CALCULATION
OF BENEFITS PAYABLE – FOUR HYPOTHETICALS
SUMMARY OF
CONCLUSIONS

(1) 10
acre Kentucky
Burley
tobacco farmer 
(2) 100
acre Kentucky Burley
tobacco farmer 
(3) 10
acre North
Carolina Fluecured tobacco farmer 
(4) 100
acre North
Carolina FlueCured tobacco farmer 
(1) Full
Phase II distribution (with no offset or refund) WHEN: January,
2005 
$
11,822 
$
118,215 
$
8,983 
$
89,830 
(2) 2005
Annual Buyout Payments (1st of 10 annual payments) WHEN: “as soon as practicable”
during
FY2005 
$
20,840 
$
208,398 
$
23,090 
$
230,899 
(3) 2005
Buyout Lump Sum Payments with Financing of total ten year
payment WHEN: private
arrangement between quota holder and financial
institution 
$
160,920 
$
1,609,187 
$
178,294 
$
1,782,933 
(4) 2005
Quota Payments WHEN: Unclear
under Kentucky law 
$
10,712 
$
107,115 
n/a 
n/a 
I.
Background.
This appendix provides information
requested by the Court. It provides
calculations for four hypothetical quota holders: (1) an owner of a burley
tobacco farm in Kentucky who holds quota for 10 acres; (2) an owner of a burley
tobacco farm in Kentucky who holds quota for 100 acres; (3) an owner of a
fluecured tobacco farm in North Carolina who holds quota for 10 acres; and (4)
an owner of a fluecured tobacco farm in North Carolina who holds quota for 100
acres.
For each owner, benefits are calculated
showing (1) a full distribution under the Trust for 2004 (assuming no
legislation requiring offsets and refunds); (2) 2005 buyout payments without any
financing as authorized by FETRA; (3) 2005 buyout payments if the farmer elects
to finance payment of the full amount due in the first year as authorized by
FETRA; and (4) quota payments, if any, in calendar year
2005.
II.
Assumptions regarding Quota Levels, Base Years, and Active Participation
in Tobacco Farming Operations.
Quota Levels.
Both Phase II and FETRA payments are based on poundage calculations. This corresponds to the manner in which
burley and fluecured quotas are calculated and divided among quota
holders. Therefore, to estimate
payment amounts for the four hypothetical quota owners listed above, the acreage
must be converted to pounds.
Fluecured tobacco quotas are issued
under an “acreagepoundage” system.
This means that each quota holder is given both an acreage limitation and
a poundage limitation on the tobacco that can be marketed. USDA first calculates the “national
marketing quota,” which is a poundage number. This number is allocated among quota
holders based on their share of the national quota. Thereafter, the individual quota is
divided by a “national average yield goal” (NAYG) to determine the acreage
limitation. For the 2003 crop, the
NAYG was 2,088 pounds per acre. A
quota holder with a 20,880 poundage limitation would also have an acreage
limitation of exactly ten acres. A
208,800 poundage limitation would correspond to a 100 acre
limitation.
Burley tobacco quotas are issued on a
“poundage” basis only. However,
USDA does publish average yield per acre statistics annually. For burley tobacco in 2003, the average
yield was 1,850 pounds per acre.
Therefore, the hypothetical examples in this Appendix use 18,500 pounds
for a 10 acre burley tobacco quota in 2003, and 185,000 for a 100 acre burley
quota.
Base Years. Phase II
and FETRA calculate payments using different base years, as described more fully
below in sections III and IV. Phase
II base year determinations are left to each state to decide. FETRA payments are based upon the 2002
quota and 2002 crop. This Appendix
makes adjustments in payments to account for the appropriate base year
requirements.
Active participation.
Under both Phase II and FETRA, payments are divided. As described below, North Carolina Phase
II payments are divided evenly between quota holders and growers. Kentucky Phase II payments are divided
into equal thirds between quota holders, growers, and the growing farm. FETRA payments are divided into two
categories, with $7 per pound being paid to quota holders and $3 per pound being
paid to growers. In addition, under
both Phase II in certain states (like Kentucky) and FETRA, tobacco grower
payments can be subdivided further if there are multiple growers and/or multiple
years to consider. This Appendix
assumes that the quota holders in the four hypothetical examples are also
tobacco growers. However, it is
important to consider that the estimated amounts in these examples would be
reduced if the quota holder is not the actual tobacco grower that produces the
crop.
III.
Calculation of North Carolina Phase II Payments.
