One-On-One: Tobacco’s Loss Has Been Agriculture’s Gain Overall

This is a longer version of the interview that appeared in the August 2016 The Lane Report.

Editor’s note: The Kentucky Agricultural Development Fund is administered by the Kentucky Agricultural Development Board, whose mission under state law is to increase net farm income and affect tobacco farmers, tobacco-impacted communities and agriculture across the state by stimulating markets for Kentucky agricultural products.

Mark Green: The Agriculture Development Fund was created as a result of the 1998 Master Settlement Agreement between 46 state attorneys general and the Big Four tobacco companies, which agreed to make annual payments, in perpetuity, to the states to fund anti-smoking and public health campaigns. What led Kentucky to decide on and set up its Ag Development Fund?

Warren Beeler: We had some legislators who were really far-thinking kind of guys, who were agriculture people, primarily Roger Thomas, who was my predecessor in the position I’m in now. Paul Patton was governor at the time, and they were talking allotting 50 percent of the money to ag development because we were going to lose tobacco in time. At one point discussions came back at 5 percent, and because of Roger and a bunch of really good legislators, they decided to invest this money and split it between agriculture and healthcare. We were very fortunate that the people in place at the time had the notion that this was a good idea.

MG: The tobacco industry guaranteed a minimum of $206 billion in payments to the states over the first 25 years. Was that an accurate number?

WB: Through 2016 total payments are $113.3 billion. Here in Kentucky, the 2016 payment was about $90 million, but there is money taken out of it. We have invested $497 million in agriculture over the years. Legislators, over the years, have opted to take out $24 million (annually) for debt service on rural water lines, sewer lines, and then split it 50/50, healthcare and agriculture. Then out of the agriculture side they take $600,000 for the food banks, and $5 million for the conservation districts, which is money for shared-use equipment being used by farmers, for animal removals, and for environmental stewardship. It’s spent on agriculture. This leaves the fund with about $26 million out of the original $90 million in a normal year like this year.

Of that $26 million, 35 percent goes to the counties, and that typically is farmer cost-share money or for local projects. County councils decide how that money is spent within the rules we set up here at GOAP and the Ag Development Board. That leaves 65 percent going to the state fund for regional or statewide projects, projects for multiple farmers or multiple counties. Many times ADB projects will combine with county money – if the county has a great project, we’ll combine county money and state money. So that’s how our deal breaks down.

MG: Kentucky legislation prescribed 50 percent of settlement money be budgeted for agricultural programs and agricultural diversification, 25 percent for early childhood development, and 25 percent for public health. Is that still the case?

WB: That is still the plan, although $24 million is taken out for debt service – we need water lines and sewer lines in rural Kentucky, so that’s not a bad thing. And then the food bank money: If we can help farmers sell their seconds or their culls to the food bank, then I don’t see that being a bad deal at all. And then the conservation districts are a truly valuable part of doing agriculture and doing it the right way. We have so many part-time farmers, and shared-use equipment is for them. I’m a part-time farmer, and I can’t afford a round baler or a no-till seed drill so I rent that. Even though 50 percent of the money doesn’t go directly to the GOAP and the Ag Development Board, agriculture gets its share.

MG: How much MSA money has gone to ag programs and diversification over the past 18 years?

WB: We know for a fact $497 million, and then we just had a University of Kentucky study come back showing that of every dollar invested, $2.03 has been generated. I think that’s low, but we doubled our money. That’s pretty good.

MG: How much money does the state receive annually now from the Master Settlement? Has this figure been consistent, or grown or decreased?

WB: They estimate in 2017 it will be $90 million and $92 million in 2018. It’s better than many people thought it was going to be. Part of the advantage in Kentucky is that our cigarette tax is lower, and this Master Settlement Agreement is all based on cigarette sales. Folks from states around us that have higher cigarette taxes come across the state line and buy, and that money does end up in this pot.

MG: It was a goal to diversify Kentucky away from tobacco, and this has occurred. How has tobacco’s share of state agribusiness changed?

WB: Roger Thomas and I just examined this. In 1998, there were 46,850 tobacco farmers in Kentucky – all of us had two acres, and all of us made our farm payment and our Christmas, and it was the best deal in the world. Now we have 4,537 farmers raising tobacco. In terms of the value of tobacco, in 1998 it was $924 million and now it’s $429 million. And interestingly, since this MSA money has shown up, Kentucky farm gate cash receipts were $3.7 billion in 1998 and have nearly doubled now to $6.5 billion. I don’t think that’s a coincidence.

