Replacing Tobacco:The Evolution of Agriculture in Durham County

Andrew Lynn

November 1, 2010

Durham Paper

Econ 145: Urban Economics

Professor C. Becker

I. Introduction

Durham is unquestionably a tobacco town. Throughout the 20th century the city’s growth paralleled that of the tobacco industry. Her skyline is dominated by the smokestacks of cigarette factories; tobacco warehouses line the streets of downtown. Traditionally Durham’s largest employers were tobacco giants Bull Durham, American Tobacco Company, and Liggett & Myers; since these companies’ dissolutions, Duke University and Medical Center—founded by a tobacco magnate—have assumed the role of dominant employers. However, Durham’s dependence on tobacco turned out to be her greatest weakness.

The Tobacco Master Settlement Agreement in 1998 hit Durham hard. In 1999 the city’s last tobacco company, Liggett & Myers, fled for small-town Mebane, NC, effectively ending over one hundred years of cigarette production in Durham (Cohn 23). The loss of the city’s primary industry led not only to unemployment and numerous unoccupied buildings, but also caused upheaval in the agricultural sector. Tobacco was North Carolina’s number one cash crop for the state’s entire existence, but with the drop in demand in the late 1990s it was suddenly no longer profitable. Farms with enough available capital switched to other crops; those without failed and were bought up by those that did. Durham County’s agricultural landscape was entirely transformed. As cash crops such as tobacco and cotton were no longer as profitable, North Carolina farmers placed renewed emphasis on cattle ranching, poultry, grain, fruit, and vegetables, as well new areas such as animal aquaculture and greenhouse, nursery, and floriculture production.

This paper will explore the growth and demise of North Carolina’s tobacco industry, the response of Durham’s farmers, and further options for the future.

Table 1: Number of Farms by Type in North Carolina

1950 1992 2007

Tobacco 135 227 14 414 1 844Cotton 21 441 349 457Grain 3 141 5 481 5 147Vegetable 1 348 1 105 2 470Fruit and Nut 732 992 1 370Dairy 5 312 900 381Poultry 5 391 3 596 4 096Livestock (Non-Dairy/Poultry)

6 262 15 177 24 759

Nursery and Greenhouse

N/A 2 028 2 317

Total Commercial Farms

193 679 51 854 52 913

Table 2: Market Value of North Carolina Agricultural Products Sold ($1000, all values converted to 2007 dollars)

1950 1992 2007

Tobacco 2 723 413 1 473 365 549 636Cotton 576 088 58 123 211 129Grain 101 979 335 788 697 792Vegetable 64 681 63 022 333 939Fruit and Nut 31 909 37 483 79 288Dairy 224 012 322 543 161 373Poultry 247 165 2 326 483 4 087 004Livestock (Non-Dairy/Poultry)

306 989 1 783 452 3 458 974

Nursery and Greenhouse

N/A 301 394 573 529

Total 4 759 165 7 074 294 10 313 628

Source: 1950/1992/2007 Census of Agriculture, USDA

II. The Rise and Fall of Tobacco

In 1950 there were 409,421 tobacco farms in the United States. Of these, 159,809 were in North Carolina—more than twice as many as any other state.

The popularity of North Carolina tobacco began after the Civil War, when veterans who had sampled the sweet, mild flavored Brightleaf tobacco of the region began trying to order more. In response to the demand, John Ruffin Green and W.T. Blackwell founded the Bull Durham Tobacco Factory in what was then the small town of Durham Station. Washington Duke soon followed suit, founding W. Duke & Sons Tobacco Company. Not wishing to compete with the larger Bull Durham, which controlled the pipe tobacco industry, James B. Duke decided to change his father’s company’s focus to rolling cigarettes. Not long after this change in business plan, the first cigarette rolling machine was invented, and Duke was among the first to invest in one. The efficiency of the machine allowed Duke to set his prices lower than his competitors, forcing them to either merge with his company or go out of business. By 1890, Duke had forced all the region’s tobacco companies, including Bull Durham, to join his conglomerate: the American Tobacco Company (Andersen 214). Though the monopoly lasted only 18 years before being broken up by antitrust laws, it had two long-lasting effects on the tobacco industry. First, the four firms created from the breakup—ATC, R.J. Reynolds, Liggett & Myers, and P. Lorillard—continued to dominate the industry, keeping it concentrated in North Carolina. Second, Duke set the precedent of focusing solely on the production and sale of cigarettes, leaving the growing of tobacco to independent entrepreneurs.

