estimated market requirements. In event no better information is available for estimating the current year's exports, the Secretary should use the exports for the previous year.

It seems to me if a formula of that nature is adopted that it would be quite applicable to the tobacco production, making due allowance for unusual conditions such as Europe's stopping buying.

The CHAIRMAN. The next witness is Mr. Fred S. Royster, president, Bright Belt Warehouse Association, Inc., Henderson, N. C.

STATEMENT OF FRED S. ROYSTER, PRESIDENT, BRIGHT BELT WAREHOUSE ASSOCIATION, INC., HENDERSON, N. C.

Mr. ROYSTER. I am F. S. Royster, of Henderson, N. C., and am president of the Bright Belt Warehouse Association, Inc., which comprises in its membership all tobacco warehouses in the flue-cured growing area. Since all flue-cured tobacco is marketed by the auction system, the warehouseman is the marketing agent or commission merchant of the grower. Therefore, it is quite natural that what affects the grower of flue-cured tobacco is of vital concern to the warehouseman. Hence, my appearance in the interest of farm legislation affecting the growers of flue-cured tobacco.

The CHAIRMAN. Will you explain to us what flue-cured tobacco is, Mr. Royster?

Mr. ROYSTER. It is a processing term used, Senator, to designate flue-cured or what we call bright tobacco goes through a different process in preparation for market than the other types. The other types that are air cured are cured by various ways.

Flue-cured means cured by heat.

The CHAIRMAN. Is that flue-curing system in general use?

Mr. ROYSTER. It is in general use in the bright area. Burley, of course, is not flue-cured.

I appreciate the opportunity of appearing before this committee and wish to express the appreciation of my association for the efforts which the members of the committee are exerting on behalf of the permanent farm program. I sincerely hope that you will be successful in formulating and enacting legislation which will continue the progress made by the growers of flue-cured tobacco in recent years. I am in agreement with the statement made by Mr. Hicks, representing flue-cured tobacco growers, concerning details that we feel should be embodied in the legislation.

I desire to call to the attention of the committee the fact that the growers of flue-cured tobacco have, on every occasion which they have had the opportunity to vote for quotas since 1933, except 1939 approved the present program by overwhelming majorities, thereby showing their satisfaction with and support of the program.

I think it should be pointed out that in the operation of the present program there has not resulted any financial loss to the Federal Government in carrying out the provision whereby the price has been supported at 90 percent of parity and that under the program the growers have met all market requirements for flue-cured tobacco, expanding production from an average of approximately 800,000,000 pounds annually, 5 years ago, to a record production of 1,351,000,000 pounds

in 1946.

The CHAIRMAN. That is the best production you have ever had?

Mr. ROYSTER. Yes, sir.

To emphasize further the support which the growers themselves have given the program, in 1947, by an overwhelming majority of more than 98 percent of those growers voting in a referendum, they voluntarily levied an assessment upon themselves of 10 cents per acre to be used in expanding markets principally in foreign countries for tobacco.

May I again express my appreciation for the consideration of the committee, and respectfully request the continuation of adequate legislation for the furtherance of the flue-cured tobacco program.

Thank you, sir.

Senator AIKEN. May I ask whether any reduction in the acreage of flue-cured and burley tobacco is contemplated for this year?

Mr. ROYSTER. For the year 1948?

Senator AIKEN. Yes.

Mr. ROYSTER. The reduction is 27.52 percent in flue-cured acreage, which of course is a drastic reduction brought about by the developments in foreign markets during the war.

Senator AIKEN. Is that not a greater reduction than would be required under S. 2318?

Mr. ROYSTER. Senator, I do not have that paper with me. As I recall it, I believe that it would not require as much reduction under your bill as was proclaimed in 1948.

Senator AIKEN. I notice in the table which Mr. Berry presented a computation under AAA as amended would require in 1948 an amount of 955,000,000 pounds and the amount under S. 2318 as computed here would be 797,000,000 pounds, or a reduction from 955,000,000 to 797,000,000 pounds.

As a matter of fact, the growers are going to produce a little more than that amount themselves.

Mr. ROYSTER. Well, you understand, of course, that figure is the amount which we need to produce during this year in order to proclaim quotas under the present act in 1949.

Senator AIKEN. These figures would show that burley would have to be reduced, would be reduced under S. 2318 about one-third, or from 474,000,000 pounds to 314,000,000 pounds. Is burley being reduced, too, this year, and can you tell me what percent?

