Program complicates peanut decisions

Planting decisions for peanut growers will be more complicated than ever this year, and these decisions should be made based on the interactions of all crop prices, crop bases and possibly payment limitations, says Marshall Lamb, economist with the National Peanut Research Laboratory in Dawson, Ga.

“The trends and prices of other crops will influence your decision-making on peanuts this year,” said Lamb at the annual meeting of the Georgia Peanut Producers Association in Albany. “Peanuts and other crops will be more interconnected than ever before under the new peanut program.”

It's helpful, therefore, that growers take a close look at historical trends in all crop prices, beginning with quota peanuts, he says.

“Under the farm bill that was in effect previous to the current one, we had a quota support price in 1991 set at about $650 per ton for runner-type peanuts. Under that law, the quota support price could increase with cost-of-production increases, but it could not decrease,” says Lamb.

Through 1995, the quota support price increased to about $680 per ton, he says. Then, beginning in 1996 with the FAIR Act, the quota support price for peanuts was set at $615 per ton, and it has remained at that level.

In 1991 — following the drought of 1990 — the price for additional peanuts was very strong, at about $385 per ton, says Lamb. Then, throughout the remainder of the 1990s, the additional price stayed at about $300 per ton, he adds.

“Then, with last year's crop, we had a very soft market for additional peanuts, and the average price for 2001 was about $230 per ton. It was a good crop year, and we all had been waiting for it, but the price for additional peanuts was down,” says the economist.

Under the new farm bill, says Lamb, planting decisions for one crop should not be made exclusive of the market for other crops. “If we're making planting decisions, we have to consider what is happening with other crop prices in order to make the best decision. It's going to be complicated in the beginning, but all crops will be inter-connected,” he says.

Turning to price trends in other crops, Lamb says corn prices stayed in the lower-$2 range throughout the late 1980s, dropping to $1.65 in 1987. Just as in other crops, corn prices trended downward from the mid-1990s to 2001, he says.

“We saw a price of about $3.25 per bushel in 1996, and a lot of us sold corn for more than $4 per bushel that year,” says Lamb, who farms in south Georgia. “Then, the price went down severely. In the 1999 to 2001 period, corn prices got down to $2 per bushel or less.”

According to data compiled from growers, the “break-even” price for corn production is about $2.56 per bushel, says Lamb. “That's break-even, with no return to your investment. Under the new farm bill, the target prices looks as though it'll be about $2.80 per bushel. This is a tremendous plus when we look at corn prices — up from about $2 to above break-even.”

Soybean acreage has gone down considerably in recent years, and the reason is simple, he says. In 1996, soybeans sold for almost $7 per bushel. Since then, the price has decreased steadily.

“In 2001, we're looking at beans in the lower $4 range. I don't think we can plant beans for $4 and expect to see a profit. According to our data, the minimum break-even price for soybeans is about $5.45 per bushel. In the new farm bill, the target price is expected to be slightly higher than the break-even price. So, maybe we can bring beans back into our crop mix in the Southeast.”

A more important economic crop in the Southeast is cotton, says Lamb. During the 1990s, lower Southeastern states like Georgia saw large increases in cotton acreage.

“In 1995-96, we had very strong cotton prices at about 70 to 75 cents per pound. However, in the late 1990s through 2001, prices have gone down steadily, with prices in the 40-cent range this past year.

“The break-even price for cotton is about 63 cents per pound, and the target could be up around the 70-cent range. Things are looking up under this new farm bill in terms of cotton prices, and that's very favorable for our farmers.”

With the GATT and NAFTA trade agreements, it becomes cheaper each year, says Lamb, to import peanuts from foreign countries like Argentina and Mexico. “Starting in 1995-96, the United States imported about 45,000 farmer stock tons from Argentina. The GATT duty in excess of the import quota is 131.8 percent of the value.

“Each year, according to schedule, the amount of farmer stock tons increases. As we go into 2001-2002, it's up to about 80,000 farmer stock tons, and that will increase over time. In the 2005-2006 period, we could see in excess of 100,000 farmer stock tons. These peanuts are taking our markets.”

