural 
  Communities and the U.S. Tobacco Industry......................    01

                              ----------                              

                        Tuesday, April 13, 2004
                    STATEMENTS PRESENTED BY SENATORS

Dole, Hon. Elizabeth, a U.S. Senator from North Carolina, 
  Chairwoman, Subcommittee on Production and Price 
  Competitiveness, Committee on 
  Agriculture, Nutrition, and Forestry...........................    01
                              ----------                              

                               WITNESSES
                                Panel I

Burr, Hon. Richard, a Representative in Congress from North 
  Carolina.......................................................    03
Etheridge, Hon. Bob, A Representative in Congress from North 
  Carolina.......................................................    04

                                Panel II

Crews, Sam, President, North Carolina Tobacco Growers 
  Association, Oxford, North Carolina............................    11
Flye, Bruce, President, Flue-Cured Tobacco Cooperative 
  Stabilization, Battleboro, North Carolina......................    10
Parrish, Keith, Executive Director, National Tobacco Growers 
  Association, Benson, North Carolina............................    14
Wooten, Larry, President, North Carolina Farm Bureau, Raleigh, 
  North 
  Carolina.......................................................    07

                               Panel III

Bunn, Tommy, Executive Vice President, Leaf Tobacco Exporters 
  Association, Raleigh, North Carolina...........................    17
Haymore, Todd, Director, Universal leaf Tobacco Company, External 
  Affairs, Richmond, Virginia....................................    21

                                Panel IV

Charville, Gene, President, East Carolina, Farm Credit, Raleigh, 
  North 
  Carolina.......................................................    25
Herring, Wallace, Senior Vice President and Manager of 
  Agribusiness, First Citizens Bank, Clinton, North Carolina.....    27
Taylor, Dallas, Senior Vice President, Wachovia Corporation, 
  Raleigh, North Carolina........................................    29

                                Panel V

Langdon, J.H. Chairman, Johnston County Board of Commissioners, 
  Angier, North Carolina.........................................    32
Scarborough, Allen, Manager, State Affair, Bayer Crop Science, 
  Raleigh, North Carolina........................................    33
                              ----------                              

                                APPENDIX

Prepared Statements:
    Bunn, J.T....................................................    52
    Charville, Gene..............................................    64
    Crews, Sam...................................................    49
    Dole, Hon. Elizabeth.........................................    38
    Flye, Bruce..................................................    43
    Haymore, Todd................................................    58
    Herring, Wallace.............................................    68
    Langdon, James...............................................    73
    Parrish, Keith...............................................    45
    Scarborough, Allen...........................................    76
    Taylor, Dallas...............................................    70
    Wooten, Larry................................................    41
Document(s) Submitted for the Record:
    Alliance for Health Economic and Agriculture Development.....    80
    Matthew Myers, President, National Center for Tobacco-Free 
      Kids.......................................................    85
    John R. Seffrin, Ph.D, Chief Executive Officer, American 
      Cancer Society.............................................   107
    Star Scientific, Inc.........................................    98
    Henry West, President, Burley Tobacco Growers Cooperative 
      Association................................................    95
    M. Cass Wheeler, Chief Executive Officer, American Heart 
      Association................................................   100


 
  THE NECESSITY OF A TOBACCO QUOTA BUYOUT: WHY IT IS CRUCIAL TO RURAL 
                   COMMUNITIES AND THE U.S. TOBACCO 
                                INDUSTRY

                              ----------                              


                        TUESDAY, APRIL 13, 2004

                                       U.S. Senate,
     Subcommittee on Production and Price Competitiveness, 
          Committee on Agriculture, Nutrition and Forestry,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:08 a.m., at 
the Central Tobacco Marketing Exchange, Smithfield, North 
Carolina, Hon. Elizabeth Dole, [Chairwoman of the 
Subcommittee], presiding.
    Present: Senator Dole.

  STATEMENT OF HON. ELIZABETH DOLE, A U.S. SENATOR FROM NORTH 
              CAROLINA, CHAIRWOMAN, SUBCOMMITTEE 
           ON PRODUCTION AND PRICE COMPETITIVENESS, 
           COMMITTEE ON AGRICULTURE, NUTRITION, AND 
                            FORESTRY

    Senator Dole. Good morning, ladies and gentlemen. As Chair 
of the Subcommittee on Production and Price Competitiveness on 
the Senate Agriculture, Nutrition and Forestry Committee, I am 
pleased to call this subcommittee hearing to order.
    When I was elected to the U.S. Senate, I chose to serve on 
the Agriculture Committee and to Chair this subcommittee 
because I wanted very much to help advance one of the chief 
issues from my campaign. That issue, of course, is tobacco 
quota buyout.
    This hearing is not intended to repeat what has been 
examined in previous hearings. The Senate Agriculture Committee 
held several hearings on the tobacco buyout when the issue 
first came to national attention in 1998. This past year, the 
House Agriculture Committee held a hearing focusing on the 
positions of the growers, the companies and the public health 
community.
    Their positions are important, obviously, and those who 
wish will have the opportunity to submit comments for this 
record any time before the end of this week.
    The real purpose for the hearing today is to examine this 
issue from a different vantage point, to look at it from the 
perspective of the long-term viability of the tobacco farm 
family and the rural community that depends on tobacco 
production.
    In the year 2003, farm receipts from tobacco sales were 
less than $600,000,000; a decline of over $500,000,000 as 
compared to 1997. That equates to a $1.1 billion hit on North 
Carolina's economy at current quota levels. The decline in our 
tobacco industry will continue to cause a negative ripple 
effect across our state.
    Tobacco production is crucial not only to our farmers and 
our leaf dealers, it also affects our equipment dealers, 
chemical dealers and so many others. Under the status quo, we 
are simply exporting economic progress to Brazil and other 
developing countries when in fact we could be doing a better 
job here if only given the opportunity.
    I look forward to the testimony of two of North Carolina's 
Congressmen, our farm leaders, the leaf dealers, financial 
institutions, one of the major players in crop protection and 
the Chairman of the Johnston County Board of Commissioners; all 
of whom will provide their valuable insight on the need for a 
tobacco quota buyout from their particular area of expertise.
    Before we move to the panels, let me give a brief overview 
of where the buyout stands in the U.S. Senate. As all of you 
know, this past year, the tobacco state members of the Senate 
for the very first time were able to come together on a 
consensus bill that was placed on the Senate calendar and we 
were very proud of the fact that we were together on that 
legislation.
    Given the current make-up and interest of the members of 
the Senate, and perhaps most importantly given the rules of the 
U.S. Senate, the object was to attach the buyout to FDA 
regulation after that piece of legislation was marked up in the 
HELP Committee, which is the Health, Education, Labor, and 
Pensions Committee in the Senate.
    Because a deal could not be reached with the public health 
community, an FDA bill was never reported from the Committee, 
ending our hopes of passing a tobacco buyout coupled with FDA 
regulation on the Senate floor before the end of the first 
session.
    Considering the quota cut that was looming at the time and 
the necessity of getting this buyout achieved, we led an effort 
to try and get a buyout attached as part of the end of the year 
consolidated spending bill called the Omnibus Bill.
    Because a bill had not passed on the floor of either 
chamber--the House or the Senate--in the final analysis there 
just was not enough support to get it included in the Omnibus 
Bill.
    That effort did raise the profile of this issue 
significantly, and we remain committed to leaving no stone 
unturned as we move forward this year.
    Now, it is my goal that our hearing today will help keep 
this issue on the front-burner and provide those skeptics in 
non-tobacco states an opportunity to see a different side to 
this issue than perhaps what they've been witness to so far.
    At this point, I would like to introduce the Subcommittee's 
first panel, my colleagues on the House side, Congressman 
Richard Burr, who represent many of the smaller tobacco farmers 
in this state from the fifth district, and Congressman Bobby 
Etheridge, a tobacco farmer himself whose district we are in 
today.
    They will present their views on the tobacco buyout and any 
other comments they'd like to make regarding the status of this 
important issue in the House of Representatives.
    [The prepared statement of Senator Dole can be found in the 
appendix on page 38.]
    Congressman Burr, welcome.

 STATEMENT OF HON. RICHARD BURR, A REPRESENTATIVE IN CONGRESS 
                      FROM NORTH CAROLINA

    Mr. Burr. Thank you very much, Senator Dole, and more 
importantly, thank you for holding this important hearing and 
for inviting Representative Etheridge and I to testify before 
you on the status of buyout legislation in the House of 
Representatives.
    If I could also, let me thank the audience. It is wonderful 
to see that you understand the importance of this issue to this 
state--to every community, to the families that make up those 
communities and at some point in this process, we will rely on 
you to really be the push that hopefully helps us push this 
legislation over the goal line.
    As you and many others know, Senator Dole, several months 
worth of effort--starting in January with a core group of 
tobacco state members--recently culminated in the introduction 
of H.R. 4033, the Fair and Equitable Tobacco Reform Act of 
2004.
    The lead authors of the legislation, which was introduced 
with thirty-five original co-sponsors, are Representative Bill 
Jenkins of Tennessee and North Carolina's Mike McIntyre. It's 
now at 38 co-sponsors, including seven North Carolinians, and 
we expect to pass the Fletcher co-sponsorship total of 42 when 
we return to session.
    The teaming up of Representative Jenkins and Representative 
McIntyre is significant. They are the Chair and the ranking 
members, respectively, of the Specialty Crops Subcommittee of 
the House Agriculture Committee, which has jurisdiction over 
the tobacco issues, including quota buyout proposals.
    H.R. 4033 is the first quota buyout bill Representative 
Jenkins has sponsored or co-sponsored. H.R. 4033 proposes to 
pay quota holders $7 a pound and active producers of tobacco $3 
a pound over a 5-year period.
    It would do so by diverting revenues from the Treasury up 
to a ceiling that is determined by the total revenue received 
by the government through the tobacco taxes. The payments would 
be based on 2002 quota. Estimates place the total buyout 
payments under the Bill at approximately $9.6 billion; unlike 
previous quota buyout bills, though; however, H.R. 4033 would 
not result in the termination of phase II, meaning that 
approximately $3 billion in phase II checks would continue to 
be mailed.
    Finally, the bill would limit tobacco production post-
buyout to traditional tobacco counties plus contiguous 
counties, similar to the Georgia model in the McConnell Buyout 
Bill.
    The impact of H.R. 4033 on North Carolina's economy, 
particularly in tobacco communities, would be tremendous. 
Estimates by agricultural economists put the total economic 
impact of the Bill for North Carolina at $6.1 billion over 5 
years as farmers and quota holders pay off debt, diversify 
crops, obtain training and education, or simply spend more on 
goods and services for their families.
    It is believed that this new economic activity would 
support more than 11,000 jobs--many of them in areas where 
employment opportunities surely are lacking. As a 9-year 
representative of tobacco country in the House, I am fully 
aware of the dire situation facing our state's tobacco families 
and communities.
    Introduction of H.R. 4033 represents one step in our effort 
to alleviate some of the problems facing tobacco production in 
our state and a great deal of work still needs to be done. To 
be fair, that work has been and will remain an uphill effort. 
If it were easy, we would have finished the process months, if 
not years, ago.
    We are working on a number of fronts to get this proposal 
moving through the Agriculture Committee and to the floor of 
the House for consideration. We are pursuing opportunities for 
the Bill to be considered as a stand-alone measure, but we are 
also working to identify possible vehicles for the buyout to be 
attached to. Our efforts in the house have been focused more 
around what we can't do than what we can do.
    Our leadership has indicated that they will not move any 
buyout that is perceived to increase taxes, so we had to 
eliminate user fees, assessments, increase in the Federal 
excise tax and other options. Taking care of this particular 
issue gives us the bonus side effect of allowing Phase II to 
stay intact.
    They also indicated to us that FDA was a non-starter in the 
House of Representatives, so we had to remove that from 
consideration. They told us last year's efforts were too 
expensive, so we had to come down on the payment level. We have 
worked to overcome those hurdles, and I believe that H.R. 4033 
presents us with an excellent alternative to tries that we have 
had before.
    Is H.R. 4033, at $9.6 billion, a smaller buyout than what 
we would like? Absolutely. Would we prefer to be able to offer 
quota holders and farmers $8 and $4? Certainly.
    Unfortunately, the political and economic realties we face 
prevent either from having a chance. Politics is the art of the 
possible and I, for one, would rather get the buyout done than 
spend time lamenting the fact that the buyout couldn't be 
bigger. The situation on the ground in tobacco communities is 
too desperate for fantasy, and we simply can't afford to let 
the perfect become the enemy of the good.
    Our effort here is to jumpstart the legislative process. It 
has been stalled for far too long. We have identified some 
technical and definitional corrections that need to be made in 
H.R. 4033, but we firmly believe those issues and potentially 
some of the others mentioned above can be resolved in a 
conference with the U.S. Senate. We need to get to conference 
first.
    Senator Dole, thank you for the opportunity to be here. I 
would be happy to answer questions that you might have. Thank 
you, very much.
    Senator Dole. Congressman Etheridge.

 STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN CONGRESS 
                      FROM NORTH CAROLINA

    Mr. Etheridge. Thank you, Madame Chair, and Senator Dole, 
let me thank you for holding this Subcommittee hearing and 
issuing the invitation for myself and Representative Burr to 
join me today. As a Johnstonian who grew up just down the road 
on a tobacco farm, welcome you to my hometown here, and having 
driven over this morning from Harnett, where Faye and I own 
some property and have a tobacco farm, we really appreciate 
this opportunity to talk about an issue that's important to the 
people in this audience today and a lot of others who aren't 
here today.
    As you mentioned, last July, the House Agricultural 
Committee held a hearing and testimony from tobacco growers, 
from companies and from the health community on the possibility 
of a tobacco buyout. The focus of that hearing, as you know, 
was to hear about the issue at that time and starting to move a 
piece of legislation.
    The focus of this hearing today is why a buyout is 
critically important to rural communities, and I commend you 
for that. It's important. I do want, though, to applaud you for 
having the hearing and looking at the broader scope of this 
issue.
    A buyout--or even more importantly, the failure to pass a 
buyout--would impact banks, agri-business, rural towns and 
communities and even county government. The entire economy and 
the infrastructure of rural North Carolina could be transformed 
by the billions of dollars that would be made available from 
the investment of a buyout payment.
    This hearing and the testimony that you will hear later 
today will broaden and talk about those benefits. I commend you 
for holding the hearing and thank you for it.
    I also want to talk briefly about the buyout efforts in the 
House during this Congress. Five tobacco buyout bills have been 
introduced in the House of Representatives. These bills differ 
widely in how much each farmer would be paid, or quota holders, 
whether there would be any kind of safety net for farmers in a 
post-buyout world.
    Unfortunately, none of these, as you have already heard 
from Congressman Burr, have anywhere. Everyone here wants to 
know. Why can't we pass a buyout? That is really why you are 
here today. You want to know how Congress can pass a bill that 
will give relief to the farmers in North Carolina.
    There are people in this audience and some have already 
mentioned it to me, why in the world can we pass a bill to send 
billions of dollars to Iraq that help put that country back 
together and we can't have just a little bit of money to help 
our farmers here in North Carolina and across the southeast who 
are hurting or are in deep trouble.
    I believe, and I would think you and Congressman Burr would 
agree, that the single biggest obstacle to passing buyout 
legislation is really the lack of political leadership at the 
highest level. We can plan and fuss and work all we want to, 
but it's going to take leadership at the highest level--a 
leadership, for one reason or another, that cannot help members 
from tobacco producing states answer our most difficult 
question and that is how to pay for a buyout.
    The bottom line--and Congressman Burr talked about it, we 
all want to talk about it--that is really, the ultimate issue.
    The Senate buyout plan introduced by Senate Majority 
leader, Whip Mitch McConnell and yourself last year, and I 
commend you for it, answered this question and what it wanted 
was an assessment to be paid by the tobacco companies. That was 
enacted.
    This is similar to the same user fee in the approach of a 
piece of legislation introduced by then-Congressman Ernie 
Fletcher and myself. Unfortunately, that bill was characterized 
as a tax increase and did not get going, and I believe those 
attacks against you and your approach were unfounded and 
absolutely irresponsible. As your office so succinctly put it, 
``assessments against the cigarette-makers are not a tax''--and 
I happen to agree.
    With our country facing a $521 billion deficit, finding a 
budget-neutral way to pay for a buyout, I believe, strengthens 
our argument for the passage of a piece of legislation this 
fiscal year.
    The Jenkins buyout bill mentioned by Congressman Burr would 
pay for a buyout by using five cents of the current excise tax. 
However, this approach has faced heavy criticism from the 
Speaker already in, and Riley and Locall in Washington, and he 
has said that ``we are not going to add to the deficit.'' 
``Well, if we aren't going to use that, and we aren't going to 
use an assessment,'' my question is how do we get there?
    Some authors of the Jenkins buyout legislation publicly 
acknowledged that the leadership has told them that the $7 and 
$3 bill that would provide funds for farmers in Georgia is too 
generous--to the tobacco farmers and quota holders. Everybody 
in this room would absolutely disagree with that statement. 
Well, we started out much higher and now we keep getting 
chiseled down and squeezed again.
    If we can't raise excise taxes and if user fees and 
assessments are unacceptable, and if the leadership opposes 
using current excise taxes, what else is left for us? The 
situation of tobacco farmers has deteriorated so badly and for 
so long, that they desperately need the relief that the buyout 
offers, regardless of the source of the funding. We have to 
have some relief.
    In my view, a viable buyout must have two components. 
First, it must fairly compensate the farm families and quota 
holders whose lives have been uprooted by the economic 
catastrophe that we have faced now for the last several years.
    Second, we must be able--and this is the critical piece--we 
have to be able to get the votes in the House and the Senate to 
pass this legislation and then we have to get the signature of 
the President of the United States if we hope to get relief for 
the people on the farm in our communities.
    If a buyout meets these criteria, I have said from day one 
I will support it regardless of who introduced it; regardless 
of what part of the country they come from; regardless of what 
their party affiliation is--and you would agree with that. It 
doesn't matter. The fact is, we need to get the job done.
    Anything else that we talk about or anything else is shown 
is nothing more than window dressing. Our focus should be and 
should remain on helping North Carolina's farm families and 
making sure that they aren't forgotten one more time and we 
just do a lot of talking. The tobacco companies have plenty of 
friends to protect their interests in Washington. My focus is 
on the farmer and I know, Madame Chair, that is what your focus 
is, and I thank you this morning.
    North Carolina is fortunate to have you engaged in this 
issue. Our state also is lucky enough to have farm leaders, who 
are fighting every day for a buyout this year. Let me take just 
a moment, if I may, to commend several of them. I don't know if 
they are here today or not.
    Keith Parrish, who is a past president of the Tobacco 
Growers Association, has walked the halls in Washington many, 
many days and he continues to do it.
    Larry Wooten and the Farm Bureau folks--they have been in 
Washington almost every week to bring the attention to the 
Members of Congress and to the National Association and Bruce 
Flye and his Stabilization Team have been working to broaden 
support for a buyout among the health groups in this country 
whose support we are going to have to have if we are going to 
get any legislation passed in Congress.
    Finally, Sam Crews, the current North Carolina Tobacco 
Growers Association President has kept the faith of his members 
who, after facing year after year of disappointment, have 
almost given up hope--but not quite. They are still there 
fighting.
    I look forward to reviewing all the testimony that comes in 
today and thank you again for holding this hearing.
    Tobacco farmers and quota holders are just barely hanging 
on the edge of a cliff by their fingertips. This December, when 
the tobacco community faces a possible thirty-three percent cut 
in quotas--that just might be the last straw--and who's going 
to be there to catch them? We can do it if we make this buyout 
a top priority and we get the leadership focused and this 
becomes part of their commitment when they need our vote for 
something very important in the halls of Congress in 
Washington, DC.
    Thank you, Madame Chair. I look forward to any questions 
you might have.
    Senator Dole. Thank you very much. I will apply the usual 
professional courtesy for my colleagues. There is no question 
that to achieve a tobacco buyout, we must have strong 
bipartisan support. There are many obstacles to overcome. 
Everyone has a constituency they must report to. Our problems 
have not arisen overnight, as we all know. It goes back for a 
decade.
    I want to thank both of you for your testimony this 
morning. It is imperative that we accomplish a tobacco quota 
buyout this year and I look forward to our continued work 
together to reach this goal. Thank you very much for being with 
us this morning.
    Senator Dole. Now I would like to call forth the second 
panel; Larry Wooten, President of the North Carolina Farm 
Bureau; Bruce Flye, President of the Flue-Cured Tobacco 
Cooperative Stabilization Corporation; Sam Crews, President of 
the North Carolina Tobacco Growers Association and Keith 
Parrish, President of the National Tobacco Growers Association.
    Mr. Wooten, will you start, please, and we will proceed one 
by one down the panel. Welcome.

