Kentucky tobacco co-op votes to pay out millions to farmers facing industry decline
Several thousand tobacco farmers would get payouts under a plan approved Wednesday by the Burley Tobacco Growers Cooperative Association.
The co-op board approved the plan to try to keep the organization going in the face of efforts to dissolve it, but it’s not clear the move will end those attempts.
More than 200 members have signed petitions to dissolve the co-op through a vote by members and distribute its assets to them. Others filed a lawsuit seeking to dissolve the co-op and divide the assets among members.
What is clear is that the plan would make significant changes to the century-old co-op, which has lost money on tobacco sales in recent years and struggled to keep its footing as the industry declines.
Under one key provision of the turnaround plan, the co-op will liquidate investments, leaving about $15 million to pay out to members after settling a large line of credit.
Co-op officials estimated 4,000 growers would be eligible to receive a share of the money. The plan calls for distributing it by the end of the year.
“We are as of now moving forward with the distribution,” Al Pedigo, head of the co-op board, said after the vote.
The board also approved selling 4.1 million pounds of tobacco the co-op owns, as well as selling its office building on South Broadway in Lexington.
Co-op officials said they believe liquidating investments and selling assets ultimately will bring in a total of about $28 million to pay out evenly to people who were members between 2015 and 2019.
The board approved letting people who can show they grew burley last year to register as 2019 members up until the end of February.
There has been some uncertainty about the number of members, but if there are 4,000, a pot of $28 million would mean about $7,000 each, though not all in one check.
The deadline for the payout from selling the leaf would be the end of 2023.
The co-op covers Kentucky, Ohio, Missouri, Indiana and West Virginia, but most of its members are in Kentucky
The plan approved Wednesday would leave $3.5 million with the co-op for continued operations, while cutting the board from 20 members to between five and 15.
It envisions an amended mission for the co-op, focusing on advocating for farmers and supporting research, education, and programs to benefit farmers, including helping them shift to other types of farming as the market for burley declines.
In another key change, the co-op will stop buying tobacco from members.
The co-op began buying burley in the mid-2000s to try to help create a market for some members, but has had increasing difficulty selling the leaf at a profit.
The reasons include purchases of foreign tobacco by cigarette makers and consolidation among tobacco companies that has left fewer places for the co-op to sell leaf.
The co-op lost an average of $436,000 a year buying and selling tobacco from 2013 to 2018, and its net worth went down by $2.5 million between 2014 and 2018, according to an analysis by the Kentucky Center for Agriculture and Rural Development and The Center for Cooperatives at the College of Food, Agricultural and Environmental Sciences.
Roger Quarles, a co-op board member from Scott County and former head of the board, objected to the plan, arguing it didn’t go far enough.
Quarles said the board should hang on to no more than $1 million, instead of $3.5 million, freeing up more money to give to farmers.
That would leave the co-op with adequate finances to continue, and could throw water on the pending lawsuit seeking to dissolve the organization because it wouldn’t leave enough money to make the complaint worth pursuing, Quarles said.
“To me we just need to make a clean sweep here,” he said.
However, Tim Tarter, a board member from Pulaski County, said $3.5 million was not an unreasonable amount for the co-op to retain while distributing most assets to farmers.
“This is a good-faith effort . . . and I think the distribution is fair,” Tarter said.
The vote may not stop efforts to dissolve the co-op.
Lexington attorneys Robert E. Maclin III and Jaron P. Blandford, who represent co-op members suing to dissolve the organization, said they would review the plan adopted Wednesday.
The plan could leave open issues that need to be worked out in court, Blandford said.
But Maclin said he was glad to see the co-op finally move to pay members.
Nathan Billings, an attorney in Lexington who represents co-op members seeking to dissolve the organization through a vote, said he will review how Wednesday’s vote affects the board’s obligation to call a meeting for a dissolution vote.
Billings said more than 200 co-op members signed a petition calling for a vote on dissolving the organization. That was more than enough to require a vote.
The co-op board’s new payout plan will spend or keep $7 million dollars in the next few years — the $3.5 million retained for ongoing operations and the rest in other costs — that could instead go into the pot to pay farmers, Billings said.
The plan would cost more than the dissolution plan he presented and take longer to pay out, he said.
Billings said if the board doesn’t schedule the vote and mail out ballots and the dissolution plan to members, he may have to file a lawsuit to enforce the petition.
“They are breaching their duties,” Billings said of board members.
Quarles said he thinks it’s likely that members will vote to dissolve the co-op despite the decision to pay out most of its assets.
“I’ve yet to find a single person, with the exception of board members, who’s not in favor of dissolving the co-op,” Quarles said.
The co-op was formed in the early 1920s. From the early 1940s to 2004, it played a role in the federal price support system. That system combined minimum payments, called price supports, for farmers’ tobacco, and quotas, or limits on how many pounds they could grow.
The program helped prop up income for thousands of farm families in rural Kentucky and other tobacco-growing states for generations.
The burley co-op maintained the pool of leaf that tobacco companies didn’t buy, and then sold it later.
Driven by opposition to smoking, the federal government ended the price-support program in 2004. It paid farmers for their quotas and left them to seek contracts to grow burley directly from tobacco companies.
Growers have faced prices in recent years lower than what they received in the early 2000s, along with rising production costs, decline in demand and foreign competition.
In 2017, Kentucky farmers grew 173 million pounds of tobacco on 2,618 farms in 2017, down from 497.8 million pounds on 46,850 farms in 1997.
The market value of Kentucky tobacco totaled $351 million in 2017, far below the $828 million from 20 years earlier, according to the U.S. Department of Agriculture.
It’s likely that after a rough year in 2019, more growers will drop out this year.
“It’s just a tough time right now for growers,” Pedigo said.
