The 2008 Farm Bill continues the current peanut program of the 2002 Farm Bill with only a few modest changes. The peanut loan rate and target price are continued at the same level, and the separate payment limitation for peanuts is maintained. Consistent with the last year of the 2002 Farm Bill, government payment of storage and handling is discontinued for the new five-year Farm Bill with a minor exception. Also, there is a reduction of direct payments for peanuts by reducing the percentage of base acres for payment from 85 percent to 83.3 percent in the 2009 through 2011 crop years.

For peanuts and other commodities, the law is modified to prohibit payments to a producer on a farm if the sum of the base acres of the farm is 10 acres or less. This prohibition applies to direct payments, counter-cyclical payments and average crop revenue payments. The new peanut program is contained in Subtitle C of Title I of the Food, Conservation and Energy Act of 2008 (Sections 1301-1308).

Adjustment Of Base Acres For Peanuts
The term “base acres for peanuts” means the number of acres assigned to a farm pursuant to the 2002 Farm Bill (Sec. 1301(1)(A)). The new Farm Bill requires the Secretary of Agriculture to provide for an adjustment “in the base acres for peanuts for a farm whenever” certain “circumstances occur”, including the expiration of a conservation reserve contract (Sec. 1302(a)(1)). In order to prevent excess base acres, the Secretary of Agriculture “shall reduce the base acres for peanuts for the farm or the base acres for one or more covered commodities for the farm…” (Sec. 1302(b)(1)). The Secretary of Agriculture “shall give the owner of the farm the opportunity to select the base acres for peanuts or the base acres for covered commodities against which the reduction is required…” (Sec. 1302(b)(3)).

“The owner of a farm may reduce, at any time, the base acres for peanuts for the farm” and such reduction “shall be permanent” (Sec. 1302(c)(1)). The Secretary of Agriculture “shall proportionately reduce base acres on a farm for peanuts for land that has been subdivided and developed for multiple residential units or other non-farming uses…unless the producers on a farm demonstrate that the land…remains devoted to commercial agricultural production; or…is likely to be returned to the previous agricultural use” (Sec. 1302(c)(2)(A)).

Peanut Storage And Handling Costs
The 2002 Farm Bill used funds of the Commodity Credit Corporation (CCC) to provide payments for storage, handling and associated costs for peanuts in the loan. However, these payments expired before the 2007 crop year for peanuts and constraints on the budget made it impossible to continue the storage and handling payments in the new Farm Bill.

The new peanut program instructs USDA to pay handling and associated costs (other than storage costs) incurred at the time the peanuts are placed under loan for the 2008 through 2012 peanut crop years (Sec. 1307(a)(6)(A)). These payments would be repaid when the loan payments are redeemed. USDA would pay the storage, handling and associated costs for peanuts under loan that are forfeited.

According the Farm Bill’s Statement of Managers, “the purpose of this provision is to not only ensure proper and adequate storage and handling of peanuts in the loan, but also to guarantee that these costs are not taken out of a producer’s loan proceeds at the time the peanuts are placed under loan.”

Adjustment Of Loans For Peanuts
The new Farm Bill provides authority to the Secretary of Agriculture to “make appropriate adjustments in the loan rate for peanuts for differences in grade, type, quality, location and other factors” (Sec. 1308(a)). The Secretary of Agriculture “may establish loan rates for a crop of peanuts for producers in individual counties in a manner that results in the lowest loan rate being 95 percent of the national average loan rate, if those loan rates do not result in an increase in outlays” (Sec. 1308(c)(1)). However, adjustment of loan rates on a county basis “shall not result in an increase in the national average loan rate for any year” (Sec. 1308(c)(2)).

USDA Proposes Market-Based Loan Differentials

With the adoption of the Food, Conservation and Energy Act of 2008 (2008 Farm Bill), USDA is proposing to implement market-based adjustments to peanut loan rate differentials.

Background
For the first several years of the peanut marketing loan program (2002-2007), USDA set peanut loan differentials for the four peanut types based on methodology established under the former peanut marketing quota program. That methodology established loan differentials using quality factors and production weights, with fixed values for the various quality factors and fixed price relationships between peanut types.

Because quality factor values and price relationships remained fixed instead of fluid, peanut loan differentials remain invariant to market conditions. For example, when the ratios between Runner, Virginia, Spanish and Valencia loan rates are restricted to the same tight pattern every year, loan differentials tend to cluster near the National Average Loan Rate (NALR) of $355, as the only variability occurs through by-type changes in production weights and quality factors.

