01-23659. Notice of Changes in Price Support Differentials for Flue-Cured Tobacco

AGENCY:

Commodity Credit Corporation, USDA.

ACTION:

Notice.

SUMMARY:

The Commodity Credit Corporation (CCC) is announcing a change in price support differentials for flue-cured tobacco beginning with the 2002 crop. The change in differentials is being implemented because of concern relating to marketability of flue-cured tobacco cured in barns with direct heat sources; for such tobacco, CCC will provide a price support rate that is one-half the normal price support rate for tobacco that has been cured in a barn with an indirect heat source. In order that tobacco can be duly valued for price support purposes, farmers will be required to certify whether their barns have an indirect heat source.

EFFECTIVE DATE:

This change is effective immediately September 21, 2001.

FOR FURTHER INFORMATION CONTACT:

Thomas R. Burgess, Deputy Director, Tobacco and Peanuts Division, United States Department of Agriculture (USDA), 1400 Independence Avenue, SW, STOP 0514, Washington, DC 20250-0514, telephone [phone] or FAX [phone].

SUPPLEMENTARY INFORMATION:

Quotas for tobacco production are administered under the Agricultural Adjustment Act of 1938, 7 USC 128 et seq. (1938 Act) Where quotas for a kind of tobacco have been approved by producers of that kind of tobacco, price support is made available for that tobacco under the terms and conditions of Section 106 the Agricultural Act of 1949, 7 USC 1421, et seq. (1949 Act). Flue-cured tobacco is one of the kinds of tobacco for which quotas have been approved. Regulations governing price support and quotas for tobacco are found at 7 CFR parts 723 and 1464.

Price support is made available through non-recourse loans to farmers through a designated producer-member association, which in the case of flue-cured tobacco is the Flue-Cured Tobacco Stabilization Corporation (Stabilization). As such, the loans do not have to be repaid, but rather the tobacco is placed in Stabilization's inventory and Stabilization then attempts to sell the tobacco for the highest price. Losses on inventory tobacco are covered by assessments levied under the No Net Cost Tobacco Program Act of 1982, against all producers (and buyers) of flue-cured tobacco, irrespective of, in the case of producers, whether the individual producer placed any tobacco under a price support loan.

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

A notice of proposed change in price support differentials for flue-cured tobacco and an invitation to comment was published in the Federal Register on December 12, 2000, (65 FR 77555). A number of both positive and negative responses were received. Those favoring the proposal were concerned about the following: the need to maintain the high integrity of U.S. tobacco; the need to be competitive with world markets, as the tobacco of competitors of U.S.-grown flue-cured tobacco is grown in indirect heated barns; the need to prevent a large increase in loan inventories of questionable value which would create a burden on CCC; and, the need to prevent a large increase in No-Net Cost assessments due to increased inventories. Also, the largest customers of US flue-cured have stated they are planning to begin acquiring tobacco with low specific nitrosamines. Those responding negatively to the proposal argued the following: there is no need for a change because they do not believe there is a problem, that it is only a marketing ploy; they need more time to convert their barns, and cannot get the barns converted for 2001; there is not enough scientific evidence to support the barn conversion; and, they cannot afford the cost of conversion on such short notice due to economic stress. After careful consideration of these responses, it was decided to make the proposed change, but to delay implementation of this change until the 2002 flue-cured marketing year; proceeding in this manner will address market and consumer concerns regarding the integrity of U.S.-grown flue-cured tobacco, while giving producers the time they need to convert to indirect-heated barns.

Beginning with the 2002 crop year, this notice changes the flue-cured tobacco price support differentials to provide for differing valuations of tobacco based on the heat source of the barn in which the tobacco is cured. The price support differentials for 2002 crop year tobacco that is cured in a barn with a direct heat source and marketed in calendar year 2002 and beyond will be set at one-half of the normal price support for flue-cured tobacco.

Setting the differential at half the normal price reflects that there may still be some market value associated with tobacco this is not cured in a barn with an indirect heat source and while it is difficult to determine what the lowered price might actually bin the market, it was determined that setting the price at the 50% level was a fair compromise which will be reassessed for future market years as changes in the marketing of tobacco become better understood and apparent. This is, on further consideration, setting a zero or near zero price for the tobacco appears too drastic at this time. As for the delay in the crop year implementation of the change in the differentials, it appears at this time that the association does not object to the delay, and that there has been general understanding in the industry that material changes in buying habits, as they involve this issue, have been modified accordingly. For these reasons, it appears that the revised disposition of this issue, is fair resolution for all concerned in this program which is a “no net cost program” in which all costs, other than the normal administrative costs associated with all support programs subject to producer assessments. As for the actual determination of the differentials, while this notice indicates the determination made with respect to the issues at hand at this time, final determinations for all differentials are made at the time that the body of differentials is announced for the crop year (that is, all the grade loan rates and premiums and discounts).

The plan with respect to the heat source issue would be that, beginning with 2002 crop, producers will have to certify whether their tobacco has or has not been produced in improved barns, i.e., whether or not the tobacco was cured by an indirect heat source. For these purposes, an improved barn will be any barn which has been retrofitted under the association's program or which otherwise have been built with, or improved to include, the technology that produces the market-preferred tobacco. The certification program will be administered by Stabilization. County FSA offices will be requested to cooperate by marking the producer's marketing card (MQ-76) with the notation “NO CERTIFICATION” for any farm failing to provide a certification to Stabilization. Individual lots of tobacco will be stamped “NO CERTIFICATION” at the auction warehouse. All tobacco with a “NO CERTIFICATION” designation will receive the lower price support loan value. Further announcements will be made as needed to implement this change. It is expected that several announcements would be made by press release or other less formal means of communications. To repeat: this value will not be based on either a positive or negative determination regarding indirect heating but a market value determination as part of the government's function of setting price support differentials. It should also be understood that if the market value of the tobacco is indeed reduced but no change was made in the differentials, not only would there be loan losses but also, because of those losses, if would be necessary to increase tobacco assessments to cover such losses, as required by the 1949 Act. Such assessments could be considerable.

Signed at Washington, DC., on September 17, 2001.

James R. Little,

Acting Administrator Farm Service Agency and, Acting Executive Vice President Commodity Credit Corporation.