United States

Department

of Agriculture

www.ers.usda.gov

Electronic Outlook Report from the Economic Research Service

TBS-2002-01

February 2003 Tobacco 2001 Production Costs

And Returns and Recent Changes

That Influence Costs

Abstract

Cash costs per acre to produce burley tobacco in 2001 were estimated to be unchanged

from the previous year, while flue-cured tobacco cash costs per acre declined slightly.

Current cost estimates are based on annual updates, since the last tobacco surveys were

conducted in 1995 for burley tobacco and 1996 for flue-cured tobacco. Recent changes

in the tobacco industry have likely altered the cost structure of tobacco producers since

tobacco production cost data were last collected.

Keywords: Tobacco, burley, flue-cured, cost of production, net returns, cost factors.

Linda F. Foreman1

1 Agricultural economist, Resource Economics Division, Economic Research Service, USDA. The author thanks

Bill McBride, Tom Capehart, and Jim Johnson, all from ERS, for their helpful suggestions and comments.
The gross value of burley tobacco rose to $4,094 per

acre in 2001, up from $3,942 the previous year and

considerably higher than the average value of $3,696

per acre for 1996-2000 (table 1). The higher value of

production per acre resulted from increased yields as

prices remained steady. Favorable growing conditions

pushed the average yield to 2,078 pounds per acre in

2001, up from 2,001 pounds in 2000. In comparison,

yields averaged 1,928 pounds per acre in the previous

5 years. Kentucky’s burley tobacco yields averaged

2,100 pounds per acre in 2001, up 75 pounds from

2000. Tennessee’s producers saw a similar increase in

their yields to 2,000 pounds per acre in 2001. Overall,

prices averaged $1.97 per pound in 2001, about the

same as in 2000. Auction prices averaged about $1.95

per pound, while contract prices averaged $2.00 per

pound in 2001. The price support for the 2001 crop

was set at $1.83 per pound. 

Total cash operating expenses of $1,682 per acre in

2001 remain steady from the previous year. A significant decline in marketing expenditures was offset by

increases in fertilizer and labor costs. Marketing

expenditures dropped $88 per acre to $64 as the use of

market contracts expanded to cover 65 percent of the

burley tobacco production, up from 27 percent in

2000. Under the terms of the marketing contracts,

tobacco growers do not pay grading or warehouse fees.

Rather, these fees are paid by the leaf dealers or purchasers. Rising natural gas prices in late 2000 raised

fertilizer prices in the early spring of 2001, when fertilizer purchases are often made, boosting fertilizer

expenditures by $49 per acre. Natural gas is the primary input in fertilizer production. An increase in

wage rates boosted hired labor expenditures by $27

per acre. 

Economic costs rose to $3,666 per acre in 2001, an

increase of $106 from 2000. In addition to cash

expenses, economic costs include estimates for capital

replacement, and the opportunity costs for land, quota,

unpaid labor, operating, and other nonland capital.

Opportunity costs per acre rose for unpaid labor and

tobacco quota. Rising agricultural wages increased the

opportunity cost of unpaid labor during 2001. The

opportunity costs of quota per acre rose due primarily

to increased tobacco yields rather than rising quota

lease rates. Quotas are usually leased by the pound.

The opportunity costs for operating and other nonland

capital fell as interest rates dropped in 2001 from 2000.

The gross value of burley tobacco production less the

cash production expenditures per acre reached $2,411

in 2001, up $155 from 2000, and well above the 1996-

2000 average of $2,092 per acre. The increase in the

2001 net returns resulted almost entirely from an

increase in the value of gross production per acre since

cash expenses were stable from the previous year. The

residual returns to management and risk rose to $427

per acre in 2001, up $46 from 2000, as gains in the

value of production more than offset the rise in the

economic costs of production. However, the 2001

residual returns were lower than the average return of

$598 per acre for the previous 5 years.

2 Economic Research Service, USDA

Burley Tobacco 2001 Costs and Returns
Economic Research Service, USDA

3

Table 1--U.S. burley tobacco production costs and returns, 1996-2001 Item 1996 1997 1998 1999 2000 2001 1996 1997 19

