A government program that grew by more than 6,000 percent in five years doesn’t provide medical care or feed the poor. It does indirectly subsidize profitable corporations such as Altria, parent company of cigarette-maker Philip Morris USA, and its spinoff Philip Morris International; British American Tobacco, and Japan Tobacco International.
This indirect subsidy from taxpayers to high-volume buyers of tobacco comes through a crop insurance program that provides payments so reliably they are referred to as the “insurance bonus.”
It’s impossible to say how much money the tobacco quality-loss program has paid out since it began in 2012 because the costs are folded into traditional production-loss insurance.
Suffice it to say, either the quality of American tobacco has taken a nosedive (implausible) or taxpayers have been taken for a ride.
A rule change taking effect this year — in response to demands for reform from farm leaders and groups — will end the unintended windfalls to growers. If the U.S. Department of Agriculture’s new rule works as expected, growers won’t pocket more than market value for their crop. If the change fails to also end the indirect subsidy to tobacco companies, Congress should take a look.
The taxpayer abuse that the new rule aims to end serves as a cautionary tale about what can happen when traditionally public functions are turned over to private interests.
Congress handed off part of agriculture’s safety net to the insurance industry in 1980 and doubled down on that change in 2014 by expanding subsidies for crop insurance. The profits are privatized while the public bears the risk. Several farm leaders told us that the U.S. Department of Agriculture’s Office of Inspector General lacks the resources to effectively police farm programs.
“So many people drawing a check; nobody cares about the fraud or the integrity,” lamented Rod Kuegel last summer. An Owensboro farmer, Kuegel has led the boards of the Burley Tobacco Growers Cooperative Association and the Council for Burley Tobacco.
Aside from the abuse of public dollars, Kuegel and other farm leaders say the lure of the insurance payouts is spurring an oversupply of tobacco that depresses prices in a declining market
In other words, your tax dollars are helping cigarette-makers save money by paying farmers less.
Kentucky farm advocates also worry that perceived and real abuses could cost farmers access to crop insurance, which is heavily subsidized by taxpayers and often required by lenders before they’ll finance a farm operation.
University of Kentucky agriculture economist Will Snell says crop insurance is “especially critical to young farmers, in order to have access to credit” and that “the current tobacco crop insurance program is in jeopardy if fraud and loopholes are not addressed, as the loss ratio (measure of payments to premiums)” is reaching levels that could set off alarms.
Grain, poultry and cattle have dethroned tobacco as Kentucky’s most valuable farm product. But the crop is still important in many rural places. Tobacco brought Kentucky farmers $250 million in 2016, even though yield was down. The 2017 crop could be worth almost $400 million.
Federal authorities in Kentucky and Tennessee have been investigating outright fraud — collecting insurance on tobacco crops that were never planted or tended. The fleecing of taxpayers through quality-loss, on the other hand, is an unintended consequence of what started as a good idea: Weather can harm tobacco quality, driving down the price that buyers will pay; farmers should be insured against that just as they’ve long been insured against a hail storm that destroys a crop.
Tobacco-growing conditions were near perfect last year, yet quality-loss claims climbed again. The pounds that growers present for grading, the first step in filing a claim, have grown from around 1 million in 2012 to almost 64 million in 2016. Final figures aren’t in for the 2017 crop; as of Jan. 31, claims had been started on 66.56 million pounds. The number of burley growers filing claims increased from 989 for the 2016 crop to 1,117 for 2017.
In three years (2014-2016), growers across the burley belt collected $237.8 million in indemnity payments, according to the USDA’s Risk Management Agency. That’s equal to 25 percent of the U.S. crop’s value of $961.7 million during that time.
Growers who qualify for a quality-loss payment, courtesy of taxpayers, often also sell their leaf for full price or close to it, a form of double-dipping that is supposed to end with the rule the feds issued late last year. Growers won’t receive more than the market value of their tobacco (or at least not much more), thus reducing the incentive to pay the 4 cents a pound fee to initiate a claim and the extra warehouse fees.