Despite its rich agricultural history, the land around Durham is not particularly suited for farming. The soil is mainly heavy red clay, which tends to bake hard in the sunlight, making it non-arable. The region

fluctuates between drought and heavy rainfall, making it difficult for plants to survive (Cohn 17). Despite these poor conditions, the hardy tobacco plant prospers in the area. Even before the founding of Bull Durham, small family farms in the region would grow enough food to sustain themselves, and then use the rest of their land to grow tobacco which they would sell at the market. After the establishment of the tobacco industry in Durham, demand for the leaf soared, as did the price of arable land in the area. Typically, production would have moved further from the city, where costs were lower. However, in 1938 President Roosevelt introduced the Federal Tobacco Program, a part of the New Deal which aimed to stabilize farm income (Cohn 18). The program established tobacco quotas, which restricted the acreage individual farmers could use to grow tobacco. Without a quota, tobacco producers were not allowed to sell the commodity. This control on supply maintained a stable price, as well as preventing production from moving away from the city. Over time tobacco quotas became important financial assets which could be bought and sold similarly to stocks and bonds. When farmers grew old and retired, they would lease their quotas to neighbors in return for also tending their other crops; this led to tobacco quotas becoming an integral part of healthy crop rotations (Dohlman 8).

Though studies indicating the effects of tobacco smoke on health were published as early as 1912, it was not until Surgeon General Dr. Luther Leonidas Terry’s report in 1964 that it became a political issue in the US (Austin 146). In 1965, Congress mandated that Terry’s warning be printed on cigarette packages. Tobacco manufacturers faced lawsuit after lawsuit for the next thirty years, until in the mid 1990s there was an explosion in tobacco litigations. Eventually, facing lawsuits from the attorney generals of 46 states, Philip Morris USA, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corp., and Lorillard Tobacco Company reached the Tobacco Master Settlement Agreement with the suitors. Under the

agreement, tobacco manufacturers agreed to pay $206 billion in damages over 25 years to the states (Gross 1081). Allotment of funds was based on 1998 tobacco quotas, meaning North Carolina received the largest share (38%) (Jones 38). The state established three institutions to distribute the funds. The Golden LEAF Foundation was allocated 50% of the funds to improve the state’s economic and social conditions. The Tobacco Trust Fund received 25%, and was charged with helping tobacco-related businesses and individuals, including farmers, quota holders, individuals who had lost tobacco-related jobs. The final 25% was given to the Health and Wellness Trust Fund to improve the health and wellness of North Carolina residents with an emphasis on reducing youth tobacco use (Jones 39).

Though the TMSA was a severe blow to the tobacco industry, it did not mean the end for individual tobacco farmers; in fact, they stood to gain from it. For example, the TTF provided $41 million to North Carolina tobacco farmers to retrofit tobacco barns, since traditional curing methods were unhealthy (Jones 40). However, tobacco farmers saw little more of the money. The HWTF spent 57% of their funds on youth tobacco use prevention, medication assistance, prescription drug assistance, and obesity prevention; the remainder was diverted to the state general fund (Jones 40). In its first year of existence, the GLF used 51% of their grants for agricultural purposes, but by 2004 that number had dropped to 4% (see Table 3). Overall, although tobacco growers did receive some benefits from the TMSA, total losses due to excise tax increases and declines in tobacco exports were far higher (Jones 41).

