The federal tobacco support program has worked through a combination of commodity pricesupport loans and marketing quotas. Price support loans guaranteed farmers minimum set prices fortobacco (the 2004 loan prices for the two principal types, flue-cured and burley, are $1.69 and$1.873/lb. respectively). These prices were mandated by a formula in the law. (2) Marketing quotas,which specified the maximum quantity of tobacco that could be sold, were assigned by the U.S.Department of Agriculture (USDA) each year to farms that had a history of tobacco production. Thepurpose of quotas was to limit supplies in order to force buyers to pay the loan prices or more (the2004 national basic quotas for flue-cured and burley were 471.3 million pounds and 302.1 millionpounds respectively). Together, the combination of guaranteed minimum prices and managed supplywas designed to create a stable market for farmers and tobacco product manufacturers. Also, thepattern of assigning quotas to farmland with a history of quotas confined production to the traditionalgrowing regions and farms. This system of support had operated since the 1930s and was authorizedin permanent law (7 U.S.C. 1311 et seq. ). (See CRS Report 95-129 , Tobacco Price Support: AnOverview of the Program .) The economic stability that was desired and expected from the tobacco support program was not achieved. First, the support prices for U.S. tobacco, as mandated by law, were higher than pricesfor competing tobacco in world markets. As a consequence, U.S. farmers steadily lost both exportand domestic markets to foreign producers. The declines are pictured in Figures 1 and 2 (based onUSDA data). Second, tobacco support prices were higher than the costs of production. This createdeconomic profits that were capitalized into the marketing quota lease rates and land prices. So,marketing quotas became an asset that added substantial value to farmland, and became a source ofrental income for owners choosing not to grow tobacco themselves. Conversely, rent on quotasbecame a sizable expense for active producers renting quota in an attempt to expand or evenmaintain output in the face of shrinking markets. As with other crops, the number of active tobacco producers has declined over time and production has become concentrated onto fewer but larger farms. In 1982 there were about 180,000farms producing tobacco. By 2002, just 20 years later, the number of active producers was about57,000, a 68% decline. (3) Most of these active tobaccofarmers owned some marketing quotathemselves and also rented quota from about 359,000 other absentee quota owners. (4) In themid-1990s, burley producers owned about 44% of their effective quota and leased the remaining56% at an average cost of $0.33/lb. Lease and transfer of quota had been prohibited for flue-curedtobacco since 1986. Instead, active flue-cured producers rent farmland that had quota attached toit, thereby obtaining the tobacco production rights. In the mid-1990s, flue-cured producers ownedabout 33% of their effective quota and rented the remaining 67% at an average cost of $0.37/lb. (5) Newer USDA cost of production data put the average rental cost of quota in 2003 at $0.63/lb. forflue-cured and $0.57/lb. for burley. (6) One reason for increased consolidation and higher quota rental fees was the sharp decline in quota levels after 1997, as shown in Figure 3 and Table 1. The decline was due to the reversal ofpreviously rapidly growing export markets for U.S.-manufactured cigarettes. The basic quotas forflue-cured and burley tobacco declined 52% and 57% respectively after 1997. Farmers needed tomarket enough tobacco to maintain their revenue and to economically utilize their barns, equipment,and labor. This required renting more quota. Along with these economic pressures to consolidate,several sources of financial aid made it possible for farmers to pay higher rental rates for quota. First, in conjunction with Phase II of the 1998 Master Settlement Agreement, cigarette manufacturers agreed to distribute $5.15 billion to tobacco producers and quota owners over a12-year period. (7) Second, to help offset decreasesin marketing quotas, Congress acted to provideassistance. Four separate emergency assistance laws ( P.L. 106-78 , P.L. 106-224 , P.L. 107-25 , P.L.108-7 ) included what the industry called direct "tobacco loss payments (TLPs)" totaling $860million. Third, Congress directed the Commodity Credit Corporation (CCC) to take ownership ofall 1999 tobacco pledged as price support loan collateral and to assume all financial losses ( P.L.106-387 , as amended). CCC finally completed disposal of this inventory in December 2003 byburying it in landfills. According to CCC data, the total cost of acquisition, interest on principal,storage, and disposal was about $625 million. These three sources of financial assistance, rather than income from the sale of tobacco, are the