WASHINGTON, Nov. 7, 2013 - Tobacco quota owners and growers are increasingly worried that USDA might trim their 2014 payments by more than seven percent as part of sequestration – undercutting the financial stability of thousands of farmers and their lenders.
Potentially, they say this type of cut – if implemented - could also set up a legal challenge because the Tobacco Transition Payment Program (TTPP) is funded by industry – not taxpayers.
“The sequester was designed to save tax dollars. These buyout payments are dollars that the tobacco companies put into a fund to pay eligible tobacco holders and producers in an attempt to transition to the free market,” explained Mark Paschall, a grower from Murray, Kentucky.
Further complicating the situation for tobacco growers is that perhaps one-third or more of the payments have already been sold to lenders or used as loan collateral.
The program provides annual transitional payments for 10 years to eligible tobacco quota holders and producers. While every contract varies, USDA’s Economic Research Service reports that, under the buyout program, tobacco quota owners received $7 per pound while tobacco growers received $3 per pound.
Payments – funded through assessments of about $10 billion on tobacco manufacturers and importers - began in 2005 and continue through 2014. However, producers could opt to receive a discounted lump sum buyout payment by contracting with a financial institution rather than waiting 10 years to receive the full payment.
Many growers have already factored the payments into their 2014 business plans and are very worried that any cuts would have a wide ripple effect throughout Kentucky, North Carolina, Virginia and other parts of the south.
“It’s like having a contract for your land and then having the buyer decide he didn't want to pay you as much as originally promised,” explained Scotty Whitford, a tobacco grower from Grantsboro, N.C. “We depend on this program to pay bills and finance our operations.”
However, the Budget Control Act requires that $109 billion in spending—divided equally between defense and nondefense—must be reduced in FY2014 and each subsequent fiscal year through FY2021.
While the Congressional Research Service notes that the effect of sequestration on any given program is subject to the interpretation of the law’s provisions by the Office of Management and Budget (OMB), overall, the USDA is required to cut certain federal programs by 7.6 percent. It’s the process of sequestration that Congress originally tried - but failed – to avoid when lawmakers could not reach agreement on a broader budget deal.
Sequestration applies to many Commodity Credit Corporation-funded programs, including the direct payment program, disaster payments, the Milk Income Loss Contract (MILC) program, new farm loans and conservation programs (except the Conservation Reserve Program). Crop insurance is exempt, as are several nutrition programs.
Last year, TTIP payments were also technically on the budget chopping block, but the sequester didn’t kick in until March of 2013. Agriculture Secretary Tom Vilsack decided to avoid the cost and the political pushback involved with asking for refunds from the 350,000 producers who had already received payments under TTIP and other programs. So he used his transfer authority to take all of the required reductions out of direct payments.
Already, growers will notice that direct payment checks issued this fall have been reduced by about 8 percent.
But without a new farm bill in place, Vilsack has fewer options going into 2014 and none of them look very appealing. If he exempts TTIP again, recipients of other programs will potentially see larger cuts.
USDA officials have yet to spell out how sequestration-triggered cuts to tobacco or any other farm program payments will be implemented, telling Agri-Pulse that the agency is still in the process of reviewing how sequestration will impact all programs.
However, in a Farm Service Agency (FSA) memo to field staff dated Sept. 30, TTPP was listed as one of the programs subject to sequestration – as soon as the percentage cut could be determined and the software for processing payments can be revised. Other FSA programs on the list include: DCP/ACRE, SURE, and new FSA loans.
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