Kentucky tobacco farmers provide model for deregulation, increased production and profit

Jun 07, 2012

If someone agreed to buy your home as is a year from now, you'd likely cancel the kitchen remodel. According to a study at the University of Illinois, Kentucky tobacco farmers adopted that same logic when the tobacco companies announced the buyout – also known as the Tobacco Transition Act of 2004 that ended a 66-year-old federal farm program. However, the immediate drop in productivity was followed by startling changes. Over the 10-year period of the study, the number of farms declined from just over 40,000 farms to just over 8,500 farms – but productivity increased by 44 percent.

"The quota system limited the amount of tobacco that could be grown," U of I agricultural economist Barrett Kirwan said. "By reducing the supply, farmers were guaranteed their price but it also guaranteed that less productive farms would keep producing because they'd see a price that was higher than what they should have been getting. As soon as that was removed, the less productive farms couldn't survive. There was a massive reallocation and massive shift of production to more productive farms. Those farms weren't realizing their full production potential."

After the buyout, the total acreage farming tobacco in Kentucky declined, but the remaining acres became more productive. They began producing more tobacco per acre on fewer acres. The acreage also relocated to the western part of the state where the soil is more suitable.

"The farmers who stayed began growing specialty tobacco used for cigars or chewing tobacco," Kirwan said. "The niche markets for tobacco haven't been hit as hard as the main cigarette market so without the quota system, restrictions were lifted. Farmers no longer had to grow only burley tobacco; they could diversify in chewing tobacco or cigar tobacco, which are specialty, higher-value tobaccos."

The study found that the most productive farmers were also the most diversified with crops other than just tobacco.

"They didn't have a decline in productivity leading up to the buyout," Kirwan said. "Their tobacco production did not decline, and after the buyout their tobacco productivity rose dramatically and so did their acreage. Their acreage more than doubled."

According to Kirwan, the diversified farms already had equipment, such as drying barns to cure the tobacco. After the quotas were lifted, they could capture the economies of scale.

"A drying barn is the same size whether you're drying a little tobacco or a lot of tobacco, so lifting the quantities allowed them to actually fill the drying barn and become much more efficient," Kirwan said. "Because they already had the invested capital, it became much more profitable for them to stay in tobacco and get bigger than it would have been to switch to a different crop."

Farmers were also able to save due to input reallocations, such as being able to shift fertilizer and electricity and workers.

"You get this double kick from removing the quota," Kirwan said. "When the quota was removed, it allowed resources to move, giving an 8.3 percent increase, but the removal of the quota itself gave 22 percent. That's a total of a 30 percent increase just by removing this regulation."

Kirwan said the findings from the study can be analogous to other commodity programs.

"In agriculture, there have been these types of farm programs for about 80 years and there is some variance, but this was one of the few times that we could see an absolute end to a program with no hope of coming back.

"Other programs may not be as binding as the tobacco program with quota limits, but when we're distorting the market price with subsidies or we're distorting a farmer's production choices by saying, 'If you grow vegetables, then you no longer get subsidies for your corn,' then we're distorting their productivity," Kirwan said.

He noted that the study focused on productivity, not equity. So although the farms were much more productive, it did put many small farmers out of business. He said the findings could help guide policy makers who are deciding whether or not to change quota or subsidy programs.

"They have to weigh this potentially huge efficiency gain with the consequences on the equality side – possibly creating fewer small farms. Which is more important? Having a lot of small farms or fewer, more productive farms?

"There are anecdotes that subsidies prop up inefficient farmers who shouldn't be farming anyway, but they are just that, anecdotes," Kirwan said. "By doing this study, we could see just how much more productive the new farmers were. We looked at the demographic differences in these two groups and confirmed that these new, more productive are young."

Explore further: Rapid UK population growth undermines living standards, but may be necessary for economic growth

More information: "Aggregate and Farm-level Productivity Growth in Tobacco; Before and After the Quota Buyout" was published in the American Journal of Agriculture Economics.

