Modeling the Impact of the U.S. Tobacco Quota Buyout

In this paper we estimate the impact of the 2004 U.S. tobacco quota buyout in both the U.S. and foreign tobacco markets. It is important to understand the impact of the buyout given the trend of decreasing demand for U.S. tobacco in domestic and international markets. While some empirical research has estimated the impact of the tobacco buyout, none has estimated the impact on both flue-cured and burley tobacco separately, and accounted for the response of imports. Using a multi-market partial equilibrium model with elasticity estimates from the tobacco literature and tobacco production cost data, we simulate the impact of the quota buyout on prices and shipments for U.S. and foreign suppliers in U.S. and foreign markets. We find that shipments of both U.S.-produced burley and flue-cured tobacco increase to both markets, while shipments of foreign produced tobacco falls to both markets. Also, assuming that supply is highly elastic from all sources, market prices for U.S.-produced tobacco are estimated to fall by about 20 to 23 percent, while market prices for foreign-produced tobacco are estimated to fall by less than one percent