To determine why these peanuts are coming into the United States, it's helpful, says Lamb, to look at the costs involved in getting them from Argentina to the docks in Savannah, Ga.

“We're talking about costs such as ocean freight, handling fees, insurance, duties and other items. We estimate this comes to about $212 per farmer stock ton. When you add that to the actual cost of the peanuts, handling, and delivery to the port, it comes to about $512 per farmer stock ton. That's how much it costs to get peanuts to our docks, and that's why these peanuts are coming in.”

Turning to Mexico, Lamb says about 6,000 tons of Mexican peanuts were imported into the United States in 1995. In 2002, about 7,255 farmer stock tons were imported from Mexico.

“That's not a lot of imports, but the duty or tax on Mexican imports is declining each year. As the duty declines, it makes their peanuts more competitive with ours. The duty in 1994 was 181.4 percent. In 2002, according to the NAFTA schedule, the duty is down to 105 percent. By 2008, there is no duty or tax on Mexican peanuts, and they can be brought into the United States for about $375 per ton. Mexico currently isn't a major player in peanut imports, but it has the potential to become one as those duties are decreased.”

The buyout for peanut quota holders will be either 10 or 11 cents per pound, depending on the final farm bill, over a five-year period. By withholding and investing part of this buyout, quota holders can maintain a “fixed income stream” over a longer period of time, says Lamb. A fixed income stream, he explains, is a set amount of dollars over a certain number of years.

“If you invest a portion of the quota buyout, you could compound it for four or five years. For example, if you get 11 cents per pound in the buyout, you could live off of eight or nine cents and invest three cents. In year one of the buyout, you would be able to compound that over five years. In year two, when you receive the buyout, you would invest the same amount of money, live on the other side of that money and compound it for four years.

“You would continue to do this until year five. Then, in year six, when you no longer would receive the quota buyout, you would live on the same amount of money in year six that you did in years one through five, and re-invest the remainder. Then, you would have a fixed income stream over that time.”

The length of the fixed income stream, says Lamb, will depend on the amount of the quota buyout that is invested. If you use the entire 11 cents for living expenses, the length would be only five years.

“If you invest one, two, three, four or five cents per pound from the buyout, the buyout will last longer in terms of income stream. And, it'll last longer depending on whether you get a 5 percent, 7.5 percent or 10 percent return on your investment.

“A 5 percent return represents a ‘risk adverse’ investment. This would be something like a CD, where little risk is involved. A 10 percent return would involve some risk. You probably should focus on 7.5 percent, which represents a very balanced investment.

“If you invest four cents per pound from the quota buyout, and it's compounded at 7.5 percent, that fixed income stream would last about 12.5 years. If you invest five cents, the fixed income stream would last almost 20 years. It's important to define your financial objectives whenever you receive your quota buyout.”

Values increase

The farm gate value of peanuts in the lower Southeast is substantial, says Lamb, totaling about $560 million in 2000. For the 2000 crop year, the farm gate value of peanuts in Georgia was $386 million, $122 million in Alabama, and $53 million in Florida.

“As we enter the new farm bill, we won't have the quota marketing of $615, but we'll have a target price of about $500. The question is, will the new peanut program generate more or less economic activity in the Southeast?”

The estimated farm gate value of peanuts in 2002 should increase under the new farm bill, says Lamb. Based on 1998-2000 production, farm gate value in Georgia should be about $431 million. In Florida, it's estimated that the value should be $72 million while in Alabama, farm gate value should increase to $142 million for total value in the three Southeastern states of about $644 million. These estimates, he says, do not include any acreage response to the new peanut program. “If we recapture some of these lost export markets, these numbers could be even higher.”

Looking ahead to the 2002 growing season, Lamb says peanut seed costs will be relatively high. “If you saved seed from last year, you took it out of quota. Or, you'll buy seed this year out of last year's quota. For this one-year period, seed costs might be relatively high, but this eventually should adjust itself.”

Land rent will be reduced this year, he says, because growers no longer will be renting quota. “But we need to look closely at land rent for peanuts and all other crops. Don't rent yourself into a break-even situation.”

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