Dollars per acre Do

Gross value of production 3,774.72 3,662.82 3,629.00 3,471.30 3,941.97 4,093.66 192.04 189.00 190Cash expenses: Seed and plant bed 103.80 100.04 100.04 98.33 102.61 106.33 5.28 5.16 5 Fertilizer 305.84 296.94 296.88 290.96 288.81 338.12 15.56 15.32 15 Chemicals 97.83 98.65 100.29 99.47 98.65 98.65 4.98 5.09 5 Custom operations 12.90 14.48 13.58 13.35 13.35 13.57 0.66 0.75 0 Fuel, lube, and electricity 73.35 77.66 63.28 66.88 96.36 87.01 3.73 4.01 3 Repairs 70.41 72.25 72.86 74.08 75.92 78.37 3.58 3.73 3 Hired labor 421.80 432.59 455.40 497.01 499.76 526.92 21.46 22.32 23 Marketing expenses 139.20 128.69 165.02 161.32 152.65 64.42 7.08 6.64 8 Other variable cash expenses 18.10 18.58 20.58 19.88 20.78 21.50 0.92 0.96 1 Total, variable cash expenses 1,243.23 1,239.88 1,287.93 1,321.28 1,348.89 1,334.89 63.24 63.98 67 General farm overhead 163.48 210.40 202.86 206.27 211.38 218.20 8.32 10.86 10 Taxes and insurance 40.13 44.22 44.88 45.45 46.19 47.18 2.04 2.28 2 Interest 64.50 71.22 76.68 74.57 78.79 82.31 3.28 3.67 4 Total, fixed cash expenses 268.11 325.84 324.42 326.29 336.36 347.69 13.64 16.81 16 Total, cash expenses 1,511.34 1,565.72 1,612.35 1,647.57 1,685.25 1,682.58 76.87 80.79 84Gross value of prod. less cash expenses 2,263.38 2,097.10 2,016.65 1,823.73 2,256.72 2,411.08 115.13 108.21 105Economic (full ownership) costs: Variable cash expenses 1,243.23 1,239.88 1,287.93 1,321.28 1,348.89 1,334.89 63.25 63.98 67 General farm overhead 163.48 210.40 202.86 206.27 211.38 218.20 8.32 10.86 10 Taxes and insurance 40.13 44.22 44.88 45.45 46.19 47.18 2.04 2.28 2 Capital replacement 91.07 97.25 100.27 104.27 134.13 142.02 4.63 5.02 5 Operating capital 31.64 32.11 31.23 31.45 40.91 23.02 1.61 1.66 1 Other nonland capital 104.28 113.12 104.87 102.80 94.08 88.16 5.31 5.84 5 Land and quota 751.25 512.67 531.74 633.44 991.31 1,081.99 38.22 26.45 27 Unpaid labor 585.19 600.16 631.80 689.53 693.35 731.03 29.77 30.97 33 Total, economic (full ownership) costs 3,010.27 2,849.81 2,935.58 3,134.49 3,560.24 3,666.49 153.12 147.05 153 Residual returns to management and risk 764.45 813.01 693.42 336.81 381.73 427.17 38.88 41.95 36Price (dollars/lb and cwt) 1.92 1.89 1.90 1.90 1.97 1.97 192.16 189.00 190Yield (lb and cwt/acre) 1,966 1,938 1,910 1,827 2,001 2,078 19.66 19.38 19

Source: Estimates were developed from the 1995 Farm Costs and Returns Survey.
The gross value per acre of flue-cured tobacco reached

a record-high in 2001 as yields and prices rose.

Unusually good weather for flue-cured tobacco production in 2001 increased tobacco quality and boosted the

average yield to 2,429 pounds, up from 2,393 pounds

last year (table 2). Virginia was the only State where the

average yield declined from 2000. Prices averaged

$1.86 per pound in 2001, up from $1.79 per pound in

2000. Prices rose due to increased use of marketing

contracts, tighter supplies, and higher quality tobacco.

Marketing contracts covered 80 percent of the 2001

flue-cured tobacco crop compared with 8 percent in

2000. Many flue-cured tobacco producers signed contracts as major tobacco purchasers announced that they

intended to contract most of their tobacco, causing

growers to fear loss of markets for their leaf. In addition, prices under marketing contracts averaged 4.3

cents per pound higher than auction prices in 2001.

Under marketing contracts, the tobacco purchaser,

rather than the producer, assumes responsibility for the

costs of grading and storing tobacco. Tighter tobacco

supplies, resulting from quota reductions in the past several years, also may have contributed to higher prices. A

3-percent decrease in the effective quota for 2001 was

partially responsible for the 5-percent decline in harvested acres from the previous year. Good weather in

2001 boosted tobacco quality, which caused the average

price for tobacco to increase since purchasers pay more

for higher quality tobacco.