The true death blow to Durham County tobacco farmers came in 2004, when the federal government ended its tobacco program, buying out quota owners and opening tobacco production to the free market. This was primarily a response to international competition (Dohlman 10). While the program kept US tobacco prices stable, international prices continued to drop. The widening price gap between foreign and domestic leaf caused

declines in exports, the loss of domestic market share to foreign producers, and a shift to overseas production. As demand for US tobacco continued to decline, the government was forced to lower quotas to match it. However, tobacco farmers needed sufficient acreage to cover their investments in machinery, equipment, and buildings, so began to bid more to rent quotas; this increase in quota rental rates further increased prices. Rising labor costs were also a concern for tobacco producers; according to the 2007 census, hired and contracted labor make up 23% of tobacco farm expenditures, compared to 11% for farms in general. Ultimately, the abolishment of the quota system was necessary for the industry’s survival, but it also meant that there is no longer any reason to grow tobacco on the expensive land in Durham County when it can be produced more cheaply elsewhere.

2000 2001 2002 2003-2004 All YearsTotal ($) % Total ($) % Total ($) % Total ($) % Total ($) % of

Total

Grant Funding Total

5 073 945

10 509 836

17 141 030

73 893 546

106 618 356

100

Agriculture

2 604 450

51 3 364 250

32 4 458 129

26 2 994 500

4 13 421 329

13

Tobacco diversification

2 384 450

47 3 364 250

32 4 458 129

26 2 994 500

4 13 201 329

12

Supporting tobacco farmers to grow tobacco

200 000 4 0 0 0 0 0 0 200 000 0

Supporting tobacco farmers—unrestricted

0 0 0 0 0 0 0 0 0 0

Equally Beneficial to tobacco and non-tobacco farmers

20 000 0 0 0 0 0 0 0 20 000 0

Inclusive Economic Development

2 469 495

49 7 145 586

68 12 682 901

74 70 899 046

96 93 197 027

87

Economic development

1 177 235

23 3 060 801

29 4 203 576

25 4 968 000

7 13 409 612

13

Workforce Preparedness

1 292 260

25 4 084 785

39 3 366 559

20 1 956 262

3 10 699 866

10

Biotech consortium

0 0 0 0 0 0 60 000 000

81 60 000 000

56

Economic stimulus grant

0 0 0 0 5 099 766

30 3 453 130

5 8 552 896

8

Site 0 0 0 0 13 000 0 521 654 1 534 654 1

certification

Source: American Journal of Public Health 2007 January; 97(1)Table 3: Percent Changes in Golden LEAF Foundation (GLF) Grants by Category and Year: North Carolina, 2000-2004

III. Replacing Tobacco

In 1950 there were 193,679 commercial farms in North Carolina; of these, 70% were primarily tobacco producers. These farms produced $318,496,320 worth of tobacco in a year, 40% of the USA’s total tobacco production. By 1992 the number of farms had dropped significantly, so that tobacco farms made up just 28% of the state’s 51,854 farms. However, North Carolina still produced 36% of America’s tobacco. In 2007, the total number of farms in the state had remained approximately the same, but tobacco farms made up just 3.5% of them. Yet North Carolina still produced 46% of American tobacco. There are three reasons for this: the decline in demand for domestic tobacco, the increased efficiency of agricultural production, and the abolishment of the quota program.

In 1950, the US produced 1.77 billion pounds of tobacco. In 1992, 1.70 billion pounds. In 2007, the nation produced just 778 million pounds. This stunning reduction in supply is a response to a reduction in demand. Not only do fewer people smoke tobacco today because they are more aware of the health effects, but American tobacco also faces intense competition from overseas. In 1950 the US exported a large amount of its tobacco product, as foreign consumers were willing to pay higher prices for what was perceived as superior tobacco (Dohlman 11). However, the quality of cigarettes worldwide has homogenized, and international buyers are no longer willing to pay American prices, which are artificially high due to taxation (and, previously, the quota program). This explains why demand for tobacco in the US dropped slightly between 1950 and 1992, despite the large increase in population. Farmers in 1992 could match the output of 1950 with fewer farms because of technological improvements to agricultural production. Tobacco is rarely picked, cured, or packaged by hand these days; the process has become highly mechanized. Indications of this can be seen in expenditures on labor. In 1950, the average hired tobacco farm laborer earned $888 a year (about $8,000 when adjusted for

