Excited by the prospect of record-high peanut contracts, many growers are starting to consider shortening their crop rotations to take advantage of the market.
But that would be a big mistake, says Marshall Lamb, research director for the National Peanut Research Laboratory in Dawson, Ga.
“I’m getting a lot of calls from growers about shortening their peanut rotations because of the $700 and $750 contracts,” said Lamb at the recent 2012 Regional Peanut Production Meeting in Shorter, Ala.
“It’s a huge mistake. One, you’ll lose yield, and two, you’ll lose money because the price differential is not that great whenever you shorten those rotations.”
Rotation research trials conducted in southwest Georgia show that the gains are not worth the risk, he says. “You’d have to get higher prices in order to justify shortening your rotations because yields would be lower.”
Comparing the costs and returns of irrigated cotton versus irrigated peanuts, Lamb says the break-even price of peanuts, considering 95-cent cotton and a rotation of two years out of peanuts, was $735 per ton.
However, if you shorten that rotation to one year out of peanuts, you’d have to get a contract of $900 per ton for peanuts in order to break even with 95-cent cotton. On irrigated corn, at $6 per bushel, the contract requirement to break even with peanuts goes from $700 to $854 per ton if you shorten the rotation to one year.
“I wouldn’t shorten my rotation just to increase peanut production, not at the prices now being offered,” says Lamb.
Looking at the current state of the market, Lamb says peanut harvest data for the U.S. shows somewhat of a roller-coaster ride, going from 1.6 million acres in 2004-2005, down to 1.2 in 2006 and 2007, and back up in 2008. It’s all related to the price of peanuts and the price of other crops competing for the same land, he says.
‘We’re in a good position as far as yields. It looks as though we’ve reached a new plateau in peanut yields. We’ve been hovering around the 3,000-pounds-per-acre mark, and despite having two devastatingly dry years in 2010 and 2011, we’re back to an average of around 3,300 pounds in the last four years, and a lot of that is due to improved genetics and outstanding Extension work,” he says.
But the volatility seen in production in recent years isn’t good for the industry, says Lamb.
In 2009, 2010 and 2011, U.S. growers produced 1.8, 1.8 and 2 million tons, respectively, and U.S. demand is from 2 to 2.1 million farmer-stock tons.
“The situation is so tight now because for the last three years, we haven’t produced enough peanuts to satisfy supply and demand. And we’re coming off the heels of a monster crop in 2008, so that’s why we’re at the place we are now.”
Need peanuts in pipeline
The marketing season for peanuts ends each year on July 31, says Lamb. “The marketing year ends, but we’ve got to have peanuts in the pipeline or in the carry-out for August, September and October, when new-crop peanuts become available.
“A healthy carry-out, in terms of what farmers want to see, is 500,000 tons. Shelling capacity in the United States is 165,000 tons per month, and we have three months — August, September and October — when we need a supply of peanuts.
“If the carry-out is more than 500,000 tons, then we see a dampening effect on the price of peanuts. If we see less than that amount, the buyers become nervous, and the prices start going up.”
In 2007, says Lamb, there was a carry-out of roughly 500,000 tons going into 2008.
“We produced a huge crop in 2008, had a minor carry-over, saw some imports, and had 3 million tons of peanuts with which to deal. With a total demand of 2.1 million, this left us with a carry-out of 1 million tons.
“In one year, we doubled the carry-forward, and the price of peanuts crashed. The carry-forward was so big, the buyers knew they had a buffer they could work with, and manufacturers sent the price down.”
In 2009, the carry-forward was about 920,000 farmer stock tons. “In 2010, we produced about 2 million tons and imported about 54 million tons, so again we had about 3 tons with which to work. The kicker in 2010 was the quality of the Southeast crop.
“In southeast Alabama, southwest Georgia and north Florida, we had to crush an abnormally large amount of peanuts. We usually crush about 230,000 tons. In 2010, we crushed about 500,000 tons.”
“In 2011, we produced 1.8 million tons, brought forward just under 500,000, and imported 70,000, for a total supply of about 2.4 million farmer-stock tons. This gave us a carry-out in 2011, going into 2012, of 197,000 farmer-stock tons.
“That’s as tight as it has been since 1980. It’s an extremely tight market. This is when a lot of buyers become extremely anxious about peanuts.”
Looking ahead to 2012, Lamb says the last thing the industry wants is to go back to 2007 and 2008, when the amount of carry-forward was doubled.
“For us to get back to a 500,000-ton carry-out, where we need to be for a stable supply, we need to produce about 2.3 million farmer-stock tons. That’s where we need to be, as an industry, going forward this year.
“More than that, and we’ll start seeing prices go down. Any less than that, and we could start losing some market share.
“According to the latest report, demand for U.S. peanuts was up 4 percent. Even though peanut prices are higher, peanut butter and peanut snacks are still the best bang for your buck at the grocery store, especially as a protein source.”
Cotton, soybean and corn prices all started dropping this past Thanksgiving, says Lamb, but they’ve started to go back up.
In comparing peanuts with these other crops, on an irrigated basis, and assuming $6 corn, 95-cent cotton and $11 soybeans, a grower would need a $699-per-ton peanuts to break even with corn, $725 peanuts to break even with cotton, and a $583 contract to break even with soybeans.
“That’s why those first contracts were offered at $750, to buy some security in the market,” says Lamb.
To reach a reasonable carry-out for this year, growers will need to produce 2.3 million tons, he says. At a 3,200-pound yield, that equates to 1.4 million U.S. acres, about a 20 to 26-percent increase over last year’s acreage.
“But we still have to manage costs, and peanut seed will be higher this year. We need more peanuts, but let’s not go overboard as an industry.
“We need to climb out of this problem over about a two to three-year period so we can sustain the market for producers at a price that’ll make us a little money. We don’t need to just jump out of this problem only to have more problems in future years.”