Returns To Investors In Flue-Cured Tobacco Allotments 1975-1980

This study outlines procedures that can be used to estimate the capitalized value of flue-cured tobacco allotments. Such estimates should be of interest to farmers, bankers, and real estate appraisers . Data on farm sales including information on the value of buildings and timber, acres of cropland, other land, and the pounds of tobacco allotment are used to estimate that part of the sale price of a farm which may be attributed to the tobacco allotments. For 11 flue-cured tobacco counties in the central part of eastern North Carolina, allotment values were estimated to be about $3.50 per pound in 1975, increasing to $4.61 in 1977, and falling to about $3.42 in 1980. Converting these to 1980 dollars, there was a decline in real terms of about 40 percent from $5.40 in 1975 to $3 .24 per pound in 1980. These estimates come from a multiple regression equation which was chosen over many other single-equation models that were tried. The discussion in the final section of Appendix A provides a su1T111ary of the preferred models that were tried and the estimated allotment values from them. The standard error of the estimated value of $3.24 for 1980 was $0 .60 per pound. This means that we are reasonably confident that the true value fell in the range $2.05 to $4.44 per pound. In order to estimate the rate of return to allotment owners, one must also take into account the reduction in the allotted pounds per farm. Flue-cured tobacco allotments were reduced by 21.5 percent from 1974-75 to 1980. A typical Pitt County farm which had 15,000 pounds of tobacco in 1975 would have had only 11,755 pounds in 1980. Allotments worth $52,500 per farm in 1975 ($81,000 in 1980 dollars) were estimated to be worth only $38,086 per farm in 1980. This represents a capital loss of 14 percent per year in real terms. Offsetting this, the owner of tobacco allotments would have had an expected annual net return to allotments, or cash rent, of about 10 percent or $.48 per pound. This means that a typical owner of a tobacco allotment who rented it out lost about 5 percent per year on his investment in allotments over the period 1975-1980. Offsetting this estimated capital loss in allotment values was a 14.4 percent per year estimated capital gain in land values. This, plus an estimated annual income of 4.7 percent from land, leaves a combined return on a typical tobacco farm of 6.7 percent per year before taxes . During this period of time, and especially since 1977, a person would have been much better off owning a farm without a tobacco allotment than one with an allotment. Also, tobacco producers who rented in allotments during these years enjoyed higher returns than those who just produced their own allotments.