On October 22, 2004, President Bush signed into law the American Job Creation Act of 2004, which included the Fair and Equitable Tobacco Reform, commonly referred to as the tobacco buyout bill. Under this legislation, payments are to be made to tobacco quota holders and producers and the U.S. Department of Agriculture will end all aspects of the federal tobacco marketing quota and price support loan programs, effective with the 2005 and subsequent crops.

At this time, details of implementation of the buyout have yet to be announced beyond what is written in the bill. As with all legislation, the details are left to the agency charged with implementing the legislation; which is USDA. USDA-FSA has pulled several key people from the state FSA offices to work on the implementation of this bill. Details of this buyout bill are not expected to be announced before the end of the year.

Provisions for the tobacco quota buyout include:

• $7 for each pound of quota owned based on the 2002 level of basic quota. The quota owner as of the date of enactment of the legislation will receive the payments. Payment will be over 10 years in 10 equal annual payments; i.e. $0.70 per pound per year.

• $3 in contract payments per pound of quota grown paid to growers who grew tobacco in 2002, 2003, or 2004. The amount of payment will be based on the 2002 effective marketing quota. Producers of a quota in all three years, 2002, 2003, and 2004, are eligible for payment of the full $3 based on the 2002 effective quota level for a particular quota. If a grower grew a quota for 2 out of the 3 years, then the grower is eligible for 2/3 of the payment. If a grower grew a quota for 1 out of the 3 years then the grower is eligible for 1/3 of the payment. The payments will be spread over 10 years in equal annual payments.

• Growers and quota owners are allowed to assign their payments to a financial institution. The significance of this provision is that some financial institutions have indicated an interest in providing growers and quota owners an up-front lump-sum payment in exchange for the stream of buyout payments. Growers and quota owners will need to carefully weigh the cost of this option since the financial institutions will retain a portion of the stream of payments in return for making a lump-sum payment.

• The legislation eliminates the federal tobacco program. Beginning in 2005 there will be no federal restrictions on the production of tobacco. It does not contain any geographical restrictions on where tobacco can be produced after the program ends. Price supports and quotas will no longer exist.

• The buyout will be funded by quarterly assessments on tobacco product manufacturers and importers based on their product's share of the U.S. market.

• Since the buyout will be funded by tobacco product manufacturers, Phase II payments will cease after enactment of the buyout. Assuming this year's Phase II payment is made, there would be a total of about $2.6 billion in the 6 remaining scheduled payments. Since these scheduled payments would be adjusted downward due to declining U.S. cigarette consumption, the actual payments would have been less than $2.6 billion. The projected total of the actual payments is around $2 billion.

This page (http://www.ces.ncsu.edu/pitt/ag/tobacco/provisions.html) was created by Mitch Smith on October 22, 2004 and updated on November 16, 2004.