   STATEMENT OF LARRY WOOTEN, PRESIDENT, NORTH CAROLINA FARM 
                BUREAU, RALEIGH, NORTH CAROLINA

    Mr. Wooten. Thank you very much, Senator Dole. North 
Carolina Farm Bureau is pleased to testify today on this 
critical issue of a buyout of the tobacco price support and 
quota system. Senator Dole, I want to thank you for putting 
your shoulder to the wheel on behalf of North Carolina's 
farmers and quota owners in pushing for a reasonable buyout of 
this badly broken system.
    We recognize that this is not an easy issue to tackle. You 
have made it your top priority and have worked tirelessly in a 
bipartisan manner to move this issue toward a successful 
conclusion. For this, all of us thank you.
    The tobacco price support and quota system has been good to 
farmers. I cannot say enough good things about the economic, 
social and environmental benefits that this sound program has 
brought to thousands of North Carolina communities since its 
inception in the forties. Today, the program is not working for 
farmers and the tobacco industry for the following reasons:
    No. 1, the tobacco price support program was never designed 
for the current intense world competition that our farmers face 
today.
    No. 2, the price support program was never designed for the 
massive, large-scale farming operations that many of us have 
today in this state.
    No. 3, the tobacco price support program was never designed 
to operate under the current marketing conditions, especially 
contracting.
    Last, the Federal tobacco price support program was never 
designed to withstand the consequences of the Master Settlement 
Agreement.
    North Carolina's rural economy has taken many hits as 
traditional industries, including tobacco, resize, restructure 
and adjust to world economic realities. According to Dr. Blake 
Brown, Extension Economist at North Carolina State, and Senator 
Dole alluded to these numbers in her opening statement. North 
Carolina farmers have seen a $500 million drop in annual farm 
gate income from tobacco since 1997.
    Barring a weather disaster, economists are forecasting 
potential for another $200 million loss next year because of an 
unprecedented forecast of another huge quota cut of around 
thirty percent. These combined figures represent a $700 million 
loss of equity that is used to finance farming operations. 
Anyone who operates a business understands what happens when 
the balance sheet reflects such a loss of assets.
    I am sure that the panel of Ag lenders who will be up next 
will address the impact of the loss of collateral on credit 
worthiness and the ability to repay loans.
    If--and I say if--the projected quota cut for 2005 would 
come to pass, the Flue-Cured Tobacco Stabilization Coop will 
again be under tremendous pressure to mitigate the impact. I am 
sure that the Coop chairman who will speak next will explain 
the difficulty and the consequences on that board of further 
intervention.
    In addition, quota cuts of additional sizes signal the end 
of the United States being a reliable supplier of flue-cured 
tobacco to the world market. We have steadily lost foreign 
buyers due to high prices and low leaf selectivity.
    Further loss of quota, ladies and gentlemen, I fear will 
seal our fate. Our foreign customers are watching this buyout 
issue very closely and they are being forced to make business 
decisions on whether to remain customers of American leaf. Once 
we have lost these markets for leaf tobacco, it will be 
extremely difficult to get them back.
    Additional quota cuts will cause the already high rent for 
quota to further escalate--neighbor bidding against neighbor; 
friend against friend for whatever quota there is left to rent. 
We will see farmers forced to exit tobacco farming without an 
option for orderly transition or have a safety net.
    As we will have to consider massive restructuring of the 
current program to salvage some stability for tobacco 
producers, the question is who will win that political tug-of-
war--the east, the piedmont, the quota owners or the producers?
    Tobacco quota impacts farmland values. The check-off funded 
export promotion program run by Tobacco Associates is currently 
running out of necessary funding. The check-off funded Tobacco 
Research Commission that is so important to the future of this 
industry is also hurting.
    As assessments spiral out of control, the whole no-net-cost 
infrastructure has become a house of cards and is on the verge 
of collapse. All of you know that political realities make 
Federal funding of these programs impractical. Where do we go 
and what do we do?
    The impending collapse of the tobacco price support system, 
ladies and gentlemen, will be a harsh and financially 
devastating occurrence for farmers and rural North Carolina. We 
have plowed this row, Senator Dole, to the cliff and we can go 
no farther.
    Farmers were not at the table when the Master Settlement 
Agreement was negotiated in 1998. The public health community 
hoped that the Master Settlement Agreement would begin the 
demise of tobacco and cigarette manufacturing. Senator Dole, 
just the opposite happened.
    Today, we have startup cigarette companies that are not 
only growing but they are thriving and prospering using cheap, 
imported tobacco and making minimal contributions to the Master 
Settlement Agreement funds. Because of the impact that the 
Master Settlement Agreement has had on the quota system, our 
farmers all across tobacco regions in the southeast United 
States are swallowing the economic consequences while state 
governments and city governments balance their budgets with the 
proceeds of the settlement.
    Senator Dole, for there to be a future for North Carolina 
tobacco farmers, our producers must be unfettered from a 
program that I said earlier has been extremely beneficial to 
this industry but has regrettably run its course. Farmers must 
be allowed to compete and meet their customers' needs, and this 
can only be obtained when we have a complete, adequately 
funded, total buyout of the current tobacco quota system.
    Adequate compensation for their investment in this program 
will allow many farmers to exit the industry with dignity. 
However, there must be a stable future for those farmers who 
wish to invest in growing and continue selling tobacco.
    Senator Dole, in conclusion, North Carolina Farm Bureau is 
at your disposal any time, any where, any place to continue to 
work in a serious way with any group--the cigarette 
manufacturers, the leaf dealers and the public health community 
and other farm organizations to make certain that farmers have 
a future. Thank you for giving me this opportunity.
    Senator Dole. Thank you. Mr. Flye.
    [The prepared statement of Mr. Wooten can be found in the 
appendix on page 41.]

        STATEMENT OF BRUCE FLYE, PRESIDENT, FLUE-CURED 
 TOBACCO COOPERATIVE STABILIZATION, BATTLEBORO, NORTH CAROLINA

    Mr. Flye. Thank you, Senator Dole. On behalf of the 
membership of Flue-Cured Tobacco Coop Stabilization, I 
appreciate the opportunity to submit testimony regarding the 
economic plight of tobacco farmers and the future of tobacco 
production in the United States.
    In 1998, the Master Settlement Agreement attempted to 
address the plight of our tobacco farm communities. 
Unfortunately, neither tobacco farmers nor community leaders 
were allowed to participate in these discussions. Tobacco 
companies raised the prices of tobacco products to pay for the 
Master Settlement Agreement and to protect their profits.
    The very foundation of their prosperity--tobacco farmers 
and their communities--were left out. A user fee to pay for the 
tobacco quota buyout would help rectify this mistake.
    Since then tobacco quota reductions of almost fifty 
percent, skyrocketing quota rent and thousands of tobacco 
farmers and their families are being pushed to verge of 
bankruptcy. While the tobacco farmers' plight is serious, the 
lack of action is killing our rural communities.
    Our state and county governments are struggling with 
declining revenues; our schools, churches and small businesses 
are reeling and worst of all, our young people, our future 
farmers, are leaving the farm in droves because they see no 
opportunity.
    For every tobacco farmer at risk of being forced out of 
business, there are ten other people in the farm community who 
are part of the farm economy, who are in danger of suffering 
the same fate. Banks, grocery stores, fertilizer and farm 
equipment dealers and automobile dealerships all depend on the 
cash-flow from the tobacco economy. Tobacco farmers' problems 
don't stop at the farm. They affect the entire community.
    How do we justify a tobacco quota buyout? All the major row 
crop commodities--corn, cotton, soybeans and peanuts. Peanuts 
even have a quota buyout, a lower buyout, but we still have a 
safety net for peanuts. They are all subsidized.
    Tobacco is not subsidized and it is not part of the 
Agricultural budget. Tobacco farmers pay for their program and 
have paid a no net cost assessment to the government since 
1982. Tobacco farmers pay for USDA inspection and they pay for 
the losses on CCC loans.
    The combination of a tobacco quota buyout and reasonable 
FDA regulation of tobacco products which includes a listing of 
the ingredients of cigarettes on the packaging so that our 
young people will know what the risk is of what they would be 
ingesting into their bodies--this will be good for the health 
of our young people and good for our tobacco-producing 
communities.
    Only the U.S. Congress has the authority and the power to 
set things right. The flue-cured tobacco production section can 
no longer afford to wait until next year. We are possibly faced 
with another huge quota decrease and increased no net cost 
assessment in 2005.
    If this happens before Congress can act, the economic toll 
and human suffering will be catastrophic. Without immediate 
action, Congress will bear full responsibility for the 
devastation and ruin of an important sector of our economy and 
the dashed hopes and dreams of thousands of farm families and 
their communities.
    We are pleading for our very survival, for the survival of 
our communities. Only the U.S. Congress can intervene. Again, I 
thank you for the opportunity to give this testimony.
    Senator Dole. Thank you.
    [The prepared statement of Mr. Flye can be found in the 
appendix on page 43.]
    Mr. Crews.

   STATEMENT OF SAM CREWS, PRESIDENT, NORTH CAROLINA TOBACCO 
              GROWERS ASSOCIATION, OXFORD, NORTH 
                            CAROLINA

    Mr. Crews. Thank you, Senator Dole. Thank you for holding 
this vitally important hearing. I am Sam Crews, a tobacco 
grower from Granville County and president of the Tobacco 
Growers Association of North Carolina. Additionally, my family 
owns and operates a Stabilization Marketing Center, formerly an 
independent warehouse, and also a farm supply business. My 
remarks today will address all of these perspectives.
    Many opponents have questioned the price of passing a 
tobacco buyout. Should we not in fairness argue the price of 
our failure to pass one? Every tobacco farm in North Carolina 
is a small family business.
    In my community of Oxford, the average size farm will grow 
between 50 and 100 acres. These growers will modestly spend 
$2,500 to $3,500 per acre in Granville County buying fuel, 
fertilizer, crop protection inputs, labor, supplies, equipment, 
etcetera.
    On our farm, my brother Jimmy and I operate as a 
partnership. Beyond our business operating expenditures, we 
each spend tobacco income at a local grocery store, pay our 
local utility bills, buy clothes and other necessities for our 
wives and our school-age children. I have two children and my 
brother has four.
    We use tobacco revenues to trade vehicles with the local 
auto dealer, secure various loans from the local bank. We also 
give tobacco profits in the church offering plate as well as 
donations to other important charitable causes.
    All of these activities stimulate the local, rural economy 
in Granville County. All of these have been negatively impacted 
as our quota has evaporated. My point is that the tobacco 
buyout or lack of one reaches far beyond the farm. The merits 
for achieving a buyout are that it would be the single largest 
contributor to saving the dismal economy of rural North 
Carolina.
    Nearly a decade ago the Tobacco Growers Association 
advocated for a tobacco quota buyout realizing that in the 
future increasing world production occurring while our domestic 
costs of production were increasing would someday place us at a 
competitive disadvantage. The future is now.
    The 1997 U.S. flue-cure crop approached one billion pounds. 
Two-thirds of that crop was produced in North Carolina. In 
2004, we will grow the smallest crop in the history of the 
tobacco program. In fact the entire U.S. production this year 
will be nearly 200 million pounds less than we grew as a state 
just 7 years ago.
    In 1997, my brother and I grew 206 acres of tobacco. Our 
independent warehouse sold five and a half million pounds at 
auction with nearly one hundred percent being purchased by 
traditional customers. The future for growing and marketing 
tobacco seemed consistently dependable and optimistic.
    This year we are reduced to 145 acres which if not for 
purchasing quota or renting of neighbors' pounds who were going 
completely out of farming, we would have been less than 100 
acres. As for our warehouse, if it were not for serving as a 
Stabilization Marketing Center, we would be completely out of 
that business.
    This year we may sell around 3 million pounds at the 
marketing center in a building that we built to potentially 
accommodate three times that volume.
    How did we arrive at this seemingly irreversible situation? 
In 1998, a congressional effort to pass a buyout was 
overloaded--largely due to FDA regulatory efforts and a massive 
price tag. The 1998 effort, which we refer to as the McCain 
bill, was never passed. What occurred next none of us could 
have imagined would ever happen.
    In 1999, the major cigarette manufacturers entered into the 
Master Settlement Agreement in order to avoid future individual 
state litigation. The price of the MSA was over $250 billion. 
Obviously it was funded on the backs of cigarette smokers who 
chose to endure an undisclosed per pack increase.
    The option for smokers has been to stop using tobacco, but 
in more instances use a cheaper made, lower retail cost 
product. Often that product contains little to no U.S. grown 
leaf, which of course adversely affects our farms.
    The option for cigarette makers was to find ways to lower 
the costs of making a pack of cigarettes. Reports indicate 
corporate downsizing and mergers as one management practice. 
Many if not all of them have sought cheaper, offshore tobacco 
resulting in a sharp and unprecedented decline in the U.S. 
quota.
    All across rural North Carolina, the absolute costs of the 
settlement has been thousands of displaced tobacco farm 
families. Indeed thousands of growers have witnessed business 
foreclosures and today are struggling to make ends meet.
    Additionally the once thriving auction warehouse business 
like the one my family entered into, has been reduced to little 
more than a dozen operators in the nations largest tobacco 
producing state.
    Our growers have scrambled to invent new ways to economize 
their operations. The margins simply do not exist. For nearly 
every grower, the 2004 crop will be the smallest ever produced. 
Yet, the 2004 crop will be the most expensive I have ever grown 
on my farm in Oxford.
    Consider the recent spike in various input costs. Fuel is 
at a record high. Adverse wage rates for guest workers are now 
over $8 an hour. Many growers find themselves in an escalating 
rental situation for leased tobacco pounds paying nearly twice 
the rental rates of 1997. Finally, the marketing assessment fee 
is double what it was just last year at 10 cents.
    If the aforementioned erosion of my chance for 
profitability isn't enough to test my optimism then last week's 
newspaper report quoting Dr. Blake Brown did. Dr. Brown 
predicts we could witness as much as a thirty percent reduction 
in quota for 2005 if we maintain the status quo.
    Senator I, nor any of my neighbors can endure such a 
catastrophe.
    Everything that I have described has occurred in just 7 
years. The tragedy is that growers did not create this current 
plight because of poor business decisions or bad management 
practices. Unless sweeping changes are implemented, many more 
will unnecessarily succumb to the unprecedented and 
unpredictable increased pressures of simply trying to stay in 
business.
    Our challenge is not to simply rectify flawed policy. Ours 
is a complex arrangement of situations bound together by the 
Federal tobacco program. The program has served us well since 
the 1930's but in today's global marketing economy, it is now a 
deterrent to buying U.S. grown leaf. It is widely considered a 
relic whose previous merit is obvious and appreciated, but 
whose current incarnation is crushing us in the world market.
    We have been greatly diminished as the world's supplier of 
premium grown tobaccos. Customers say that our leaf is too 
expensive relative to the world market. As a producer of that 
leaf, I am confident that it is worth its price and I am proud 
to deliver that value. However, as a businessman, I must pay 
close attention to the characteristics my customer values. We 
are dangerously approaching the reality of becoming a niche 
leaf producer for one major manufacturer.
    I become increasingly disturbed by the number of proud, yet 
broke tobacco farmers that I personally know. For the past 2 
years many of them hung on hoping for a buyout. A buyout that 
would afford the opportunity to address debt and either remain 
profitable or transition away from growing tobacco. Sadly, they 
remain indebted and completely out of the tobacco farming 
business.
    Absent the achievement of an $8 and $4 tobacco buyout this 
spring, I, too, may join the ranks of unemployed former tobacco 
farmers. For too many of us, time has already run out. Please 
do all that you can to advance and achieve the buyout in the 
next several months.
    On behalf of all NC growers, I thank you for your 
leadership and attention on this matter.
    Senator Dole. Thank you. Mr. Parrish.
    [The prepared statement of Mr. Crews can be found in the 
appendix on page 49.]

