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Executive Summary
D
uring 2005, RAFI interviewed a series of tobacco farmers and reviewed a sampling of tobacco contracts in use. This guide summarizes and discusses issues identified as of the highest concern. Information in this booklet will help farmers evaluate any contract offered. Some issues are of immediate concern. Others are highlighted as needing to be tracked over time as contracts continue to evolve. Here is a summary of key issues identified.
Length and Permanence of Contract Most tobacco contracts cover only a single growing season, and the content and terms of the contract can be changed from one season to the next. At some point, to qualify to receive or keep a contract will require the farmer to make a capital investment in buildings or equipment. At that point, it is important to ask: • • •
How does the duration of the contract compare to the duration of the debt associated with that capital investment? How does the duration of the contract compare to the anticipated useful life of those buildings or equipment? Can those capital assets be easily put to use in other income generating enterprises?
When evaluating the duration of the contract, carefully review any language related to contract cancellation. Most of the cancellation clauses require written notice to the farmer and a 15 to 30 day notification period. Some contracts are more detailed than others concerning the conditions that would lead to an earlier termination.
The process for awarding contracts is not transparent. Company officials and local warehousemen have a significant amount of control over who is offered a contract and for how many pounds. While an individual farmer’s production history plays a role in that decision, there are other factors too. With unclear criteria and lack of public disclosure, verifying fairness for a farmer or group of farmers is difficult. Photograph by Rob Amberg
Payment and Objective Grading Systems The grower’s real income depends on the grade the tobacco receives, not just on the top price listed in the contract. Although USDA standards guide grading, company employees interpret and apply the standards. • A relatively small shift in leaf grade can produce a significant decrease (or increase) in final pay. This lessens the reliability of income projections in the contract. Risks are increased when farmer payments are not publicly reported, and actual average prices paid are not published regularly. •
The appeals process of all the contracts reviewed was limited. Most farmers interviewed noted that, in general, they would be too afraid of retaliation to appeal a poor grade.
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In contracts that were longer than one year, the company retained the right to change the methods and calculations used to make grading determinations.
Other Considerations •
Because tobacco farmers are signing marketing contracts, they retain all the risk for loss prior to acceptance of their tobacco by the company contracted to purchase it. If the tobacco crop is lost, the farmer usually bears all the risk of that loss.
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Many tobacco marketing contracts contain provisions that provide the contracting company with the right to access the farmer’s land and barns to inspect the tobacco and curing practices. 4