inflation). In 2007, tobacco workers were paid an average of $8,051per year. Although wage rates, when adjusted for inflation, have remained approximately the same, tobacco farm expenditures on hired labor dropped from 53% in 1950 to 28% in 2007, because fewer laborers are needed thanks to mechanized production. The government’s buying up of quotas in 2004 also gave small farm owners incentive to get out of the tobacco business. Now, instead of being grown on family farms near cities, tobacco is produced on fewer but larger farms to the east (Cohn 18). Because production is concentrated on fewer farms, and the owners of those farms have the capital to invest in the best machines, one-tenth the number of farms can produce one-half the amount of tobacco.

So the message is clear: compared to the past, very few farms are needed to meet US demand for tobacco. If small farms such as those in Durham County are going to remain solvent, they must find new products to specialize in.

Despite the huge drop in tobacco production between 1992 and 2007, the total market value of agricultural products in North Carolina has gone up (see Table 2). Unable to compete with the low cost of cash crop production in the rest of the country and overseas (though cotton has made a resurgence from its 1992 levels), North Carolina farmers turned instead to food production. Since bottoming out in 2000, the demand for and price of food has steadily risen worldwide (Roberts 1). The past decade has also seen hugely increased demand for organic and locally produced food. Cattle ranching, hog farming, and animal aquaculture (fish farms) were at such low levels in North Carolina in 1950 that the Census of Agriculture lumped them all into a single category. Today these three make up 31% of North Carolina’s agricultural production, and poultry alone is 40%. Grain and fruit production have doubled since 1992, and vegetable production has quintupled.

Though tobacco remains one of its strongest productions, Durham County has also experienced the shift away from cash crops and toward food production. Cattle ranching is Durham’s second most profitable agricultural industry, and goat and sheep production are also strong (see Table 4). However, due to the high land prices in Durham County, farmers have trouble competing with goods from elsewhere. Thus, the most productive goods for Durham farmers to specialize in are those that gain value from the same factor that drives up land prices: proximity to the city.

Greenhouse, nursery, and floriculture production is one of the fastest growing industries in the state. It includes cut flowers, cut cultivated greens, potted flowering and foliage plants, and bedding and garden plants (Cohn 25). These products make up 72% of the market value of crop production in Durham County; the primary reason for this is shipping costs. Products such as dried tobacco leaf, cotton, and grain are easily packaged and shipped. Fresh fruit and vegetables are more difficult as they can bruise and go bad, but are still relatively cheap to ship. The true difficulties come with shipping living things. Livestock is expensive to ship, but once the animals have been slaughtered the meat can be frozen, packaged, and shipped efficiently. However, live plants cannot be slaughtered or frozen. Plants and flowers are fragile and need sunlight, water, and soil to survive. Producers cannot simply stack them in the back of a truck and drive them across the country unless their consumers want dead plants. Due to the difficulty in shipping these products, it is considerably cheaper to grow them near the population centers in which they will be sold. This, combined with the relatively low acreage requirements of the products, makes Durham County an ideal location (Cohn 25).

Table 4:

Source: 2007 Census of Agriculture, USDA

IV. Ideas for the Future

Some might argue that due to the high price of land in Durham County, it would be more efficient to shift local agriculture to areas further from the city. However, the farms in Durham County provide benefits to county residents beyond just supplying fresh food. For example, having farmland in the watersheds helps preserve clean water for city residents (Cohn 8). Also, farmers help subsidize local taxpayer-funded services, as they pay far more in taxes than they receive in services (Cohn 1). These benefits, on top of the cultural, environmental, and aesthetic advantages, make Durham County’s farms essential.

