The U.S. peanut industry is preparing to pay a heavy price for decisions made last spring, says George Lovatt of the Georgia peanut brokerage firm Lovatt and Rushing.

“We have to understand that if we’re going to sell more peanuts, we’re going to have to grow more peanuts. A friend of mine told me you can’t sell out of an empty wagon — well we’ve got an empty wagon,” said Lovatt at the recent Southern Region Agricultural Outlook Conference in Atlanta.

Looking at recent supply/demand numbers, Lovatt says the U.S. carried out 940,000 tons from the 2009 peanut crop, or 161 days worth of peanuts. The peanut marketing season runs from the first of August through July 31.

“That got us through December, and it was January before we ran out of 2009 crop peanuts. As you can imagine, peanuts were plentiful and cheap,” he says.

For 2010, the U.S. carried in 940,000 tons and made what should be a reasonable crop of 2.74 million tons, says Lovatt.

“Then, we ran into a quality buzz saw. We had aflatoxin contamination in the Southeast crop like I haven’t seen since 1980. It was a very expensive and problematic crop to deal with, and we’re still dealing with it today,” he says.

The costs of handling the 2010 crop increased due to the re-milling, blanching and cleaning required, he adds.

“Concurrent with that, you had demand from other crops such as corn and cotton, raising the price we had to pay for farmer stock for the 2011 crop, and the result is we saw some pretty dramatic price increases in 2010.”

On July 31, USDA reported a peanut carry-out of 758,000 tons, with adjustments for quality, Lovatt estimates a carry-out of 730,000 tons, or 118 days worth of peanuts. This amount normally would be adequate, he says.

Looking back to 2002, when the new peanut program began, whenever the carry-out days get to 90 or below, supplies get tight and prices go up, says Lovatt.

“The crop year starts at the first of August, but we don’t really begin harvesting until the middle of September, so we’re 45 days into it. By the time you accumulate enough peanuts to crank up some of these enormous shelling mills, clean up the crop, have it graded, and establish a critical mass so we can start up the mills, you’re talking about the first week of October.

Reasonable number

“Then you put them in rail cars and it takes 10 days or so to take them to the manufacturing facility. So 90 days is a reasonable number.

“Runner peanuts really drive the engine, and that number typically is below that average. Whenever we get over 150 days, prices plummet.”

The September USDA estimate indicates a 2.2 million ton demand and a 1.7 million ton supply, says Lovatt, so problems lie ahead.

According to supply and demand estimates, the U.S. will carry in 730,000 tons. “Assume we make 1,729,000 tons, and we’re making no quality adjustments — even though we’re beginning to see aflatoxin issues in the 2011 crop — and assuming all else is constant, we carry out 317,000 tons or 51 days of carry-out. That’s just not enough. It’s a model that’s unsustainable.”

Over the next 12 months, the U.S. needs to increase imports, reduce export demand, reduce domestic demand, reduce crushings and, most importantly, increase plantings to replenish the 2012 crop, says Lovatt.

It’s early in the game, he says, to start making estimates for the 2012 crop. One variable is imports.

“We don’t know what imports will do. Finding imports will be difficult because there’s a world shortage of peanuts. The countries we normally import from such as Argentina have Europeans begging for their peanuts, and those countries will be more consistent customers than the U.S.

“At this point, I’m guessing a carry-out of 98 days to transition comfortably into the new crop. This could be a catastrophe for peanuts. The price of medium runners from a year ago was 45 cents, and I’ve heard of some trading now for $1.26. Who knows where prices will go?”

Manufacturers already are in the process of increasing prices to consumers, he says. Jif has announced a price increase of 30 percent beginning in November, and Skippy and Peter Pan will follow. “Manufacturers are aggressively pursuing a course right now to ration demand,” he says.

Acreage is anybody’s guess

For 2011, USDA estimated that U.S. growers planted 1,147,000 acres and will harvest 1,114,000 acres.

“How many acres we need for 2012 will depend on the estimated yields for 2012. But no matter what you guess, 1,114,000 acres will not be enough to satisfy demand in the 2012 crop.

We have to keep in mind that we’re not growing more acres. When we look at corn, cotton, peanuts and sorghum, in the peanut-producing states, it’s amazing how constant the acreage is. We’re dealing with 25 million acres of row crops. If we’re going to increase acres, we have to take it from somebody else.”

If the 1,114,000 harvested acres from this year are increased by 20 percent, and growers make 3,100 pounds per acre, they’ll make 2,072,000 million tons against a demand of 2,043,000 million tons, says Lovatt.

“So we just hold even and limp along. There’s no growth and we can’t export peanuts or grow domestic demand. Basically, we’ll have to increase acres by 100,000 to 200,000 acres next year, and we’ll do that by paying prices for farmer stock.

“People ask me what’ll we have to pay for farmer stock next year? I’ve heard guesses as high as $900 per ton and as low as $550. That lower number may be right if cotton goes to 60 cents and corn goes to $4, but I don’t think that’ll happen. A price of $900 will be too low if corn goes to $8. It’ll also depend on the price of cotton.”

Lovatt says there will be competition this time around. “The manufacturers and shellers, unlike this past year, understand the imperative of competing with corn and cotton for acres.”

The U.S. dollar index also will have a huge impact on commodity prices, he says. As the value of the dollar increases, the value of commodities decrease, and the value of crude oil will have an impact on production costs.

“We have daunting challenges ahead, but we’ll meet those. Peanuts are a terrific crop. They continue to provide healthy nutrition for people everywhere. We have to roll up our sleeves, get more acres planted, and weather this storm. It’s a shame we have to go through this, but we did it to ourselves.”