The $23 decline in cash expenses per acre in 2001 was

mostly attributable to the decline in the expenditures

for marketing and curing fuel, while expenditures for

fertilizer and labor rose. Marketing expenses declined

by $98 to $89 per acre in 2001, despite increased

yields, as the use of marketing contracts greatly

expanded. The cost of curing tobacco fell $31 per acre

in 2001 as fuel prices began to decline in the early

summer of that year. Fertilizer prices were higher in

the spring of 2001 than in the previous year due to

higher natural gas prices and fears of shortages caused

by reductions in fertilizer production by some manufacturers. Natural gas is a major input for fertilizer

production. Increases in agricultural wage rates boosted hired labor expenditures per acre.

The economic costs of producing flue-cure tobacco

rose $29 per acre to $4,449 in 2001 as increases in

opportunity costs for land, quota, and unpaid labor

overcame the decline in cash and operating expenses

between 2000 and 2001. The estimated value of land

and quota continued to climb in 2001 as the effective

quota declined slightly in 2001. The opportunity

costs for unpaid labor rose as the agricultural wage

rates increased.

Net cash returns to flue-cured tobacco production, the

gross production value less total cash expenses, rose to

$2,009 per acre in 2001 from $1,750 in the previous

year. The gross value of production rose by $234 to

$4,518 per acre as prices and yields of flue-cured

tobacco increased, while cash expenses declined by

$24 per acre to $2,509. Economic costs per acre rose

less than 1 percent to $4,449. The residual return to

management and risk, at $68 per acre, climbed into the

positive territory in 2001 from a negative return of

$137 per acre in 2000. The positive return to management and risk in 2001 was the first since 1998. 

4 Economic Research Service, USDA

Flue-Cured Tobacco 2001 Costs and Returns
Economic Research Service, USDA

5

Table 2--U.S. flue-cured tobacco production costs and returns, 1996-2001 Item 1996 1997 1998 1999 2000 2001 1996 1997 19

Dollars per acre Do

Gross value of production 3,941.28 3,921.60 3,846.50 3,744.48 4,283.47 4,517.94 183.70 172.00 175Cash expenses: Seed and plant bed 55.71 57.65 59.10 63.46 60.07 63.95 2.60 2.53 2 Fertilizer 282.59 290.73 304.39 282.66 273.93 320.04 13.19 12.75 13 Chemicals 216.56 218.38 220.18 218.38 216.58 216.58 10.11 9.58 10 Custom operations 9.07 9.88 8.00 7.86 7.79 7.92 0.42 0.43 0 Fuel, lube, and electricity 67.75 71.74 59.56 62.94 90.69 81.89 3.16 3.15 2 Curing fuel 272.91 301.50 258.98 325.72 477.38 446.30 12.74 13.22 11 Repairs 106.95 109.74 110.67 112.53 115.32 119.04 4.99 4.81 5 Hired labor 468.02 491.96 554.12 582.09 594.35 634.61 21.85 21.58 25 Marketing expenses 143.42 151.39 145.95 160.76 187.24 88.95 6.70 6.64 6 Other variable cash expenses 3.91 4.01 3.88 3.81 3.98 4.12 0.18 0.18 0 Total, variable cash expenses 1,626.89 1,706.98 1,724.83 1,820.21 2,027.33 1,983.40 75.94 74.87 78 General farm overhead 116.32 149.71 181.75 184.80 189.38 195.49 5.43 6.57 8 Taxes and insurance 111.78 122.91 140.61 141.26 142.27 148.49 5.22 5.39 6 Interest 129.03 142.47 169.37 164.71 174.03 181.80 6.02 6.25 7 Total, fixed cash expenses 357.13 415.09 491.73 490.77 505.68 525.78 16.67 18.21 22 Total, cash expenses 1,984.02 2,122.07 2,216.56 2,310.98 2,533.01 2,509.18 92.61 93.08 100Gross value of prod. less cash expenses 1,957.26 1,799.53 1,629.94 1,433.50 1,750.46 2,008.76 91.09 78.92 74Economic (full ownership) costs: Variable cash expenses 1,626.89 1,706.98 1,724.83 1,820.21 2,027.33 1,983.40 75.94 74.87 78 General farm overhead 116.32 149.71 181.75 184.80 189.38 195.49 5.43 6.57 8 Taxes and insurance 111.78 122.91 140.61 141.26 142.27 148.49 5.22 5.39 6 Capital replacement 255.67 273.03 283.70 295.02 313.34 320.86 11.94 11.98 12 Operating capital 41.60 44.21 41.83 43.32 59.30 33.72 1.94 1.94 1 Other nonland capital 77.81 84.40 80.10 79.19 77.52 76.83 3.63 3.70 3 Land and quota 853.63 843.73 974.05 1,131.93 1,370.37 1,433.20 39.85 37.01 44 Unpaid labor 189.91 199.62 224.84 236.19 241.16 257.49 8.87 8.76 10 Total, economic (full ownership) costs 3,273.61 3,424.59 3,651.71 3,931.92 4,420.67 4,449.48 152.82 150.22 166 Residual returns to management and risk 667.67 497.01 194.79 -187.44 -137.20 68.46 30.88 21.78 9Price (dollars/lb and cwt) 1.84 1.72 1.75 1.74 1.79 1.86 183.70 172.00 175Yield (lb and cwt/acre) 2,141.90 2,280.00 2,198.00 2,152.00 2,393.00 2,429.00 21.42 22.80 21

