The peanut market is over-supplied — that is the one certainty as producers begin to make planting decisions for 2009.

“We do need an acreage reduction to get these markets back into balance,” says Marshall Lamb, research director for the National Peanut Research Laboratory in Dawson, Ga. “If we don’t, and we end up over-supplying for 2009, we will be over-supplying going into 2010, and we’ll have to pay back in both years.”

Speaking at the recent Central Alabama Peanut Meeting, held in Shorter, Lamb cautioned growers that circumstances could change rapidly this year, depending on acreage and yields. “We could see some large swings this year that could have late-season effects on the market,” he says.

To determine how the peanut market got in its current state, it’s helpful to look at recent production years, says Lamb. In 2004 and 2005, there were 1.4 million and 1.6 million peanut acres, respectively, in the United States. “Those were big crops with yields, and you could see the impact in 2006 and 2007 when we went down to 1.27 and 1.195 million acres, respectively.

“This time last year, there were contracts offered on farmer stock peanuts of $500 to $525. "Because of 2006 and 2007, the manufacturers and the shellers were aggressively trying to buy back some peanut acres. A lot of farmers signed those contracts and planted a few extra peanuts, up to 1.5 million farmer stock acres,” he says.

Based on supply and demand, this acreage was just about what was needed for an average yield. But the yield in 2008 was above average, the highest recorded U.S. peanut yield.

“We were blessed to get the rainfall we received, and we delivered a crop that averaged more than 3,400 pounds per acre. In addition, it was an excellent quality crop,” he says.

In 2004, growers produced 2.5 million farmer stock tons of peanuts and 2.4 million tons in 2005. Then, explains Lamb, farmers reduced acreage in 2006 and 2007.

“Then, the contract offers came, we had good weather, and we produced roughly 2.5 million tons last year in the United States,” he says.

The marketing year for peanuts, notes Lamb, extends from August through July of the next year. “The ‘carry-out’ is the amount of peanuts that are needed to supply the sheller in August, September, and October, until new-crop peanuts come in. That’s what we mean when we say ‘carry-in.’”

Typically, U.S. shelling capacity is roughly 160,000 to 165,000 farmer stock tons per month. So about 500,000 tons are needed to keep the mills full while the new crop comes in, says Lamb.

“From the 2005 crop, we brought in about 700,000 tons, and that’s a little too much. We reduced the crop in 2006 to 1.695 million tons, and this gave us a total supply of just under 2.4 million tons. Taking off a 1.85-million ton demand, left us with a carry-out in 2006 going into 2007 of 545,000 farmer stock tons, a reasonable amount.”

In 2007, 1.8 million farmer stock tons were produced. With the carry-out added, the total supply was 2.4 million tons. After demand, the carryout was 455,000 tons at the end of 2007.

“That’s why we were seeing such good contracts last year,” says Lamb. “This is a very tight number, and it makes the market nervous that there won’t be enough peanuts to keep the mills running until the next crop.”

In 2008, good weather conditions helped to produce about 2.5 million tons of peanuts, he says. Add to that a 450,000-ton carryover, and it gives us a total supply of 2.9 million farmer stock tons.

“We’re hoping for a 2-million ton demand. That would bring us to carry out 946,000 tons from 2008. It’s uncertain at this point what this salmonella threat will do to demand. Peanut butter demand had been going up, because peanut butter sales increase during a weak economy. It’s one of the best values in terms of food and protein. We’re hoping we can move these peanuts.”

As growers move into 2009, the number 946,000 is of great importance, he adds. “How many peanuts do we need to produce in order to get supply and demand back into balance? Consider if we bring 946,000 tons into 2009, and we have a demand of 2.1 million tons, then we need to produce a U.S. crop of roughly 1.65 million farmer stock tons. Add that to the carry-in, and you have a 2.6-million ton supply. Hopefully, a 2.1 million-ton demand would give us a 500,000-ton carryout going into next year. If that occurs, we could see some premiums for farmer stock peanuts.”

But what if this doesn’t happen? “This is the key. To get supply and demand back into balance, we need a 2009 production of 1.65 million farmer stock tons. We have had an average U.S. yield over the last eight years of 2,974 pounds. That means the acres we need to achieve this goal are roughly 1.12 million acres, or a 22-percent reduction from the 2008 plantings. This is a big drop-off from where we were in 2008, but close to our acreage in 2007.”

Assuming this 22-percent acreage reduction occurs, then growers need to start looking at the yield potential of the 2009 crop, says Lamb. One standard deviation in the average yield could bump it up to 3,350 pounds or drop it to 2,600 pounds. If the crop is one standard deviation above the average, it could deliver 1.83 million tons into the market. If it’s one standard deviation below the average yield, it’ll be a 1.476-million ton crop.

One standard deviation above the average yield will leave a carryout of 677,000 farmer stock tons going into 2010 — not a good situation, says Lamb. But one standard deviation below would leave a carryout of 322,000 tons.

“Manufacturers and shellers will get nervous with a 300,000-ton carryout, and they should because they have to keep their mills running year-round to be efficient. So even if we cut back on acres, there still could be some huge swings in this market. If we have higher-than-average yields, and our carryout is larger than we need, then prices will remain depressed through 2009 and through a good portion of the 2010 crop. If we have lower-than-average yields, we’ll be under-supplied in 2009 and 2010 and it’ll put upward pressure on peanut prices.”

If there is upward pressure on prices — because of the excess carryover in the pipeline — upward pressure on prices probably won’t materialize until late 2009, and it will materialize at that time when the shellers start offering contract prices to entice more acres in 2010, says Lamb.

This could have an impact on growers’ marketing plan, he says. “If this happens late, the only way producers can take advantage of it is to have some peanuts in the loan under your control — not in an options contract. If a contract comes out, and it seems attractive, take it for a portion of your crop. But if you think all farmers will cut back and there will be upward pressure on prices, I suggest you have some of them in the loan late in the year so you can take advantage of any offers that come out.

“There are two reasons for this. One, you need to do it for your current production. The other reason is that if prices do start going up, it’s the only hedge you’ll get with peanuts against prices going up and our counter-cyclical payments going down. It’s important to balance your marketing this year, more so than ever.”

e-mail: phollis@farmpress.com