The evolution Durham County agriculture has been guided by the local market. When the city was dominated by the tobacco industry, local farmers produced primarily tobacco. If the Durham of yesteryear was a tobacco town, then the Durham of today is a food town. The city is home to numerous fine dining establishments, including Magnolia Grill, which is applauded as one of the top restaurants in the country (Cohn 31). Every Saturday, rain or shine, a bustling farmer’s market is held downtown where consumers can purchase locally grown produce. Duke University and Medical Center have also indicated their support for local farmers by serving primarily locally grown food in their cafeterias and dining halls. The county and city governments are also supportive of farmland preservation, and have defined an urban growth area intended for development, outside of which the farmland and forests will be preserved (See Fig. 1).

Despite local support, farms in Durham County continue to face a number of problems. One of the main issues is the aging of farm owners (Cohn 24). Farms that would traditionally have been passed down through the family no longer are, as many farmers’ children have no interest in agriculture. Though there are young people interested in farming, high land costs remain a barrier to them entering the industry. Thus, older

landowners are pushed to sell their farms to developers. Though the solution to this issue is not obvious, it will probably have to come in the form of a state subsidy or loan to help young people purchase land of their own. Otherwise, Durham County’s farms will disappear over the next few decades.

Medicago is a Canadian company with offices on the Durham side of the Research Triangle Park. The company uses genetically manipulated tobacco plants (grown locally) to produce proteins used in flu vaccines (Anonymous 36). Medicago is just one example of a rapidly growing industry. As seen in Table 3, North Carolina is committed to the growth of its biotechnology industry. With two of the world’s premiere research institutions, Duke University and UNC-Chapel Hill, just up the road, Research Triangle Park is the perfect location for companies like Medicago. Depending on technological developments, it may turn out that the survival and growth of Durham County’s agriculture industry is inextricably tied to the success of its biotech firms. Farmers in Durham have conquered endless problems since the collapse of the tobacco industry, and although issues still exist that threaten their farms’ survival, the future of agriculture in the region looks bright.

Figure 1:

Source: Durham County Agricultural Development and Farmland Preservation Plan

Works Cited

Anderson, Jean Bradley. 1990. Durham County. Durham, NC: Duke University Press.

Anonymous. 2010. “After Tobacco: Biotechnology in North Carolina.” The Economist. 23 Oct: 36.

Austin, W. David and David Altman. 2000. “Rural Economic Development vs. Tobacco Control? Tensions Underlying the Use of Tobacco Settlement Funds.” Journal of Public Health Policy 21(2): 129-156.

Cohn, Gerry. 2009. Durham County Agricultural Development and Farmland Preservation Plan. Durham County Government Soil and Water Conservation District. Accessed 1 Nov. 2010. <www.co.durham.nc.us/departments/swcd/documents/durhamfarmplanpublicdraft2.pdf>.

Dohlman, Erik, Linda Foreman, and Michelle Da Pra. 2009. “The Post-Buyout Experience: Peanut and Tobacco Sectors Adapt to Policy Reform.” USDA Economic Research Bulletin Number 60. Accessed 1 Nov. 2010. <http://www.ers.usda.gov/Publications/EIB60/EIB60.pdf>.

Gross, Cary P., Benny Soffer, Peter B. Bach, Rahul Rajkumar, Howard P. Forman. 2002. “State Expenditures for Tobacco-Control Programs and the Tobacco Settlement.” New England Journal of Medicine 347: 1080-1086.

Jones, Alison Snow, W. David Austin, Robert H. Beach, and David G. Altman. 2007. “Funding of North Carolina Tobacco Programs Through the Master Settlement Agreement.” American Journal of Public Health 97(1): 36-44.

Roberts, Michael. 2008. “Why Are Food Prices Going Up?” NC State Economist. Accessed 1 Nov.

2010. <http://www.ag-econ.ncsu.edu/virtual_library/economist/novdec08.pdf>.

United States Department of Agriculture. National Agricultural Statistics Service. 2007 Census of Agriculture. Dec. 2009. Accessed 1 Nov. 2010. <http://www.agcensus.usda.gov/Publications/2007/index.asp>.

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United States Department of Agriculture, National Agricultural Statistics Service. 1950 Census of Agriculture. Fairfax, VA: USDA 1952.

All statistics from 1950/1992/2007 Census of Agriculture unless otherwise noted.