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User comments : 14

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tadchem
2.8 / 5 (5) Jun 07, 2012
In the absence of artificial constraints on participants (physical boundary conditions), a free market will tend towards an equilibrium (analogous to a Boltzmann-type thermal equilibrium) in which the resources become redistributed preferentially towards those who manage resources successfully, and away from those who manage resources with less success.
"Equity" is a moral ideal, but not an achievable reality. Maxwell's demon won't allow it.
Money is energy.
ryggesogn2
1.7 / 5 (6) Jun 07, 2012
New Zealand ended their ag subsidies and productivity and profits increased.
jerryd
3 / 5 (4) Jun 07, 2012

But what about the other 31,500 farms that quit? Tobbaco was done in plots too small to be used for enough of any other crop to make a living.

Of course does one really want to grow one of the great health problems in the world? It's only reason is to addit people who have to have it so big corporations make the drug profits while the US taxpayers pay the costs. Luckily taxes on them have went up so now tobbaco is paying at least part of it's share.
Vendicar_Decarian
3.4 / 5 (5) Jun 07, 2012
This article provides strong reasoning why Tobacco production should be heavily regulated.

As to price supports for other crops, one has to ask what the price supports are for. Are they to improve the production of the crop at the expense of the farmers, or are they to improve the plight of the farmers at the expense of the crop?

In a free market economy, the economy is master and the workers are subservient slaves.

In a price supported market, the slaves are at least guaranteed a price for their labor.

Rational minds support price supports for fundamental goods and services.

Vendicar_Decarian
3.7 / 5 (3) Jun 07, 2012
Who cares? Let them die in the streets where they belong.

"But what about the other 31,500 farms that quit?" - jerryd

Vendicar_Decarian
3.7 / 5 (3) Jun 08, 2012
"Libertarians ... think they are for freedom but they don't know what freedom is. In reality, their doctrine is so contrary to freedom that it ought to be entitled 'anti-libertarianism'. The thief comes in innocent disguise, but the beautiful garment is stolen. (The Right are good at that sort of thing.)" - Alan Haworth, Anti-Libertarianism: Markets, Philosophy, and Myth
pokerdice1
2 / 5 (4) Jun 08, 2012
A free market will find an equilibrium all right. When the dust settles after this ideal competition the victors will, after having crystallized, create institutions and laws (with their hard won resources and influential officers) similar to what we have now. We will be right back where in the situation we are in now.

Study US economic history and examine the time before big government, excessive regulation and high taxes. Trace the players in big business who were competing for business in developing interest and how that actually fed the nascent giant of big government. Many of the same players; Rockefellers, Pritzkers, Duponts and Morgans who were titans of industry helped lay down laws and manipulate governments both here and abroad, until the lines between gov and business became blurred. The one thing they have in common is people. People make up both institution types and it is the fundamental, cultural and archetypical nature of man that needs addressed.
Caliban
3 / 5 (2) Jun 08, 2012
It's the natural end-game of the "freemarket". Once(or on the way to) an industry reaches maturity, if there isn't any external intervention(ie government regulation, subsidies, etc), then consolidation occurs.

This results in a very small number of actors controlling the market, through regulatory capture and consumer price inflation to the point of charging whatever the traffic will bear, as the man said.

All in the name of maximized profits --regardless of the "external" costs of lost livelihoods, gutted comunities, lost tax revenue, on and on...

Neat trick, huh?

ryggesogn2
1 / 5 (3) Jun 08, 2012
through regulatory capture

This has nothing to do with a free market.
This is the 'progressive' plan that started with the FDA.
In a free market, regulation is by competition and consumers.

But the tobacco market never started 'free'. It was a monopoly protected by the British Crown.
COCO
2.3 / 5 (3) Jun 08, 2012
this is obscene - treating a benign product like this and putting so many honest people out of work - should be using our policy to go after the death dealing pot growers not these innocent folk.
Vendicar_Decarian
5 / 5 (1) Jun 08, 2012
Deregulation has nothing to do with a free market?

"This has nothing to do with a free market." - RyggTard

Oh Tard Boy. You have now gone Rogue Tard.

"In a free market, regulation is by competition and consumers." - RyggTard

American Consumers decided that OJ Simpson was innocent.
ryggesogn2
1 / 5 (1) Jun 09, 2012
How many of you 'progressives' who fret about the world running out of food fully support raising marijuana?
Vendicar_Decarian
5 / 5 (1) Jun 09, 2012
Libertarians support all manner of anti-social behavior including prostitution, alcoholism, drug addiction, child molestation/pornography etc.

It's all in their party platform.
COCO
1 / 5 (2) Jun 11, 2012
you say that like it is a bad thing comrade.