brought about renewed hope, enthusiasm, and optimism on the part of tobacco growers. Many old debts and mortgages are being paid off, trade in every line has been stimulated, and the flow of commerce in many channels has been increased. All this has worked toward the attainment of the objectives of the Agricultural Adjustment Act by tending to give flue-cured tobacco a purchasing power equivalent to its purchasing power during the base period from August 1919 to July 1929.

Chart 14.-Flue-Cured Tobacco: Parity and Actual Prices, 1920-33

The production of burley tobacco ranks second in importance only to flue-cured. It is grown over a wide area in Kentucky, Tennessee, and nearby States. About 95 percent of it is consumed domestically, being used largely for cigarettes, smoking tobacco, and chewing tobacco.

Present supplies of burley tobacco are excessive. From 1929 to 1933 production so far exceeded consumption that stocks increased from 332,000,000 pounds in 1929 to 616,000,000 pounds in 1933. The 1933 crop is estimated to be fully 125,000,000 pounds above the level of consumption, which will further increase the already burdensome stocks. This continued overproduction appears to have been due to influences growing out of the depression. Consumption of products in which burley tobacco is used did not decline materially, but production was increased during this period because of the effort of farmers to obtain sufficient income to meet current expenses and pay debts.

BURLEY TOBACCO PRICES

Prices paid growers for burley tobacco declined from 211⁄2 cents per pound in 1929 to 8.7 cents per pound in 1931. In 1932 the market average price was increased to 12.6 cents per pound, owing largely to unusual competitive conditions in the manufacturing industry. The fair exchange value of the 1932 crop was 14.6 cents per pound.

The unusual competitive conditions during the 1932 marketing season were brought about because of the so-called "10-cent" ciga

rette. Sales of the low-priced cigarettes had greatly increased during the depression, and it was reported that manufacturers of these brands had practically exhausted their stocks of tobacco. Manufacturers of the "standard" brands of cigarettes were anxious to protect their inventory position and, even though their stocks were large, they gave strong competition on the markets.

In considering the price prospects for the 1933 crop it was recognized that the supply situation was less favorable than a year ago and that there was little likelihood that competitive demand conditions would be anything like as favorable as last year. Between January 2, 1933, and February 12, 1933, wholesale prices of the so-called "standard" brands of cigarettes were reduced from $6.85 per thousand to $5.50 per thousand, which was nearly to the level of the lower-priced brands. Sales of the lower-priced brands fell off rapidly, so that stocks of tobacco held by these manufacturers then became materially larger than needed for the reduced volume of output.

PRODUCTION ADJUSTMENT

Faced with record stocks in the hands of dealers and manufacturers, and the second largest crop in history, it was evident that any program designed to bring about an improvement must rest upon production control measures. During July representatives of the Administration held conferences with a number of the leading burley growers and interested citizens in the burley district. It was the consensus of opinion of all present at these conferences that some immediate action was needed to improve the situation.

Work was begun with the aid of representatives of the colleges of agriculture of Kentucky, Tennessee, and Virginia upon a productionadjustment plan for burley tobacco, under which it was proposed to reduce the 1934 crop to not more than 250,000,000 pounds, compared with a crop of around 400,000,000 pounds in 1933. After a preliminary contract for growers had been completed, further conferences were held in Washington at which leading growers and Congressional Representatives were present.

Final contracts were offered to growers beginning about the middle of December and the sign-up campaign is now nearing completion. It is reported that a very large percentage of the growers have signed these contracts, under which the option is given for reducing tobacco acreage and tobacco production in 1934 by either 33% percent or 50 percent of a base selected from the years 1931, 1932, and 1933. The contract provides that the base tobacco acreage and base tobacco production for a farm shall both be one of the following:

(a) The average of 1932 and 1933

(b) Eighty percent of the average of 1931, 1932, and 1933
(c) Eighty percent of the year 1932

(d) Seventy-five percent of the year 1933

Each grower who takes part in the program will receive a rental payment of $20 per acre for the rented acreage and two adjustment payments. The rates of the adjustment payments will vary in accordance with whether the reduction chosen by the producer is 33% percent or 50 percent. For those who reduce 33% percent, the first adjustment payment shall be not less than 10 percent of the net sale value of the 1933 crop. For those who reduce 50 percent, this payment

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shall be not less than 15 percent of the net sale value of the 1933 crop. In no event shall the first adjustment payment be less than $15 per rented acre or more than $45 per rented acre.

