What is in this article?:
- Peanut Futures: Know the tools to handle peanut production risks
- Price discovery more difficult
- With no futures market, peanut producers face higher-than-normal farming risks.
- The main methods for marketing peanuts since 2002 have been marketing contracts and the marketing assistance loan provided by the government in the peanut program.
- There are also cooperatives that pool peanuts and sell to shellers.
SINCE PEANUT PRODUCERS don’t have a futures contract, price discovery is a little more difficult.
With no futures market on which to base planting decisions, peanut producers face higher-than-normal farming risks, making it even more important that they know the tools available to help manage these risks.
“In peanuts, particularly on the price side, you’re working with limited information,” says Nathan Smith, University of Georgia Extension economist. “In the spring, you’re trying to decide how many acres you’re going to plant, and where to go to get prices. Growers are responding to markets now, and looking at costs and returns.”
(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 fourth story in the series.)
And that’s not a situation that’s likely to change anytime soon, he adds.
“I don’t think we’ll ever have a futures market for peanuts in the U.S.,” says Smith. “It’s the same problem as with rice – you have fewer players, so the problem is getting enough liquidity in the market for it to actually work. Also, peanut markets in the U.S. are more of an edible market, and the world market is more of an oil market. So we have two different markets. We might be able to get enough liquidity in the world exchange, but then you’d have two different markets and two different prices.”
There are, however, other tools available to help peanut producers manage risks, he says. “As a producer, you’re basically taking inputs and producing outputs to meet a certain market demand. We’re producing peanuts to meet a demand for peanut butter, candy, snacks and in-shell peanuts."
To be able to keep doing it, there has to be a profit in that risk. There’s also a lot of uncertainty as far as revenue goes, and that’s a risk.
“There’s a chance for loss, with low prices and low yields. Risk is defined as a possibility of adverse outcomes due to uncertainty and imperfect knowledge in decision-making. That certainly defines the peanut market when we talk about weather uncertainty, production uncertainty and limited knowledge when it comes to making decisions," he said.
Growers deal with various risks on the production side, says Smith, with No. 1 being weather. Other factors include pests, new technology, machinery efficiency, and the availability, quality and efficacy of inputs.
“As margins get tighter, machinery efficiency is becoming more important – being able to optimize the acres that you’re growing. There are varying costs and returns across the country, and there are differences across commodities. The top one-third of producers are more efficient with their machinery. Others may have low inputs because they have better ground and produce more from an acre of land.”
Crop insurance is one of the main tools for managing the uncertainties of weather, he says. “The top two crop things losses that crop insurance pays on are drought and heat and excess moisture or flooding. More than 30 percent of payouts go towards heat and drought and about 25 percent go towards excessive moisture. One of the reasons crop insurance is utilized is for financing, with bankers and lenders requiring crop insurance before they’ll approve a loan.”
In addition, government programs provide a safety net for growers, whether through price, disaster assistance or a loan program, says Smith.
Irrigation will continue to be important as a risk management tool, with growers seeing a strong response from irrigation in peanuts, especially when planting improved varieties, says Smith. Irrigation is probably the number one tool for production risk. In Georgia this past year, more than 50 percent of the acres or about 22017,000 acres were irrigated , according to FSA.
“So irrigation is an important risk management tool for peanut producers. In the Southwest, Texas, New Mexico and in the peanut production area of Arkansas, pretty much all of the peanut acreage is irrigated. In Georgia’s neighboring states – Florida is at 29 percent irrigated, Alabama at 4 percent, and South Carolina at 15 percent of peanuts irrigated – not a lot of irrigation compared to Georgia. That’ll fluctuate in Georgia each year, between 40 and 50 percent. We have more than 1 million acres of irrigated land in Georgia, so it’s certainly an important tool.”