Senator COOPER. Two percent.

Senator AIKEN. That is probably as a result of the failure of the foreign countries to buy burley. Do you export flue-cured, too?

Mr. ROYSTER. I would not agree that it is too heavy, but we export of course a great deal larger percent of flue-cured than is exported of the other types. That has been customarily true down through the years. It has gone as high as 50 percent in the years past.

Senator AIKEN. Under this bill there would be, instead of any reduction an increase of about 80 percent in the production of firecured and an increase of about one-third in the production of dark air-cured.

Mr. SHAW. That increase represents 27.52 percent taken out.

Senator AIKEN. That represents a cut taken out? That explains it. Otherwise, I was wondering why you were objecting to a formula that was doing almost exactly what you were willing to do anyway. That would mean additional cut anyway.

Mr. ROYSTER. That is right, sir.

Mr. BERRY. At the bottom of the chart that I filed a moment ago the answer in that particular with respect to burley, the 514,000,000 pounds, is after the 2 percent reduction or after a restoration of 8.4 percent of the previous reduction.

Senator AIKEN. Yes.

The CHAIRMAN. We thank you, Mr. Royster, for your statement before the committee.

Mr. ROYSTER. Thank you, Mr. Chairman.

The CHAIRMAN. The next witness is Mr. William C. Clay, Jr., counsel for the Burley Auction Warehouse Association, Mount Sterling, Ky.

STATEMENT OF WILLIAM C. CLAY, JR., COUNSEL FOR BURLEY AUCTION WAREHOUSE ASSOCIATION, MOUNT STERLING, KY.

Mr. CLAY. Mr. Chairman and members of the committee, my name is William C. Clay and I represent the Burley Auction Warehouse Association.

The CHAIRMAN. How long has that been in existence?

Mr. CLAY. We have been in existence, sir, for about 3 years.

The CHAIRMAN. It is a rather new undertaking?

Mr. CLAY. Yes, sir, it is. In recent years we have had for the first time a rather complete organization of the various interests in the tobacco industry and we appear here today presenting a united front on this problem.

The Burley Auction Warehouse Association is a nonprofit association organized for the benefit of burley-tobacco growers. One of the charter objects of the association is to serve farmers by working for "fair and equitable prices for tobacco."

More than 95 percent of the burley leaf tobacco produced in the United States is marketed through the sales facilities of members of the Burley Auction Warehouse Association. The association represents almost every domestic producer of burley tobacco, and this appearance before the Committee on Agriculture and Forestry is made on behalf of and in the interest of growers of burley tobacco.

The CHAIRMAN. This method of marketing a farm product is certainly new to me. Why should not wheat or corn or cattle growers have similar organizations? Why is tobacco the only one that seems to have an undertaking along that line?

Mr. CLAY. Burley tobacco, flue-cured tobacco, and the other types of tobacco, cigarette tobacco, are sold at auction. They are sold through sales facilities owned by independent warehousemen who serve the farmers for a commission. We are their selling agents, their factor, so to speak, and obviously whatever benefits our customers, our clients, the people we represent, is of vital concern to us.

In other industries it is not customary for a factor to occupy the role of warehouseman in the industry and it is for that reason that our organization is rather unique.

The CHAIRMAN. Is it the only one that has that system?
Mr. CLAY. Yes, sir; to my knowledge it is the only one.

In other respects the tobacco industry is quite distinct. The production, the marketing, the processing, the storage of burley tobacco are operations distinctively different from those characterizing products other than tobacco. At the very outset we are confronted with

the problem of dealing with a commodity that cannot be utilized until it has been aged and ripened through storage. Other products of the soil move rapidly through the channels of trade to an ultimate consumer; but leaf tobacco cannot be manufactured into a smoking product until, like a rare wine, it has reached its peak of perfection through an aging process.

This fact has a direct and immediate relevance to the question of stocks or total supply that must be accumulated for the maintenance of a normal reserve supply level. This distinctive factor must be considered in accommodating the problems of tobacco to a long-range agricultural program.

Secondly, tobacco refuses to be chained to the course of the customary laws of supply and demand. In tobacco, price is seldom an accurate expression of the interplay between supply and demand.

The Adam Smith laws of economics are applicable only in a market in which there are many sellers and many buyers. Then, when free and open competition prevail price performs its function of maintaining the balance between these classic forces of economic life.