        STATEMENT OF KEITH PARRISH, EXECUTIVE DIRECTOR, 
         NATIONAL TOBACCO GROWERS ASSOCIATION, BENSON, 
                         NORTH CAROLINA

    Mr. Parrish. I feel like I am sitting on the bench over 
here. My name is Keith Parrish. I represent the National 
Tobacco Growers Association as its Executive Director and also 
am a lead plaintiff in the grower lawsuit for North Carolina. I 
am most of all a tobacco farmer and quota holder from Benson, 
North Carolina, and I thank you very much for holding this 
field hearing on legislation that is critical to the future of 
all tobacco growers, quota holders, consumers and manufacturers 
in the American tobacco industry.
    Tobacco growers and quota holders have lived under the 
nation's quota--tobacco quota and price support system since 
the 1930's. As everyone else has said today, the system that 
was invented for a different time worked well for many years, 
but it is now clearly broken. It is imperative that we work 
together to create a landmark national initiative on tobacco.
    American tobacco farmers support a buyout of historic 
tobacco farm quotas and reasonable FDA regulation of tobacco 
consumer products. The goal is a healthy future and the path is 
fairness.
    Although it is a product at the economic core of many 
communities, today tobacco farmers are planting the smallest 
crop in history. All predictions for the next year are even 
more grim at a cut of thirty percent or more with a huge 
assessment--some say close to 20 cents.
    Due to the decline in tobacco production and the rising 
costs associated with production, tobacco growers have farmed 
our equity away. Today, entire farms are now growing houses 
where they used to grow field crops. Our bankers are no longer 
willing to gamble on the promise of a buyout. Thousands are 
going out of business and the health of our communities are 
going with them.
    Two aspects of the buyout are important to help address 
this point. First, we need the buyout to occur and occur now 
without delay. Second, we need to phase in the impact of the 
buyout on farmers who may be the smallest, the oldest, or the 
ones who were unfortunate in the last growing season allowing 
them to receive their money and their compensation in the 
quickest possible time period. The most basic of rights--the 
Federal marketing orders, inspections, FSA oversight--all of 
these must be maintained. Our commodity should have the same 
rights as all other crops.
    The buyout compensation needs to be handled by putting the 
money into the hands of the growers and quota holders. It is 
the farmers and their families who largely populate most 
agricultural towns and counties. They support retail 
businesses, services, schools and church activities.
    If you want an engine to generate a recovery and stabilize 
these communities as we go forward from the buyout, the 
compensation needs to be paid to the people who make their 
living there, who raise their kids there, who farm there and 
shop there.
    The real issue, also, is a health issue, and it faces all 
the communities in every state. Tobacco is legal commodity. The 
demand for tobacco leaf is not going to disappear. 
Increasingly, manufacturers are turning to imports. We can 
choose to regulate tobacco and make it a safe product and have 
it be produced here in the United States or we can have it 
produced uncertified and imported in from Zimbabwe, Brazil, 
China or Mexico.
    One major manufacturer has been a main stumbling block in 
preventing a buyout, and I find it very ironic that they 
purchase most of their tobacco offshore and have a smaller 
percentage of their tobacco in our cigarettes that are consumed 
in America today. This is one of the reasons that we have had 
so many cuts and been subjected to so much hardship in the 
past.
    We are embarking on a new set of national tobacco policies 
and we need cooperation from all parties. Tobacco production is 
unique and the policy covering it needs to reflect its 
uniqueness, while simultaneously addressing the health 
concerns. Reasonable FDA regulation of tobacco consumer 
products is a non-grower issue.
    U.S. tobacco growers are willing to accept any form of 
safety or health check. Tobacco growers understand the Farm 
Service Agency's system for tracking tobacco which is now in 
place, is one that they are very familiar with in the past and 
have used every day.
    The point today is that the purpose of tracking will not 
disappear--it'll change. Instead of tracking for quota, a new 
health policy on tobacco products will require tracking for 
health. We make a living growing tobacco, and as a business 
person, we would welcome the checks and balances that would 
enable us to grow a premier crop.
    We are very proud of what we grow. We would like for all of 
our consumers to know where our tobacco was produced and where 
their cigarette manufacturers used the tobacco--where it came 
from--it came from us. Because a governing organization already 
exists, any new legislation would not require the need to 
invent a new entity to register our crops and oversee their 
certification.
    With hundreds of thousands of class members, never in 
history has there been such a large group of farmers and 
growers and quota holders that have had the capability to speak 
as one voice. Tobacco growers were not invited to the table for 
the MSA, but now there is a unity of positions which has never 
happened before. The path of fairness allows us to reach our 
goal for a healthy future of tobacco production.
    Our state stands to receive over $6 million. Just imagine 
the economic impact for our rural counties. I would invite our 
elected officials to think about this the only way it possibly 
can work. It is a rare moment for you to accomplish a difficult 
task--putting together a bipartisan coalition, including health 
organizations, in a singular direction without political risks.
    You can get it done. We need your help. We need your clear 
leadership to come to our aid. We are looking to you to help 
us. You are our champion. You are our Senator, and we thank you 
for all that you have done. We appreciate the focus of your 
attention on these very important issues that threaten the 
future of America's growers and I appreciate this opportunity 
to testify and deliver our views.
    [The prepared statement of Mr. Parrish can be found in the 
appendix on page 45.]
    Senator Dole. Thank you very much. Now, as alluded to in 
the testimony this morning, Blake Brown, our great agricultural 
economist at N.C. State, just recently released his quota 
forecast for the 2005 crop year based on fairly conservative 
numbers and it is an eye opener, for sure. A thirty plus 
percent cut. I would like your perspective on what a cut of 
that magnitude would mean for your communities back home.
    Let me start with Mr. Wooten. You are a native of Pender 
County. What kind of impact is it going to have there?
    Mr. Wooten. Senator Dole, this tobacco buyout--it's more 
than an agricultural issue. It's an economic development issue 
for all of North Carolina. As Mr. Parrish said a while ago, 
when you take five to six billion dollars and spread it across 
the state of North Carolina primarily in our rural communities 
for over a period of 5 to 6 years--and tobacco money 
traditionally turns over four times in the economy--you can see 
what type of tremendous economic impact this will have not only 
for agriculture, but for the rural communities, grocery stores, 
the school boards and on and on and on.
    I did a--I was just looking in six southeastern North 
Carolina counties, the six southeastern counties of Bladen, 
Columbus, Duplin, Pender, Sampson and Wayne, in 1997, total 
tobacco income for those six counties was about $214 million.
    In 2002, that income was roughly $147.3 million, a decrease 
of thirty-one percent just in those six counties, so without 
this tobacco buyout, more than the farm economy is going to 
hurt, Senator Dole, in these primarily rural counties.
    Senator Dole. Thank you. Mr. Flye, how is it going to 
affect your home community of Battleboro?
    Mr. Flye. Senator Dole, more farmers will go out of 
business. It will affect the financing of the farmers, I 
believe, and as I mentioned in my remarks, when we lose one 
farmer, eventually a chain reaction is ten more people losing 
their livelihood.
    We'll see a smaller tax base, but higher taxes on farm 
land. We'll see schools rejuggled and there will be less 
students there; there will be more empty pews in our country 
church. It will have a far reaching effect on our communities, 
not just the farmers.
    Senator Dole. Mr. Crews, you really answered this question 
in your testimony. I am going to come back to you in just a 
moment, but let me ask Mr. Parrish first--you are next door in 
Harnett County, what is your take on the economic impact of a 
cut of that magnitude?
    Mr. Parrish. Well, if we don't get it, I wouldn't want to 
be a politician that had to face election in November--I had 
that in my speech--and I honestly mean no disrespect by that, I 
honestly do not. It's a reality that farmers in Harnett County 
and every county, I believe, in this state and all the other 
states here and represented and there's people here from 
Kentucky, there's people here from South Carolina, Virginia--
I've seen them here already. That's how much this thing means 
to people.
    In my community, I know that it is something that is going 
to affect everyone in their heart. It's going to affect their 
way of life; it's going to affect their churches, their ag 
businesses--they're already so negatively impacted, they're 
teetering on the edge of disaster, and I don't think they can 
withstand what is going to happen here if we do not get a 
buyout.
    A buyout is a saving thing that farmers are looking for and 
quota holders--everyone is hanging on for that one thing to 
occur. We desperately need it.
    Senator Dole. Mr. Crews, as President of the North Carolina 
Tobacco Growers Association, your organization represents 
communities all over the state. Now many in Washington, DC 
wonder why tobacco farmers can't just transfer their equipment 
and their land to the production of another crop.
    Would you like to comment on that for the record, please?
    Mr. Crews. Yes, Senator, thank you. Tobacco--a lot of 
tobacco equipment is tobacco-specific--tobacco barns, I don't 
know of any other use you could make of a tobacco barn. Also, 
grain crops, vegetable crops--it doesn't seem to be any crop at 
all right now in North Carolina that's very profitable, and 
that's the major reason why we can't transition to another crop 
without a buyout.
    Senator Dole. Thank you, gentlemen, very much for your 
testimony today. I appreciate it. Thank you.
    Senator Dole. Now if the third panel will report to the 
table, please. We will receive testimony from Mr. Tommy Bunn, 
Executive Vice President of the Leaf Tobacco Exporter's 
Association and Todd Haymore, Director of External Affairs for 
Universal Leaf.
    Mr. Bunn, thank you very much for being here.