A look at market-driven prices indicates significant price variation between the four peanut types. When peanut loan rates fail to reflect these price differences, the marketing loan may over-support one or more peanut type while under-supporting others. Potential consequences include overproduction of the over-supported types (which serves to depress prices paid to producers), reduced ability to move peanuts into the export market at competitive prices and increased risk of forfeiture of CCC collateral and losses associated with CCC sales.

A major reason for using the existing (non-market-based) methodology for peanut loan rate differentials was a lack of reliable peanut price information. The development of a weekly by-type farmer stock peanut price survey by the National Agricultural Statistics Service (NASS) improved price information and the opportunity to include market prices in the peanut loan rate calculation.

Market-based peanut loan differentials are expected to benefit peanut producers in several ways. They will allow planting decisions to become more market-driven, which should help to allocate resources more efficiently among peanut types. This might, in turn, reduce the risk of overproducing one peanut type, thereby improving prices received by farmers.

More appropriate peanut loan differentials might also improve the competitive position of U.S. peanuts. When a given peanut type is over-supported relative to its market value, it increases the likelihood of peanuts entering into and remaining in the marketing loan. This hinders the orderly marketing of peanuts and increases risk of forfeiture.

Establishing Market-Based Loan Differentials By Type
USDA estimated market-based loan rate type differentials by taking into account average share of production since 2002 and average prices by peanut type (Sept. 2006-May 2008). Instead of fixed price relationships imposed on the four peanut types, USDA estimated actual market-based price relationships. Average production share was then used to set loan differentials for the four peanut types that averaged to the $355 NALR.

As seen in the table above, the loan rate for Virginia peanuts increases to almost $30 above the NALR, which is consistent with the higher cost associated with growing Virginia peanuts and their higher market value. The loan rate for Runner peanuts falls approximately $7 below the NALR, while rates for Spanish and Valencia peanuts increase by $22 and $7 above the $355 NALR, respectively.

Given the prevalence of $500+ contract prices for 2008-crop peanuts, USDA expects very little risk to producer returns if the above loan rates are adopted this year. Record-high prices for many agricultural commodities, including peanuts have significantly reduced the impact of comparative loan rates on 2008 production decisions.

USDA proposes a gradual implementation of market-based loan rates over two years. The 2008-crop loan rates, shown below, reflect a midpoint between 2007 loan rates and the loan rates above.

Market-based peanut loan differentials are expected to result in more variation in the loan rates announced each year. Some redistribution of acreage and production between peanut types due to these market-oriented loan rates may occur. However, these shifts are expected to be minimal owing to the nature of calculating price differentials and to market prices anticipated at levels well-above loan rates in future years.

Editor’s Note: Since the release of USDA’s proposed loan-rate changes and the immediate response from many industry members, USDA has postponed any changes for the 2008 crop year. The current loan differential formula will be applied for the 2008 crop. Following is a response to the postponement from Sen. Chambliss.

Chambliss Applauds Postponement Of Loan Changes
U.S. Senator Saxby Chambliss (R-Ga.), Ranking Republican Member of the Senate Agriculture Committee, today applauded the decision made by the U.S. Department of Agriculture (USDA) to not make any changes to the manner in which they establish marketing loan differentials for peanuts for the 2008 crop year.

Maintaining the current practice for determining differentials for 2008 benefits Georgia peanut producers as the recent USDA proposal would have resulted in a significantly lower marketing loan rate for the runner variety, which makes up almost 100 percent of Georgia production. Georgia produces nearly 45 percent of all the peanuts produced in the United States, making it the number one peanut-producing state.

“This is good news for peanut producers in Georgia,” said Sen. Chambliss. “This year’s crop of peanuts has been in the ground for weeks and 2008 production contracts were signed months ago. Changing the loan differential formula after the peanut crop has been planted would have been detrimental for our growers.

“Domestic demand for peanuts and peanut products has increased, and the federal government should allow growers to respond to this demand without interrupting current systems in place. I applaud USDA for recognizing the importance of maintaining the historically recognized practice of establishing loan differentials for the 2008 crop year.”

The Farm Bill recently approved by Congress contains several provisions that benefit peanut producers such as: maintaining a separate subtitle for peanuts; preserving the target price, direct payment rate and marketing loan rate established in the 2002 Farm Bill; providing a mechanism for ensuring handling and associated costs are not deducted from a producer’s loan rate; maintaining separate payment limits; and including Conservation Security Program incentives for producers moving towards an optimal crop rotation.

PG