It will be noted that the rates of the first adjustment payment, as specified in the contract, are minimum rates. On January 22, 1934, the following announcement was made by the Agricultural Adjustment Administration:

If the average price for the current season should be as low as 10 cents, the rate of the adjustment payment for those growers who reduce 33% percent will be increased from 10 percent of the net sales value of the crop to 25 percent and the rate for those who agree to reduce 50 percent will be increased from 15 percent to 30 percent. If the market price should average 11 cents per pound, the rates of the first adjustment payment would be increased to somewhere between the minimums provided in the contract and the increase stipulated in the event of a 10-cent average.

The second adjustment payment shall be not less than 15 percent of the net sale value of the 1934 crop for producers who reduce 33% percent, and not less than 35 percent of the net sale value of the 1934 crop for those whose reduction is 50 percent. If for any reason the amount of the 1934 crop which is grown for market is less than the initial production allotment a payment of 2 cents per pound will be paid for each pound of the deficiency. The total of all the above payments, at the rates specified in the contract, is estimated at approximately $15,000,000, of which nearly $10,000,000 will be paid during the current marketing year.

The contract gives the Secretary of Agriculture the right to require a reduction of acreage and production in 1935 not to exceed 50 percent of the base tobacco acreage and base tobacco production chosen by the producer. (See exhibit 25 of appendix I.)

PROCESSING TAX

To provide funds for financing the production adjustment program, a processing tax equal to the full difference between the current average farm price and the fair exchange value (2 cents per pound), was levied on the first domestic processing of burley tobacco.

As indicated previously, burley tobacco is consumed almost exclusively in the United States, consequently nearly all of it is subject to processing taxes. If, in levying a processing tax to make up the full difference between the current average farm price and the fair exchange value, the revenues derived from such taxes should be paid to growers who take part in a program of production control, these growers would eventually receive the fair exchange value for at least. that portion of their production which is equal to domestic consumption. Under such a plan, the participating growers could always be assured of receiving the fair exchange value for their entire production, so long as it did not exceed domestic consumption. A part of this would be received in the form of prices paid on the market and the remainder would be received in the form of payments under the control program.

MARKETING AGREEMENT

Inasmuch as that portion of the returns obtained by the grower in the form of prices received on the market reaches him much sooner than the portion which has to be collected through processing taxes,

the Administration made every effort to bring about an increase in market prices for the 1933 crop. Before the markets opened, negotiations were begun upon a marketing agreement with the principal domestic buyers.

Direct purchasing of tobacco by the Government was urged by some of those representing burley growers, as a means of increasing the price of the 1933 crop. A similar proposal was made by the leading manufacturers using burley tobacco, who insisted that it become a part of the marketing agreement. The Administration refused this proposal on the ground that it involved the dangerous practice of stabilization, and proceeded upon negotiations for an agreement which did not include this feature.

A formal hearing was held upon the marketing agreement December 21, 1933, and the agreement was signed by the Secretary of Agriculture January 6, 1934. Under the terms of the agreement each contracting buyer, except two, agreed to purchase on the markets between December 11, 1933, and April 15, 1934, a number of pounds of burley tobacco of the 1933 crop at least equal to the number of pounds of such tobacco (farm sales weight) used during the period of 12 months ended October 31, 1933. The exceptions to the above were Axton-Fisher Tobacco Co. and Brown & Williamson Tobacco Corporation, which agreed to purchase 1,250,000 pounds and 25,000,000 pounds, respectively. Each signatory company agreed to pay at least 12 cents per pound for all its purchases, with the provision that if the average price for the entire crop is 12 cents or more per pound the Brown & Williamson Tobacco Corporation shall pay at least 10%1⁄2 cents per pound for its purchases. The signatory companies were:

The American Tobacco Co.