STATEMENT OF TOMMY BUNN, EXECUTIVE VICE PRESIDENT, LEAF TOBACCO 
         EXPORTERS ASSOCIATION, RALEIGH, NORTH CAROLINA

    Mr. Bunn. Thank you, Chairwoman Dole and other Members of 
Congress for being here today and for the opportunity to 
participate in this important hearing. I would like to say that 
I am going to bring some good news, but unfortunately this is 
not possible. As you have heard, this may be the toughest times 
the U.S. tobacco industry has ever known.
    This morning I want to talk about the Leaf Tobacco 
Exporters Association's views on the state of our industry and 
tell you what we think must be done to salvage our tobacco 
industry in this country.
    For decades, LTEA members and their companies have worked 
hard to support the U.S. market, its growers, workers and 
communities by making major investments in leaf processing 
facilities within the tobacco-growing region. Today, we find 
ourselves at a point where there is very little left to 
support.
    U.S. production of flue-cured and burley tobacco is 
currently less than half the level it was just a few years ago. 
The decline in production continues as the domestic market for 
cigarettes fall. High support prices and the restrictive 
provisions of the Federal tobacco program make it impossible 
for U.S. growers to compete in the world market. During this 
same period, other countries have progressively expanded 
production.
    This is not news to any of us that many of the problems in 
the U.S. market have been brought about by numerous legislative 
and legal battles during the last decade. Yet the greatest 
impediment to recovery in the U.S. market remains inviolate and 
unchanged--and that is the Federal tobacco program with the 
artificial costs it forces on domestic leaf prices.
    Simply put, the program has become so antiquated and 
inflexible it is destroying the entire tobacco domestic and 
export trade. Changes must occur. They must occur now if we are 
to salvage U.S. flue-cured and burley production.
    The unnecessary costs that result from the ``cost of 
quota'' and the inherent rigidity in the program have 
dramatically reduced the competitiveness of U.S. leaf in the 
world market. Besides contributing to the large production cuts 
of the last 6 years, this situation also has reduced the amount 
of U.S. leaf exported into the world market. The number of 
export customers has been dropping for more than a decade and 
this list is rapidly getting shorter.
    Most recently, we lost two important and long-time export 
customers who decided not to purchase any U.S. flue-cured 
tobacco, due primarily to the high costs of our leaf. It 
doesn't stop there. While we continue to promise and promise 
and promise these customers that U.S. price reform is just 
around the corner, we now have been informed by the remaining 
few export customers that they also are seeking less costly 
alternatives to U.S. leaf.
    Further declines in export sales will devastate the already 
crippled domestic market by reducing our economies of scale for 
producers and processors.
    Leaf Tobacco Exporters Association endures the principles 
of a buyout and we endorse the principles of a buyout because 
we believe that a buyout can make U.S. tobacco more competitive 
in the world market. However, we do have serious concerns about 
some aspects of the various legislation proposals that have 
been drafted for deliberation in previous legislative sessions.
    We are most concerned about legislative language that would 
retain the market distorting features of the current Federal 
tobacco program that restricts production and inflates leaf 
prices to uneconomic and non-competitive levels.
    We believe that any buyout proposal has to be written with 
the long-term interests of the grower in mind if the 
legislation is to be economically viable. By growers we mean 
those producers who intend to continue producing tobacco post-
buyout. All of us are feeling the constraints of our shrinking 
market, but it is the growers who have been hurt the most by 
the current program's free fall and unresponsiveness to market 
conditions.
    In the long run, growers will not be well served if some of 
the worst features of that program are permitted to continue 
hampering farm efficiency and compromising competitiveness.
    I want to define LTEA's position on specific features of 
legislation regarding a tobacco quota buyout and the Federal 
tobacco program.
    First and foremost, LTEA strongly supports any and all 
efforts to make U.S. leaf tobacco more competitive in the world 
market. We believe a buyout of the program is an essential step 
in that direction. The cost of leasing quotas probably adds 
fifty cents a pound on the average cost of U.S. leaf. The 
current law places the U.S. growers at a severe competitive 
disadvantage. There is no other tobacco-producing country in 
the world that requires growers to pay for the privilege of 
growing tobacco.
    Too often, we make excuses for our high prices saying other 
countries can pay low wages, they have government subsidies, 
the currency exchange rates are against us. These so-called 
justifications miss the point altogether. These are advantages 
of our customers and our competitors--they are not reasons we 
should fail to address the role of competitiveness in our 
market.
    Second, the interests of non-producing quota holders who 
outnumber the active producers by more than ten to one, are 
diametrically different from the interests of the growers. 
Quota holders wish to maximize their income from quota rentals 
and may be unconcerned if production is reduced as long as 
their income stream is protected.
    Quota owners have exercised a strong influence over the 
Federal tobacco program for years and have often resisted 
changes that they believed would reduce quota income.
    As a result, needed legislative changes in the program have 
not been made, and flue-cured and burley quota levels have been 
reduced by more than half since 1998. Quota rent levels have 
increased significantly and while good growers have been forced 
to operate at production levels far below their optimum 
efficiency.
    This has contributed to the dramatic increase in quota 
lease rates, as growers have bid against each other in an 
effort to maintain an efficient scale of production. The 
resulting non-value-added costs have also made it difficult for 
U.S. growers to accept the lower prices that would be necessary 
to compete in the world market.
    Third, we believe that the only solution to the problem 
today is dramatic policy change. We believe any legislation 
that seeks to replace the market distorting features of the 
existing program with new provisions that continue to limit 
production and maintain support prices at unrealistically high 
levels would guarantee a continued decline in the U.S. tobacco 
production.
    More important, it would represent the loss of a historic 
opportunity to restore the competitive position of U.S. leaf in 
the world market and provide U.S. growers a chance to stay in 
business. This can only be done by freeing up efficient growers 
to do the best job they can, unfettered by restrictions on 
production and arbitrary floors on price.
    Fourth, although Leaf Tobacco Exporter's Association is not 
taking a formal position on legislative proposals regarding the 
amount of buyout payments to quota holders and growers, we do 
have strong concerns about the high cost of a buyout and the 
financing of these payments through assessments, or user fees, 
on manufacturers of tobacco products.
    Certainly, any assessments placed on the manufacturers 
would likely be passed along to the consumer, thus forcing the 
price of U.S. tobacco products to rise and the demand for 
tobacco products to continue to decline. The unintended 
consequences of this financing mechanism would likely create 
even more hardship on the U.S. growers by reducing the need for 
domestic leaf.
    Fifth, we also question the basis in some of these 
legislative proposals for providing buyout funds to growers who 
choose to continue producing tobacco because such payments 
would be contrary to the World Trade Organization provisions on 
agriculture.
    Sixth, we fail to understand the rationale for allowing 
quota owners and the growers to double-dip by receiving 
payments for both their quota and their production and still 
remain eligible to produce tobacco. We believe this concept has 
no place in any buyout legislation; it doesn't make sense 
because it simply costs too much.
    Seventh, we believe that a post-buyout marketplace should 
be characterized by free market supply and demand. We believe 
U.S. growers should be free to produce tobacco according to the 
domestic and international market demands. Allowing the cost of 
U.S. tobacco to become competitive in the world market could 
minimize the need for imported large volumes of foreign leaf.
    In line with this, we also believe that buyout legislation 
should not place restrictions on post-buyout tobacco production 
areas. Growers who choose to continue producing tobacco and any 
new growers who decide to enter the market should have the 
flexibility to grow tobacco wherever the natural resources and 
climate conditions would allow. We see no need for a Federal 
oversight committee to place restrictions to protect a few 
growers to the detriment of the industry as a whole.
    However, Leaf Tobacco Exporter's Association believes that 
if buyout legislation establishes a national tobacco board, it 
must include provisions for leaf export dealer representation. 
Some previous legislative drafts failed to recognize the 
difference between product exporters and leaf exporters. There 
is indeed a significant difference that must be addressed.
    Finally, while FDA regulations of tobacco products is an 
issue that primarily concerns the manufacturing sector, we are 
strongly opposed to any type of FDA regulations that would 
impose direct oversight on farms and leaf processing 
operations. Costly and unnecessary government regulations will 
further burden the tobacco growers and increase the cost of 
U.S. leaf to our remaining foreign customers.
    We also think it is impractical to try to regulate at the 
farm and processing level. If manufacturers are required to 
comply with FDA regulations, then it is the manufacturers who 
should be responsible for issuing specifications to processors 
and producers and monitoring their compliance.
    This would avoid the confusion and the high cost that would 
be inherent in trying to enforce multi-layers of compliance 
across multi-levels of the industry. It is, we believe, the 
only way such a regulatory environment can have any chance of 
working.
    For years now, we have been dismayed by the lack of 
progress in making any substantive changes in the tobacco 
program. Even with the failure of so many in our industry to 
recognize the need for change at all. Now we all are suffering 
the consequences of this inertia.
    Tobacco policy must be changed now. All of the market-
distorting, non-competitive features must be laid to rest, 
relics of a bygone era. We need a marketplace shaped by supply 
and demand, one that will enable U.S. growers to produce 
tobacco competitively for the domestic and international 
markets.
    Thank you for the opportunity to testify.
    Senator Dole. Thank you.
    [The prepared statement of Mr. Bunn can be found in the 
appendix on page 52.]
    Mr. Haymore, thank you for being with us today as well.

