ANNAPOLIS – Tobacco giant Philip Morris will meet with growers in Atlanta next week to discuss alternatives to the auction system – a move that some reports say could affect a $5.15 billion grower trust fund.
Maryland growers are set to receive $31.5 million from that fund to compensate for anticipated profit loss due to increased anti-smoking campaigns and an unstable market.
Philip Morris has invited tobacco growers from the South to meet with company representatives, beginning Monday, to discuss growers’ concerns and possible alternatives to the auction system.
“We’re meeting to engage in discussion regarding mutual interests and to strengthen our business,” said Philip Morris spokesman Mike Pfeil. “We’re looking for ideas from the farmers. We certainly support the grower trust fund … as the largest purchaser of American tobacco.”
If alternatives to auctions do come about, small-time growers could be pushed out of the market completely as cigarette makers sign individual contracts with big producers, farmers have said. A majority of Maryland’s 1,200 tobacco farmers, most in the southern part of the state, grow only a few acres per year.
Currently, growers bring their crops to warehouses to be auctioned off – a process that usually begins near the end of March. By using this system, those small farmers have a chance to sell their products for profit, the same as the big growers.
“It allows the small producer, who, in numbers, make up about 60 percent of our producers, to compete on the same basis with the same prices as a large producer,” said Rod Kuegel, president of the Burley Tobacco Growers Cooperative Association in Kentucky. “He receives fair and just treatment.”
Maryland warehouse owners said by replacing the auction system with that of cigarette companies independently contracting growers, tobacco makers would make a killing.
“We call it `rape, pillage and plunder,'” said Jane Schultz, owner of Farmers Tobacco Warehouse in Hughesville, Md. “They (tobacco companies) would go directly to farms and barns and get it for cheap.”
“(We) secure tobacco through contract,” he said. “There’s no law that says tobacco has to go through the auction system.”
A story by The Associated Press out of Lexington, Ky., reported Thursday that if companies move to kill off the auction system, promises such as the grower trust fund – that links payments to consumption and taxes – may be broken.
These statements could not be confirmed by national tobacco litigators, Philip Morris representatives, or attorneys general.
“We’re not aware of any movement to do away with the auction system,” said Craig Nielson, Maryland’s assistant attorney general for agriculture.
By looking at the tobacco trust fund contract, Nielson said, he did not see how the $5 billion deal would be affected if auctions were eliminated.
The trust fund was set up by six governors of tobacco-growing states and industry representatives in January to offset growers’ financial losses. Those losses could come from the federal government taking a share of the multi-state settlement with Big Tobacco last year – a deal that will bring a windfall of $4.4 billion to Maryland – as well as from falling cigarette sales due to anti- smoking campaigns and higher prices.
The bulk of the money distributed into the fund will be determined by company cigarette sales.
But the trust fund paperwork was distributed just this week to governors of tobacco growing states sharing in the fund, Kuegel said.
“No contracts have been signed on the trust fund to this point,” he said.
From a financial standpoint, if tobacco companies do not take part in the auction system and choose to buy tobacco directly from growers at a cheaper price, cigarette makers can make a larger profit while maintaining current cigarette prices.
Maryland is unique among tobacco-growing states in that it doesn’t use a quota system. State farmers are allowed to grow as much or as little as they want. This allows them to grow tobacco either full time or part time and still make a profit. But it also results in Maryland’s market being more susceptible to fluctuations.
“In the event that the auction system was subverted, then it’s probably the beginning of the end of the tobacco program,” Kuegel said.