Continental Tobacco Co.
Philip Morris & Co., Ltd., Inc.
Larus & Brother Co.

Liggett & Myers Tobacco Co.

R. J. Reynolds Tobacco Co.

P. Lorillard Co.

United States Tobacco Co.

Brown & Williamson Tobacco Corporation.
Axton-Fisher Tobacco Co.

The commitments of the contracting buyers as to purchases do not go beyond the quantities manufactured last year, which have been estimated at 260,000,000 pounds. With the 1933 crop reckoned at around 400,000,000 pounds, this leaves 140,000,000 pounds for which no definite commitment has been made. A part of this will be purchased by exporters. Most of the remainder probably will go to leaf tobacco dealers, who normally purchase a considerable portion of each burley crop, but it is likely that the contracting buyers themselves will take a part of it. Those whose business has gained during the past few months and those whose stocks are not excessively large are expected to buy more than their commitments.

RESULTS EXPECTED

The objective of the Administration's plan for burley tobacco is to raise the level of income to the grower. The first step in accomplishing this objective was to bring production into line with market requirements. It is expected that fully 90 percent of the growers will

sign contracts to reduce production, and that the 1934 crop will be below the level of world consumption. This will make it possible to bring about some reduction in surplus stocks.

Studies made by the Department of Agriculture indicate that without any adjustment program or marketing agreement, the 1933 crop probably would have brought no more than 8 cents per pound. In 1931, when the supply of burley was about 20 percent less than at present, the crop sold for an average of 8.7 cents per pound.

It is expected that under the present plan the 1933 crop can be made. to average around 11 cents per pound. Should the contracting buyers purchase only their minimum commitments of 260,000,000 pounds at the minimum average price of 12 cents per pound, the remaining 140,000,000 pounds would need to average only 6 cents in order for the entire crop to bring an average of 10 cents. It is not believed that competition in the tobacco industry will permit this 140,000,000 pounds of tobacco to be sold at such low prices, in comparison with the prices paid by the contracting buyers.

Each of the contracting buyers agrees to purchase in the usual and ordinary manner, and not to buy unduly of the higher grades in order to defeat the purposes of the marketing agreement. In the event that the buyers do not fulfill the terms of this agreement and assessments have to be made upon them, the funds derived from such assessments will be distributed to those growers who participate in the adjustment program.

The total income of growers from burley tobacco during the current marketing season will be fully $55,000,000, of which around $45,000,000 will be received from sales on the market and the remainder in the form of rental and adjustment payments. The total income received from each of the past two crops of burley tobacco was $39,000,000.

IV. FIRE-CURED TOBACCO PROGRAM

Fire-cured tobacco represents between 10 and 15 percent of the total tobacco production of the United States. It is grown principally in Kentucky, Tennessee, and Virginia. In recent years, about two thirds of the crop has been exported, and formerly a much larger proportion of it was consumed abroad. In the United States it is used largely for the manufacture of snuff and, to a lesser extent, for cigars.

World consumption of United States fire-cured tobacco has declined nearly 50 percent in the last 10 years. Exports declined from around 200,000,000 pounds in 1923 to below 100,000,000 pounds during the last few years. Domestic consumption showed only minor fluctuations from 1922 to 1930 but in 1933 consumption was about 10 percent below the level of 1930.

Production of fire-cured tobacco has been reduced materially but not enough to bring supply into line with consumption. Production in 1933 was 138,000,000 pounds, which is above the estimated world consumption for the current year. Approximately one third of the 1932 crop is still in the hands of the farmers and farmers' organizations. In addition, stocks in the hands of the trade are considerably out of line with consumption.

Average prices paid growers for fire-cured tobacco declined from 13.2 cents per pound in the 1929 season to 5.1 cents in the 1931 season.