Rising from ashes, tobacco rebounds

Firms refocus, farms consolidate amid dire forecast

By Bruce Schreiner and Emery P. Dalesio, Associated Press  |  November 28, 2008

MOUNT STERLING, Ky. - Lindsay Pasley is an eager young man in what used to be an older man's game - tobacco farming.

He recently took 20 tons of his early prepared leaf to Clay's Tobacco Warehouse in Mount Sterling, due east of Lexington in the Appalachian foothills. He said he earned enough to "have a nice Thanksgiving and Christmas."

The auctioneer's singsong chant still rings out at Clay's and a few other tobacco-selling sites stubbornly hanging on with limited sales, but not nearly as often.

Clay's is the last tobacco warehouse still conducting auctions in Mount Sterling, once home to four auction warehouses. Owner Roger Wilson, who has watched as longtime growers have switched crops or quit farming altogether over the years, hopes to sell more than 2 million pounds this season, comparable to last year but down about half from the days before Congress pulled the plug on a Depression-era buyout program.

Yet Pasley, 28, wants to quadruple his acreage. He has a contract to sell 10 times as much to R.J. Reynolds Tobacco Co. as he did at the auction.

A decade ago, tobacco seemed destined to wither as cigarette companies shelled out tens of billions to settle lawsuits with states.

Smoking bans swept the country and - worst of all for the small-time grower - Congress cut off the quota system four years ago.

As production this year shows, however, Big Tobacco and individual growers have proven as resilient as their leaf, aided by a boost in exports primarily to Germany and Switzerland and by new marketing tactics emphasizing smokeless options.

According to the US Department of Agriculture, production of all tobacco varieties fell 27 percent to 640 million pounds in 2005, the first year without the price support program, which entitled license-holders to a quota of the total tobacco crop capped by the USDA each year.

This year, production climbed to 805 million pounds - within 10 percent of the 2004 level of 882 million pounds. That 2004 output was half the production in 1997 and a third of 30 years earlier.

The uptick has coincided with the increasing consolidation of farms.

"We've had so many to drop out, that for the ones who stay in there are opportunities," said Will Snell, a University of Kentucky agricultural economist.

Production of burley leaf, which accounts for about a quarter of tobacco production in the United States, has lost three-fourths of its growers since the buyout, Snell said. Yet some operations now cover hundreds of acres, a big undertaking when much of the work is done by hand.

In 2004, the last year of the federal price-support program, there were nearly 26,000 farms with quota licenses to grow the more common flue-cured tobacco in North Carolina, still the nation's top tobacco-growing state. By this year, that was down to 2,500 to 3,000 farms, said Scott Bissette of the state agriculture department.

The top two US cigarette makers - Philip Morris USA and Reynolds American Inc. - are aggressively searching for a non-cigarette product that consumers will like. They are focusing on cigars, moist snuff, chewing tobacco, and snus, which comes in tea bag-like pouches that users stick between the cheek and gum.

To move beyond cigarettes, Altria Group Inc. bought John Middleton Inc., the maker of convenience-store staple Black & Mild cigars, last year. Its pending acquisition of UST Inc., whose Skoal and Copenhagen brands make it the US market leader in smokeless tobacco, is expected to close in January.

Reynolds bought the Conwood smokeless tobacco business in 2006.