Adapting to a New Peanut Program
and a New Risk Environment
2005 National Risk Management Education Conference
Nathan Smith, University of Georgia,
Jim Pease and Mike Roberts, Virginia Tech,
Gary Bullen, North Carolina State University,
Kim Anderson, Oklahoma State University,
Tim Hewitt, University of Florida,
Stanley M. Fletcher, University of Georgia
Peanut are Grown Primarily
in 9 Southern States
Alabama, Florida, Georgia, New Mexico, North Carolina,
Oklahoma, South Carolina, Texas & Virginia
Source: Dr. John Baldwin, UGA Extension Peanut Specialist
Who Buys and Process
Peanuts?
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Peanut Shellers
Blanchers
Oil Mills
Peanut Butter Manufacturers
Candy Manufacturers
Snack Companies
First Buyer Level of Peanut
Marketing
• Two shellers purchase an estimated 80% of
the US peanut production.
• Buying Points handle and store peanuts for
shellers. Several also provide farm inputs and
supplies. Some are independently owned but
typically buy exclusively for one buyer.
• Majority of peanuts are shelled after which
some will be blanched and roasted depending
on end use.
Production History
• Peanuts have been historically grown under a
quota program.
• Quota was limited to domestic use only.
• Additionals used for export and crush.
• Quota began as acreage allotment then
changed to poundage allotments in late 70s.
• Based on historical production, no movement
across states, limited movement across
county lines.
Policy Changes Lead to a New
Risk Environment for Peanuts
• Elimination of “Section 22” blocking
imported peanuts under WTO.
• Declining schedule of Tariff Rate Quotas
for imported peanuts.
• Political economy changes in Congress
• The 2002 Farm Bill eliminates the
peanut quota allotment program that
had been in place since 1930s.
2002 Peanut Program Basics
• Quota Poundage Allotments Eliminated
• Provided 55 cents/lb Quota Buyout to
Quota Owners
• Established a Marketing Assistance Loan
Program for Peanuts
• Peanut Base (yield and acres)
Established
– Direct Payment
– Counter Cyclical Payment
Program Transition
• Moving from a supply control program that restricted
production through quota poundage allotments and a
two-tiered pricing system to a more market-oriented
program.
• Support price lowered from $610 to $355 per ton.
Non-quota (additionals) support price was $132 to
$175 per ton.
• DCP payments for peanuts:
– Minimum of $36/ton on 85% of base
– Maximum of $140/ton on 85% of base
– Subject to payment limitations
• Buyout of quota owners designed to aid transition
Peanut Quota Buyout by State
State
Quota Buyout
($million)
State
Quota Buyout
($million)
Georgia
$440.3
New Mexico
$5.4
Alabama
$136.2
Mississippi
$4.7
Texas
$129.7
Arkansas
$1.8
North Carolina
$98.0
Arizona
$0.8
Virginia
$61.5
California
$0.6
Oklahoma
$56.8
Missouri
$0.2
Florida
$40.4
Louisiana
$0.1
South Carolina
$6.6
Environmental Working Group (www.ewg.org, accessed 10/21/03), with data from USDA/FSA
2003 Peanut Program Base Acres &
Average Program Yields by State
600,000
3046 3155 3134 3126
500,000
2780 2901
3192
3000
2597
2000
300,000
1500
Base Acres
Program Yield
200,000
1000
100,000
500
Source: USDA/FSA Price Support Division
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Minimum and Maximum
2003 DCP Payments by State
A Lot of Uncertainty
• How will the marketing loan program work?
• What are the marketing alternatives for peanut
producers?
• Increased supply risk for peanut buyers (shellers).
• Peanut buying points (first handler of peanuts and
marketing representative of shellers) uncertain of role
in new program, who will pay for handling and
storage of peanuts?
• No public exchange or terminal market prices.
• How will manufacturers respond to lower price for
shelled peanuts?
• Where will peanuts be grown?
Risk Management Education
Opportunity
• Producers, Bankers, Shellers, Buying Point
Managers, USDA/FSA, Production Specialists
and County Educators.
• Lot of focus on program provisions,
mechanics and base update/establishment
decision.
• Producers used to delivering peanuts and
picking up check, need help in evaluating
marketing alternatives and developing price
risk management strategies.
Southern Region Peanut Risk
Management Team
• Team formed to address marketing risk
issues for peanuts.
• Group supported by Southern Region
Risk Management Education Center
• Organizers were:
– Kim Anderson, Oklahoma State University
– Gary Bullen, NC State University
– Jim Pease, Virginia Tech University
– Nathan Smith, University of Georgia
Objectives
• Develop educational materials for
marketing peanuts under the new
peanut program.
• Conduct train-the-trainer workshops.
• Deliver education programs through
local producer meetings.