MG: So tobacco dropped from being one-fourth of all Kentucky farm gate receipts to about 6 or 7 percent?

WB: Yes. That’s amazing.

MG: What philosophy guides Agriculture Development Board decision-making in allotting money for ag development and diversification investments?

WB: Everything is measured basically on farm impact, agribusiness impact, rural community impact. We’ve got a great bunch of farmers and bankers and leaders on our Ag Development Board who make tough decisions. When you’ve got money, there are lots of projects. In the end, the issue that really weighs heavy is farm impact – on how many farmers. Travel with me and see what I see, and it’s been amazing what we’ve done. One of the biggest advancements is the educational component. When you get farmers in a room, it’s not maybe what they learn from a speaker but what they learn from each other. If their neighbor’s doing it and it’s working, then they’ll try it. We have made so much progress. Livestock are better. We’re doing a better job of producing more with less. Environmental stewardship has never been as good. We work on water quality plans. The whole process of doing agriculture and doing it better is what this money was intended for. We realize that it’s not just for this year; it’s next year, it’s keeping soil healthy, managing soil in a progressing manner as you take off a tremendous yield. That’s a huge deal.

MG: Has MSA money investment boosted the development and spread of best practices across Kentucky agribusiness?

WB: It’s one of the reasons we’re doing it so well. We’re to the point now that we’re monitoring the rivers, measuring nutrient load to know if we waste a drop of anything. Why would we if you’re a good businessman, a good efficient farmer? There’s nothing more important than clean water, keeping nutrients in the field and making animals comfortable. When the rivers have an abnormal nutrient load, we want to know where the problem is because agriculture is assumed guilty, and that’s not a good place to start. The first report came back on the Little River Basin in southwest Kentucky, and there was nothing there from agriculture.

MG: Studies identify a positive return on investment in ADF projects. What is the latest information?

WB: This past year there was an ROI of $2.03 for every dollar invested. Here at the GOAP, we think that it is seed money for investment. For example, years ago I built an $8,000 hay barn because I got $2,000; I would have never spent that $6,000 difference without the seed money. We’ve built facilities to get our cattle numbers up. I was in Rockcastle County the other night where 167 hay barns have built with ADF support. We’ve got 600 cows being synchronized in Anderson County where they get artificial insemination, and those AI calves, they said, were 72 pounds heavier than natural service calves. For every herd in Kentucky – 26 or 28 is our average size – that’s $6,300. We’re making an investment in agriculture that pays back. So $2.03 (on the dollar) seems a little low, but any time you double your money, I’d say you’ve done all right.

MG: What is the application and vetting process for investments?

WB: Because our counties run a County Agriculture Investment Program, which is what our county cost-share money is for, applicants fill out a CAIP score sheet, and if they score 44 or higher, then they become eligible. Every application has to go through the (state) Ag Development Board, even projects that a county says is a ‘no fund,’ that just doesn’t fit their criteria, still have to come to us and be voted on. The county puts in its recommendation, and then people come directly to us to make application. We do not make recommendations. At GOAP, as administrators our job is not to decide who gets the money; we get them prepared to go in front of, first, the committee at the Ag Development Board, where an application can be kicked back and can be voted on again later. If approved, then it goes in front of the full board and is voted on. Money is dispersed based on counties’ tobacco bases, or tobacco dependency, so due to that some people can get funded and some can’t. One concern we have is that young farmers have trouble getting it because this money is to diversify away from tobacco, and they’re not tobacco-dependent. Also, it is terribly hard to buy a $5,000 acre of land and farm it. We’ve got a new generation program and some other things and we’re working to tweak that.

MG: What is the County Agricultural Investment Program? Was that also a direct result of the Master Settlement?

WB: When MSA money first came out, we had to have a county entity run the programs. The only county entities we had were cattlemen’s associations, so the cattle folks handled a lot of the money. To level the playing field, we have CAIP, and now we have 45 conservation districts and we have farm bureaus administer the program. The extension agent is vital to this process and serves as a consultant but can’t be the administrator. CAIP came about so we could offer all the programs.

MG: Is CAIP a state-level program or based in all the counties?

WB: It’s a state program that is administered by the counties. We make the rules here for all the tobacco money. A CAIP project passed by a county then has to come through our board and be approved before they get the money. A county can decide it doesn’t want to do CAIP one year. One county one year used its money as matching funds to build a livestock arena and farmer’s market. They don’t have to, but most do a CAIP because it’s been so beneficial to the individual farmer.

MG: What is the composition of the Ag Development Board?

