Despite setbacks, tobacco trying to come back in U.S.

MOUNT STERLING, Ky. -- Lindsay Pasley is an eager young man in what used to be an older man's game -- tobacco farming.

He recently took 20 tons of his early prepared leaf to Clay's Tobacco Warehouse in Mount Sterling, due east of Lexington, Ky., in the Appalachian foothills, where he said he earned enough to "have a nice Thanksgiving and Christmas."

The auctioneer's singsong chant still rings out at Clay's and a few other tobacco-selling sites stubbornly hanging on with limited sales, but not nearly as often.

Clay's is the last tobacco warehouse still conducting auctions in Mount Sterling, once home to four auction warehouses. Owner Roger Wilson, who has watched as longtime growers have switched crops or quit farming over the years, hopes to sell more than 2 million pounds this season, comparable to last year but down about half from the days before Congress pulled the plug on a Depression-era buyout program.

Yet Pasley, 28, wants to quadruple his acreage. He has a contract to sell 10 times as much to R.J. Reynolds Tobacco Co. as he did at the auction.

Warehouse owner Roger Wilson ,right, looks over tobacco being offered by auctioneer Bobby Rogers, second from left, and warehouse employee Dennis Norris, left, on the opening day of the burley tobacco market at the Clay Tobacco Warehouse in Mount Sterling, Ky., on Thursday, Nov. 13, 2008. Wilson bought much of the tobacco being offered on the opening day. A decade ago, tobacco seemed destined to wither as cigarette companies shelled out billions to settle lawsuits and smoking bans swept the country. But as a rebound in production this year shows, Big Tobacco and small growers alike have proven resilient, aided by a boost in exports and by new emphasis on smokeless products. (AP Photo/ James Crisp)

A decade ago, tobacco seemed destined to wither as cigarette companies shelled out tens of billions to settle lawsuits with states. Smoking bans then swept the country and -- worst of all for the small grower -- Congress cut off the quota system four years ago.

As a rebound in production this year shows, however, Big Tobacco and individual growers alike have proven as resilient as their leaf, aided by a boost in exports primarily to Germany and Switzerland and by new marketing tactics emphasizing smokeless options.

According to the U.S. Department of Agriculture, production of all tobacco varieties fell 27 percent to 640 million pounds in 2005, the first year without the price support program, which entitled license-holders to a quota of the total tobacco crop capped by the USDA each year. The program was reeling from steep declines in tobacco demand due to antismoking efforts.

This year, production climbed to 805 million pounds -- within 10 percent of the 2004 level of 882 million pounds. That 2004 output was half the production in 1997 and a third of 30 years earlier. The bottom came in 2005, when growers produced 645 million pounds.

The uptick has coincided with the increasing consolidation of growing onto fewer farms.

Production of burley leaf, which accounts for about a quarter of all tobacco production in the United States, has lost about three-fourths of its growers since the buyout, Snell said. Yet some operations now cover hundreds of acres, a big undertaking when much of the work is still done by hand.

"We've had so many to drop out, that for the ones who stay in there are opportunities," said Will Snell, a University of Kentucky agricultural economist.

In 2004, the last year of the federal price-support program, there were nearly 26,000 farms with quota licenses to grow the more common flue-cured tobacco in North Carolina, still the nation's top tobacco-growing state. By this year, that was down to 2,500 to 3,000 farms, said Scott Bissette of the state agriculture department's tobacco marketing division.

U.S. tobacco production was valued at $1.3 billion in 2007, off from $1.75 billion in 2004, according to the USDA. Domestic cigarette sales are falling by 3 percent to 4 percent a year, a decline that has worsened since the quota system ended. Smokers have felt increased pressure to quit due to smoking bans and higher prices, on top of the longstanding health concerns and the social stigma.

The top two U.S. cigarette makers -- Philip Morris USA and Reynolds American Inc. -- are aggressively searching for a smokeless product that consumers will like. They are focusing on cigars, moist snuff, chewing tobacco and snus, which comes in tea bag pouches that users stick between the cheek and gum.

To move beyond cigarettes, Altria Group Inc. bought John Middleton Inc., the maker of convenience-store staple Black & Mild cigars, last year. Its pending acquisition of UST Inc., whose Skoal and Copenhagen brands make it the U.S. market leader in smokeless tobacco, is expected to close during the first week in January.

Winston-Salem, N.C.-based Reynolds bought the Conwood smokeless tobacco business in 2006 and sells moist snuff under the Grizzly brand.

Richmond, Va.-based Altria, which also owned Marlboro-maker Philip Morris International, spun it off as an independent company in March. It has since shifted the production of 57 billion cigarettes to overseas factories, but it still buys tobacco grown in the U.S., spokesman Greg Prager said.

Prager said Philip Morris International, the world's biggest nongovernmental tobacco company, also buys tobacco from Brazil, Malawi, Italy, Greece, Turkey and other countries. He said U.S. tobacco remained a key component of the company's international blends, though he declined to specify how much is bought from U.S. sources, citing competitive reasons.

Exports of U.S. tobacco have played a big role in the crop's rebound. Foreign sales peaked in 1978 at 700 million pounds, but the price supports meant American farmers were undercut by developing countries such as Zimbabwe and Malawi selling tobacco for as little as a third of the U.S. cost. U.S. exports slid to about 339 million pounds in 2005 before rising again to 398 million pounds in 2006, the USDA said.

The rebound was due to a weak dollar and rising currencies overseas, said Blake Brown, a North Carolina State University agricultural economist.

In recent months, a strengthening dollar along with a rebound in tobacco production in South America and Africa are causes for concern for export prospects, Snell said. And profit margins remain tight for farmers because of rising costs, Snell said. Whether tobacco companies offer price incentives will be crucial in determining how much U.S. tobacco is grown, he said.

"Today's farmers are not like yesterday's farmers -- that since they grew tobacco last year they're going to grow it next year," Snell said. "These farmers will look at the market opportunities year to year."

Still, the U.S. is expected to remain the world's fourth-largest tobacco grower throughout this decade, trailing China, India and Brazil, according to the United Nations. Not only has tobacco production expanded outside the Southeast to places like Pennsylvania and Missouri, but farmers are feeling better about their prospects.

In 2004, 69 percent of North Carolina growers in one survey said they saw a future in tobacco. Two years into the buyout experience it was 76 percent, according to the research conducted under National Cancer Institute grants. About a third of farmers said in 2006 they would advise their children to grow tobacco, up from about one-fifth in 2004.

Pasley said he expects to produce about 500,000 pounds of burley this year, and that he would have produced another 150,000 pounds if he'd gotten more rain.

"My goal is to sell 1 million pounds before I turn 30," he said.

As he sees it, the best thing tobacco has going for it is demand.

"People always chew and smoke," he said.

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AP Business writer Emery P. Dalesio reported from Raleigh, N.C. AP Business writers Vinnee Tong in New York and Michael Felberbaum in Richmond, Va., contributed to this report.