North Carolina has chosen to divide
payments equally into two amounts between (1) quota holders and (2)
growers. Phase II payments to quota
holders and growers in North Carolina are based upon the crop year designated by
the North Carolina Phase II Tobacco Certification Entity. The crop year upon which payments are
based has generally been updated each year. For example, 2003 Trust Fund payments in
North Carolina for fluecured quota holders were based on ownership of tobacco
quota as of October 1, 2002, while payments to growers were made to those who
actively engaged in, or shared in the expense of, producing the 2002 crop. For 2004 Trust Fund payments, the basis
for these payments was updated to be based on quota holder ownership as of
October 1, 2003 and grower participation with the 2003
crop.
In 2002, Phase II payments were roughly
21.644 cents per pound for each of the two categories. These payments were based on the 2001
crop year. From the 2001 to the
2003 crop year (upon which 2004 payments are to be based), the fluecured basic
quota fell by 4.03 percent, meaning that Phase II payments for 2004 are to be
spread over a smaller number of pounds.
This would have the effect of slightly increasing payments per
pound. However, total Phase II
payments fell by roughly 4.62 percent between 2002 and 2004. This would have the effect of slightly
decreasing payments per pound.
Therefore, we are estimating that the North Carolina Phase II 2004
payment would be 21.511 cents per pound ([21.644 cents times .9538] divided by
.9597). The total amount received
for a quota holder that was also a tobacco grower (and therefore entitled to
both amounts) is estimated to be twice that amount, or 43.022 cents per pound
for 2004.
IV.
Calculation of Kentucky Phase II Payments.
Kentucky divides its Phase II payments
into three equal parts, among (1) quota holders, (2) growing farms, and
(3) actual growers or tenants. This
distinction with North Carolina allows for a different outcome where the tobacco
quota is owned by one farm owner but produced on another farm.
Like North Carolina, the crop year upon
which payments to quota holders are based is generally updated each year by the
Kentucky Tobacco Settlement Trust Corporation. For example, 2003 Trust Fund payments to
quota holders in Kentucky were based on the ownership of tobacco quota as of
July 1, 2002. The 2004 Trust Fund
payments to quota holders were to be based on quota ownership as of July 1,
2003.
Unlike North Carolina, however, payments
to growing farms and tobacco growers or tenants are based on a fixed period – a
three year average using 1998, 1999, and 2000. For example, a tobacco grower who
provided labor and shared in the risk of production for each of the three years
would receive a full share of the grower payment. A tobacco grower who provided labor and
shared in the risk of production for only one or two of those years would
receive a weighted portion of the grower payment.
In 2003, Phase II payments were roughly
19.5 cents per pound for quota holders.
These payments were based on the 2002 crop year. This amount represented onethird of the
total Phase II funds available, since Kentucky pays onethird of its funding to
quota holders. From the 2002 to the
2003 crop year (upon which 2004 payments are to be based), the burley basic
quota fell by 11.09 percent, meaning that Phase II payments for 2004 are to be
spread over a smaller number of pounds.
The total Phase II payments fell by roughly 2.7 percent between 2003 and
2004. Therefore, we are estimating
that the Kentucky Phase II 2004 quota holder payment would be 21.3 cents per
pound ([19.5 cents times .973] divided by .8891).
As noted, Kentucky divides its Phase II
funds into three equal parts. In
2003, for example, $43.3 million was distributed to quota holders, $43.3 million
was distributed to growing farms, and $43.3 million was distributed to growers
or tenants that produced the tobacco.
Payments to quota holders were based on the 2002 basic quota, and were
19.5 cents per pound. Payments to
growing farms and growers and tenants were based on the average effective quota
for 1998, 1999, and 2000. Since the
quota numbers were higher in these years, this average figure produced a higher
total number of pounds. The $43.3
million translated into 14.3 cents per pound in Phase II payments for the latter
two categories (growing farms and growers/ tenants). Since our examples in this Appendix
assume the quota holder was also growing tobacco on his own farm and was the
actual grower for those three years, that farmer’s percentage share from each of
the three funds will be identical.
In other words, the payment to farmers in our examples will be exactly
the same for each of the three categories of payments. The total amount received for a quota
holder that owned the growing farm and was also a tobacco grower, therefore, is
estimated to be 63.9 cents per pound (based on the 2003 quota) for 2004 (21.3
cents per pound times three).
V.
Calculation of FETRA Payments.
