The Tobacco Buyout: Early Observations and Concerns Among KY Tobacco Growers Will Snell
Tobacco Farmers, Markets, & Industry: Buyout Impacts
description
Transcript of Tobacco Farmers, Markets, & Industry: Buyout Impacts
Agricultural Policy Analysis Center - University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996-4519
www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298
Tobacco Farmers, Tobacco Farmers, Markets, & Industry: Markets, & Industry:
Buyout ImpactsBuyout Impacts
ERS & Farm FoundationTobacco Buyout Impacts
Workshop
Washington, D.C.
September 20, 2005
AAPPAAPPCCAACCAA
Kelly TillerAgricultural Policy Analysis Center
The University of Tennessee
AAPP CCAA
Impacts Addressed
• Impacts on manufacturers
• Impacts on/of Phase II
• Impacts on state/regional economies
• Post-buyout contract evolution
• Other impacts and observations
Impacts on Manufacturers
• Tobacco manufacturer and importer assessments(-$10b)
• Domestic leaf cost savings (+$3.1b to $6.5b)
• Imported leaf cost savings (+?)– Savings for domestic leaf purchases for use in
international manufacturing operations (+?)
• Phase II payment savings (+$2.1b)
• Responsiveness to future market changes (+?)
• Net financial burden: 1.3¢ to 2.7¢ per pack
AAPP CCAA
Assessments
• Assessments authorized up to $10.14 billion FY2005 through FY2014
• Based on share of sales volume for 6 major tobacco product classes
• 158 product manufacturers and 666 product importers– Required to submit data regularly to enable CCC
to determine respective quarterly shares of product classes
• CCC to send quarterly assessment notices the 1st of March, June, September, and December– Assessments due in 30 days AAPP CCAA
Assessments
AAPP CCAA
ClassFY2005
Proportional Share
FY2005 Assessment
(mil $)
Cigarettes 96.331% $975.0
Cigars 2.783% $28.2
Snuff 0.539% $5.5
Roll-your-own 0.171% $1.7
Chewing 0.111% $1.1
Pipe 0.066% $0.7
Market Responsiveness
• Absent the federal tobacco program, U.S. tobacco industry can exert more control over the tobacco production sector– Mere existence of former program influenced
the incentive structure surrounding contracting
– Growers now have a much stronger incentive to quickly adjust production, curing, and market prep practices to meet customer demands
• Highly beneficial in the event of future FDA authority
AAPP CCAA
Measuring Mfgr Impacts
• Event study methodology– Predicated upon the efficient markets hypothesis– All available information is impounded in current
stock prices– The value of a firm changes as the result of
unexpected events that cause investors to revise estimates of future cash flows and/or risk
• Calculate a measure of “normal” returns
• Calculate “actual” returns around event dates
• Estimate abnormal returns, the difference between actual and normal returns AAPP CCAA
Companies Included
AAPP CCAA
Company
Total Assets (mil
$)
Sales (mil $)
Net Income (mil $)
EPS (diluted)
Altria / Philip Morris $101,648 $63,963 $9,416 $4.57
British American Tobacco
$33,867 $65,633 $387 $1.45
RJR / Reynolds American $14,428 $6,437 $688 $5.62
Imperial Tobacco Group $11,630 $5,485 $805 $2.21
Gallaher Group $7,867 $4,886 $556 $3.40
Loew’s CP $2,778 $3,348 $546 $3.15
U.S. Smokeless Tobacco $1,659 $1,789 $531 $3.23
Vector Group $536 $323 $7 $0.10
Star Scientific $70 $31 -$17 -$0.28
Event Dates
• June 14, 2004– Buyout added to H.R.4520, vote in House W&M Committee– No FDA, funded by part of tobacco excise tax (public $)
• July 15, 2004– JOBS bill passed Senate vote with a buyout intact– Included FDA, funded by tobacco manufacturers
• October 6, 2004– H.R. 4520 reported out of conference committee WITH the
buyout
• October 22, 2004– President signs JOBS bill, prior to election
• December 23, 2004– Judge rules in favor of cigarette manufacturers on 2004
Phase II payment questionAAPP CCAA
Cumulative Abnormal Returns
AAPP CCAA
Event Dates
Average Cumulative Abnormal
Return
Z-Statistic
House Passage (6/14/04) 0.0083 0.5864
Senate Passage (7/15/04) 0.0036 0.2655
Conference Report (10/6/04) -0.0176 -1.3993
Signed into Law (10/22/04) 1.0019 0.1478
Phase II Ruling (12/2304) 1.0071 1.5717
Cumulative Across All Dates 0.000634 0.1085
Phase II Payments
• Because the buyout funded by manufacturer and importer assessments, future Phase II payments will be terminated
• Total Phase II payments expected to be about $2.13 billion 2005-2010
• Not specifically addressed in the buyout, triggered by an offset condition in the Phase II agreement