  STATEMENT OF TODD HAYMORE, DIRECTOR, UNIVERSAL LEAF TOBACCO 
         COMPANY, EXTERNAL AFFAIRS, RICHMOND, VIRGINIA

    Mr. Haymore. Thank you, Senator Dole. I do appreciate the 
opportunity to appear before you and this group to give you 
Universal Leaf Tobacco Company's position on a few issues.
    Before I begin my formal testimony, please allow me to give 
you a brief overview of Universal and the role that we play in 
an industry that is so important to the economic vitality of 
North Carolina and indeed the entire southeast. Universal is 
the world's largest independent leaf tobacco dealer.
    Put more simply, we purchase leaf from the growers, process 
it and sell it to the manufacturers of tobacco products. 
Universal's global headquarters is located in Richmond, 
Virginia, but our U.S. operational headquarters is located in 
Rocky Mount, North Carolina, and we now have the largest and 
most modern leaf tobacco processing facility located just 
outside of Nashville, North Carolina, just up the road here.
    The leaf dealer sector, as you know, is often overlooked, 
but we do contribute a great deal to the economy of North 
Carolina. During the last flue-cured and burley processing 
seasons, Universal processed in North Carolina about 120 
million pounds of the flue-cured crop and about 110 million 
pounds of the burley crop.
    That translates to about twenty-seven percent of total 
flue-cured crop sold last year and about forty percent of the 
total burley crop sold. Let me make a note that we probably 
would have processed more in our Nash County facility had we 
opened on a normal July opening day, but because of 
construction, we were forced to wait until mid- August, so 
those numbers would have been a little higher.
    Also, during the same time period, Universal employed more 
than a thousand people in North Carolina and paid out more than 
$20 million in payroll.
    With these facts in mind, I want to stress that Universal 
does play a key role in the U.S. tobacco industry and we are 
quite proud of our long-time support of the domestic industry, 
including our recent $130 million investments in the United 
States, a little more than $100 million was spent right here in 
North Carolina.
    Unfortunately, if drastic change doesn't take place very 
soon in the domestic tobacco industry very soon, there will be 
little left for us to support and obviously, we do not want 
that.
    Senator today I am going talk a little bit about how the 
current state of the domestic tobacco industry is impacting our 
business and what we would like to see happen to change this 
situation.
    Unfortunately, I must tell you that the domestic tobacco 
industry is in serious decline, due primarily, we believe, to 
the Federal price support program that has worked to price U.S. 
leaf out of the world market and paralyzed good growers by 
increasing the cost of doing business in the United States.
    This, obviously, is having a detrimental impact on our 
business as well, and these issues have an effect on everybody 
in this industry as you well know. Let's look at some of the 
cruel and sobering facts that are out there.
    U.S. production of both flue-cured and burley crops is 
about half of what it was just a few years ago--and obviously 
it's been stated several times here today that we know from 
internal and external data that we are facing a potentially 
devastating quota for the flue-cured crop for 2005.
    Exports--the only growth engine left for the domestic 
market--are shrinking at a very alarming rate, and we believe 
that both of these issues are directly related to the Federal 
tobacco program. As a result of these problems, thousands of 
growers have been forced to scale back their operations, reduce 
work force, and take income cuts.
    I don't need to say that; you are living it. You've made 
the capital investments and have the equipment to produce a 
crop twice the size you are today--yet many of you are making 
probably bad long-term economic decisions today just out of 
pure necessity to stay in business in the short run.
    Growers, you are not alone. We are experiencing pain, too. 
In the leaf processing and purchasing sector, consolidations 
fostered again out of basic survival because of exports 
shrinking, have made all three of the major independent leaf 
dealers in the United States shut down major processing 
operations and downsize work forces.
    Universal alone has gone from having six processing 
facilities in 1998 to just two this year, and we have seen our 
U.S. employment level drop from approximately 8,000 workers in 
1998 to about 2,500 this year.
    Unfortunately, it is very likely this bad news will 
continue to occur in our sector and throughout the entire 
domestic industry unless the handcuffs of the tobacco program 
are removed and good growers are given the opportunity to 
compete effectively in the world market.
    Now, you may be asking yourself, if the state of the 
domestic tobacco market is so bad, why did Universal invest 
$130 million in the United States? How could Universal make 
such a significant commitment to the United States when the 
future looks so bleak?
    Yes, we recently completed a major modernization effort in 
the United States by building a brand new, 1.2 million square 
foot, state-of-the-art leaf tobacco processing facility in Nash 
County and we expanded and renovated our Danville, Virginia 
facility so that it, too, would have the most modern, up-to-
date leaf processing technology in the world.
    Yes, that $130 million outlay represents the single largest 
investment ever made by Universal in its processing facilities 
and yes, we are very proud to have made these investments in 
Virginia and right here in North Carolina. However, I am sorry 
to say that we made these investments with little or no 
confidence in the future of the U.S. market.
    Rather, we made these investments because we needed to 
increase efficiency in order to remain viable in the face of 
smaller U.S. crops and the ever growing quality demands of our 
customers.
    We recognize that we took a substantial risk as the 
fundamental problems facing our industry remain squarely in 
place and so far, no one has really shown any true inclination 
with wanting to deal with them. We felt like we had to make 
these the decisions and investments in order to maintain our 
position as the premier leaf dealer in the United States, even 
if the export market completely collapses and we are only left 
to service the shrinking domestic market.
    What must be done to ensure the future of the domestic 
tobacco industry?
    We believe without a doubt the greatest challenge facing 
the industry today is the need for substantial and immediate 
change. We believe that the time has come to eliminate the 
Federal tobacco price support program. Let me explain.
    As you all know, the program has been historically one of 
our greatest assets and one of the most effective and efficient 
farm programs in the United States. Now, however, it has become 
an albatross--clearly saddled with antiquated rules and non-
competitive prices, and as Tommy mentioned, it's become so 
inflexible that it cannot react and effectively respond to 
changes in the global or the domestic markets.
    Many in the industry, including Universal, believe the 
program has led to greatly inflated U.S. tobacco prices to the 
point where the U.S. is simply no longer competitive in the 
world market, and this is evidenced by the shrinking export 
figures we have all seen over the last few years. Regrettably, 
more and more foreign customers are turning away from U.S. leaf 
and seeking cheaper alternatives from places like Brazil, 
Malawi, and even China now.
    Because of these reasons and others, Universal strongly 
believes the only way for the U.S. leaf to be more price 
competitive in the world market is to allow the market to work 
without restrictions on prices or production.
    That's why, in principle, we support a quota buyout and the 
elimination of quota. The right to grow tobacco must be placed 
squarely in the hands of growers if the domestic industry has 
any chance of long-term survival and good growers must have the 
ability to achieve economies of scale if they are to be able to 
compete profitably in the world market.
    The United States is the only country in the world in some 
cases where growers have to pay for the privilege of growing 
tobacco. This is wrong and it places the U.S. growers at a 
severe competitive disadvantage to growers elsewhere in the 
world. More importantly, we believe that the complete 
elimination of the Federal price support system is absolutely 
essential if the U.S. grower is going to be able to compete 
effectively in the world market.
    Any new tobacco legislation that emerges from the U.S. 
Congress should not limit production or have measures that 
support prices at artificial and non-competitive levels. 
Instead, the production and price issues should be determined 
by simple supply and demand economics.
    Universal believes that a move to a free market system will 
help to restore the competitive balance of U.S. leaf in the 
world market and stabilize domestic leaf production. In fact, 
we believe that it is the only step that can achieve these 
important objectives and restore the economic viability of the 
domestic tobacco industry.
    These are just two of issues that Universal believes must 
be resolved in the very near future, but we believe that they 
are the two most critical and we will offer a more thorough 
explanation of our beliefs on these issues for the record at a 
later date.
    Senator Dole, let me close my testimony by stating that 
Universal has been--and remains today--a significant buyer and 
the largest processor of U.S. tobacco. We have worked hard to 
support this market, its growers, and its workers, and I 
believe that our recent $130 million investment in Virginia and 
right here in North Carolina lends full credence to our 
commitment to this market.
    We intend to be here for years to come processing U.S. 
leaf--your leaf--in our state- of-the-art processing facilities 
in Nash County and Danville, Virginia, but the time is fast 
approaching when there may be very little for us to support and 
that is why we believe changes obviously must come and must 
come soon.
    In some cases, the changes will be painful, but no change 
at all is bringing a great deal of pain right now. To make 
these changes, it will take strong leaders with the willingness 
to make tough decisions in the short-term in order to have a 
more prosperous long-term.
    Senator Dole, I do applaud your leadership on this issue 
and I thank you for bringing these issues to the attention of 
your Congressional colleagues. Universal stands ready to work 
with you to do and we know that reaching these goals is going 
to be difficult, but we are ready to do it, we are ready to be 
there with you.
    Thank you again for having me here today.
    [The prepared statement of Mr. Haymore can be found in the 
appendix on page 58.]
    Senator Dole. Yes, indeed, thank you very much. Now, Mr. 
Bunn, you mentioned the trend that you are witnessing among 
foreign buyers as it relates to U.S. tobacco production. How 
far are we from the point of no return for these buyers?
    Once they quit doing business with the American tobacco 
farmer, is there any incentive for them to come back?
    Mr. Bunn. Well, we have always been noted for our integrity 
and quality and capability to be a steady supplier of tobacco 
and a stable government--so while our prices may be different 
than some of our competitors, we still have things to offer.
    The problem is now the value of those are not being 
considered because of our competitors and the price of their 
tobacco is so much lower than the price of U.S. tobacco.
    Senator Dole. From your perspective, what kind of business 
decisions do you anticipate another thirty plus percent cut 
will require your member companies to make?
    Mr. Bunn. We will see some dramatic scaling back of 
operations. In some cases, there may be consolidation of 
operations, but certainly we would see the plants trying to at 
least maintain some economies of scale in operation which would 
mean short time operations perhaps even closing some factories.
    Senator Dole. Mr. Haymore, as you reference in your 
testimony, Universal Leaf has made a significant investment in 
a processing plant in Nash County just up I-95 from here. Let 
me ask you the same question that I have been asking each of 
these witnesses, how is an additional thirty percent cut going 
to affect Universal Leaf and what kind of impact is that going 
to have on the new plant in Nash County?
    Mr. Haymore. The first easy answer to that is with a thirty 
percent quota cut, we are going to try to get as much of our 
competitor's business as possible to make sure it's processed 
in that facility, but a more, I guess, in depth answer is if we 
are a volume driven business. If we don't have the volume to 
run through the plant, it means less time to process, less 
workers, less jobs.
    To give you maybe a historical answer, Senator, just this 
past year, because of less burley or fewer burley pounds than 
we expected, we closed our Danville, Virginia--where we just 
spent $30 million--we closed it 7 weeks earlier than 
anticipated.
    That was 7 weeks of payroll that didn't go out; 7 weeks of 
time that folks didn't have jobs and quite honestly with a 
thirty plus percent quota cut, we are looking at unfortunately 
more of the same probably in both Virginia and North Carolina.
    The biggest question mark is if nothing happens and we do 
have this thirty percent quota cut, how long can we go just 
scaling back operations before you get to a situation where you 
must mothball or close permanently a facility. Obviously with 
the investment we have made, we don't want that to happen.
    Senator Dole. Thank you both very much for your testimony. 
It's certainly been informative and it's very important to have 
your testimony on the record. Many thanks.
    Will the fourth panel please come forward? We have with us 
today Mr. Gene Charville, President of East Carolina Farm 
Credit; Mr. Wallace Herring, Senior Vice President and Manager 
of the Agribusiness Department for First Citizens Bank; and 
Dallas Taylor, Senior Vice President for Wachovia.
    It's important to get the perspective of the financial 
institutions on this important issue as well.
    Mr. Charville, welcome.

