BY BRUCE SCHREINER AND RANDALL DICKERSON
LOUISVILLE, Ky. (AP) -- Burley tobacco farmers in Kentucky and Tennessee are reaping some of their best paydays since plunging into the free market, capitalizing on tight leaf supplies and a quality crop that bounced back from an early-season drought.
Farmers who endured the tough growing season have been rewarded with burley prices near or at $2 per pound so far during the marketing season, said Will Snell, a University of Kentucky agricultural economist.
That nearly matches the prices burley fetched in 2004, the last year growers sold their crop under federal production and price controls dating back to the Depression era.
Now, after years of being squeezed by sluggish prices, higher production costs and uncertain markets due to smoking bans, burley farmers are welcoming the return of more robust prices.
It's driven by stronger demand from tobacco companies, partly due to smaller tobacco crops this year in places like Africa and South America.
"It's a good feeling again to have something somebody wants," said Daviess County, Ky., tobacco farmer Rod Kuegel.
Prices for last year's Kentucky burley crop averaged $1.75 per pound, the peak average so far in the free-market era that started in 2005.
The 2010 crop, hurt by drought as it cured, averaged $1.45 per pound, the lowest average of the period.
During post-harvest curing, green burley tobacco leaves change to a reddish, brown color desired by tobacco-buyers.
The price outlook for growers improved in recent weeks due to competition from independent leaf dealers and tobacco cooperatives also vying for limited supplies, Snell said.
As a result, at least one tobacco company rewrote its contracts with producers to increase the prices it offered, said Paul Denton, a burley tobacco specialist for the University of Tennessee and the University of Kentucky.
University of Kentucky extension tobacco specialist Bob Pearce rates this year's burley crop as one of Kentucky's best in a decade.
Yields will be close to average due to the early drought, he said, but quality is high, thanks to ideal curing conditions in late summer and fall.
Kentucky is the nation's top producer of burley, an ingredient in many cigarettes.
The Tennessee crop also rebounded from the dry spell to produce average yields, Denton said.
R.J. Reynolds Tobacco Co., the maker of such brands as Camel and Pall Mall, contracted for higher burley production amounts from its U.S. growers this year, said company spokesman David Howard.
The prices offered its contract growers also are up, he said, without specifying amounts.
"We expect to meet our burley needs from our contract growers," he said.
"And though it is very early in the process, we are very pleased with the quality of burley leaf that has been delivered."
Two other leading leaf-buyers, Marlboro maker Philip Morris USA and Philip Morris International, also said they were pleased with the quality of burley being supplied by contract growers.
Altria Group Inc., owner of Philip Morris USA, spun off Philip Morris International a few years ago. Philip Morris International produces Marlboro and other cigarette brands for overseas markets.
Kuegel said the first load of tobacco he delivered to his contract buyer this month sold for an average of $1.93 per pound, his best price since the tobacco buyout ushered in the free market.
Now, burley is mostly grown under contracts between farmers and tobacco companies.
For farmers, the favorable marketing season is a turnaround from early July, when the crop's prospects looked grim.
"I wouldn't have given you a nickel for it at one time," Kuegel said of his tobacco.
The crop showed resilience after timely rains spurred a late-season spurt.
The result is that even farmers growing tobacco without contracts -- speculating someone will buy their leaf on the open market -- are finding buyers and raking in higher prices, thanks to demand for leaf.
"I thought they'd been insane these past few years because of the risk," Kuegel said. "But this year the potential exists for them to gross more on their crop than somebody that's contracting."
Jerry Rankin, a tobacco warehouse operator in Danville, said farmers received about $2 per pound for nearly 330,000 pounds of burley sold during his first two auctions of the season. Last year's crop sold at his warehouse averaged about $1.79 per pound.
The higher prices won't necessarily yield bigger profits, though. Fertilizer and labor costs have skyrocketed in recent years.
"With the way costs have gone up, I'm not going to say it's that much better," said Allen County, Ky., tobacco farmer Al Pedigo.
But one advantage is that farmers no longer have to pay lease prices to grow as much leaf as they want. Those lease prices, a big expense in the days of the tobacco program, allowed farmers to obtain the right to non-growers' production quotas.
Pedigo's first load of tobacco sold recently for $1.94 per pound on average, and he's hoping his later deliveries will range from the $1.90s to $2 a pound. His crop last year averaged about $1.80 per pound.
"It's still not real profitable, because the costs have gone up so much," he said. "But it's better, with them giving us these increases."
Pedigo has doubled burley production to about 150 acres since the buyout.
It's part of a trend in which farmers who stuck with the beleaguered crop tended to increase production, while most growers got out. U.S. tobacco production has fallen sharply since the buyout.
A shortage of farmhands to work in tobacco fields has been another nagging problem in producing the labor-intensive crop. The result is, growers have bid against each other for field crews, Denton said.
"The problem producers had getting labor may put a brake on expansion next year," Denton said.
Still, he predicted the strong prices this fall will encourage burley farmers to stick with the crop.
But even for some still growing tobacco, there's the temptation to change amid high prices for corn, soybeans and cattle.
"The only thing that's going to keep more people in business next year is that bottom line -- how much you make per acre," Kuegel said.
"If tobacco doesn't consistently make $1,000 an acre, then there's going to be a lot of people leaving it. Because it's a whole lot easier to sit on that combine and drive that corn planter than it is to harvest those acres of tobacco."
Dickerson reported from Nashville, Tenn.