• Legally untested, but many believed that taxpayer (Treasury) funding of a buyout would not trigger the legal Phase II offset language AAPP CCAA
Phase II Legal Issues
• Shortly after buyout passed, participants withheld Q4 payments ($106 m) and requested refund of Q1-Q3 payments for 2004 ($318 m)– Major legal question was the start of the buyout
• Decision issued by NC federal business court December 23– 2003 Phase II payments were essentially the “last”
Phase II obligations
• Decision appealed to NC Supreme Court
• Decision issued August 19 reversing lower court– Ordered participants to make 2004 Phase II
payments AAPP CCAA
Phase II Impacts
• Widespread lack of anticipation that 2004 Phase II payments may not be forthcoming
• Phase II payments tied to cash flow
• Misperception about basis for Phase II payments
• Influencing quota owners and growers to choose discounted lump sum over 10 annual payments– Perception of risk of early termination and
significant payment delays
• Promoted grower distrust of manufacturers
• In reality, Phase II and buyout are apples and oranges AAPP CCAA
Buyout Payments by State
AAPP CCAA
(million $)Owner
Payments
Grower Paymen
ts
Total Paymen
ts
North Carolina
$2,752 $1,191 $3,943
Kentucky $1,736 $733 $2,469
Tennessee $528 $240 $767
South Carolina
$508 $216 $725
Virginia $458 $208 $667
Georgia $429 $183 $612
Buyout Payments by Kind
AAPP CCAA
Type(s) / Kind (million $)Owner
PaymentGrower
PaymentTotal
Payments
11-14 Flue-Cured $4,073 $1,734 $5,807
31 Burley $2,266 $1,048 $3,314
22-23 Dark Fire-Cured $23.6 $68.2 $306.8
35-36 Dark Air-Cured $78.6 $33.7 $112.3
21 Virginia Fire-Cured $10.1 $4.4 $14.4
37 Virginia Sun-Cured $0.9 $0.4 $1.3
41-55 Cigar Filler & Binder $47.9 $20.5 $68.4
ALL TOBACCOS $6,500 $2,909 $9,624
Community Economic Impacts
• Input-Output analysis using the IMPLAN model
• State level analysis for 11 states– Congressional district level analysis for NC, KY, TN
• Estimate regional impacts and statewide impacts– Sum over regions does not equal state impacts
• Estimate impacts (2003 vs. 2005) due to – Infusion of buyout payments (with tax
consequences)– Changes (reduction) in acreage– Changes in yields and prices– Phase II payments AAPP CCAA
IMPLAN Impacts
• Direct Impacts– Impacts that result from changes in the
tobacco sector’s economic activity
• Indirect Impacts– Impacts that result from changes in
inter-industry purchases
• Induced Impacts– Impacts that result from changes in
household income and spendingAAPP CCAA
IMPLAN Impacts, cont’d
• Total Industry Output Impacts– The annual dollar value of the goods and
services that the tobacco production sector produces
• Employment Impacts– The number of total wage and salary
employees (full-time, part-time, self-employed)
• Total Value Added Impacts– The dollar value of wages and salaries,
including benefits, self-employment income, interest, rents, profits, taxes AAPP CCAA
IMPLAN Scenarios
AAPP CCAA
Scenario A
Scenario B
Scenario C
Scenario D
1/10 of payments X
1/10 of payments + 30% of remaining payments at 78¢/$1
X
1/10 of payments + 40% of remaining payments at 78¢/$1
X
6/100 of payments (1/10 * 60%) X
(-) 2005 Phase II, (+) 2004 Phase II X X X
2005 state acreage declines according to 8/31 NASS report, no change in yields
X X X
2006 state acreage increases 10% over 2005, yields increase 10% over 2003
X
Burley/Flue avg prices at $1.50/$1.40 X X X
Burley/Flue avg prices at $1.60/$1.50 X
Post-Buyout Contract Evolution
• Since 1999, most contracts offered generally marketing contracts with some production guidelines– Grower still bears most production risk, reduces price risk
• Post-buyout incentives to move toward production contracts– Contractor has significantly more control over the production
process
• Changes in contract length: (+) and (-)– Shorter term contracts
• May reduce long-term purchase commitments• Gain flexibility in meeting market changes and demands
– Longer term contracts• Ensure longer-term leaf supply security• With sufficient competition, ensure quality and stability in supplies
AAPP CCAA
Other Impacts
• Impacts on locations and staffing of USDA Service Centers in tobacco states
• Impacts of §1031 like kind exchanges on land sales and land values
• Financial decision for contract holders are very individualized– Many at or above retirement age, many
without internet access
– Lack of information among tax preparers and financial planners in many rural areas
AAPP CCAA
www.TobaccoBuyoutInfo.com
AAPP CCAA
www.agpolicy.org/tobquota.html