Tobacco Systems 2000
Phil Kenkel, Univ. of Tennessee
Southern Region Outlook Conference
Atlanta Georgia Sept. 25-27, 2000
Background
• Historically risk was not a major issue in
burley production
• Stable prices
• Small acreages
• Owned quota
• Family and regular farm labor
• Out of pocket break-even yields were low
Shift to Larger Scale Production
• Hydroponic production of seedlings
• Authorization of cross county leasing
• Production exceeding 100 acres became
common
• Quota lease became a cash input
• Labor hired or sub-contracted
Large Scale Production Implied:
• Risks of not covering cash costs increased
• Need to analyze (and compete for) leased
quota emerged
• Labor arrangement impacted grower’s risk
Policy Issues Increased Need for
Risk Analysis
• Settlement & government payments are
significant portion of return to management
• Amount and basis of allocation of future
payments is uncertain
• Anticipated payments increased lease rates
• Increased incentives to continue production
Tobacco Systems 2000
• Stand Alone (baled) software
• Simple budget format with pop-up menus
for yield, plant spacing, fertilizer,
chemicals, labor, marketing fees
Summary Information
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Return to management
Return per hour of manger’s labor
Breakeven yields
Summary of marketing expenses
Comparison of returns for owned and leased
quota
Tobacco System 2000 Was Used
to Illustrate Risk
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Break even yield levels
Return per hour of manager’s labor
Return per pound (maximum lease rate)
Expected return and break even yields
under alternative labor arrangements
• Impact of fungicide and insecticide
applications
Higher Quota Lease Rates
• Increases Breakeven Yields
• Reduces Managers “Hourly Wage”
Labor Arrangements Based on
Poundage Limit Upside and
Downside Risk
Equity and Risk Profile of Crop
Share Arrangement May Change
with Quota Price Increase
Government and Settlement
Payments
• Risk of Not Receiving a Payment
Overshadows Yield Risk
• Payments Based on Marketings Do Not
Smooth Out Yield Risk Profile
Irrigation
• Operating and Ownership Costs Entered on
Budget
• Per Pound Return Over Variable Cost
Provided in Budget Comparison
• Can Determine the Poundage Increase
Needed to Justify Irrigation Expense
Summary
Budget software can be a risk education
tool
• Labor & share arrangement impact risk
• Breakeven yields and maximum quota
price varies widely across farms
• Predicting future payments would be more
useful than predicting drought