  STATEMENT OF GENE CHARVILLE, PRESIDENT, EAST CAROLINA FARM 
                CREDIT, RALEIGH, NORTH CAROLINA

    Mr. Charville. Good morning, Senator Dole, and members of 
the Subcommittee. I am Gene Charville and I am President of 
East Carolina Farm Credit. We are an Agricultural Credit 
Association serving the credit needs of agricultural producers 
and rural homeowners in eastern North Carolina. Currently our 
Association serves approximately 3,000 farmers and 500 rural 
homeowners and provides approximately $700 million in credit.
    I would like to thank you, Senator Dole, for your work on 
behalf of the North Carolina farmers that we serve. Your 
efforts to bring resources to bear on the agricultural and 
rural development challenges facing our state are very much 
appreciated by me, my farmer board members, and all of the 
farmers and rural citizens we serve.
    We are the largest farm lender operating in eastern North 
Carolina and over fifty percent of the agricultural credit is 
with our organization; and as a cooperative business, the 
success of our business parallels the performance of the 
farmers that we serve. Being a single industry lender, with a 
loan portfolio that consists nearly entirely of agricultural 
loans, our success is directly linked to the plight or 
successes of our farmer/members.
    Within that single industry that we serve, our business is 
even further concentrated predominately in a few main 
agricultural commodities. The largest commodity concentration 
is tobacco. Over forty percent of our loans and commitments are 
to farmers who rely on income from tobacco to pay their bills. 
For East Carolina Farm Credit, this amounts to an investment of 
over $300 million.
    The future of our business is directly dependent on the 
ability of tobacco farmers to be successful, build and maintain 
their equity, generate profits, and repay their debts. 
Eliminating the opportunity for growth or expansion limits the 
ability of farmers to succeed. It affects the value of their 
assets, the collateral they provide for loans, and the entire 
rural economy.
    The tobacco quota cuts that have occurred over the past 
several years have diminished the ability of tobacco farmers to 
succeed. Further cuts and the resulting instability could 
adversely affect the quality of our loan portfolio and the 
performance of our cooperative business.
    Senator Dole, as someone who lives and works in rural 
America, I see the very real needs facing our farmers and 
communities. As you know, rural people face daily hardships as 
they meet the challenges of living and working in a rural area.
    The tremendous reductions in the tobacco allotment that 
have occurred over the past few years have only added to these 
hardships, making the challenge of surviving as a tobacco 
farmer nearly impossible.
    Farming or working in a rural community no longer offers 
the appeal necessary to keep the next generation in the rural 
areas where they were raised. The average age of our customers 
is fifty-eight years old and that number has been continually 
increasing for the past two decades.
    At East Carolina Farm Credit, we have pursued numerous 
programs to support and encourage young people to stay on the 
farm. Despite these efforts, young people, the next generation 
of farmers, are leaving the rural area. A buyout of the tobacco 
quota program would help restore economic strength to rural 
North Carolina.
    Tobacco farming, for decades has been a stable and 
profitable farm enterprise, but it has now become a myriad of 
risk and uncertainty. The continuing reductions in the quota, 
increasing operating expenses, marketing changes and an 
uncertain future have all created a tenuous situation for 
tobacco farmers, as well as for their cooperative lender.
    Farmers today are faced with many of the same obstacles 
that their fathers and grandfathers faced. They have no control 
over the costs of the inputs they purchase and no control over 
the proceeds they receive when they sell their crop, but we 
have added yet another burden with the uncertainty of whether 
there will be a buyout. Let's not continue with this burden on 
an industry that is already stressed.
    The good news is that adequate credit is still available to 
tobacco farmers. With continued cuts and in the absence of a 
buyout, credit restrictions will be inevitable. The quota cuts 
of the past several years have financially weakened nearly all 
tobacco farmers. Net worths have declined, earnings have eroded 
and tobacco farmers who have worked hard and achieved financial 
success are now fighting for their survival. Let's end this 
downward spiral and let the tobacco industry start on a new 
course in North Carolina.
    East Carolina Farm Credit was established to fulfill unmet 
credit needs for farmers and assure that a dependable and 
reliable source of credit would always be available. East 
Carolina Farm Credit has been fulfilling this need for farmers 
since 1917.
    Farmers still have these same needs for credit and for a 
lender that understands their needs as they did over 85 years 
ago. Let's give tobacco farmers the ability to continue to earn 
a living.
    Senator Dole, we are at a turning point. We can sit back 
idly while we continue to see our tobacco industry slowly and 
painfully decline, and with this decline a further erosion of 
our rural communities and businesses that depend on a strong 
rural economy. Instead, I hope that we seize the opportunity to 
change the tobacco industry in a positive way.
    Let's provide an equitable buyout of the tobacco quota 
program. Doing so will strengthen eastern North Carolina, it 
will strengthen the entire state, and it will do so in a way 
that provides the farmers who are with us today, the farmers 
that have built eastern North Carolina and its economy, a way 
to make a transition.
    Senator Dole, your interest and support on issues affecting 
rural North Carolina, your strong support of the tobacco 
industry, and your pursuit of a tobacco buyout are very much 
appreciated. Again, thank you for your leadership on this vital 
issue and for conducting today's hearing.
    Senator Dole. Thank you. Mr. Herring.
    [The prepared statement of Mr. Charville can be found in 
the appendix on page 64.]

STATEMENT OF WALLACE HERRING, SENIOR VICE PRESIDENT AND MANAGER 
  OF AGRIBUSINESS FIRST CITIZENS BANK, CLINTON, NORTH CAROLINA

    Mr. Herring. Thank you, Senator Dole for being here for 
this very important event. I am Wallace Herring, Senior Vice 
President and Manager of the Agribusiness division of First 
Citizens Bank.
    This morning I plan to speak from a business perspective 
about the tobacco buyout and why we need to move forward with 
it. Our company has a vested interest in what happens to our 
tobacco farmers. In 1898, we opened our first office in 
downtown Smithfield, primarily serving the farmers of this 
community and then agricultural customers throughout Eastern 
North Carolina.
    Over the last century, our company has expanded to 337 
offices in North Carolina, Virginia and West Virginia. While we 
have expanded our products and services beyond agricultural 
lending, we have never forgotten our roots.
    At First Citizens, we have made a considerable commitment 
to support this sector of our economy. We have a business 
development team as well as a credit analysis group devoted 
solely to farming and agribusiness. Many of our bank branches 
are in rural communities where we provide financial services to 
farmers, family members and companies who rely on agricultural 
business for their livelihood.
    Without question, tobacco has been a very important part of 
the economy in these areas, including here in Smithfield. The 
potential for a buyout looms heavy on the minds of many people, 
especially the growers and the quota owners.
    As we all know, a tobacco buyout and an end to the tobacco 
program have been debated for many years. Many of us were 
hopeful that some type of buyout would take place last year. 
Obviously this did not happen. Our customers who operate 
tobacco farms tell us they are frustrated with the continued 
uncertainty over the buyout.
    It's hard to make long-term decisions--should they finance 
a new tractor or a barn, for example--when income is tight and 
they don't know what to expect down the road.
    Without a buyout, further quota cuts will continue to put 
pressure on tobacco growers, owners and our rural economies. If 
the forecast by an N.C. State economist, Blake Brown, who is an 
expert on this issue holds true, the situation looks 
increasingly dire, especially if we face the predicted thirty-
three percent cut in quota in next year and lose $200 million.
    The bottom line is, unless we move ahead with a buyout, 
tobacco growers will find it hard to stay in business. Some 
farmers will turn to alternative crops to offset quota cuts and 
decreased income. Others will sell their operations. Some will 
turn to other lines of work. We all know good jobs are hard to 
come by--especially in the rural areas of our state.
    The current tobacco program not only hurts farmers, but it 
also compounds the already distressed economic situation in our 
rural communities. Many of these areas hard hit by the quota 
reduction are struggling to discover a replacement for the 
tobacco dollar, which sustained them for many years. Local 
companies that do business with tobacco growers are finding 
that it's hard to make ends meet.
    As if this isn't enough, manufacturing plant closures and 
job layoffs so common to our state in recent years are adding 
to the economic woes in many of these rural areas. It's time to 
end the uncertainty and make the buyout a reality, while we 
still have the opportunity to help our farmers and their 
communities.
    A buyout would allow quota owners and farmers to make the 
transition if they want to stop raising tobacco. At the same 
time, it would stabilize the position of larger growers who 
want to continue their operations. A tobacco buyout would also 
make a dramatic impact on our state's economy. Growers and 
owners would use their buyout payments to settle debts, pay 
taxes, purchase equipment and supplies, invest in education or 
diversify their operations.
    The buyout's impact would spread to other businesses and 
sectors, resulting in billions of dollars in additional 
economic activity. According to a University of Tennessee 
analysis, North Carolina could see an estimated $6 billion in 
additional growth under the proposed House bill; $1.16 billion 
in the first year of the buyout alone.
    The economic activity would also significantly support the 
creation of much needed jobs in our agricultural communities. 
In other words, a tobacco buyout would help steady our state's 
already fragile rural economy and significantly increase 
business opportunities in these areas.
    First Citizens is proud of the partnership we have built 
with our agricultural customers over the last 106 years. That's 
why we support this issue and understand how important it is to 
the communities and businesses we serve.
    I commend Senator Dole for her leadership and for putting 
together this hearing. We must continue to keep the public 
aware of agriculture's value to our statewide and local 
economies. We must support our farmers and take steps to pass a 
tobacco buyout. Thank you.
    Senator Dole. Thank you. Mr. Taylor.
    [The prepared statement of Mr. Herring found in the 
appendix on page 68.]

  STATEMENT OF DALLAS TAYLOR, SENIOR VICE PRESIDENT, WACHOVIA 
              CORPORATION, RALEIGH, NORTH CAROLINA

    Mr. Taylor. Thank you, Senator Dole. On behalf of Wachovia, 
thank you for inviting me to speak to the subcommittee today 
and voice my support for a segment of Wachovia's customer base 
that has been and continues to be very important to our 
success.
    My name is Dallas Taylor. I have been a Wachovia employee 
for 38 years. All of those years have been spent in various 
Wachovia locations in North Carolina. Most of my time with the 
company has been spent providing loan and deposit services 
directly to agricultural customers, including numerous tobacco 
growers and quota owners. Currently, I work on the Risk 
Management side of the bank. Although I am no longer in direct 
contact with our customers on a daily basis, I am still part of 
the team that looks for ways to add value through various 
credit products.
    Over the past several years, I have observed first hand the 
plight of the farming community in eastern North Carolina. 
Although change is inevitable within every segment of our 
economy as business cycles ebb and flow, tobacco farmers have 
struggled more so than other segments to keep pace with those 
changes.
    We have seen balance sheets erode in asset value and equity 
value due to rapidly declining quota ownership. We have seen 
tobacco growers' disposable income dwindle due to the fewer 
acres grown which combined with rising costs leads to reduced 
profit margins.
    These changes have put more pressure on the grower to find 
other sources of income to take the place of what was once a 
thriving income source. With limited alternatives available, we 
have seen the number of farmers steadily decline and fewer new 
farmer startups.
    The deterioration in tobacco farmers' financial conditions 
often increases credit risk, resulting in increased bank costs 
to maintain appropriate capital and increase loan portfolio 
monitoring. In turn, this reduces the credit flexibility with 
existing customers and prospective new customers.
    Since its beginnings in the late 1800's, Wachovia has been 
a friend to the agricultural community. The farmers and tobacco 
growers are one of the economic engines in eastern North 
Carolina. If the farmers are viable, they funnel money into our 
economy through the purchase of products and services, and they 
create and maintain a large percentage of jobs in this region. 
As their financial institution of choice, we have a vested 
interest in their ongoing success. If our customers thrive and 
succeed, so do we.
    In summary, the financial deterioration of tobacco growers 
increases our cost to provide credit through higher credit 
risk, reduces the credit flexibility available to tobacco 
growing customers and impairs the financial viability of 
lending to tobacco-dependent producers.
    Based on our understanding of the various tobacco buyout 
proposals presented to date, tobacco growers and quota owners 
would be given the opportunity to better control their own 
destinies as well as bolster their deteriorating balance sheets 
and income streams.
    This may give the tobacco grower the option to expand 
existing operations, retire from farming or maintain operations 
at the same level with less fear of further financial 
deterioration due to quota cuts.
    Wachovia is not here to directly support any kind of new 
legislation--what we are in support of are our customers. 
Again, thank you for this opportunity to voice our support for 
valued Wachovia customers. We wish them continued success. 
Thank you, Senator Dole.
    [The prepared statement of Mr. Taylor can be found in the 
appendix on page 70.]
    Senator Dole. Thank you. Mr. Charville, East Carolina Farm 
Credit obviously provides great service to the farm community 
and your customer base truly is rural North Carolina. You 
stated in your testimony just how important a tobacco quota 
buyout is for that customer base. Keeping consistent with my 
questioning, what kind of an impact will another substantial 
cut in quota--like thirty percent--have on this customer base 
from your perspective, and what other ways do you see this 
impacting rural communities?
    Mr. Charville. Continued cuts will have a tremendous impact 
on our financial institution as well as our customer base. With 
the cuts that have already occurred, we have seen the financial 
strength of our customers decline; their net worths have been 
reduced; their earnings abilities have been significantly 
eroded.
    To date, we have been able to continue to provide credit 
and adequate credit is available, but with continued cuts, at 
some point, the impact of that will be felt even more so from a 
credit standpoint to the point that credit availability could 
be lessened to the point that many wouldn't be able to obtain 
credit to put their crop out.
    The impacts on the communities would be significant. The 
rural areas of eastern North Carolina--the rural communities 
that are there today have been built by the tobacco industry 
and sustained by the tobacco industry and continued cuts and 
continued deductions would, we believe, lead to continued 
reduction in opportunities available, less opportunities that 
would keep our young people in the communities they were 
raised, and just a weakening of the overall economy.
    Senator Dole. Thank you. Mr. Herring, you mentioned a 
general economic impact of the House buyout bill in your 
testimony, and I understand that you've been involved in 
agribusiness from the banking perspective for a long time. How 
hard is it for tobacco farmers to get their credit extended as 
compared to previous years?
    Mr. Herring. Tobacco has always been considered a very 
stable source of income for our farmers. Reduction in that 
source of income has already had an impact on many farm 
operations by reducing their ability to service term debt, make 
the needed investments in equipment and other capital 
expenditures necessary to keep the operation viable.
    As an agribusiness banker, I can tell you emphatically that 
the tobacco income plays a big part in credit decisions in 
rural eastern North Carolina on tobacco farmers.
    Senator Dole. Are there other side effects of the current 
economic decline resulting from the inflexibility of the 
current tobacco program that aren't obvious to those who live 
outside of tobacco dependent communities?
    Mr. Herring. We feel that there are. We think that the 
tobacco program the way it is now--the current program has made 
some of the smaller farmers stay in business who would have 
ordinarily gotten out or to convert to cash leasing their quota 
to neighboring farms, which simply does not produce adequate 
income to even consider any form of diversification that might 
enhance their livelihood and their quality of living in the 
rural environment.
    Senator Dole. Now, if North Carolina were to get back the 
annual $1.1 billion in economic activity it's currently losing 
due to this broken Federal policy, how much of an impact would 
that have on capital investments? How many new job 
opportunities would that create in these rural communities?
    Mr. Herring. Those numbers have been alluded to all morning 
in these discussions. In a recent study conducted by Dr. Kelly 
Tillen at the University of Tennessee, it is estimated that the 
buyout will produce the $1.16 billion in income chained to 
economic activity for the year 19005 with $789 million of that 
going to the quota owners and growers. The remaining $371 
million, more or less, would flow directly into the local 
economies of these communities.
    According to this study, the change in economic activity 
would support more than 11,000 jobs in our state. North 
Carolina would realize an increase of more than $6 billion 
overall.
    Senator Dole. Thank you very much for that answer. Mr. 
Taylor, it's well known and been documented today just how 
important tobacco is to the overall economy in North Carolina. 
Our state ranks third in agricultural diversification and it is 
the State's No. 1 industry. What kind of impact would a tobacco 
buyout have on that part of the population that is not involved 
in agriculture?
    Mr. Taylor. Well, outside the tobacco industry, the cuts 
that we have seen in the past few years certainly has a ripple 
effect on the entire community--agribusiness, every business 
that you can think of--car dealers, furniture dealers, anyone 
who is in retail and it will have a tremendous impact in 
reference to North Carolina, particularly eastern North 
Carolina, as it would create jobs and provide a tremendous 
amount of cash-flow into the population. As we have indicated 
with consideration to balance sheets, it would go a long ways 
to turning that tide and strengthen those--and that would have 
a ripple effect throughout the economy.
    Senator Dole. Thank you very much, gentlemen. Your 
testimony has been most helpful. Thank you. I appreciate your 
joining us.
    Senator Dole. Will the last panel please come forward? We 
have the Chairman of the Johnston County Board of 
Commissioners, Mr. J.H. Langdon and Mr. Allen Scarborough, 
Manager of State Affairs with Bayer CropScience.
    Mr. Langdon, welcome.

