Market Faces Uphill Climb

What can you do to ride out the storm?

By Amanda Huber

  
Who could have predicted the factors that would combine to create the perfect storm situation the peanut market finds itself in today? Record production has the market buried under an avalanche of tonnage. Then a ray of hope in the form of increasing consumption, which offered the potential of gobbling up the excess, is completely extinguished by the recall of salmonella-tainted peanut products and the negative, often confusing, news reporting. Even exports that had reached levels not seen in years dropped off with the changing of the exchange rate. Together, these factors have the market not just quiet, but silent.

Every segment of the industry has a critical role in what happens from here. Can the situation be reversed, and what can producers do to help?

Records Broken Everywhere
Although the numbers seem daunting now, growers across the peanut belt produced an outstanding crop in 2008, with record yields in nearly every state.

Dell Cotton, manager of the Peanut Growers Cooperative Marketing Association in Franklin, Va., confirms that it is the biggest crop ever.

“In 2007, there were two states with record yields - Oklahoma at 3,400 pounds to the acre and Texas with 3,950. But in 2008, every state and every region averaged more than 3,000 pounds per acre.

“We’ve never seen that before in the peanut industry. There were record yields for Alabama, Mississippi, South Carolina, North Carolina, Virginia and Oklahoma. That’s unheard of,” Cotton says.

“The total average pounds per acre at 3,416 was 360 pounds above the average yield in 2007 and 257 above the prior record yield of 2003.”

Last year’s acreage was up 25 percent over 2007, but it wasn’t the most acres ever planted.

“The highest number of planted acres was in 2005,” Cotton says. “If you compare production in 2005 and 2008, we planted 119,000 acres less than in 2005, but produced 139,000 more tons.”

Production Impacting Contracts Early
Nathan Smith, University of Georgia Extension economist, says the economics of this crop were already being impacted by the good year peanuts had in 2008, before any of the other issues erupted.

“Last year at this time, farmers could contract peanuts for $500 a ton, some as high as $600 a ton,” Smith says, “Currently, there are no contracts being offered for the ‘09 crop.”

We just had too many peanuts, he says.

“U.S. acreage increased 25 percent over 2007, and that increase in acreage as well as the record yield gives us record production. Georgia had a record this year; although it wasn’t a record for acres or a record average yield, it was record for total production.”

By type, Cotton says that Virginias are in worse shape than runners, with an excess of about a third more than normal.

“We’ve got around 60 percent of what we need for the coming year before the year starts,” he says. “That’s not good.”

A Healthy Surplus Is Needed
Some surplus of the crop is always needed because of the way the crop is bought and sold before becoming a food product, Smith explains.

“The industry likes to keep 300,000 tons to 400,000 tons in the pipeline as a buffer against a major crop loss,” he says. This is considered carryout.

Carryout is a normal component of the market each year. It is the industry standard of how much tonnage is needed after the year basically stops, which is about June or July. The trade needs three or four months of carryout, about 25 percent of supply, as a healthy amount to get into the next year.

“We started getting into trouble in 2005 when we had about 50 percent carryout, and that’s way too high,” Cotton says. “In 2006 and 2007, the lowest years for production and acreage, carryout went back down to a healthy level.

“Now, after the year we have just experienced, carryout is astronomically high, particularly for Virginia-type peanuts.

But, Cotton says, excess supply is not a bad situation if there is usage for that supply. “One should match the other.”

And that’s what was trying to happen until the Food and Drug Administration linked salmonella-caused illnesses to peanut butter and peanut paste.

“Typically, when the country has economic problems, people turn to peanut butter,” Cotton says. “Peanut butter from August to November was up 11.9 percent, which was good for our industry.”

Recall Timing Compounds Problem
In recent years, peanut consumption has increased annually.

“In fact, consumption was on track to be six percent more than in 2007, or around 2.24 million tons,” Smith says. “Average annual peanut consumption in the U.S. is 6.5 pounds per person.

“It’s never a good time to have anything like this happen, especially when there is great concern for the consumer’s health. But it comes at a particularly bad time with the large surplus of peanuts.

“Before the FDA warning, the industry was adjusting to the surplus,” he says. “Farmers were expected to plant fewer acres this year and to produce less than the U.S. consumes in a year in an effort to eat into that surplus. That would be in a typical year, one without a decline in consumer consumption.”

Both Cotton and Smith say it’s too early to tell how the FDA warning will impact consumption this year.

“We were probably on our way to correcting the supply and demand gap, but now it may take another year to do that,” Smith says.

