Video: Up in smoke

CNBC
updated 6/11/2008 10:52:21 AM ET 2008-06-11T14:52:21

Tobacco barns were packed solid with the golden leaf this past season. Farmers in the United States raised more than 350,000 acres. The crop, which many predicted would be extinguished along with cigarettes, has defied expectations.

Tobacco is what you might call “smoking hot.”

Rod Keugel, a fourth-generation Kentucky grower, says this is the most profitable time in his entire life to be a tobacco farmer.

Beginning in the 1930s, the federal government supported farmers like Keugel by artificially propping up tobacco prices. They imposed quotas that put a cap on how much tobacco each farmer could grow, which kept supply low and prices high.

In 2004 the government got out of the tobacco business, and since then everything has changed. Gone are the price supports that kept the cost of American tobacco artificially high. And with the quota system gone, farmers can raise as much as they’d like wherever they’d like. To many, tobacco has become the poster child of how free global markets are supposed to work.

“We’re seeing that an agricultural sector can prosper and function well without those government mechanisms,” said David Orden, an economics professor at Virginia Tech and a researcher on agricultural policy.

Orden said the theory was that taking away the quota system would allow more production to take place at lower prices, and that would stimulate demand.

Which is exactly what has happened. Tobacco acreage has increased 20 percent in the last two years. Instead of bringing ruin, the government’s exit has brought rebirth for many growers like Keugel.

“It’s allowed us to do a lot of things that we couldn’t do before,” Keugel said. “We were raising about 40 acres and we're raising 100 now.”

Numbers like that convinced TJ Vaughn, his father, Randy, and neighbor Martin Barbre from Carmi, Ill., to get into the business. They are farmers who never dreamed of raising tobacco before in states that hadn’t seen tobacco farming for a century.

If someone had asked him 20 years ago if he’d be raising tobacco?

“If you’d asked me before the turn of the century, I’d have said you’re crazy,” Vaughn said.

Longtime corn and wheat farmers, the Vaughns and Barbre are part of a trend of new growers being lured into tobacco by the cigarette manufacturers.

In 2006, PhilipMorris International invited them to the local café for a sales pitch.

“I wanted to do it right after the first meeting,” Vaughn said. “Sounded interesting. Sounded like there was a good chance for profitability."

He’s not kidding. A reasonable profit for an acre of corn is about $100. For tobacco, he said, it’s $1,000 to $1,500.

The farmers raise burley tobacco, which is used in premium cigarettes like Marlboro. Burley is an extremely labor-intensive crop. Farmers can harvest wheat and corn from an air-conditioned combine. But harvesting Burley is back-breaking work often done in horrendous heat. In many ways it’s a throwback to an earlier era.

“You know, here we were, we needed a plow,” Randy Vaughn said. “TJ had never hardly even seen a plow.”

“Boys don’t know how to plow,” Barbre said.

“I do now,” TJ Vaughn said, laughing.

Once harvested and cured, every leaf is stripped from the stalk and sorted according to the position on the stem.

This year, farmers are expected to sell more than 700 million pounds of leaf.

“We believe it’s a very exciting time to be in the business,” said David Sutton, spokesman for PhilipMorris USA, maker of Marlboro, the top-selling cigarette in the country.

He says it’s exciting even though demand is shrinking in the U.S.

Sutton said the company making changes, including coming out with new products to meet the demand for smokeless tobacco. And Sutton said there is still plenty of demand from the 45 million smokers in the domestic market.

But the domestic market isn’t where most American-raised tobacco ends up. According to the Department of Agriculture, more than 60 percent goes overseas. Not only is it going to traditional trading partners like Japan and Germany, but increasingly to developing countries like China, Korea and Ukraine.

And that has anti-smoking groups alarmed.

“There are 5 million people around the world dying each year from tobacco now. It’s going to grow to 10 million a year by 2020.  And 7 million of those deaths will be in developing countries,” said Kathy Mulvey, international policy director for Corporate Accountability International. The group works with the World Health Organization to curb smoking abroad.

She said it’s not just tobacco being exported, but a health disaster. Mulvey and other critics say PhilipMorris International aggressively promotes its products in developing countries on billboards, television and in movie theaters — practices no longer legal in the U.S.

PhilipMorris USA’s Sutton declined to discuss the company’s booming international business.

“I can’t. I’m not allowed to,” he said.

He said overseas operations could only be discussed by sister company Philip Morris International. But neither representatives of PMI nor its corporate parent Altria would speak to us on camera.

Just recently the two companies split. The international unit will be headquartered in Switzerland and effectively be shielded from American regulation and litigation. Philip Morris International says the split will encourage growth.

For the Vaughns and Barbre, who sell their crops to PMI, a boost in overseas demand could mean greater demand for their crop. Are they bothered that they are growing a crop that is likely to harm someone, somewhere?

“It’s their choice to smoke,” Randy Vaughn said. “It’s not like we’re saying you have to smoke cigarettes.”

“Somebody is going to grow it,” Barbre said. “I guess being an American you maybe feel a little better that it’s being exported.”

The new tobacco farmers and more tobacco acreage may have been the last thing health groups expected when the government eliminated price supports.

“The hope would be that by eliminating the quotas there would be fewer farmers then engaged in growing this crop,” Mulvey said.

In fact, there are fewer farmers since the end of the program. But there is more tobacco being grown. And companies are investing in growers like Rod Keugel to a degree not seen in the past. PhilipMorris USA picked up the tab for some of his equipment and a tobacco barn. Critics say the manufacturers value these relationships even more for the political benefits than the tobacco.

“Tobacco companies, they don’t have a positive public image, you know,” Mulvey said. “If they can put the farmers out front they can get much more favorable responses from the public and the policy makers.”

Mulvey points to protests such as one against a tax increase on cigarettes in 1994. The company bused in their employees along with tobacco farmers. The tax was defeated.

Keugel is also wary of the tobacco companies’ intentions. He received a mailing from Philip Morris USA encouraging him to complain to Congress about a proposed cigarette tax. He worries that as more supply comes on line the companies will try to control the way farmers do business.

“Not only the way we do business but the way we live our lives,” he said. “You know, instructing us when we need to make those political phone calls, even orchestrating what we need to say to our senators and representatives.”

Sutton said PhilipMorris USA is not trying to buy the strength of the farm lobby.

“I think it’s the other way around, really,” he said. “What we’re trying to do with growers on those political types of issues is to make them aware of what’s happening.”

Not too long ago, Big Tobacco was on the hot seat, and the American tobacco farmer was on the run. Not anymore. What didn’t kill the golden leaf may have made it stronger.

Despite the antismoking movement in this country, buyouts, additional taxes and suspicion of tobacco companies, Keugel said he will continue to grow tobacco.

“Well for one thing it’s what I know,” Keugel said. "It’s what I’ve been taught all my life. There is an art to raising tobacco. It sustains our farm. Its profitability has allowed us to buy a farm. It’s taken us from tenant farmers to farm owners. Tobacco has done that. Nothing else but tobacco.”

PhilipMorris International told us in an e-mail that wherever they do business they advocate for comprehensive regulation on the manufacture, sale and use of tobacco products, and that they support wide-ranging regulations that cover mandatory health warnings, limitations on public smoking, and restrictions on advertising.

© 2012 CNBC, Inc. All Rights Reserved

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