Amid Changes, Tobacco Growers Struggle With Contracting

7/13/2013 7:00 AM
By Rocky Womack Virginia Correspondent

CHATHAM, Va. — Tobacco growers and quotaholders in Virginia took a buyout in 2004. Some opted to leave the industry, while others pushed on to continue raising tobacco like their forefathers.

Grower C.D. Bryant of Chatham continues to grow flue-cured tobacco. He says the buyout has worked, but it is not a perfect system.

“It has filled the void of the quota system,” Bryant said. “But farmers have found it is a system that can be punishing, when he or she probably thinks that in the past it would not have been that way because you had a price support system.”

The reason contracting has been punishing for some growers, he said, is that tobacco companies have sent a message that they want quality tobacco. For that quality, the companies reward growers with better prices and new contracts for the next year. For undesirable tobacco, growers see a lower grade and price.

While the reward system sounds fair, it can cause havoc.

“The danger of that is you can put so much pressure on a producer within one given year, that they start twiddling on not bankruptcy, but not being able to keep that farm lucrative enough that they can continue year after year,” he said.

These growers have faced hardship because of the tightening of the financial system, brought on by the recent long-term recession and new financial regulations, as well as the absence of a quota system. Under the quota system, growers could rely on a price support, which is a guarantee of at least its graded price. Bryant said this guarantee made bankers more comfortable about loaning money because they knew the government would meet a specific price and growers would see some kind of profit.

Today, growers must provide their banker with a good financial statement.

“Now, when they come in and need to borrow the money to finance, that operation is scrutinized to the point you better have some big assets, or you better be showing them you can sustain when they look at your bill of sales,” he said. “They’re starting to doubt you big time and don’t really want to do business with you. The companies need to understand that.”

If growers’ balance sheets don’t measure up, they risk the loss of a loan that they could have easily obtained in years past. This tightening along with the tobacco companies’ penalizing system can have lasting effects.

“When a company puts the pressure on a producer and does not allow him or her to at least have some level of profit within the lower grades, you’re spelling out a recipe for disaster,” Bryant said.

Every dollar counts, he said, and margins are thin. Growers need profits to keep their farm operations viable.

“If the companies do not move these contracts to where they are profitable enough, I do think you’ll see a fair amount of exiting of tobacco production,” he said. “I think it’s going to be sizable enough that eyebrows will probably rise.”

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