“It’s going to be about two more months before we start to see what the situation of today is going to have on consumption,” Cotton says. “We can assume it’s going to have a negative effect, we just don’t know the extent of it.”

Exports Fall Back
Besides consumption, another bright spot for the industry was exports. After several years of very little export opportunities, the economic situation had turned to favor moving products abroad.

“Exports had been really strong, up 60 percent since 2005,” Smith says.

However, just recently, the dollar shot back up to make exporting unfavorable.

“Exports were going really good when the dollar was low enough that we could get in there with a cheaper price,” says Tyron Spearman, editor of Peanut Farm Market News and a contributing editor to Peanut Grower magazine.

“I thought exports might help the industry work its way out of the surplus, but with the change in the exchange rate of the dollar, it’s going to be almost impossible,” he says.

Spearman says Canada is the number one buyer of U.S. peanuts, with Mexico at number two, followed by the United Kingdom and the Netherlands.

Yield
  2003 2004 2005 2006 2007 2008
Southeast
AL 2,750 2,800 2,750 2,500 2,600 3300
FL 3,000 2,800 2,700 2,500 2,700 3200
GA 3,450 3,000 2,840 2,780 3,150 3400
MS     3,200 2,900 3,300 3900
Average 3230 2928 2808 2640 2910 3364
Southwest
NM 2700 3500 3500 3600 3500 3200
OK 2800 3100 3270 2850 3400 3500
TX 3000 3300 3750 3550 3950 3400
Average 2961 3288 3690 3216 3832 3401
V-C region
NC 3,200 3,400 3,000 3,200 2,800 3700
SC 3,400 3,400 2,800 3,000 3,100 3900
VA 2900 3250 3000 3200 2700 3300
Average 3158 3,371 2,929 3,070 2,772 3,721
Average U.S. 3159 3057 2989 2785 3054 3416

What’s Needed For 2009?
For producers, fewer peanuts will need to be
planted in 2009.

Cotton says a total crop of only 600,000 tons is
needed to make things good for 2010.

“That’s about 40 percent less than what we produced this year,” he says. “Using 3,000 pounds per acre
yield, we need around 1,066,000 acres planted for a
30 percent reduction. The two lowest acreage years
were 1,244,000 and 1,225,000.”

Spearman uses the same range for acreage reduction.

“Acreage needs to be reduced 25 to 35 percent,” he says. “You might as well get it into your plans. A crop of about 1.5 million will get us level for next year, but not in 2009.”

Cotton says if we don’t reduce the crop enough this
coming year and too many peanuts are produced again, then the problems will just carryover to the next year.

“And we continue to compound our problems,” he says.

Unfortunately, there are very little in the way of alternatives, says Spearman.

Acres
  2003 2004 2005 2006 2007 2008
AL 190,000 200000 219,000 165,000 160,000 193,000
FL 125,000 145,000 165,000 130,000 125,000 140,000
GA 545,000 620,000 770,000 580,000 530,000 685,000
MS     14,000 16,000 19,000 21,000
SE Total 860,000 965,000 1,168,000 891,000 834,000 1,039,000
 
NM 18,000 17,000 18,000 15,000 10,000 8,000
OK 37,000 35,000 26,000 23,000 17,000 18,000
TX 275,000 240,000 240,000 155,000 190,000 253,000
SW Total 330,000 292,000 284,000 193,000 217,000 279,000
 
NC 101,000 105,000 88,000 85,000 93,000 97,000
SC 19,000 35,000 62,000 59,000 59,000 68,000
VA 34,000 33,000 24,000 16,000 22,000 24,000
V-C Total 154,000 173,000 174,000 160,000 174,000 189,000
U.S. Total 1,344,000 1,430,000 1,626,000 1,244,000 1,225,000 1,507,000

“Last year, corn was $7.00 a bushel, it’s $3.76 this week. Soybeans were $13.00 last year down to $9.80 now. Cotton was 80 cents per pound last year and you may get 56 cents and can’t sell it today. Wheat was $9 a bushel down to $5,” he says.
“All these inputs we use are
sliding a little bit, but not much.”

Who Pays Handling And Storage?
The experts all agree that any contracts will be offered late and will be on a limited basis.

Smith says, in the absence of contracts, you’ve got to be planning on the possibility of
$355 peanuts. He also offers
producers a reminder to pay attention to what’s being covered if they are offered a contract and what they are responsible for if peanuts are put in the loan without a contract.

