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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. 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?
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 21/2 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?
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.
Senator AIKEN. Are you folks satisfied, Mr. Clay, to have the Secretary announce goals, the production goals and the requirements, at the beginning of each year?
Is that method satisfactory to you?
Senator AIKEN. If that is done that way, then I do not see why the formula as proposed in this bill would not at least maintain support prices equal to what you now get and in the case of most types of tobacco actually increase them a little bit. There would not be too much difference.
Mr. Clay. Yes, Senator Aiken, we have no quarrel whatsoever with the alternative parity-price formula. As a matter of fact and policy, we wonder whether there is any probability of enactment of an alternative formula. We do not care so much which parity formula is used because the result, as you pointed out this morning, would be substantially the same. We are vitally concerned, however, with the sliding scale of loan values, the percent of loan available.
Senator AIKEN. That is right. We recognized at the beginning of our study of agricultural problems that the two crops—tobacco and cotton-presented problems which were not common to the other basic commodities, and that it was even considered at one time working out different formulas completely for the crops. Yet we have been trying all the time to get some formula that would cover them all fairly. You cannot look at just the parity formula alone but you have to take into consideration all those other factors which enter into a well-rounded program such as the means of disposal, taking off the market. I do not know what else we would do to the market in the
of diversion of it to other uses.
Mr. CLAY. Senator Aiken, we are certainly in entire accord with the desirability of enacting a long-range agricultural program which will have an understandable uniformity if possible in applicability to all commodities.
That goal would be conceded. At the same time we must recognize that tobacco is distinctly different and we do not want to be crucified upon the alter of uniformity.
Senator AIKEN. I do not think you are going to be crucified. I think we can assure you that.
Mr. Clay. I know you are not. I did not mean to imply that was the purpose but we would not suggest that you flue-cure or fire-cure wheat or corn. The crops are different in their every aspect and we believe from these discussions you will discover that necessarily, unfortunately, yes—but necessarily tobacco must be given a different treatment.
Senator AIKEN. We have been trying to work out some way of including wool under a general agricultural law because the wool growers are in a peculiar position, too, producing a necessity as far as national security is concerned, and yet having to meet an unusual type of competition.
I think we are going to be able to work that out because the wool growers do not like to come in here every year or every 2 years or at
all and ask for legislation applicable to wool alone. We realize that tobacco people don't want to do that either, in fact they have told us they do not like to come in and ask for special legislation affecting tobacco alone.
So I think that after we hear your testimony today and working with you, it may be entirely possible to work in one bill adequate protection for the tobacco growers in such a way that he will lose nothing and at the same time not be conspicuous as the beneficiary of special legislation.
Mr. Clay. Thank you, sir. We are grateful for your statement of your objective. We do not want, Senator Aiken, any special treatment and I think that is rather well evidenced by comparison with a commodity which you just cited, wool. I took exhibit G from the testimony filed on behalf of the wool people, the National Wool Growers Association, and I discover there that among 23 commodities, tobacco percentagewise has increased in price between September 15, 1941, and January 15, 1948, twentieth on the scale. We are not seeking any special price advantage whatsoever. We do not want special treatment although it may require special legislation to give us equal treatment.
In the years of experience which we have enjoyed, the Commodity Credit Corporation has not been forced to take a loss on tobacco. The tobacco program has worked and worked well. ,
SENATE BILL 2318
Senate bill 2318 is a well-conceived outline for a long-range agricultural program; but, as the sponsors of this bill undoubtedly recognize, the measure itself is designed as a pattern for discussion, as a place of beginning in the development of a program that can be accommodated to the problem of each particular agricultural product. In its present form, Senate bill 2318 is addressed primarily to products which do not possess supply and price problems comparable to those of tobacco.
Under the Agricultural Adjustment Act of 1938 as amended, reserve supply level is calculated on the basis of principles which are firmly established in the tobacco trade itself. The reserve supply level computed under the existing tobacco program is the actual reserve supply
required to produce an adequate but not excessive supply of burley tobacco.
Senator THYE. What has been the history of your acreage in the past 10 years in the over-all total tobacco production?
Mr. ČLAY. Are you interested in the acreage or poundage or both?
Senator THYE. The question was, what has been the history of your total acreage in the growing of tobacco in the past 10 years?
Mr. Clay. Beginning with the year 1936, burley acreage was 302.500,000 pounds.
Senator THYE. Pounds?
Mr. Clay. I take that back. I read that wrong. In 1936 the acreage was 302,500. In 1937 the acreage was 443,300.
Senator ÁIKEN. You will find the production in pounds, Senator Thye, on page 11 of this pamphlet.
Senator THYE. I know, but I was interested in the total over-all acreage that has been planted to tobacco annually for the past 10