Activities
• Two Regional Train-the-Trainer Workshops
– Roanoke Rapids, NC - December 16, 2003
– Tifton, Georgia – January 27, 2004
• Peanut Marketing workshops for producers
and county agents in Florida, Georgia, North
Carolina, Oklahoma and Virginia
• CD with presentations and factsheets
• Revised factsheets are in development
Train-the Trainer
Workshops
• Original plan to have a regional
workshop in each of the three main
production regions:
– Southeast,
– Southwest,
– Virginia-Carolina.
Peanut Marketing Train-theTrainer Workshop Topics
• Peanut Program Overview and USDA
Implementation
• National Posted Price for Peanuts
• Domestic and International Structure
• Peanut Contracting
• Market Outlook
• Financial Keys to Success
• Lender’s Considerations
• Issues Facing the Peanut Industry
Marketing Virginia Peanuts:
New Peanut Program and New Industry Dynamics
Regional Peanut Marketing Workshop
Location: Ralph’s Barbeque, 1400 Julian R. Allsbrook Hwy, Roanoke Rapids, NC
Date: December 16, 2003
Workshop Program
9:00 - 9:15
Introduction Welcome, agenda, workshop objectives, handout materials.
9:15 - 9:45
Basic Mechanics and Implementation of the Peanut Program
Jim Pease, Virginia Tech
9:45 -10:15
USDA Structure and Functions of the Peanut Program
Tonye Gross, USDA/FSA
10:15-10:30
Break
10:30-11:00
USDA Resolved and Pending Issues in the Peanut Program
Dan Stevens, USDA/FSA
11:00-11:40
New Structure and Dynamics of the US Peanut Industry
Nathan Smith, University of Georgia
11:40-12:10
Market Outlook for 2004
Dell Cotton, PGCMA
12:10-1:10
Lunch
1:10-1:40
Peanut Lending after the 2002 Farm Bill
Michael Lacks, Colonial Farm Credit
1:40-2:20
Peanut Contracting
Mike Roberts, Virginia Cooperative Extension
2:20-3:00
Keys to Financial Success in Producing Peanuts
Gary Bullen, North Carolina State University
3:00-3:15
Peanut Revenue Estimator
Nathan Smith, University of Georgia
Southeast Regional Peanut Workshop
“Marketing Peanuts: New Peanut Program and New Peanut Industry Dynamics”
Date: January 27, 2004
Workshop Program
10:00 - 10:15 Welcome and Introductions
10:15 - 10:45 Basic Mechanics and Implementation of the
Peanut Program
Jim Pease, Virginia Tech University
1:00-1:40
Peanut Contracting
Mike Roberts, Virginia Cooperative Extension
1:40-2:10
Keys to Financial Success in Producing Peanuts
Gary Bullen, North Carolina State University
2:10-2:20
Break
10:45 -11:05 Peanut Program Update
Ray Pate, USDA/FSA, Tifton
11:05-11:15
Break
2:20-2:40
11:15-11:45
National Posted Price – What is it and How is it
Used?
Kenny Robinson, USDA/FSA, Washington, DC
Market Outlook for 2004
Tim Hewitt, University of Florida
2:40-3:20
Domestic and International Structure of the
Peanut Industry
Nathan Smith, University of Georgia
Peanut Megatrends: A Potpourri of Issues
Stanley M. Fletcher, National Center for Peanut
Competitiveness, University of Georgia
3:20-3:30
Questions & Adjourn
11:45-12:15
12:15-1:00
Lunch (provided)
Sponsors and Partial Funding by:
The Southern Region Risk Management Education Center
UGA Cooperative Extension Service
National Center for Peanut Competitiveness
Georgia Peanut Commission
Regional Workshops
• North Carolina
60 Workshop participants: lenders, county
agents, buyers, County FSA personnel
• Georgia
50 participants: shellers, buying point
managers, lenders, agents
• Participants received CD with copy of
presentations and factsheets.
Oklahoma
• Schedule conflicts and logistics precluded a regional
meeting.
• Kim Anderson partnered with Shelling Firms and
Southwest Peanut Cooperative Marketing Association
to do a series of meetings.
• Developed Marketing Oklahoma Peanuts factsheet,
Excel pricing model, and powerpoint presentations to
help producers identify and manage price risk.
• 12 workshops in Oklahoma where material and
information developed by the Southern Region Peanut
Risk Management group was shared with about 360
producers, buyers, agricultural industry professionals
and educators.
Excel Peanut Pricing Model
North Carolina & Virginia
• Gary Bullen and Blake Brown conducted 8 peanut
meetings with North Carolina producers with a total
participation of about 500.
• Multi-state meeting was organized by Mike Roberts in
Virginia, January 2004. Risk management information
presented regarding peanut processing, peanut
production, peanut cost analysis, marketing
alternatives with and without contracting. 277
producers (169 Va, 108 NC), 5 shellers/processors,
27 lenders.
• Participants received CD containing 2004 budgets
and seminar proceedings.