FETRA provides for ten equal annual payments to quota holders based on
the 2002 basic quota. The 2002
basic quota for fluecured tobacco was 10.583 percent higher than the 2003 basic
quota. The 2002 basic quota for
burley tobacco was 12.474 percent higher than the 2003 basic quota. The poundage figures used to calculate
Phase II payments (which are based on 2003 quotas) have been adjusted to reflect
this difference when calculating FETRA payments (which are based on 2002
quotas).
The payment is $7.00 per pound, or 70
cents per pound per year. For
tobacco growers sharing in the risk of production, FETRA provides for ten equal
annual payments totaling $3.00 per pound, or 30 cents per pound per year. For tobacco growers that produced
tobacco in all three of the years 2002, 2003 and 2004, the 2002 effective quota
is used as a basis for payment. For
tobacco growers that produced tobacco in one or two of those three years, the
payments are pro rated into three equal amounts and paid accordingly. The examples in this Appendix assume
that the farmer produced the crop in each of the three
years.
VI.
Kentucky State Law: Phase II supplemental funds.
Tobacco quota holders and tobacco growers
have received substantial “quota payments” since 1999 in addition to Phase II
payments. The 1999 Disaster
Assistance legislation (Pub.L. 10678) and the 2000 Agriculture Risk Protection
Act (Pub.L. 106224) each provided $340 million in assistance to tobacco growers
through the Tobacco Loss Assistance Program provisions. The 2001 Disaster Relief legislation
(Pub.L. 10725) provided an additional $129 million in payments, while the 2003
Disaster Relief legislation (Pub.L. 1088) provided $53 million. Taken together, these payments total
$862 million in additional funding.
In addition, Congress passed legislation in 2000 (Pub.L. 106387) that
eliminated an estimated $650 million in pending losses on the 1999 burley
tobacco crop. Tobacco quota holders
and growers benefited directly through lower program assessments that are
normally imposed to cover such losses.
None of these quota payments and benefits continue
today.
However, Kentucky passed a unique law in 2000 that appears to result in
immediate additional quota payments once Phase II payments are eliminated. The Kentucky law (KRS 248.705) provides
supplemental funds “each year for tobacco growers and quota holders so that the
total amount available for payment is maintained at one hundred fourteen million
dollars ($114,000,000) each year.”
We estimate that the 2004 Phase II payment to Kentucky would have been
roughly $125,631,250 prior to the application of the Tax Offset Adjustment. The Kentucky Phase II supplemental funds
law provides for $114 million in payments in the event that Phase II funds are
eliminated, or 90.7 percent of the amount estimated for 2004 under Phase
II. We further estimate that this
will produce 19.3 cents per pound in quota payments (compared to 21.3 cents per
pound under Phase II), or 57.9 cents per pound total for all three categories
for which Kentucky Phase II payments are made. The Kentucky law provides no offset for
federal tobacco buyout payments made in the same year.
SUMMARY OF ASSUMPTIONS
USED

(1) 10
acre Kentucky
Burley
tobacco farmer 
(2) 100
acre Kentucky Burley
tobacco farmer 
(3) 10
acre North
Carolina Fluecured tobacco farmer 
(4) 100
acre North
Carolina FlueCured tobacco farmer 
2003
poundage 
18,500
lbs. 
185,000
lbs. 
20,880
lbs. 
208,800
lbs. 
2002
poundage 
20,840
lbs. 
208,398
lbs. 
23,090
lbs. 
230,899
lbs. 
Phase II
payment 
$
0.639/lb. 
$
0.639/lb. 
$
0.43022/lb. 
$
0.43022/lb. 
FETRA
payment 
$
0.70/lb./yr. PLUS $
0.30/lb./yr. 
$
0.70/lb./yr. PLUS $
0.30/lb./yr. 
$
0.70/lb./yr. PLUS $
0.30/lb./yr. 
$
0.70/lb./yr. PLUS $
0.30/lb./yr. 
Kentucky
Phase II Supplemental Payments 
$
0.579/lb. 
$
0.579/lb. 
n/a 
n/a 
VII.
Discount Rate.
This appendix uses a discount rate of 5.0
percent with respect to the financed payment calculation. This was chosen as a reasonable starting
point in light of prevailing market rates.[1]
A discounted payment using a 5.0 percent
discount rate on a 10 year stream of payments will result in a lump sum payment
that is approximately 77.217 percent of the ten year total.
As
instructed by the Court, the Settlors contacted opposing counsel to confer about
the discount rate to be used for these calculations. Counsel for Settlors understand that
opposing counsel intend to use a range of discount rates. Settlors believe that the
5.0 percent discount rate used in the above calculations is appropriate and
a reasonable estimate.