A non-grower who’s gained from the program is former USDA official, Cliff Parker, who helped the Lexington-based Burley Tobacco Growers Cooperative Association develop quality-loss insurance for tobacco and, when it got off to a slow start, promoted it to growers. Parker is partners with the owner of AgWin, a company that handles the quality-loss logistics, including setting up locations for inspecting insured tobacco and operating a hotline that schedules appointments.
Of the 4 cents a pound that growers pay to have their leaf graded, 2.5 cents is split between the burley co-op and AgWin. Their joint share has already reached $1.6 million for the 2017 crop. The remaining 1.5 cents goes to the USDA’s Agricultural Marketing Service which employs the graders who judge the loss of quality due to uncontrollable conditions. The program covers both burley, predominantly grown in Kentucky, and flue-cured tobacco, centered in North Carolina.
Parker, based in North Carolina, disputes that the program is responsible for oversupply but is confident the new rule will end growers’ unintended “windfall.” Pratt, general manager of the burley co-op, predicts that claims could drop by as much as half.
Of the dozen-plus people, all involved in some aspect of tobacco production, interviewed for this editorial, the staunchest defender of the quality-loss program was Danville warehouseman Jerry Rankin. His is one of the few remaining marketing outlets for growers who don’t have contracts with tobacco companies or who want to sell surplus tobacco above their contracted amount. The predicted cutback in insurance payments would cut into his business and also into the incomes of the families who truck their leaf from around the state to sell in Danville. Rankin predicts that half his customers would quit growing tobacco without what he sees as “an entitlement program to keep farmers competitive.”
On the Monday after Thanksgiving, walking through the arriving crops, Rankin praised the meticulous work of a husband-wife team who farm in Clinton County while also pointing to another grower’s bale that appeared to be made of scraps swept off the stripping-room floor and made profitable by the “insurance bonus.”
Rankin remembers when large and small landholders had an important market in Danville which once boasted three tobacco warehouses, three lumberyards and a stockyard. Now, he said, all that’s left is his warehouse.
The tobacco industry is indefensible; cigarette makers covered up smoking’s dangers and marketed poison to children. Oddly enough, considering the deadly end product, the federal price support system for tobacco, defunct for 14 years, was a model program. At little cost to taxpayers, it balanced supply and demand, supported small-scale diversified farming and never made a direct payment to farmers.
Tobacco prices have stagnated for years. The end of the price-support program (the $9.6 billion buyout) freed growers from having to rent quota, lowering their production costs, but labor costs have more than doubled since then. Tobacco farming in Kentucky consolidated and moved west. The number of growers across the burley belt has declined from 46,000 just before the buyout to maybe 3,500, says Pratt. Burley prices have hovered at $1.90 to $2 a pound or around $4,300 an acre.
One of the most persistent critics of the market-distorting effects of the quality-loss program is Hampton “Hoppy” Henton, a Woodford County farmer who was Kentucky’s top USDA official during the Clinton administration and pushed the burley co-op and the USDA for reforms. Henton predicts the new rule will “drastically reduce the ‘insurance bonus’ for many growers” but he predicts that insurance payments will continue to offset lower prices paid by tobacco companies.
In other words, he doubts the indirect subsidy to tobacco companies will end. “At least in the old quality-loss program the scheme dumped money into rural communities, be it unevenly and with abuse,” said Henton, who last year pleaded for higher prices for farmers at Philip Morris’ annual meeting.
A pack of cigarettes, which retails for an average $5.51 in the U.S., contains about a nickel’s worth of tobacco and represents an estimated $19.16 in health care costs and lost productivity. Taxpayers should not be subsidizing cigarette production in even a small way.
U.S. Department of Agriculture graders inspect and assign a grade to the tobacco to determine whether and how much damage to quality (and therefore the crop’s value) has occurred due to insurable reasons such as weather.
The quality grade is translated into lost pounds of production. The indemnity due the grower is calculated through a complicated formula that considers such things as the grower’s production history and projected price of tobacco.
Theories for the low grades:
▪ USDA graders want to help farmers make money via crop insurance.
▪ The program provides a revenue stream (more than $1.9 million in the first five years) for the federal agency that employs graders.
▪ Grading standards have remained unchanged for decades while cigarette-makers’ preferences in tobacco color and other qualities have changed.