In a forthcoming paper, Kirk White, Yagi Uchida, and I demonstrate the massive productivity gains due to market deregulation—in particular the elimination of the tobacco program. Kirk appropriately called the 2004 tobacco buyout a “black swan.” It’s the only farm program I know of that completely, totally, irrevocably ended. Tobacco farmers were paid a one-time, lump sum, and the quotas—the supply controls that artificially raised the price of tobacco leaf—were eliminated. No other program was invented or augmented to fill the void. Tobacco farmers were suddenly subject to the “free market.”
As we report in the paper, the effect on tobacco farmers was profound. Between 2002 and 2007 the number of tobacco farms in Kentucky (the state with the most data, where our analysis focuses) fell from 31,000 to just over 8,000. The remaining farmers, however, experience dramatic productivity gains; we estimate that, on average their productivity grew by 44%! Eliminating supply controls accounted for about half of that growth. 8% of the growth came from simply allowing farmers to respond to market prices.
The 44% average productivity gains, however, hides a tremendous amount of variation. The productivity gains illustrated below mirror the shift in tobacco production from the mountainous East to the relatively more fertile West. The picture below shows huge productivity gains in Western Kentucky and sizeable losses in Eastern Kentucky.
How do these results generalize? I can only speculate. Tobacco supply controls restricted both the quantity and location of tobacco production. Other commodity programs aren’t as restrictive. Still, if Direct and Counter-Cyclical Payments (D-CCP) were to be eliminated, and along with them base acres, which were the historical basis for supply control, one can imagine that productivity gains will follow. The tobacco buyout, however, is truly a black swan. Direct and Counter-Cyclical Payments will be replaced with another support program, which might attenuate productivity gains.