In leaf tobacco, however, we always have a market in which there are many sellers and only a few buyers. Today there are approximately 400,000 producers of burley tobacco; but today, as for many decades, only 3 or 4 major buyers and seldom more than 10 buyers altogether are in the market for this product of American agriculture. The consequence is obvious and apparent. Even in the absence of any conspiracy or agreement concerning price, each major buyer of leaf tobacco possesses an almost unrestricted power over price. For example, on a burley tobacco auction market a major manufacturer may be purchasing 20 percent of the offerings. If that manufacturer instructs its buyer to reduce its purchases from 20 percent to 10 percent of the offerings, there is an immediate decline in the price of burley leaf tobacco. By the same token an increase in the order of one buyer causes an immediate rise in the price of burley leaf tobacco.

In the hypothetical market postulated by Adam Smith, the action. of a single buyer or a single seller could not conceivably have a decided effect upon price. In leaf tobacco only one portion of the equation holds true. The action of a single tobacco seller cannot affect price. Whether a single seller markets his crop or withholds it from market has utterly no effect upon price. But the action of a single buyer can set the tempo and the trend of a market. Each major buyer has a power over price.

The existent tobacco program created by the Congress of the United States takes full account of the idiosyncracies. In the computation of the reserve supply level of tobacco for the purpose of determining marketing quotas the normal supply of tobacco is calculated at 275 percent of a normal year's exports. These ratios are identical with those prevailing in the trade itself. A domestic manufacturer normally carries stocks sufficient for a production of from 22 to 3 years. This is done because tobacco stocks must be aged before they can be used. For the same reason dealers in the export trade carry stocks that are estimated to be equivalent to 165 percent of a normal year's exports. This, too, must be done so that supplies-properly aged for production-are available for use in the manufacture of tobacco products.

In the Agricultural Adjustment Act of 1938, as amended, the price pattern of the leaf-tobacco industry has been accurately appraised. Loans at 90 percent of parity are made available to cooperators in those years, and only in those years, for which marketing quotas are in effect. The logic is irresistible. Parity payments should not be made available unless marketing quotas are in effect, because otherwise the parity-support program would induce the production of a crop far in excess of demand. On the other hand, when marketing quotas are in effect the percentage of parity available through nonrecourse loans is sufficient for the farmer to have a bargaining power adequate enough to cope with the tobacco manufacturer's power over price.

If, in spite of the marketing quotas, the reserve supply level exceeds domestic and export requirements, the grower is not penalized by a reduction in the percentage of parity which is available as a nonrecourse loan. This is as it should be, because the grower should not be compelled to suffer the consequence of an injudicious proclamation of a marketing quota or the consequence of a change in economic conditions beyond his control. The Government can protect itself by a reduction in quota in subsequent years, which will have the effect of protecting its nonrecourse loans.

Actually, as well as logically, the Agricultural Adjustment Act of 1938, as amended, serves to protect the economic welfare of tobacco growers without a consequent financial loss to the Government of the United States.

Senator THYE. Mr. Clay, if you bring about a shift by a reduction in the acreage, to what crop do you normally shift?

Mr. CLAY. We do not, sir. That is perhaps one difficulty in our economy.

Senator THYE. What do you do with the acreage?

Mr. CLAY. We have never had an acreage cut comparable to that proposed by S. 2318. In fact, only a very small proportion of our cropland is devoted to tobacco. I would not know the exact percentage over the area as a whole, but it is not uncommon for a 500acre farm to have a base of only 10 acres, and yet tobacco is our principal source of income.

Does that answer your question?

Senator THYE. If a 500-acre farm has 10 acres in tobacco, what would you have in the other acreage?

Mr. CLAY. Some of it is used for pasturage and livestock. We produce some wheat and some corn, but tobacco is our principal cash crop. It has been the basis of our economy in Kentucky for the history of the entire State, I believe.

Senator COOPER. May I ask a question?

The CHAIRMAN. Yes.

Senator COOPER. You mentioned the fact that there might be a 500-acre farm with 10 acres in tobacco. Is it true that there would be no crop to which you could shift which would supply the cash income that you would lose in that 10 acres?

Mr. CLAY. That is true, sir, and in addition, Senator Cooper, as you well recognize, our farms are organized for the production of this one crop. It requires special facilities for housing and handling and the labor in our area is trained and experienced in this one field of production.