GREENSBORO, N.C. - So many tobacco farmers are signing up to sell this year's crop directly to cigarette makers that the already dismal outlook for middlemen - the South's 147 auction warehouses - is getting worse.
As few as 30 warehouses selling flue-cured tobacco could survive this year in North Carolina, South Carolina, Georgia, Florida and Virginia, said Michael Boyette, an engineer with the North Carolina Cooperative Extension Service.
Judging by his conversations with major cigarette producers, Boyette said, they may contract with farmers to supply as much as 80 percent of their crop this year.
R.J. Reynolds Tobacco Co., the nation's second-largest cigarette maker, plans to buy all of its flue-cured leaf directly from farmers. The other producers haven't disclosed how much they will buy under contract.
If cigarette companies were to buy 80 percent of their tobacco directly from farmers, that could result "in the same percentage of warehouses closing," said Mac Dunkley, managing director of the Bright Belt Warehouse Association, a trade association for flue-cured warehouses.
If that forecast proves true, all but four or five of Georgia's 18 tobacco warehouses could close. "Farmers are signing contracts out of the fear that if they take their tobacco to auctions [next summer], the buyers may not even show up," said Lamar DeLoach, a tobacco farmer near Statesboro, Ga.
`Looks mighty bleak'
The bleak outlook has swept the industry since Philip Morris, the nation's biggest cigarette maker, began soliciting contracts. Even though the company said it will continue to buy some tobacco at auction, its decision to buy flue-cured leaf under contract has sparked fierce competition among cigarette makers bidding for farmers' leaf.
"It looks mighty bleak to me," said Joey Coleman, a third-generation warehouse man in Tabor City, N.C., who decided this week to close his family's 64-year-old business. "If we had operated this year, we would have operated at a loss."
He said more than 30 of the 42 farmers who sold their crop last year at Coleman's warehouse recently signed contracts with Philip Morris, Reynolds and Brown & Williamson, as well as leaf dealers such as Dimon and Universal Leaf.
"I thought contracting would start off a little slower, but it is just mushrooming," Coleman said. "A lot of the farmers said they'd prefer to sell through the auction, but they're afraid not to sign contracts. If the industry is going to contracting, they want their names in the pot."
Officials with Philip Morris and Reynolds said they have been successful in signing up farmers because contracts give farmers a set price for their tobacco, as long as the crop turns out well. For Philip Morris, contracting provides greater efficiency in buying tobacco, as well as more control over the grade and styles of leaf, company Vice President Michael Farriss said.
Cigarette companies also are aggressively seeking contracts to ensure that the leaf they buy does not contain cancer-causing compounds known as tobacco specific nitrosamines, Boyette said. Those compounds are formed during the curing of the tobacco, and farmers are modifying curing barns with a new heating method that reduces the levels of nitrosamines.
Not all of the curing barns have been modified, meaning that some leaf with potentially high levels of nitrosamines could wind up in auctions.
Seeking to reduce the amount of tainted leaf they buy, cigarette companies are stipulating in their contracts that farmers cure their tobacco in retrofitted barns, Boyette said.