Source: Estimates were developed from the 1996 Agricultural Resource Management Survey.
Most of the data used to compute the costs of production for various commodities are derived from the

Agricultural Resource Management Survey (ARMS)

for 1996 and later years, and the Farm Costs and

Returns Survey (FCRS) prior to 1996. Multiple versions of the survey are conducted each year. On the

ARMS, one version of the annual survey collects data

for the entire farm operation, while one or more additional versions collect commodity-specific data.2 Data

on a specific commodity are collected on a rotating

basis every 3 to 8 years. Agricultural commodities

included in the survey program are: corn, soybeans,

wheat, cotton, grain sorghum, rice, peanuts, oats, barley, sugarbeets, burley tobacco, flue-cured tobacco,

milk, hogs, and cow-calf. 

Data from the 1995 FCRS provide the base for the

burley tobacco cost of production estimates since the

1995 FCRS was the last survey to collect burley tobacco production and cost information. The information

was collected from personal interviews with 131

Kentucky farmers and 104 Tennessee farmers. The

1996 tobacco version of the ARMS collected data on

the costs of production for flue-cured tobacco from

316 flue-cured tobacco producers in four States:

Virginia, North Carolina, South Carolina, and Georgia.

Costs of production estimates after the survey year are

computed by adjusting the survey year’s estimates by

an index of the current year’s to the survey year’s

input prices and, in some cases, adjusting for yield

change. This procedure holds production input and

technology levels constant for post-survey years.

Hence, cost of production estimates are generally most

accurate for the survey year since these estimates

reflect the level of technology and the sizes of farm

enterprises at that time. The accuracy of the cost estimates for post-survey years depends on changes in

production practices, enterprise size, and technology

since the last survey.

Data for computing the annual update come from a variety of sources. The National Agricultural Statistics

Service (NASS) provides most of the data used in the

process. NASS reports annual and sometimes monthly

estimates of quantities and prices for a variety of farm

input items. NASS also provides State figures for harvested tobacco acreage, yields, and production as well as

information on the average cash rents for farmland. Data

for updating marketing costs come from the Agricultural

Marketing Service. The quota rental rate is estimated

based on historical relationships between quota cash

rents and the effective quota for burley tobacco.

6 Economic Research Service, USDA

Data Sources and Methods

2 For more information on ARMS, please visit the ARMS briefing

room ERS web site, <http://www.ers.usda.gov/briefing/ARMS/>.
There have been several significant changes in the

tobacco industry since tobacco surveys were conducted in 1995 and 1996. Since then, the tobacco quota

has fallen significantly while marketing contract usage

has risen considerably for burley and flue-cured tobacco. Additionally, flue-cured tobacco producers have

increased their use of heat exchangers and began baling their tobacco. These changes have likely influenced the cost structure of tobacco production.

Readers need to recognize that many of these structural changes are not reflected in the tobacco costs of

production estimates.

Flue-cured and burley tobacco quotas3 declined yearly

after reaching a peak in 1997 for both tobacco types.

In 1996, when detailed data were collected on fluecured tobacco production practices, the effective quota

was 944 million pounds. The quota rose to 1,020 million pounds in 1997 before declining to 545 million

pounds in 2001, a 42-percent reduction from the survey year. In 1995, the effective quota for burley tobacco was 578 million pounds. The quota peaked at 880

million pounds in 1997 and then declined to 352 million pounds in 2001, for a reduction of 39 percent

from the 1995 survey year.

The quota reduction caused tobacco producers to

reduce their planted and harvested tobacco acreage.

Harvested acres of flue-cured tobacco declined 44 percent, while harvested burley acres declined by 28 percent since tobacco producers were last surveyed. It is

likely that producers now plant tobacco only on their

best land for tobacco production. This action may

reduce their tobacco production costs per acre and

increase yields.

