Peanut revenue generated under the 2002 farm bill is higher than what would be generated under the previous farm bill when comparing 10 representative peanut farms in the Southeast, according to a recent study conducted by the National Center for Peanut Competitiveness.
After the passage of the Farm Security and Rural Investment Act of 2002, the peanut program changed from a supply-management system to a market-oriented one. Many farmers have questioned whether such a monumental change would be beneficial to producers.
In addressing the issue, the National Center for Peanut Competitiveness used the Southeastern representative peanut farms database to compare potential peanut revenue under the 1996 Freedom to Farm Act and the 2002 Farm Security and Rural Investment Act.
The peanut revenue under analysis of the 2002 Act includes direct and counter-cyclical payments and quota buyout payments. This analysis compares the difference in the annual gross peanut revenue under each of the bills for each of the farms, as well as a composite or average for the farms for the years 2002 to 2007.
The new farm legislation eliminates the two-tier pricing system consisting of quota valued at roughly $610 per ton and additionals valued from $132 (loan rate) to $350 (contract additionals) per ton.
In its place is a system where peanut quota has been bought out, peanut prices are to be determined by the market, with a marketing loan ($355 per ton), loan deficiency payments and decoupled payments providing a safety net for producers.
Producers want to know, states the study, if they really are better off under the new program as compared to the 1996 farm bill. The focus of the study was not to consider the economic viability of peanut producers, but rather to compare the peanut income generated under the two farm bills, says Stanley Fletcher, economist with the University of Georgia's National Center for Peanut Competitiveness.
“While this study does not provide details on the sustainability of these farms under the new bill, it does point at that, given the representative farm database, revenue generated under the 2002 farm bill is substantially greater than what might have been generated under the 1996 farm bill when all the various intricacies of the peanut industry are considered,” says Fletcher.
Analysis under the 2002 farm bill considered two production scenarios — no change in total production for the six-year period of the bill and a 2 percent increase in production for each year after 2002. Under the 2002 legislation, peanut income consisted of the value of production (quantity produced times the market loan price of $355 per ton) and government payments.
The government payments consisted of the annual quota buyout of 11 cents per pound on the pounds of quota each representative farm owned for years 2002 to 2006 and direct payments of $36 per ton and counter-cyclical payments of $104 per ton on 85 percent of the peanut “base” established on each farm for each year.
For the “base” payments, two scenarios were considered - that the farm received 100 percent of the eligible base payments, i.e., the producer was an effective negotiator, or that the farm received only the portion of base payments equal to the percent of cropland they actually owned (reflecting that many landowners “captured” the base payments associated with their land through higher rent prices, etc.).
Analysis under the 1996 farm bill considered quota and additional peanuts and consisted of three levels of pricing used to derive the value of production. For this analysis, quota pounds for 2002 were equal to the levels reported by each representative farm panel and were reduced by 2 percent for each succeeding year.
Likewise, total peanut production was assumed to decrease by 2 percent for years 2003 to 2007. Quota peanuts were priced at the prior support price of $610 per ton, half of the additionals were priced at $325 per ton - which was an average price for contracted additionals — and the other 50 percent of additionals were priced at $200 per ton, which reflects the average payout, including “pool profits” of loan additionals that were crushed. Quota rent also was taken into account in calculating peanut income under the 1996 law.
All other direct costs associated with peanut production were considered to remain constant under the two bills and were not a major focus in the study. While seed cost is expected to decrease under the 2002 bill, a seed price hasn't been established. Quota rent, however, directly affected income under the 1996 bill but was not an issue given the elimination of the quota in the 2002 bill.
To accurately compare the two bills, income under analysis of the 1996 bill was reduced by the quota rent, based on the representative farm data. Given that the prior program was a “no net cost” program, also included in the analysis under the 1996 bill was the potential assessment of $175 percent that would have been imposed on the quota produced in 2002 to cover the losses generated by the program in 2001. Then, for each representative farm and the composite of farms, the gross revenue under the 2002 bill was compared to the gross revenue less quota rent under the 1996 bill.
Results of the study showed that when producers captured 100 percent of the direct and counter-cyclical payments — regardless of whether production remained constant or increased under the 2002 analysis — revenue generated under the 2002 bill was higher than that generated under the 1996 bill for all years for all 10 farms, as well as the composite farm.
Likewise, when producers received the direct and counter-cyclical payments equal to the proportion of cropland owned, revenue generated by the 2002 bill was greater than that of the 1996 bill for all farms for all years when production was assumed to increase by 2 percent after year 2002.
When producers received the direct and counter-cyclical payments equal to the proportion of cropland owned, and production was held constant under the 2002 bill, revenue generated by the 2002 bill was greater than that of the 1996 bill for all farms for all years except 2007. Under this scenario — in 2007 — three of the representative farms had slightly lower income under the 2002 bill as compared to the 1996 bill.
When the aggregate of the six years is considered, the benefits from the 2002 bill can be seen to an even greater extent. If constant production is considered, the aggregate benefit of the 2002 bill over the 1996 bill ranges from $81,100 to $797,000 if the producer receives decoupled payments equal to the proportion of cropland owned.
If the producer receives 100 percent of the decoupled payments, those figures rise to $246,000 to $1,548,400 for the aggregate over the years 2002 to 2007. If production is considered to increase under the 2002 bill, the benefits received range from $115,000 to $972,000 for the proportion of decoupled payments equal to cropland owned and $280,000 to $1,723,400 with 100 percent of decoupled payments.