U.S. peanut producers began 2004 with high expectations, coming off a record year in 2003, says Nathan Smith, University of Georgia Extension economist.

The 2003 U.S. peanut yield set a record at 3,159 pounds per acre. The Southeast led the way with a 3,238-pound yield, followed by the Virginia-Carolina Region at 3,126 pounds per acre and the Southwest at 2,962 pounds per acre. The Southeast's share of total production was 67 percent, says Smith, followed by the V-C at 10 percent and the Southwest at 23 percent.

"Basically, about 10 percent of the production market share has shifted from the Southwest and the V-C to the Southeast," he says. "Most of the shift has occurred from a decrease in acres in the Southwest and V-C with some increase in the Southeast."

A very encouraging market trend, says Smith, is the growth in domestic food use — by more than 9 percent this past year. The growth is more than three times what would be considered normal growth in food use.

"Producers received a higher price for the 2003 crop at 18.8 cents per pound or $376 per ton on average. The average price in 2002 was $364 per ton. Thus, many producers looked to 2004 with optimism for peanuts," says the economist.

Adjustments due to the new peanut program are evident in acreage shifts throughout the Peanut Belt, says Smith. Some areas have declined while some new areas have emerged, particularly in the Southeast, he adds.

The primary method of marketing under the new program is contracting with shellers, he says. "Sheller contracts are based off the loan repayment rate, where producers are offered so many dollars above the loan repayment rate. These contracts are termed 'option contracts' that give the sheller the right to purchase a producer's peanuts during a specified time period in exchange for the option price."

To give an example, last year a typical option price for runner peanuts was $25 above the loan repayment rate. The producer receives $25 plus the loan repayment rate, which was $355 most all of last year. The net price to the producer is $380 per ton.

"The government is paying for the cost of handling and storing loan peanuts, helping to carry of portion of the peanut inventory throughout the marketing season," says Smith.

Determining the "market price" for peanuts is proving to be a difficult task without a transparent pricing system, he says. It also makes it difficult to determine a National Posted Price for peanuts. The domestic, export, crush and seed markets all figure into the value of peanuts, with a majority of the crop contracted.

"The harvest and delivery of peanuts are pretty much the same, but the producer now has the responsibility to market his peanuts. With new rules for contracts and loans, producers need to be prudent in understanding their options and requirements for selling their peanuts."

Much like last year, the market is in a supply mode, says Smith. With the majority of the crop contracted, the market is closely watching harvest.

The October USDA crop forecast put U.S. peanut production at 4.13 billion pounds, down 7 percent from the September estimate and down fractionally from 2003. Yields are expected to average 2,972 pounds per acre, down 187 pounds from 2003.

The impact of three consecutive hurricanes is uncertain as harvest was just beginning when they hit the Southeast and carried heavy rainfall up through the Southeast and into the Atlantic Coast states, he says.

Last year's promising crop turned out to be a disappointment as damage from tomato spotted wilt virus and poor harvest conditions dropped yields in the Southeast, and the Virginia-Carolina region experienced a disaster year at 2,100 pounds per acre, says Smith.

An increase in carry-in stocks on Aug. 2, 2004, is estimated at 1,121 million pounds or 560,500 tons farmer stock equivalent. The projected ending stocks on July 31, 2005, is expected to grow to 1.335 billion pounds. This would be more than enough stocks to carry over to 2005, he says.

Roughly four months use is in the stocks inventory, notes Smith. "A question concerning stocks is whether the majority is for the edible market or just suitable for crush. The market would become nervous if the inventory dropped to two months supply or about 650 million pounds."

USDA estimates imports to be 50 million pounds, which would be above the 2003-04 total of 35 million pounds, says Smith. However, imports are still well below the minimum-access levels indicating that U.S. peanuts are preferred over foreign origin peanuts.

"The United States potentially could import more peanuts if a shortage were to develop in the future. Adding carry-in stocks, imports and production, the total supply of peanuts is expected to increase by 11 percent to 5.61 billion pounds in 2004."

The bad news of the year is that supply will again exceed demand, says Smith. The good news is that domestic food use made a dramatic jump, and the supply increase was due to excellent yields.

"The 2-million ton crop came at the right time for domestic use. The 2003-04 marketing year for peanuts ended on July 31, showing that total use of shelled peanuts for primary products increased 9.24 percent. This is a sizable increase for peanuts as year-to-year growth is typically between 1 and 3 percent when it's not negative."

The increase, says Smith, is attributed to peanut butter use growing 8.8 percent and snack use growing 21.4 percent. Factors leading to the food use increase include increased promotion and advertising, diet and health benefits, and lower shelled prices as a result of policy change in 2002, he adds.

Domestic food use is estimated at 2.448 billion pounds for last year, according to Smith. USDA is forecasting an increase of 3 percent for the 2004 crop to 2.523 billion pounds.

"The question concerning consumption is that despite the large increase in food use, total disappearance of peanuts did not quite equal the 2002-03 marketing year. Planted acreage was down, and the oil and meal market tighten raising prices. Are stocks being carried over because of lower demand for peanut meal and oil, or is there another reason?"

The export market was a major concern for shellers heading into the 2003-04 marketing year, says Smith. U.S. peanuts have not been competitive in the world market at $355, and the National Posted Price for peanuts brought the world price up rather than down.

"In recent years, other origins have gained market share in Europe, including Argentina. Argentina and China had short crops and worked to keep their market share in Europe. However, the United States was able to maintain exports and increase by a small margin due to the shortfalls elsewhere. The projection for the 2004-05 marketing year is to increase exports by 8 percent to 550 million pounds."

The USDA's harvested acreage estimates give a clearer picture of the impact of the new peanut program, says Smith, adding that some shifts in regional acreage and a drop in national acreage were expected.

Looking at the production history by region and nationally for the base periods of 1998-2001 and 2003, the 2003 harvested acreage would be 10 percent less than the base period average, he says. But the Southeast actually shows an increase of 4 percent versus a 26 percent decrease in the Southwest and a 33 percent decrease in the Virginia-Carolina region. The Southeast's proportion of total U.S. acreage is projected to go from about 55 percent to 65 percent.

"The marketing season average price for peanuts was published at 18.2 cents per pound or $364 per ton. Producers with peanut base should have received their last counter-cyclical payment for the 2002 in September. Provided a large crop is harvested, a similar counter-cyclical payment can be expected for the 2003 crop as was received for the 2002 crop."

e-mail: phollis@primediabusiness.com