As a result of the quota reduction, most tobacco producers were suddenly faced with the prospect of

under-utilization of their tobacco-related equipment

and structures and a rising cost structure as their fixed

costs were spread among fewer production units.

Many tobacco producers tried to obtain more quota to

maintain cost efficient farm operations. This increased

competition for quotas, along with phase II tobacco

settlement and other payments, boosted quota lease

rates. The most efficient tobacco producers were likely

the ones most able to pay higher quota lease rates.

Estimates of the higher lease rates have been incorporated into the tobacco costs of production accounts.

Marketing of tobacco has changed rapidly. When the

last tobacco surveys were conducted, all burley and

flue-cured tobacco was sold through an auction system. Under this system, tobacco producers brought

their tobacco to warehouses to be inspected, graded,

and auctioned. Producers paid for fees associated with

auctioning tobacco, such as the warehouse and grading

fees. In 2000, tobacco companies began offering marketing contracts to tobacco producers. By the following year, the majority of the burley and flue-cured

tobacco crop were covered under marketing contracts.

Marketing contracts allow manufacturers to more readily obtain the leaf qualities they desire. Marketing contracts also offer tobacco producers higher prices and

lower marketing expenses, while guaranteeing a market for their entire tobacco crop.4 Under marketing

contracts, tobacco purchasers assume responsibility for

warehouse and grading fees. Most marketing contracts

require that all tobacco marketed by a farm operation

be covered under the contract.

In 1999, tobacco companies announced that U.S. fluecured tobacco contained high levels of nitrosamines, a

cancer-causing chemical that forms when tobacco is

exposed to fumes from the heat source used during

curing. By July 2001, all curing barns had to be retrofitted with heat exchangers to prevent direct fume

exposure since tobacco companies would no longer

purchase tobacco with high nitrosamines.

The cost to retrofit barns was shared between tobacco

producers and the tobacco industry. The producers’

share of the costs to retrofit barns is a capital investment that would be recovered over several years. An

estimate was made of the annual capital replacement

costs and incorporated into the cost of production

accounts. However, other cost effects from retrofitting

barns are unknown. Some producers have reported

higher fuel costs, while others have reported lower

costs. No adjustments were made to curing fuel costs

Economic Research Service, USDA 7

Major Factors Influencing Recent Costs

3 Quotas give the quota owner the right to market or sell tobacco.

These rights can be rented to others. Thus, farmers and nonfarmers

own quota.

4 For further details on tobacco marketing contracts, see “Tobacco

Industry Downsizing, Restructuring” Agricultural Outlook, Jan.-

Feb. 2002, ERS, USDA, < http://jan.mannlib.cornell.edu/

reports/erssor/economics/ao-bb/2002/ao289.pdf>.
due to lack of information regarding the aggregate

influence of this change.

Baling flue-cured tobacco is another change that has

occurred since cost data were last collected. Baling

tobacco is the tying of tobacco leaves into a bundle for

transportation from farm to warehouse and on to

processor. Prior to 1998, nearly all flue-cured tobacco

was bundled onto burlap sheets with corners of the

sheets tied together. Each burlap bundle contained

approximately 250 pounds of tobacco, an amount that

could be easily lifted by several workers. Tobacco handlers and purchasers desired larger bundles that could

be moved easily by machinery. As a result, producers

began to bundle flue-cured tobacco into bales weighing 650 to 850 pounds in 1998. Handling bundles of

this size requires special baling machinery and lifting

equipment. Increases in bundle weight likely increased

equipment costs, but reduced labor hours and labor

costs to prepare tobacco for marketing. Producers have

the option of using the smaller bundles or baling their

tobacco. Baling tobacco may give larger tobacco enterprises an advantage over smaller ones, since larger

enterprises can spread their fixed equipment costs over

more production units. However, it has not been possible to adjust the flue-cured production cost account for

changes in bundle sizes since little information is

available on the percentage of tobacco baled and cost

differences for forming and transporting large and

small tobacco bundles.

Tobacco costs of production estimates would certainly

be different if costs resulting from the factors mentioned in the previous paragraphs were adequately

incorporated into the costs of production accounts. It is

not possible to determine whether average tobacco

production costs would be higher or lower. Also, the

relative costs of production for producers with small

and large tobacco operations are likely to have

changed. Extension agents are reporting that farms

with larger tobacco enterprises are much more likely

to have a marketing contract than farms with small

tobacco enterprises. Further changes in quota levels or

in the tobacco program are likely to increase the probability of changes in tobacco production costs.

8 Economic Research Service, USDA