Peanut industry feels growing pains

This year marks the last year of transition for peanuts under the 2002 farm bill, but the industry continues to deal with growing pains in adapting to a market-oriented program after functioning under a supply-control program for more than 60 years, says Nathan Smith, University of Georgia Extension economist.

“As a result of the elimination of the traditional quota allotment program, peanut production has shifted geographically in Georgia and along the U.S. Peanut Belt,” says Smith. “The impact on Georgia peanut growers and on the infrastructure has been mixed across the state. However, the overall effect has been positive, keeping the industry growing and strong.”

A major obstacle to growers fully using and benefiting from the marketing assistance loan program is price discovery, he says. “The industry and USDA are struggling with who sets peanut prices and price information availability. This is an issue that will not be easily solved without a publicly traded exchange or other form of price discovery. Though peanuts are very important to the Georgia economy, the size and concentration of the peanut industry makes a futures exchange unlikely. So another alternative must be found.”

Looking to this year’s crop, Smith says several factors will impact the peanut market, with the first being competition for acres from grains and soybeans. Current high prices for corn and soybeans most likely will lead to the expansion of acreage for these crops in Georgia, he predicts.

“The question is whether the acres will come from peanuts, cotton or other commodities. The last time corn prices were above $4 per bushel was in 1996. Georgia corn acres have ranged from between 360,000 in 1998 and 280,000 in 2006. Soybean acres have ranged from 300,000 to 155,000 over the same time period. A total increase of corn/soybean acres in the 100,000 to 200,000-acre range is possible. The limiting factor will be harvest and storage capacity,” he says.

For peanuts, any reduction in acres will largely go to corn for crop rotation purposes, says Smith. Cotton, however, could potentially capture a few more acres from peanuts due to continued price uncertainty in 2007, he adds.

Peanut growers have two alternatives for marketing their crop, says Smith — the $355 per-ton marketing assistance loan or option contracts on all or on a portion of expected production. Limited offerings of contracts before planting created a great deal of uncertainty among growers last year, and a similar situation in 2007 could discourage producers from planting more peanuts.

Georgia peanut acres, he says, dropped by 23 percent last year in response to a surplus stock situation and price uncertainty. Production was further reduced due to a second consecutive year of disappointing yields in Georgia.

“With surplus stocks of peanuts from the 2005 crop being worked down, the concern is that 2007 could quickly develop into a short supply situation in the event of reduced acres and the end of the El Nino weather phase, reducing yields again,” says Smith.

A slowdown of growth in domestic peanut use contributed to a stock buildup going into 2006, he adds. Heading into 2007, total use has not gone backwards, but domestic food use increased only 0.5 percent last year and is projected for similar growth again in 2007. Crush and exports are projected to be the main drivers of an overall increase in consumption.

“Under the new peanut program, exports have not increased as hoped. U.S. peanuts are not as competitive in the export market because the export prices has been below U.S. domestic prices.”

Other economic considerations for peanut production in 2007 include the narrowing of profit margins due to increases in energy, fuel and technology costs, says Smith. “Grower marketing of peanuts is of particular concern because handling and storage fees, which are usually funded by the government, currently are not being paid on 2007 loan peanuts. If the cost is passed down to growers, then their prices could be effectively reduced by $45 to $50 per ton.”

The U.S. House of Representatives Appropriations Committee recently approved the supplemental appropriations bill which includes language to provide $74 million for the payment of storage, handling and other associated costs for the 2007 peanut crop. To become final, the bill also must pass the full House of Representatives and then the Senate.

The next farm bill, says Smith, will be of great interest to peanut producers. Peanut policy is now tied closely with other major program crops through the marketing loan and DCP program.

“Issues of importance to peanuts will be current program continuation, National Posted Price tweaking, loan peanut handling and storage fees, payment limits, type and level of base payments, loan rate levels, and the elimination of all planted restrictions on base acres. Other issues include conservation or ‘green’ payments in relation to peanuts and biofuel potential with peanuts.”

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