Scaled-Back Tobacco Auctions Begin This Week

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The photo on the wall at the Growers Tobacco Warehouse shows smiling workers gathered around tobacco bales three years ago, when 13.8 million pounds of tobacco were sold, the best season ever.

The picture has become a relic, memorializing a marketing system in decline and holding on for dear life.

On the same auction floor, burley farmers now deliver truckloads of leaf for contract sales directly to Dimon Inc., which buys and processes tobacco for cigarette companies and overseas markets.

In an adjoining building that could fit inside the main warehouse, workers have stacked a few short rows of burley grown by farmers still loyal to the auction system. Auction sales will start there and at other Kentucky warehouses Tuesday amid diminished expectations.

"I don't think anybody is looking for a good sales season," said Denny Wilson, executive director of the Burley Auction Warehouse Association. "The mood is not real good."

In the past year, burley farmers abandoned the auction system in droves, signing contracts to sell leaf directly to tobacco companies.

Jerry Stafford, owner-operator of Growers Warehouse, expects only 1 million to 1.5 million pounds of burley to be sold at auction under his roof, down from about 5 million pounds last season.

Meanwhile, the amount of burley sold under contract to Dimon at his main warehouse will be five to eight times greater, he said.

Stafford, a warehouse operator since 1968, was reluctant to climb aboard the contracting bandwagon, but said the trend forced his hand.

"When you're in business and you see things changing, you have to change with it," he said. "That's the bottom line."

Three tobacco warehouses will open for auctions in this Ohio River community, Stafford said. Last year, there were five.

Wilson said 52 warehouses in Kentucky are expected to open for auction sales. That represents barely a third of the warehouses open three years ago, reflecting steep burley production cuts and the spread of contracting.

Nearly 65 percent of the burley belt crop will apparently be sold directly to cigarette manufacturers and leaf dealers, bypassing auction markets, said Will Snell, a University of Kentucky tobacco economist.

Most buyers will acquire a majority of their burley through contract sales, Snell said. A year ago, only industry giant Philip Morris U.S.A. contracted with growers, accounting for 27 percent of the sales.

"While a dual marketing system will prevail for the 2001-02 season, the future of the auction system remains very unclear," Snell said.

The eight-state burley belt includes Kentucky, Indiana, Ohio, Missouri, West Virginia, Tennessee, Virginia and North Carolina.

This year's U.S. burley crop, forecast by the USDA to total 372 million pounds, is considered above average in quality, Snell said.

Meanwhile, global supply and demand conditions have improved, which should create a favorable market for American burley, he said.

The overall average market price is expected to exceed last year's record high price of $1.95 per pound, Snell said. Prices for burley sold under contract appear to run 5 to 7 cents more per pound than price-support levels, he said. If supplies tighten for some tobacco, however, demand at auctions could narrow the price difference, he said.

Once warehouse fees are tacked on, contract leaf will probably fetch a farmer 9 to 12 cents more per pound than burley sold at auction, Stafford said.

Owen County farmer W.A. Grisham said the price difference means a lot to farmers forced to shoulder higher production costs.

"Farming in general is getting in a pretty tight spot as far as clearing any money," said Grisham, who was delivering burley to the Carrollton warehouse for sale directly to Dimon.

Grisham's tobacco was weighed and then evaluated by USDA graders, which determined the amount of money he received from Dimon. Some tobacco companies are using their own graders at receiving stations.

Grisham, 75, sold his tobacco at auction for decades until this year, but said it wasn't an agonizing decision to switch to contracting.

"I think this program would work all right as long as we keep the tobacco program and grading system going," Grisham said. "I would hate to see the (tobacco) program gone."

That's the underlying concern among critics of contracting. They contend if the auction system collapses, so will the federal burley price support program that has sustained generations of small growers.

Kenton County farmer Bobby Cheeks said he was so devoted to the auction system that he'd probably quit growing his small plot of burley rather than sign up to sell his crop directly to a tobacco company.

Cheeks had brought in his burley crop for sale at the auction market. He uses tobacco money to buy Christmas gifts and pay property taxes.

"What they're doing in there, I don't think too much of it," he said, pointing toward the Dimon receiving station.

Cheeks said he worried that if the auction system goes under, farmers would be at the mercy of tobacco companies. He said the companies could lower prices without fear of competition from the warehouses.

"I believe it will just cut them short later on, and it will hurt the sales price," he said. "I don't want anything to do with it."