Peanut producers must adjust their farm planning decisions and marketing strategies to make the most out of their new government program, says Marshall Lamb, economist with the USDA National Peanut Research Laboratory in Dawson, Ga.
With the enacting of the Farm Security and Rural Investment Act of 2002, the peanut quota program was replaced with a marketing loan program. The new program, says Lamb, has a series of payments designed to provide producers with a safety net in terms of price.
“Producers of peanuts during the 1998-2001 period were assigned a peanut base determined from average plantings during this period,” explains the economist. “Such producers are termed ‘historic producers’ and must assign the peanut base to a farm by March 31. Once the base is assigned to a farm, it stays with the farm and cannot be reassigned in future years.”
The new program, he continues, provides an assortment of payments linked to base, production and marketing. The payments include the market price for peanuts, loan rate for peanuts, loan deficiency payment (LDP), market loan gain (MLG), direct payment (DP) and counter-cyclical payment (CCP).
“Peanut base entitles producers to a direct payment — which is guaranteed — and to a counter-cyclical payment — which is not guaranteed. For peanut producers with base, this series of payments can potentially add up to a target price for peanuts of $495 per ton.
“Producers with base are not guaranteed $495 per ton, and producers with base are not limited to no more than $495 per ton. To reach this price level, producers need two things: good planning to hedge against price changes and proper marketing,” says Lamb.
Under the old peanut program, farmers were not required to market peanuts actively, he notes. Even peanuts placed under CCC loan were marketed for growers. And, when profits were realized, GFA mailed a check to the farmer.
“Under this farm bill, producers must actively market their own peanuts,” says Lamb. “Rather than viewing this change as a problem, we should see it as an opportunity. However, growers should consider several points to insure that problems don't arise and place them in an adverse market situation.”
Basically, three scenarios exist for producers under the new peanut program, he says. These include producers who do not have peanut base and intend to plant peanuts, producers who have peanut base and intend to plant peanuts and producers who have peanut base and do not intend to plant peanuts.
If a grower does not have peanut base and intends to plant peanuts, he can receive those payments tied to production, including the market price for peanuts, loan deficiency payments and/or market loan gains, says Lamb. And a grower is eligible for an LDP if he doesn't have a base, he adds.
“Producers are not limited to $355 per ton. This is the floor established by the loan. With good marketing, producers can exceed $355 per ton by selling commercially at delivery and collecting a loan deficiency payment — if available — or by placing peanuts under the loan and collecting a market loan gain — if available.
“For example, if a $25 per ton equity was being offered for loan peanuts, producers would receive $355 plus $25, which is $380 for loan peanuts. Remember, this changes weekly. Farmers must watch and position themselves in the market by locking in a repayment rate, selling peanuts out of the loan at the right time, or waiting for markets to develop.”
Producers who have peanut base and intend to plant peanuts have the same marketing responsibilities as those with no base. The only difference, says Lamb, is that the base entitles them to the direct and counter-cyclical payments. The direct payment is a guaranteed fixed payment of $36 per ton and will not change with changes in peanut prices.
“The counter-cyclical payment is inversely related to market prices and can range from on payment up to a maximum of $104 per ton. In cotton and grain markets, we can ‘protect’ counter-cyclical payments by hedging with options in commodity markets. However, there is no commodity market for peanuts. In peanuts, the only hedge against declining counter-cyclical payments is production.”
If the market price of peanuts starts going up — which subsequently causes the counter-cyclical payment to begin going down — the only way to protect yourself is to sell your peanuts at a price that gets you to the target price, says Lamb.
“Let's take this one step further. The key is more than just production. Marketing also is vital, because if the price increase starts, you must own the peanuts to sell them. If you sell all of your peanuts at delivery, and the price of peanuts increases later in the marketing year, you won't be able to take advantage of the price increase. You could be hurt by declining counter-cyclical payments, and you could end up netting less than the target price.
“However, if you place your peanuts in the loan, and this situation develops, you can pay back the loan, sell at a higher price, and potentially net more than the target price without collecting the maximum counter-cyclical payment. Bear in mind — the only way this can happen is to have base, produce peanuts and market properly.”
The final scenario is the producer who has peanut base and does not intend to plant peanuts. If you have base, says Lamb, you don't have to plant to collect the direct and counter-cyclical payments. However, this is a potentially dangerous game, he cautions.
“The only guarantee in this case is $36 per ton. Depending on the average peanut price, you could collect a counter-cyclical payment anywhere from zero up to a maximum of $104 per ton. With no futures market, you cannot protect yourself from declining counter-cyclical payments.”
If the average peanut price goes to $459 per ton, the counter-cyclical payment will be zero, he says. “The weather always has affected price and it will again in the future. If is safe to assume that during some year of this farm bill, adverse weather will lead to price increases with corresponding decreases in the counter-cyclical payment. But can you survive a year collecting only the direct payment?”