Georgia & Florida
• 38 county level producer meetings in GA
during 2003 and 2004 covering peanut
marketing, 1,483 participants.
• Agent training in both GA and FL.
• Southern Peanut Growers Conference,
Panama City, FL – Peanut Marketing Options
by Nathan Smith, Tim Hewitt and Marshall
Lamb, about 125 participants, mostly
producers.
• Series of articles during 2003 on peanut
marketing in the Southeastern Peanut Farmer
Magazine.
Other Training
• Southern Extension Committee Meeting
in 2003. Kim Anderson made a
presentation on marketing peanuts to
joint committees on Farm Management,
Marketing and Public Affairs.
• Nathan Smith presented marketing
alternatives to 150 producers at 2003
Ag Expo in South Carolina.
Key Marketing Issues
• Quota was often contracted by shellers to insure their
market share.
• “Loan” peanuts prior to 2002 were thru CCC
approved regional grower Cooperative Marketing
Associations. Marketed on behalf of the grower
through pool.
• Marketing Assistance Loans are made on individual
basis and must be stored in CCC approved
warehouse (federal license).
• Marketing pools allowed through Cooperative
Marketing Associations, but not the sole loan
servicing agent for CCC as before.
• Concentrated buyers market with little price
information.
Sources of Peanut Income Under
New Peanut Program
• Market
– Cash Sales
– Contract Sales
Tied To Production
• Government
– Marketing Loans
– Direct Payments
– Counter-Cyclical Payments
– Buyout
Not Tied To Production
What are the Marketing
Alternatives for Peanuts?
• Sell peanuts to commercial buyers
(shellers) through buying points.
• Place peanuts in the CCC marketing
assistance loan and forfeit the loan.
• Place the peanuts in a marketing pool.
• Farmer-owned shelling and marketing.
Marketing “Tools”
• Forward Contract
• Sell at Harvest for Cash
• Marketing Pool (CMAs such as GFA)
• Store in Approved Warehouse and
Use Marketing Loan
• Store On Your Own – Risky!
• Pros and Cons covered in workshops
Marketing Loan Peanuts
• Heavily used by shellers in an indirect way
through “option” contracts.
• Two big benefits to sheller:
– Financing inventory through the marketing loan
program, major savings for shellers
– Ditto for handling peanuts at the buying point,
sheller was paying before 2002
• Shellers have more control once peanuts in
their warehouses and/or under contract.
• Nine month loan is potential challenge for
cleaning out warehouses in time for harvest.
Response to New Risk
Environment
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Heavy use of market contracts.
Price is tied to loan repayment rate.
Right of first refusal on surplus production.
Contracted peanuts go into market loan
which pays handling and storage fee.
• Has “Act of God” clause for short deliveries.
• Shift in where peanuts are grown.
• New grower-owned ventures in peanut
processing and marketing.
Barriers to Entry
• New peanut program provided window of
opportunity for entry of new shellers,
• Two groups of farmers have invested in their
own shelling plant in Georgia,
– Donalsonville, Georgia
– Tifton, Georgia
• CMA and DMAs designed to allow farmers to
market peanuts in a pool
– GFA, Concordia, SWPGA, VCPGA
Tifton Quality Peanut Building an
Innovative Farmer Stock Storage System
Price Variability
• To date price volatility has not been a
problem,
• It is fortunate that the economic
fundamentals of peanut market have
been in balance during the
implementation of new program,
• Price Contract is the main marketing
tool with farmers to date.
Risk Management and
Efficiency Gains
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Electronic warehouse receipts
Semi trailer hauling and drying
Electronic grading
Green weight grading
Cleaning and drying systems
Storage technology to reduce shrink and
damage
• System is currently inefficient for segregation
by variety and grade
Control Beyond the Farm Gate
• THE DAY IS COMING OF IDENTITY
PRESERVED.
• 14 varieties grown in Georgia in 2004,
• Integration will happen, will farmer be
integrated or will they integrate up?
• Aflatoxin, genetic traits such as hi-oleic,
size, color, taste…
• Mandatory chemical testing
Challenges
• Export market
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Same peanut competes for domestic and export markets
$355 historically higher than world market
Stricter specifications in EU market, i.e. Aflatoxin level
Argentina can deliver similar quality, except for taste
• Nine month marketing loan for a semi-perishable crop
• Price Discovery
– Shellers wanted the government to set the price
– Government wants market to set the price
• Price Transparency
– Does National Posted Price reflect the market price
– Does the Average Season Price reflect what the farmer
receives?
• Handling and Storage Fees
• Integration and Control
Challenges in Delivery of Risk
Management Education
• Smaller commodity relative to acreage
and states producing peanuts – fewer
resources dedicated to peanuts.
• Distance and logistics of collaborating
with other states.
• Extension specialists have major
responsibilities in other areas:
commodities, subject area, teaching
• Evaluation of impact.
Thank You
http://www.ces.uga.edu/Agriculture/agecon/agecon.html