CHARLOTTE, N.C. (Reuters) - The amount of U.S. tobacco grown under contract has exploded this year as tobacco companies seek stable supplies and growers abandon tobacco auctions in favor of guaranteed payments on their crop.

Across the flue-cured tobacco belt stretching from Virginia to Florida, an estimated 80 percent of the golden leaf will be grown under contract this summer, marking the end of an era in which auction warehouses handled virtually all tobacco sales. And in the burley tobacco belt, warehouse owners expect contracting to account for at least 60 percent of production this year, threatening the viability of auction houses that form the cornerstone of the federal price-support program for the nation's tobacco farmers. ``We've had the program since 1941, and it protected them and their dads and their grand-dads on back,'' said Scott Althauser, leaf processing supervisor for the Burley Tobacco Growers Co-operative based in Lexington, Kentucky. ``But the auction process according to law is the only way we can offer price support right now,'' he said. ``Everybody still wants the program, (but) we feel like any type of contracting does limit its strength and could possibly lead to a weakening of the program.'' Flue-cured tobacco differs from burley in that a heating process is used to dry the leaf, whereas burley is air-dried. A typical American cigarette, for example, consists mainly of flue-cured tobacco, with burley and other blends added to give it taste. ``THEY WERE ACTUALLY SCARED INTO IT...'' In the heart of the so-called Bright Belt of flue-cured tobacco producing states, the rural town of Smithfield, North Carolina could be considered ground zero in the explosive growth of contract farming and its impact on farming communities. On a stretch of Smithfield's Brightleaf Boulevard, the Central Tobacco Exchange is being converted into a Philip Morris receiving center and two neighboring warehouses will open for auctions while two others, victims of plummeting sales, have been shuttered. Next door to the Central exchange is the Farmers Tobacco Warehouse, which merged with a Goldsboro auction house in a bid to boost business. Its owner, Leroy Moore, said the surge in contracting is threatening the federal price-support program along with hundreds of jobs. Under the tobacco program, production quotas and minimum prices are set by the government to balance supply and demand. Government-backed cooperatives buy up any unsold tobacco, storing and later selling it on the open market. With most harvested tobacco set to bypass the auction houses this year for the first time, warehouse owners question whether the federal tobacco program can survive. ``It's very unfair for 80 percent of the people to contract and 20 percent to bear the burden of 100 percent of the system,'' Moore said. ``The only way that you can have a flue-cured market price support system is to have the auction system. If all the auction houses were to close, you could not have a price-support system.'' But farmers, faced with falling demand for their crop, were left with little choice but to sign with the tobacco companies. ``They were actually scared into it. They were told: 'This is the only train to get on. If you don't get on this train, it will pull out of the station and you'll be left behind,''' Moore said, expressing a sentiment of many growers and warehouse owners. ``EVERYONE IS DOING IT...'' As farmers begin harvesting leaf next month, about 98 auction warehouses in the flue-cured belt will be open for business, down from 147 last year and 198 four years ago. In North Carolina, the nation's leading producer of flue-cured tobacco, 89 warehouses were operating last year, but most of those are not expected to reopen this year. ``If we have 25 auction houses this year, that would be surprising,'' said William Upchurch, a former North Carolina Department of Agriculture tobacco specialist now working to distribute the state's share of the national tobacco settlement. Philip Morris, which controls about half of domestic U.S. cigarette sales, in 1999 floated the idea of contracting for its leaf purchases, only to put the plan on hold for a year. Last year, the nation's largest tobacco company for the first time contracted for its purchases of burley tobacco, which is grown in Indiana, Kentucky, Missouri, North Carolina, Ohio, Tennessee, Virginia and West Virginia. Based on its success in contracting with burley farmers, Philip Morris this summer is setting up receiving stations for its first contracted crop of the less aromatic flue-cured leaf, which nevertheless accounts for most of the tobacco in a typical American blended cigarette. Rival R.J. Reynolds Tobacco began buying leaf under contract directly from farmers in a pilot program in 1999, and start-up Star Scientific turned to contracting to produce a low-nitrosamine tobacco using a modified curing system. This year, all the major tobacco companies are buying flue-cured leaf under contract, although most also will buy supplemental tobacco on the auction floor, growers said. ``Everyone is doing it (contracting). If not on their own, they are doing it through a leaf dealer,'' said Graham Boyd, head of the North Carolina Tobacco Growers Association Along with a stable supply of leaf, the tobacco companies are contracting only with flue-cured belt farmers who install a modified curing process using heat exchangers to reduce tobacco-specific nitrosamines, a known cancer-causing agent. The lingering question is whether the tidal wave of contracting will swamp stabilization, ending a system that balanced supply and demand by setting production quotas and minimum prices -- and brought some measure of stability to tobacco farmers and farming communities. ``The fact of it is, I just don't think we're ready for the reality of it,'' warehouseman Moore said. ``Politically, we need to weigh the value of contracting against the (tobacco) program...There's more to this than just putting the tobacco warehouse out of business.''

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