With no futures market on which to base planting decisions, peanut producers face higher-than-normal farming risks, making it even more important that they know the tools available to help manage these risks.
“In peanuts, particularly on the price side, you’re working with limited information,” says Nathan Smith, University of Georgia Extension economist. “In the spring, you’re trying to decide how many acres you’re going to plant, and where to go to get prices. Growers are responding to markets now, and looking at costs and returns.”
(Peanut Futures: Marketing for Profitability, an exclusive editorial series sponsored by DuPont Crop Protection, examines recent developments in U.S. and international peanut markets. This is the fourth story in the series.)
And that’s not a situation that’s likely to change anytime soon, he adds.
“I don’t think we’ll ever have a futures market for peanuts in the U.S.,” says Smith. “It’s the same problem as with rice – you have fewer players, so the problem is getting enough liquidity in the market for it to actually work. Also, peanut markets in the U.S. are more of an edible market, and the world market is more of an oil market. So we have two different markets. We might be able to get enough liquidity in the world exchange, but then you’d have two different markets and two different prices.”
There are, however, other tools available to help peanut producers manage risks, he says. “As a producer, you’re basically taking inputs and producing outputs to meet a certain market demand. We’re producing peanuts to meet a demand for peanut butter, candy, snacks and in-shell peanuts."
To be able to keep doing it, there has to be a profit in that risk. There’s also a lot of uncertainty as far as revenue goes, and that’s a risk.
“There’s a chance for loss, with low prices and low yields. Risk is defined as a possibility of adverse outcomes due to uncertainty and imperfect knowledge in decision-making. That certainly defines the peanut market when we talk about weather uncertainty, production uncertainty and limited knowledge when it comes to making decisions," he said.
Growers deal with various risks on the production side, says Smith, with No. 1 being weather. Other factors include pests, new technology, machinery efficiency, and the availability, quality and efficacy of inputs.
“As margins get tighter, machinery efficiency is becoming more important – being able to optimize the acres that you’re growing. There are varying costs and returns across the country, and there are differences across commodities. The top one-third of producers are more efficient with their machinery. Others may have low inputs because they have better ground and produce more from an acre of land.”
Crop insurance is one of the main tools for managing the uncertainties of weather, he says. “The top two crop things losses that crop insurance pays on are drought and heat and excess moisture or flooding. More than 30 percent of payouts go towards heat and drought and about 25 percent go towards excessive moisture. One of the reasons crop insurance is utilized is for financing, with bankers and lenders requiring crop insurance before they’ll approve a loan.”
In addition, government programs provide a safety net for growers, whether through price, disaster assistance or a loan program, says Smith.
Irrigation will continue to be important as a risk management tool, with growers seeing a strong response from irrigation in peanuts, especially when planting improved varieties, says Smith. Irrigation is probably the number one tool for production risk. In Georgia this past year, more than 50 percent of the acres or about 22017,000 acres were irrigated , according to FSA.
“So irrigation is an important risk management tool for peanut producers. In the Southwest, Texas, New Mexico and in the peanut production area of Arkansas, pretty much all of the peanut acreage is irrigated. In Georgia’s neighboring states – Florida is at 29 percent irrigated, Alabama at 4 percent, and South Carolina at 15 percent of peanuts irrigated – not a lot of irrigation compared to Georgia. That’ll fluctuate in Georgia each year, between 40 and 50 percent. We have more than 1 million acres of irrigated land in Georgia, so it’s certainly an important tool.”
Price discovery more difficult
Since peanut producers don’t have a futures contract, price discovery is a little more difficult, says Smith. “The main methods for marketing since 2002 have been marketing contracts and the marketing assistance loan provided by the government in the peanut program. There are also marketing cooperatives and grower-owned shelling plants that offer other alternatives.”
The main marketing tools for most peanut growers include an option contract or the loan, he says. An option contract is like a cash contract, but it’s like a hybrid where the sheller provides an option premium to contract a certain amount of tons or volume.
“They will pay an option above the loan rate of $355 per ton for the right to purchase the grower’s peanuts. They have the right to purchase those peanuts, but they don’t have to. The farmer can pocket the premium, so that’s pretty much an option contract.
“If a $500 contract is being offered, and there’s a $145 premium to purchase those peanuts in reality, the sheller will probably go ahead and buy those peanuts. The market would really have to move for him to let that option go without buying those peanuts.”
Also, says Smith, contracts can differ from sheller to buyer on specifications for payment, including when payment is received, how many tons are on the farm, the right to buy additional peanuts, and shrink and storage options. Many different clauses can be contained in a contract, he adds.
“Three years ago, we first saw a ‘flex’ contract from one sheller. It’s like a minimum price contract, if you’re familiar with similar ones for corn, soybeans or cotton. A minimum price is set, and you have a certain time period in which to set that price after you deliver the peanuts. That price moves or is tied to the shelled price of the medium runner peanuts. This is a recent innovation in marketing peanuts.
“The sheller has a period of time, and if he isn’t satisfied with the price and thinks it can go up, he can use that contract. But there will probably be a limit on how high the price can go.
We’ve also seen pool or shared-profit contracts which is similar to a flex price, but it would be more tied to how the profits of the company are doing, and that they provide some of it back to the grower. There might be a range of price, from $450 to $550, with the price guaranteed to be somewhere in that range due to profit sharing.”
Without a contract, says Smith, a grower basically has the loan rate, at $355 per ton – a nine-month loan from the end of the month after the peanuts are delivered or enrolled in the loan program. Farmers put peanuts into the loan, and the Commodity Credit Corporation will cover the handling and storage costs while they’re in the loan. When the peanuts are redeemed, those costs will be paid back to CCC.
The loan operates somewhat like cotton in that you can forfeit the peanuts in the loan if the repayment rate prices never get above $355.
There are also cooperatives that pool peanuts and sell to the sheller, says Smith.
“They share the profits like the supply cooperatives. Most are organized where yYou receive the loan rate up front and then a patronage is paid as the year goes. You don’t get all of your money up front. Grower-owned shellers are similar in that producers actually own part of the shelling operation and you deliver peanuts based on your shares. The profits come back to the grower in the form of patronages throughout the year from selling the shelled product. That’s another market alternative that provides the opportunity to maybe do a little better in some years. It won’t always be the best price, but it won’t always be the worst price either.”