Peanut Futures Series: Will farm bill ease peanut's boom-bust cycle?

Peanut Futures Series: Will farm bill ease peanut's boom-bust cycle?

The U.S. peanut market has been since the end of the quota system on a boom-bust cycle, leaving farmers in a state of oversupply and suppressed prices or responding too much in acreage following a high-price season. Under this farm bill, wise growers will market their peanut planting by responding to market indicators with the benefits of keeping a solid rotation of crop acres in mind,

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 third story in the series.

If the 2014 farm bill didn’t give peanuts a leg up on competing against other Southern row crops, provisions in the bill at least will force other crops to more seriously come to the table to woo established peanut acres away from a farm’s typical rotation.

Call 2014 the wait-and-see year for peanut policy, but the broad strokes are known. In general, the programs in the bill related to peanuts create a good safety net for farmers at least for the next five growing seasons or so.

“We were going to be up with (peanut) acres this year anyway. But down the road, growers will certainly have the flexibility to keep rotation acres. Peanuts fared well in the bill, I think, and it gives a good safety net for farmers to, again, truly keep rotation and respond to markets on a year-to-year basis. … This is more so of the case for Georgia,” said Nathan Smith, University of Georgia Cooperative Extension peanut economist.

Because it has no futures market or openly traded market, and contracts are direct between growers and buyers, the peanut market sense the end of the quota system, now more than a decade ago, has been on a pretty extreme boom-bust cycle, Smith said.

“Since peanut is a rotated crop and one that responds to market conditions, you can easily oversupply the market by going off rotation or skipping a year off that rotation, and that’s kind of what we’ve done in 2005, 2008 and again in 2012. In those years we really responded to the markets and overplanted and in ’12 that coincided with a record crop and not just a small record but a record that took many by surprise,” Smith said.

The industry is still working through that record ’12 crop, with more than 1 million tons in the pipeline now, which is 300,000 to 400,000 tons more than the industry really needs to carryover from one year to the next to keep shellers and manufacturers running.  As growers plant the ’14 crop now, they face a bust side of the cycle.

What lead to this oversupply was a drastic undersupply in 2011, when peanut farmers were not wooed by peanut contracts as other major row crop prices were much more tempting, leading growers particularly in Georgia to opt out of typical peanut acreage rotation to the lowest planted acres in Georgia in modern history. By harvest 2011, uncontracted peanuts were going for $1,000 per ton or better, riding a boom at that time.

The drastic nature of the market is why peanuts need particular provisions in a farm bill to ensure a safety net to keep the industry viable and growing in the country for this staple food item, he said.

Under the 2014 farm bill, peanut growers’ have safety net choices like the Price Loss Coverage and the Agriculture Risk Coverage. The bill provides risk management tools, too, like peanut revenue insurance and Supplemental Coverage Option in the crop insurance title. Newer peanut farmers, or those who started after 2002, are without base of any kind and are not eligible for the opportunities under the program part of the bill. This concerns growers in newer production areas, and they would like to see this changed. But for now, the newer growers still can use the SCO crop insurance options in the bill now to measure risk.

Back-of-the-envelope price competition

Each farmer or peanut operation differs, but back-of-the-envelope numbers paint a broad picture of peanut prices related to other crops going forward:

To compete against peanut prices averaging between $460 and $470 per ton, cotton prices would need to go 90 cents per pound and corn $6 per bushel on non-irrigated land. On irrigated land, though, to compete against peanuts at that prices, cotton would need to hit 83 cents to 85 cents per pound and corn to $5.50 per bushel. Soybeans will need $14 per bushel non-irrigated and $13 per bushel irrigated, Smith said.

If $490 to $500 per ton peanuts, then 95 cent cotton and $6.55 to $6.75 corn for non-irrigated and  $5.85 to $6 for irrigated.  Soybeans will need $17 and $15.50 respectively.   That’s assuming better irrigated yields than in the budgets, or 1,300 pounds of cotton per acre, 5,250 pounds of peanut per acre and 225 bushels of corn per acre, adjusting costs on peanuts and corn to reflect current seed prices and more fertilizer for corn. 

“This might give peanuts a stronger incentive to not fluctuate as much in acres unless cotton and the other crops can really bid them away,” he said.

Under this farm bill, he said, wise growers will market their peanut planting by responding to market indicators but always with the benefits of keeping a solid rotation of crop acres in mind -- and not plant for the programs in the bill.

The program payments use the marketing year average price which carries into the summer of the next year. If price lose coverage payments are triggered under PLC, the payments will be made Oct. 1 or after; same timeframe under ARC, too. It’s important to remember that peanuts grown for the ’14 season, if payments are triggered, will not receive payment until after Oct. 1, 2015.

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