primary reason active producers were able to pay higher rental rates to absentee quota owners as theybid against each other for their share of a declining national tobacco quota. (See CRS Report RS20802 , Tobacco Farmer Assistance .) Active tobacco producers were being hurt financially both by declining marketing quotas, which reduced their sales revenue, and higher quota rental rates, which raised their production costs. Farmers felt there was little they could do to increase the demand for tobacco, especially since it wasfederal policy to discourage consumption of tobacco products. However, the elimination of quotarents, through a buyout of marketing quotas, could reduce the costs of production substantially forfarmers leasing substantial amounts of quota. At the same time, active producers might continue toreceive the price benefit of a continuing support program. Advocates of this policy approach ( H.R. 245 , Fletcher; H.R. 986 , Goode) proposed to give marketing licenses (or permits specifying quantity limits) to activeproducers, just as with marketing quotas. However, the licenses would be issued only to activeproducers and all forms of rent would be prohibited. This restriction would prevent the licenses fromacquiring any exchangeable value. The initial recipients of the licenses would be current tobaccoproducers wanting to continue as active growers. Active producers, not just absentee landlords, also would have received quota buyout payments under all of the legislative proposals that were offered. This provided the farmers who wanted toquit growing tobacco with sizable benefits. The farmers who remained active producers under thelicense scheme would receive a windfall from their buyout payment since they would have sufferedno losses (they would continue to get the extra income created by licenses and price support). This framework for a quota buyout, of licensed future production and continued price support, was developed by the President's Commission on Improving Economic Opportunity in CommunitiesDependent on Tobacco Production While Protecting Public Health. (8) This commission includedadvocates for tobacco farmers, anti-smoking and health organizations, and rural communitydevelopment proponents. H.R. 245 and H.R. 986 largely were modeledon the Commission's recommendations. There was little disagreement that U.S. tobacco could become substantially more competitive in the domestic as well as export markets if prices declined by the amount paid in quota rents. Sucha price reduction would happen if tobacco support program loan rates were reduced substantially oreliminated. The quota rent paid to absentee landlords would vanish. The decline in revenue fromlower tobacco prices largely would be offset by the elimination of quota rent payments, leaving theproducer in about the same net revenue situation. In fact, a North Carolina agricultural economistonce estimated that in the absence of the price support program, U.S. tobacco production couldincrease by possibly 50%. (9) At the same time, the economic analysis noted there would be substantial adjustment costs associated with dropping support prices to free market levels or eliminating the program. Mostimmediately, the value in quotas would be wiped out. This would eliminate the rental income ofabsentee quota owners. Furthermore, all of the farmland with quota, whether owned by absenteelandlords or active producers, would drop in value. However, the economic adjustments associatedwith a reduction in tobacco prices could be minimized, if not eliminated, by compensating quotaowners for lost asset values. This "free market" policy approach ( H.R. 140 , McIntyre; H.R. 4033 , Jenkins) was most appealing to active producers who wanted to see an expansion of their tobaccoenterprises. These producers likely had a sizable investment in barns and machinery, and probablyrented a large proportion of their annual effective marketing quota. This option was equallyappealing to farmers intending to exit from tobacco production. The farmers most disadvantagedwould have been small to medium sized operations and those that were inefficient because of highcosts or low yields who wanted to continue growing tobacco. As compared to a system of licensed producers, this "free market" option would result in fewer but larger farms because of economies of size. Also, production likely would move within each ofthe tobacco states to the geographic locations with the most suitable soils and climate for economicalproduction. The very fact that production could increase substantially made the "free market" optionunappealing to some anti-smoking and health advocates. Somewhere between the Commission concept of production licenses with continued price support and the free market proposal, S. 1490 (McConnell) proposed to eliminatequotas and price support but allocate a national crop acreage base among active producers.