LOUISVILLE — The Kentucky-based Burley Tobacco Growers Cooperative Association has supplied seed money and expertise for a start-up venture aimed at giving farmers another marketing option.
Coined as US Growers Tobacco Co., it will provide a place where farmers can have their tobacco stored, processed and marketed, burley co-op President Roger Quarles said Thursday.
The venture seeks to find a home for large volumes of tobacco that could be on the market in the next couple of months without an apparent buyer other than a handful of auction markets, he said.
Last year, about 600,000 pounds of burley sold at "distressed prices" at a wrap-up auction for the burley-sales season, Quarles said. This new venture will give farmers an alternative, he said.
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Farmers doing business with USGTC will deliver their leaf to G.F. Vaughan storage facilities in Lexington. Growers will receive a certificate listing the number of pounds, type and grade of tobacco delivered.
The company intends to sell leaf to international and domestic buyers. Farmers will be paid when their tobacco is sold and incur no up-front costs, but some fees will be deducted from payments.
The company will begin offering tobacco for sale in April, and transactions could take from a few weeks to a year or more, depending on demand, Quarles said.
The business could appeal to farmers with leftover leaf after meeting supply under their production contracts with tobacco companies, Quarles said. It could also draw interest from growers who raised tobacco without a production contract and are unhappy with prices offered at auction, he said.
"After farmers exhaust their efforts to find what they would consider an acceptable price, that's when they need to come see us," Quarles said in a phone interview.
The new company is prepared to accept up to 2 million pounds of leaf, he said. Whether that volume is reached could depend on auction prices, which have escalated recently, he added.
Kentucky is the nation's top producer of burley tobacco, an ingredient in cigarettes.
The state's burley production in 2009 was estimated at 161 million pounds, up 10 percent from 2008, according to the National Agricultural Statistics Service's Kentucky field office. Production in the burley-producing states was pegged at 215 million pounds in 2009, up 7 percent from a year ago.
The Lexington-based burley co-op purchased $250,000 worth of preferred stock to capitalize the new stockholder-owned company, and it will supply about $80,000 in start-up costs, Quarles said. The co-op expects to recoup half those start-up costs once the new company completes transactions with farmers, he said.
The co-op will have majority control on the USGTC board of directors, he said. Co-op staff will assist the new company, handling such tasks as record keeping, tobacco grading and overseeing processing.
Will Snell, a University of Kentucky agricultural economist specializing in tobacco, said the marketing option might not be ideal for producers facing "immediate cash-flow needs." But it gives producers dissatisfied with current prices "an opportunity to have the tobacco processed and, ideally, wait for global demand conditions to improve."
Some farmers selling burley under contract this season have reported prices plus incentives being near or above $1.80 per pound, Snell said. Prices at tobacco auctions have "been all over the board," he said. Concerns about late tobacco being lower in quality could cause prices to fall, he said.
More than 3 million pounds of leaf has sold so far at auctions this season at Farmers Tobacco Warehouse in Danville, said Jerry Rankin, the owner and operator. He said there was skepticism about a program in which farmers would have to wait for a paycheck.
"The feeling that I have from talking to farmers, it would have to get dirt cheap before they'd be interested in that program," Rankin said. "They want their money now. They need their money now."
But those feelings could change if the market climate worsens, he said.
"If all of a sudden there's almost no demand for it, and we've got 15 or 20 million pounds left out in the farmers' hands, the opinion they have of that program may change quick," Rankin said.