After doing things the same way for more than six decades, U.S. peanut producers can't learn in a single year all there is to know about their new marketing system. Moving from government quotas to a more market-oriented approach has created numerous opportunities and uncertainties.
Marketing alternatives now available to peanut growers include contracts, cash sales at harvest, cooperative marketing associations and the marketing loan program.
“We're in an entirely different situation now,” says Tim Hewitt, University of Florida Extension economist. “We have to find out how this market works. Last year, no one knew what was going on. This year, we know more but still not enough. Things will change once we find out exactly what is going on.”
The bottom line, says Hewitt, is that growers should be aiming for an option that will bring them more than the government support price. “When all is said and done, there's a good chance growers will see more than $450 per ton for their peanuts. I'm encouraging my growers to think in terms of between $450 and $500 per ton. They might even see more than $500 per ton,” says Hewitt.
Growers, he says, should take a good, hard look at commercial contracts with shellers that'll bring some premium. “I'd advise them to see what they can work out with the shellers and look at any contracts that are above the support price. Some sheller contracts contain various stipulations, and growers should be aware of these,” notes the economist.
Hewitt believes the initial USDA planting intentions report — showing Florida's peanut acreage increasing from 96,000 acres in 2002 to 110,000 acres this year — could be realized.
“We keep hearing stories about the large acreage increase in South Carolina, and I think we'll see an increase throughout the Florida peanut belt. And growers should keep a close watch on these acreage reports. Somewhere down the road, supply and demand issues are going to become the big factor. Contracts basically will be made on the needs of the shellers, and they'll be watching reports showing the supply we had the previous year, and what we have going into the current marketing year.”
Another viable marketing option for peanut growers will be cooperatives, says Hewitt. “A cooperative is a good idea with this peanut program, and it obviously can offer some type of premium. If given the opportunity, a grower should consider the co-op option. Anything that'll give them a little extra edge will help. Many growers are standing back and watching how these first peanut co-ops perform for their grower members. We'll probably see more of them in the future.”
The major differences between peanut contracts now and before 2002 are the delivery requirements and how the price is determined, says Nathan Smith, University of Georgia Extension economist.
There were two basic contracts last year, he explains, and they included harvest delivery and optional delivery or an “option-to-purchase” agreement.
“The type of delivery is important because it can affect eligibility for a loan deficiency payment (LDP). For a harvest delivery contract, the sheller takes ownership during delivery at harvest. To receive an LDP — if the National Posted Price is below $355 at harvest), a request must be made at the FSA office using form CCC-709 prior to harvest,” he says.
The option-to-purchase contract, he continues, gives the sheller the option of when to take ownership of the peanuts. If the sheller decides to defer ownership at harvest, the producer enrolls the peanuts in the marketing loan and stores them in a CCC-approved warehouse. Then, the sheller will purchase the peanuts out of loan at a later date.
“Care must be taken that LDP or loan eligibility is protected when contracting,” says Smith. “This means maintaining beneficial interest until the peanuts are sold. The FSA defines beneficial interest as retaining control, risk of loss and title to the commodity. Beneficial interest can be lost prior to delivery if one of these conditions is not met. So, it's important to have a clear interpretation from FSA on how the contract affects beneficial interest.”
Recent contracts, he says, have tied price to the loan repayment rate, which is the National Posted Price. As long as eligibility is maintained for the loan program or LDP's, the producer is guaranteed a price equal to the loan rate or above the loan when a premium is included.
“For example, a contract with a $25-per-ton premium above the National Posted Price would assure the producer a price of $380 per ton ($355 loan rate plus $25 premium) provided beneficial interest was maintained until the peanuts were sold.”
The total price received, he adds, is dependent on the adjustments made for grade. The grading procedures did not change in 2002, and the official weights and grades on the FSA 1007 are used to determine total dollars per-ton received. For contracts, shellers either may use their own or the FSA loan discounts and premiums for different grades.
An important factor to consider in pricing is how shrink is handled, says Smith. “Shrink of about 3.5 percent is automatically deducted from peanuts in the loan where as it can be treated differently with contracts, such as using the total weight from the FSA-1007. Another factor to consider is how much of your total production you want to lock in a price if you have peanut base.
“Prices at harvest and later in the marketing year could rise, thereby lowering the counter-cyclical payment. To offset a lower counter-cyclical payment, you'll need to have peanuts to sell at the higher price.”