STATEMENT OF HON. J.H. LANGDON, CHAIRMAN, JOHNSTON COUNTY BOARD 
            OF COMMISSIONERS, ANGIER, NORTH CAROLINA

    Mr. Langdon. Thank you. Thank you, Senator Dole, for asking 
me to be here today to participate in this event. We have heard 
a lot of things today about how tobacco affects and what's 
happening to affect our citizens in North Carolina--
particularly eastern North Carolina--and I would like to put a 
focus on what we have done in Johnston County.
    Johnston County is one of the fastest growing counties in 
North Carolina, so we have a mix of things happening, but 
tobacco is still an extremely important part of our economy in 
Johnston County. In 2003, the estimated farm income from 
tobacco was $35,363,561. The income was shared among an 
estimated 550 active growers, probably the largest number of 
producers in one county in the United States.
    There are some growers who do not own quotas, but most 
growers, well over eighty percent, own quotas and lease tobacco 
quotas from other quota owners. Johnston County had the second 
highest amount of quota in the state, Pitt County being first. 
Tobacco has been a stable source of income and to some degree, 
it stabilized our local economy over the years. Because the 
crop was grown under the quota system with price supports, 
growers have been able to make business plans and arrange to 
secure resources necessary to do what they need to do in their 
farming operations.
    Tobacco has been profitable for growers and for quota 
owners and because it's profitable, the quota has value, and of 
course, that value has allowed farmers to purchase land and 
paid for their equipment based on that value.
    If we change that value, we make it very difficult for them 
to maintain the level of living they have and to carry out the 
kinds of things that they need to.
    As we know, times have changed, haven't they? Eighty-three 
percent of tobacco produced in Johnston County in 2003 was sold 
under marketing contract. Since 1997, the quota in Johnston 
County has dropped forty-seven percent--from 37 million pounds 
in 1997 to 19 million pounds last year and in that same period, 
the income from tobacco has dropped by forty-five percent from 
$64 million in 1997 to $35 million in 2003, which the 
projections have been mentioned a number of times today about 
the thirty percent reduction in quota in 2005--that would be an 
$11 million hit for Johnston County. This would significantly 
impact our farmers and our quota holders.
    Johnston County tobacco farmers and allotment holders need 
the buyout and with the present tobacco program, quotas and 
allotments are in a downward spiral. While quotas and 
allotments become smaller, growers are suffering from the lack 
of dependable source of income and the value of assets that 
quota owners and producers have invested in is decreasing. A 
buyout will compensate allotment holders for their investments. 
This includes over 5,000 Johnston County citizens.
    Most important, a buyout will help active growers 
transition into other commodities and industries and we must 
remember that money that comes from tobacco multiplies three to 
five times.
    When we say we are going to possibly have an $11 million 
cut, you are looking at a tremendous cut in our local economy. 
The ability of our people to work and make a living and to 
carry on the things they need to carry on is really important 
and Senator Dole, I hope you will continue to work hard like 
you have for our tobacco buyout.
    Senator Dole. Thank you. Mr. Scarborough.
    [The prepared statement of Mr. Langdon can be found in the 
appendix on page 73.]

 STATEMENT OF ALLEN SCARBOROUGH, MANAGER, STATE AFFAIRS, BAYER 
             CROP SCIENCE, RALEIGH, NORTH CAROLINA

    Mr. Scarborough. Senator Dole, I really appreciate the 
opportunity to come and to give testimony for this hearing 
representing a segment of the ag community, and the tobacco 
economy, as well, and to the folks that are certainly vital to 
our business as well, our partners in agriculture.
    Bayer CropScience researches, develops, manufactures and 
sells a broad range of innovative crop science products for 
crop protection, biotechnology, seed markets; the turf and 
ornamental and professional pest management markets; the 
consumer lawn and garden markets.
    You can see we are vitally diversified throughout crop 
protection. Our U.S. business headquarters is in Research 
Triangle Park, North Carolina. I myself live in Raleigh. We 
employ about 400 people throughout this state and many more 
throughout the U.S.
    The success of Bayer CropScience is directly linked to the 
economic health of U.S. agriculture and the producer community. 
Our business is reliant upon the ultimate users of our products 
and technology and, beyond our own work force, is partnered 
with the distribution and retail businesses that sell, service, 
and help to steward what we develop and manufacture. It's very 
important throughout the entire chain.
    The crop protection/production industry is affected by the 
crop acreage under production. A drop in acreage directly 
represents a reduction in the potential market for that crop. 
It's a very simple analysis from my perspective certainly. 
Additionally, the value of the crop to the grower also 
determines the producers' input decisions affecting the 
purchasing of our technology or our products.
    In a simple analysis, if a market or other factors reduce 
crop acreage and/or the value of the crop declines, then our 
industry experiences reduced sales for that market. The impact 
is also felt within the broader agribusiness community. We are 
very much aware of that and tied directly to that.
    For the agricultural industry, the basic manufacturers of 
crop protection products, the wholesalers and the retailers of 
input products and technology, from our perspective and our 
interest, are the components most directly affected.
    Of very important concern, the long-term economic viability 
of the producer community will ultimately affect the continued 
and future markets for agrichemicals and related businesses. 
For tobacco, the acreages have declined and I hear different 
reports, but certainly around forty percent since the late 90's 
and we have heard support of that information this morning.
    According to North Carolina State University, each lost 
acre no longer receives chemical inputs worth hundreds of 
dollars per acre. A continued decline in acreage and/or the 
potential loss of producers would adversely affect crop 
protection/production sales, but could affect the viability of 
distribution and retail locations in such areas of these 
losses. The bottom line of national suppliers such as us 
certainly also is affected.
    For our industry and the economic health of the region, it 
is important that legislation support agribusiness by 
supporting the producer community. Without that support, many 
producers may leave farming altogether. Clearly, the loss of 
producers would negatively affect the crop protection/
production industry.
    Thank you very much.
    [The prepared statement of Mr. Scarborough can be found in 
the appendix on page 76.]
    Senator Dole. Thank you. Mr. Langdon, you may very well 
have the best overall perspective on this important issue as 
Chairman of the County Board of Commissioners. As evidenced by 
your testimony, you see the impact from all sides. You've seen 
first hand how the decline in tobacco quota has affected the 
County. How important is tobacco quota to the county tax base?
    Mr. Langdon. It's very important, as you well know. The 
ability to pay your taxes has a lot to do with what happens in 
government and the services we provide, so the quotas and 
tobacco being--because we are still a very rural county, it is 
extremely important that we are able to maintain that base.
    Senator Dole. Johnston County is the fastest growing County 
in North Carolina--that makes your job all the much more 
demanding. What are examples of services that would have to be 
cut if the tobacco industry were to simply dry up or does it 
mean that taxes would have to be raised?
    Mr. Langdon. It would not mean that we cut services, as 
much as it would be taxes would be a problem for the people. We 
would hope that services that are important to our citizens we 
would be able to maintain, but the ability of people to pay 
local taxes is a very important effect of that, and it becomes 
our board having to make decisions that could be really tough 
on the services we provide.
    Senator Dole. Mr. Scarborough, how much of an impact would 
continued quota cuts, particularly the thirty percent cut 
looming for the 2005 crop have on your local business and 
tobacco areas and if you could also answer, what other 
businesses that Bayer CropScience works with would be impacted?
    Mr. Scarborough. Certainly, I alluded in my comments, 
there's a simple calculation just on an acreage basis and 
something that's occurred to me during this morning and should 
have been more obvious certainly tobacco growers versus some of 
the other row crops would probably have fewer acres under 
production totally and to make up that difference in 
diversification would require an extensive addition of acres--
at this point, if they are in a situation where they choose to 
go to another crop, for example, and would require further 
acreage to try to make similar economic grounds, if that 
transition can't be made, it's simply a reduction in acreage.
    The second part to your question is the partners and I also 
alluded to that--the other businesses key to us in our industry 
are the dealers, the distribution network as well as the 
producers--and on a local basis, those are the folks that 
service our products and help to get it on the ground directly 
and it's sort an environmentally conscious to make sure that 
the labels are followed to the best maximum usage--so it's an 
acreage issue from the fact that local businesses and down the 
chain with us going all the way to the grower as well as our 
individual sales structure and support staff and research.
    Senator Dole. Thank you. I want to thank all of the 
witnesses who joined us today. Your testimony has been very 
informative and will be an extremely valuable resource for us 
as we continue to work with the other ninety percent of 
Congress who are not from tobacco states to make this buyout a 
reality.
    Before I call the Subcommittee adjourned, let me take a 
moment to thank Frank Lee and his staff who have allowed us to 
use his warehouse and who went to great efforts to get all of 
this arranged for us today. We are extremely grateful. Thank 
you very much for being with us--all of you--today.
    The subcommittee hearing is adjourned.
    [Whereupon, the subcommittee was adjourned.]
      
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