Tobacco companies cutting contracts with farmers

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Published: May 19,2010

Tags: agriculture, smoking, tobacco

CYNTHIANA, Ky. — After years of faithfully supplying leaf to tobacco giant Philip Morris International, farmer Jess Burrier received a postcard, thanking him for his contributions and telling him his service wasn’t needed this year.

“They were very courteous, but a Dear John letter’s still a Dear John letter,” said Burrier, who has seen the amount of tobacco he grows under contract shrivel from about 600,000 pounds two years ago to 20,000 pounds this year with another leaf buyer.

Kentucky, the nation’s top producer of burley tobacco, a common ingredient in cigarettes, could lose a fourth of its contracts this year, said Will Snell, a University of Kentucky agricultural economist specializing in tobacco. Many contracts also have been lost in North Carolina, South Carolina, Tennessee and Virginia as smoking continues to decline in the U.S.

U.S. farmers also are seeing more competition from overseas as worldwide burley production has grown in the past two years, Snell said. And, a 2009 federal law giving the Food and Drug Administration broad power to regulate tobacco has added to cigarette makers’ uncertainty, making them even more conservative about purchasing, he said.

The cutbacks mean farmers who’ve lost contracts might not be able to pay mortgages and rural communities could lose jobs and income as farmers have less money to spend.

Some top tobacco companies acknowledged cutting contracts but wouldn’t say by how much.

“When volumes go down, you don’t need as much leaf across the board to manufacture the product,” said David Sutton, a spokesman for Altria Group Inc. — parent of Philip Morris USA, the nation’s top cigarette maker, which produces the top-selling Marlboro brand. But even with cutbacks, he said Altria will buy leaf valued at more than $100 million this year from thousands of Kentucky burley and dark tobacco farmers.

R.J. Reynolds Tobacco Co. spokesman David Howard said the nation’s second-largest cigarette maker, whose brands include Camel and Pall Mall, is buying less burley through contracts because U.S. cigarette sales have dropped with higher excise taxes and smoking restrictions.

“We are simply doing what any business would have to do, and that’s keeping supplies in line with demand,” Howard said.

Philip Morris International, which is no longer tied to Philip Morris USA, also is buying less Kentucky burley this year, company spokeswoman Monica Montero confirmed.

The amount of contracted tobacco may plunge by 40 percent this year in Breckinridge County in western Kentucky, said Carol Hinton, the county’s agricultural extension agent. The reduction could cost growers about $2 million overall, based on a conservative 2,000-pound-per acre yield, she said.

“Every day, people were calling saying, ‘I lost my pounds,'” Hinton said. “It was a month there that was just true heartache for people.”

In North Carolina, the biggest tobacco state, contracts for flue-cured tobacco, another cigarette ingredient, are down about 10 percent from last year, said Peter Daniel of the state Farm Bureau.

North Carolina farmers have known this would be a lean year since December, when Phillip Morris International closed a receiving station in Lenoir County, the heart of eastern North Carolina tobacco country. That left farmers stuck with about 25 million pounds of tobacco, although Japan Tobacco Inc. later bought some of it, Daniel said.

In Tennessee, some producers with contracts say it’s increasingly difficult to live with the terms.

John Rose, 45, a tobacco farmer in northern Middle Tennessee who has a Phillip Morris International contract, now must take his burley to Glasgow, Ky., a four-hour round trip, after a nearby receiving station closed.

Some Kentucky farmers without contracts still lean toward planting tobacco, which they could sell at a limited number of auctions.

“That really scares me,” said Gary Carter, the ag extension agent in Harrison County. “It’s an unknown. They’re going to be at the mercy of whatever someone wants to give them.”

The U.S. Department of Agriculture reported in late March that farmers in all the burley states combined intended to plant 97,800 acres, 4 percent less than a year ago.

Burrier, 52, said he’ll scale back from 110 acres of tobacco last year to 12 acres. Just two years ago, he planted 200 acres on his farm just outside Cynthiana, about 30 miles northeast of Lexington.

“This is the least amount of tobacco that I have ever raised on this farm,” said Burrier, who traces his family’s tobacco-growing heritage back a century.

The small contract won’t pay his mortgage, and the money he invested in tobacco setters and sprayers will largely go to waste. In the fall, he’ll only need two of his 15 tobacco barns for curing leaf; he’ll rent a few others to farmers who snagged larger contracts.

Still, Burrier doesn’t hold any grudges with Philip Morris International. Having prepared for this day, he has a sod business and grain production to fall back on, although he likely won’t earn as much without the tobacco contract.

“Philip Morris (International) is doing what they should do as a business,” Burrier said. “They’re taking care of their stockholders. If they did any differently, they wouldn’t be in business.”

Todd Clark, a tobacco grower from Lexington, lost his entire contract with Philip Morris USA this year. The 40-year-old farmer spent an agonizing week not knowing what he was going to do.

He eventually landed a contract to supply 75,000 pounds — his smallest crop ever — to Philip Morris International. Clark supplements his farm income with hay, livestock and a greenhouse operation that produces tiny tobacco plants for other farmers.

About a month after he learned he had lost his contract, Clark received another letter from Philip Morris USA. This time, he was commended for his previous crop and told he would receive a plaque.

He’d rather have his contract back.

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