All segments of the peanut industry will be forced — by the new farm bill — to change how they do business, and growers need to be thinking about how they'll market their crop under a new program.
“It's a brand new ball game for growers, shellers and manufacturers, and it's not safe to assume anything at this point,” says Richard Barnhill, a broker with Mazur & Hockman. “Talk to your buying points and shellers and make sure you understand exactly what's going on.”
It's expected, says Barnhill, that the House and Senate will vote on a compromise farm bill by March 22, before the Easter recess. After that, the bill will be sent to the President for his signature.
“Let's assume that a compromise bill passes and we're ready to move forward on a bill that falls somewhere between the House and Senate versions. Most peanut growers want to know why marketing will be different. They want to know why they can't do just as they have in the past,” said Barnhill at the annual meeting of the Georgia Peanut Producers Association in Albany.
Under the new peanut program, he says, there will be a target price and a loan guarantee, and the sheller will not have to grade peanuts to buy them.
For several years now, the U.S. government has provided a $610 support level for one ton of peanuts, he says. “That pretty much was a guarantee to the grower. You produce a product, bring it in for shipment, and you'll be guaranteed $610 for quota peanuts. Then, you contract with your sheller for additional peanuts. Growers really had no downside risks in this arrangement.
“The way you market when you know there are no downside risks is that you wait. You wait to see if the price goes up, and that makes good sense. You can get $610 today, you can get it in April, or you can wait until you harvest in the fall and still get $610 for quota peanuts. If we have weather problems, or if we have a short crop, the price might go up, and we could take advantage of that and get a higher price,” says the broker.
Under the current peanut program, about 30 percent of the crop was sold in advance, says Barnhill. “That was done for financial reasons, and the remainder of the crop was bought at harvest. The sheller bought 90 to 100 percent of what he thought he would need. Basically, the crop was handled at harvest and bought, and shellers put the peanuts into their warehouses or contractors' warehouses, and they owned the peanuts from that point on.”
Changes in the new peanut program will affect everyone, he says, including growers, buying points, shellers and manufacturers.
“There isn't anyone in the industry who won't be impacted by this new bill. It'll provide a loan rate of $350 to $400 to the grower, depending on the final compromise. And the market will be completely separate from how the grower and the loan will operate. The law says the market will trade freely, on supply and demand.
“We saw how the economic law of supply and demand worked this past year with additional peanuts. We normally have a market of 400,000 to 450,000 tons of peanuts each year that we sell and export out of the country. This past year, we bought 650,000 tons of peanuts, and we had more additional peanuts than we had a demand for. The price dropped below $200 per ton because the supply was great while the demand was stable.”
With the new peanut program, growers will have to think about price potential being both up and down, says Barnhill. Growers will have to make a decision on the best time to sell their crop, he adds.
“One of the key things to watch is the April/May planting intentions report. This will be a key piece of information that'll help to decide supply and demand. We probably can figure on about a 3 percent increase in demand. So if we plant the same amount of peanuts we planted in 2001, or more, then we know there will be plenty of supply.”
If demand increases by about 3 percent and the growing season progresses well, there will be a greater risk of lower prices, he says, because the supply will be confirmed. If drought conditions persist, or if other weather problems occur, the price might increase, he adds.
Under the new farm bill, peanuts will be similar to cotton in terms of the loan program, notes Barnhill. Growers, he says, should be looking to market their crop at a price higher than the national average price or the loan repayment rate.
“For example, the secretary of agriculture might set the loan repayment rate at $300 per ton. If you find a sheller who will pay you $325, the government will make up the difference between the loan repayment rate and your loan rate of, let's say, $350. Considering the $325 you'd get from the sheller, you would net out $375 on that ton of peanuts.”
“Farmer stock peanuts likely will be traded throughout the growing season, says Barnhill. “In the past, you probably brought your peanuts to market, received a grade and then sold them. Most likely, shellers now will buy 30 to 35 percent of their handle at harvest.
“These peanuts will be graded, paid for, and taken to warehouses managed by the shellers. Then, they can start shelling and meeting their commitments to manufacturers in the fall.”
Manufacturers, he says, will make shorter commitments. They will want to cover their needs, but they typically won't be buying 12- or 18-month contracts.
“Manufacturers will buy short contracts, just as they do for other commodities, and the shellers probably will buy your farmer stock as they need it to cover the manufacturers' contracts.”
Many details, says Barnhill, will have to be worked out before a new peanut program can be implemented. “How will you market these peanuts — through the buying points or through an organization such as GFA? Who will handle the storage, and the costs in and out of the warehouse? There are a lot of details that have yet to be decided.”
The first year of the peanut program will be a learning experience for everyone, he says. Barnhill predicts there eventually will be several markets or designations for peanuts.
“I think we'll have a premium edible quality market. This will be a quality that meets the requirements of the major national brand manufacturers. Peanuts falling in this class probably would have to be free of aflatoxin, meet a certain grade or have a special characteristic such as high oleic.
“Then, I think there will be a regular edible market that meets the government standards and the standards of a certain group of manufacturers. Then, if there are problems with the peanuts, there probably will be an oil stock or surplus market. Each one of these markets would have different price levels.”
The long-term effects of a new peanut program will be very positive for the entire peanut industry, predicts Barnhill. “Lower prices for U.S. peanuts in the free-trade market — where the price won't be related to target prices or loan levels — will stop or deter significantly the 140 million pounds of shelled kernels that come into the United States from Mexico, Argentina and China. That will stop, and we can grow, shell and manufacture that 140 million pounds of peanuts. It'll stop the exportation of our industry to other countries.”