WB: There are 16 members including the governor. There’s a banker and a lawyer, but they’re both also agriculture people. Almost everybody else on the board are farmers. We have two women and the rest men. The governor chairs the board, but typically the commissioner of agriculture serves as the active chairman. Don Goodin (director of the Office of Financial Services in the Cabinet for Economic Development) sits in for the secretary of economic development. Gov. Matt Bevin did attend the first meeting after he started, but he’s so busy, so Commissioner Ryan Quarles does it. The members are all agriculture people.

MG: What are some of the On-Farm Energy Efficiency and Production practices the fund has invested in that are proving successful?

WB: We have $500,000 that we plug in to what we call the energy program. They have a score sheet as well, and they have to have a third party on it, typically University of Kentucky people; the quicker it pays back, the higher you score. Kentucky has so many chicken barns now, and probably the poultry people have taken advantage of (On-Farm Energy Efficiency funds) the most. As the evolution of these buildings continues, they get better and better. They’re taking off the curtains; they’re putting on metal; they’re changing the vents; they’re putting in foam insulation, insulating the building. I was in a dairy barn recently where the farmer put (low-speed, high-volume Big Ass) Fans in instead of the box fans; it saved him $2,000 a month. They are eligible for $10,000 a year in cost share, which they have to match, and up to $25,000 in a lifetime.

MG: Can you explain some of the special loan programs that have been created for use of MSA funds?

WB: Maybe the most versatile money we have is the $60 million now that has been moved over to the Agriculture Finance Corp. Half the money in that program is loaned out to help young farmers buy land. They tell us 75 percent of these transactions wouldn’t have been made without us. We provide the lender with 2 percent money, and the lender gets three-quarters of a percent. So it’s 2¾ percent money to the borrower toward their loan. The lower interest rate takes pressure off the lender; we take the interest rate off the farmer.

One of the big things is getting the farm from one generation to the next. We did shares for a young farmer buying into the farm. We have such flexibility. There’s $60 million in that now. If this (MSA) money ever runs out, that money will be here. Off that 2 percent principal, we get in about $500,000 a month to re-loan. We’ve loaned $2.3 million or $2.4 million each month for the last three months, so we’re loaning it faster than it’s coming in. But it’s really a terrific program that has the flexibility to help individual farmers.

MG: Is there a process to determine what projects are successful?

WB: One big issue for GOAP is compliance. Everything we do has a legal agreement. As a result, we have a lawyer on staff who does a great job and follows up. The problem is if you add seven or eight projects every month and you don’t take anything off, it’s tough. We have somebody who works on the front side of compliance and someone on the back side of compliance. On top of that, UK twice now has looked at what the payback is – that is a third-party assessment. That’s where the $2.03 return on the dollar came from. Everything we’ve done hasn’t been perfect, but from the ones that fail we’ve learned something and gotten much smarter about it.

MG: What have been some of the most significant ADF investments over the years, in dollar and/or in impact terms?

WB: The biggest and most successful is the ethanol plant in Hopkinsville. It ended up being partially loan, partially grant. 4,000 farmers now sell their grain to the Hopkinsville Elevator Co-op. Last year they sold their grain and then additionally got back a dividend from the ethanol sales of 78 cents a bushel. If you’re selling $3.50 (a bushel) corn, you’re just spinning your wheels (financially); you’re trading dollars. But the 78 cents is profit. That’s probably one of the most successful deals. Other significant impacts come from what the call the Big Four:

• The Kentucky Beef Network has education and facilitators to improve cattle genetically and nutritionally, the whole package.
• The Kentucky Dairy Development Council supports an industry that went from 2,200 dairies down to 645, but we’re still producing about a billion pounds of milk a year. We support their MILK program (Market Incentive Leadership of Kentucky), where processors (get incentives) to increase production by 10 percent, but had to maintain quality levels. It’s been great.
• We’ve worked with the Kentucky Horticulture Council in terms of cost share programs.
• And then look at Kentucky Proud. 86 percent of the people in Louisville and Jefferson County recognize Kentucky Proud as the brand for agricultural products in our state. We’ve got lots of success stories.

MG: Have Kentucky farmers enhanced their business management skills as a result of the ADF investment program?

WB: The MILK program guys have to be in DHIA (the Dairy Herd Improvement Association management records system). In this day, if you’re gonna farm, you better have those skills or you’ll dig a big hole in a hurry. It has been a natural progression as agriculture has changed to keep the books in order and know where we’re at. Managing risk is such a big part of this deal: How do you contract ahead? Contract farming is used by all the poultry barns and a lot of the hog barns. There is contract heifer growing, feeder cattle growing. You don’t have to cash flow the whole thing; you don’t have to worry about the market. You’re furnishing the buildings and the labor, and you get paid whether market prices are high or low. That has really limited risk. We’ve been a big part of the growth of contract farming in Kentucky.

