The United States Tobacco Industry after the Buyout

The elimination of the quota and price support program in 2004 meant limited government intervention and made U.S. tobacco producers more vulnerable to market risks. In this paper we provide an examination of the situation in the U.S. tobacco industry before and after the buyout and identify how the enacted policy change affected the U.S. tobacco industry in terms of supply and demand. The supply and demand system is estimated using the generalized method of moments (GMM). The results suggest that the buyout, which began with lowering the price for tobacco as well as increasing the cost of production, had a negative impact on the number of farmers in the United States as it declined substantially after 2004. However, tobacco producers who remained in the industry apparently became more efficient and more competitive on the world tobacco market in the face of lower tobacco prices. Improved overall competitiveness of the U.S. tobacco industry along with changes in U.S. consumer tastes and preferences for less consumption of tobacco products resulted in an increase in U.S. exports of tobacco leaf after the elimination of the government policy.