MG: In mid-July, the Ag Development Board awarded the UK College of Agriculture, Food and Environment a $15 million grant for its Research and Education Station in Princeton, Ky. How unique is this, and how did it come about?

WB: It’s the biggest project that’s ever come through the Ag Development Board by a long shot and had been in the works for years. It initially wasn’t driven by UK; it was driven by the corn growers and the soybean association and those forward-thinking folks who knew that if we were going to keep pace, we had to have research on Kentucky ground, on what we do. A guy told me the other day that if we could just fix the fragipan (an impermeable soil layer in the U.S. Midwest) in Western Kentucky, we’d increase grain yields by 25 percent, and Dr. Lloyd Murdock at UK is in the middle of research with ryegrass (whose roots, with certain chemicals, might break up fragipan). This deal is a huge investment. It’s one of those that will pay back for the next 50 years, both in grain and in forage production – we’re such a big livestock state and forage is a huge part of that. It’s a different project for us, but we’re proud for the state that the legislators would see the opportunity for that extra money to do something to build a unit that’ll pay off for the rest of my lifetime and way beyond that.

MG: A 2014 New York Times article reported many states mismanaged their MSA money, even equating it to the bad decision-making common among lottery winners. How unique was Kentucky’s use of Settlement proceeds?

WB: Roger Thomas and I spoke at the Southern Legislative Conference (in Lexington in July) about this because it is so unique that we took our money and invested it. Before I went to work for Gov. Bevin, when I was interviewing, I said, “Governor, if you’re going to take this tobacco money and put it on the pensions or put it on the General Fund, I really don’t want this job.” He looked me right in the eye and said, “Well, why would I take the only money in Frankfort that’s making money?” And he’s left it alone. We’ve had four governors now who’ve left it alone, a whole set of legislators left it alone. It has done so much statewide. Only two counties don’t (under MSA rules) get the money, Pike and Knott, and we’ve done projects in both those counties. A farmer’s market is being built in Pikeville right now, and it’s going to be one of the nicest in the state. Every investment we’ve made has not been totally successful, but with every investment we’ve made we have learned something about what we can do, what we can’t do and, particularly, how we can do it. What we already do well, we do better. Compared to everybody else – and every state I go, I ask – Kentucky is really, really ahead of the game. We’ve gone from $3.7 billion to $6.5 since the money showed up; we take part of the credit for that.

MG: Is there an area of agribusiness development or entrepreneurship that you would like to see more thoroughly explored by ADF investment?

WB: The local food movement is on fire, and that’s a different segment of agriculture. People are starting to learn the difference between eating out of a can and eating out of a garden. Local food is about so many small farmers – we’ve built 160 farmer’s markets in the state now; we’ve been involved in most of those – and what we would like to see is “middle processing infrastructure.” We’ve got a consumer used to buying food and sticking it in the microwave. We’ve got to get raw product processed to a level that’s acceptable to this new consumer. We don’t need pot roast; many people don’t know what a roast is. We need to be able to provide cooked, sliced roast beef ready to put between two pieces of bread to this local food person. The closer you get it to the mouth, the more valuable it is. We need networking, we need distribution, we need lots of things to help local food.

MG: Do you have a closing statement?

WB: I feel blessed. The more I travel, the more I see how fortunate we’ve been in Kentucky and that this money has really made a difference. Al Cross said to me the other day, “Beeler, your money’s gone stale. You need to take some new chances.” He’s correct in a lot of ways. We need to make sure this money stays new, that it is seed money for investment.

But we have taken chances. We’re doing projects with chia, the seeds that cereal companies want. We’ve got a project with goldenrods, which produce natural flavors. Sumac, which we’ve been trying to kill forever, is full of tannins and used in all kinds of diet foods and stuff. That fits this new consumer. We did a two-acre greenhouse the other day in Ashland that will produce lettuce in 22 days, two semi loads a day, no bugs, no weeds. That’s where we’re headed. Of course the biggie is hemp, and that’s really hot. We had 22 counties invest their county money, and we matched it with state money – half a million dollars for a $2.4 million processor.

So our job is to keep our eyes open and realize that agriculture is changing every day, and we’re blessed to have this money to help that process. ■

Mark Green is executive editor of The Lane Report. He can be reached at markgreen@lanereport.com