“If you put peanuts into the loan without a contract, you will be responsible for handling and storage,” he says. “It will be paid to you up front, but when you redeem those peanuts, you will be responsible for repaying the handling and storage fee.

Production
  2003 2004 2005 2006 2007 2008
SE 1,358,375 1,375,600 1,599,225 1,176,200 1,213,450 1,747,900
SW 481,950 468,650 574,705 310,325 415,725 474,400
VC 236,750 286,600 261,000 245,600 241,150 351,650
U.S. Total 2,077,075 2,130,850 2,434,930 1,732,125 1,870,325 2,573,950

“If you have a contract, then the sheller will likely cover handling and storage, but be sure about this.”

“Handling is prepaid for the grower by the first-buyer so it does not come out of your $355 per ton, and that’s good for the grower,” Spearman says. “If you take the peanuts out, you’ve got storage and handling to pay.

Runner Production

  2003 2004 2005 2006 2007 2008
SE 1,314,032 1,353,203 1,551,775 1,160,300 1,161,555 1,731,914
SW 305,792 314,208 362,687 196,214 230,168 310,698
VC 2,293 8,419 29,485 34,971 18,747 30,131
US 1,622,117 1,675,830 1,943,947 1,391,485 1,410,470 2,072,733
Demand   1,629,000 1,648,000 1,645,000 1,746,000 1,696,000
Over/under   46,830 295,947 -253,515 -335,530 376,733

Virginia Production

  2003 2004 2005 2006 2007 2008
SE 18,772 10,581 199 5,044 5,113 6,708
SW 80,164 104,233 81,750 47,293 89,883 87,527
VC 218,206 280,729 223,823 202,174 197,958 309,173
US 317,142 395,543 305,692 254,511 292,954 403,408
Demand   310,000 323,000 313,000 309,000 310,000
Over/under   85,543 -17,308 -58,489 -16,046 93,408

Carry Out As A Percentage Of Demand

  2003 2004 2005 2006 2007 2008
Runner 28.70% 32.80% 50.30% 37.63% 26.65% 44.40%
Virginia 35.60% 63.10% 52% 35.40% 41.20% 67.74%
U.S. 30% 37.70% 53% 37.90% 29.20% 48.70%
Information courtesy of Peanut Growers Cooperative Marketing Association, Franklin, Va., and Lovatt & Rushing, Inc., Roswell, Ga.

“Storage is $2.71 a
month for nine months. That’s about $20.00. Then handling is about $30.00, so you’ve got about $50.00 in these peanuts. If the sheller pays you the $50 and gives you $10 more, would you say, ‘Okay, you can have them.’ And he’d get them out of the loan. Or, would you just say, ‘I walk away from it; let the government handle that $50.’ Remember storage and handling has to be paid by somebody and that will be important in the forfeitures.”

Smith also reminds producers to do what they can to protect themselves through risk management.

“Crop insurance will be pretty important this year,” he says. “Go to your lender and look for where you can show positive cash flow. Look at using as many tools as you can, not just on peanuts, but on any crop, to protect some of that net return.

“The other consideration, if you find that things aren’t penciling out just right, you may need to lay out some land this year and rest it. If that’s a possibility,” Smith adds.

  2008
  Runner Virginia
Carry-In 374,000 117,000
Production 2,075,00 403,000
U.S. Demand 1,384,000 237,000
Export/crush 312,000 73,000
Total Demand 1,696,000 310,000
Carry-Out 753,000 210,000

Looking For A Silver Lining
The situation facing consumption will eventually be cleaned up, and the industry, through adhering to strict good management practices, can convince consumers to again dine on their delicious, nutritious and convenient products. Grocery store shelves will be restocked with new products.

“We will recover in time,” Smith says. “Consumers have not lost confidence in the growers, themselves. It will take a while to play itself out, but it will.”

PG


A Lot At Stake For The Government

Besides producers, buying points, shellers, manufacturers and allied personnel needed to supply to those segments, the government is a major player this year because of the amount of surplus in the loan.

“The government has a whole lot at stake for the current situation that we are in,” Cotton says.

“A little more than 2,000,000 tons are in the loan.”

“For a lot of those peanuts, you could say, ‘we’ll just forfeit them’ and that will get them out of the supply, but that’s easier said than done.”

But Cotton says to remember that the majority of those peanuts were contracted. “If they were contracted at the option price, then the sheller has already got 150 to 250 dollars into those peanuts, and, in that case, it would be difficult to forfeit those peanuts.

“The length of the loan is nine months, and then something has to be decided on those peanuts.”

In nine months, how many peanuts will be in the loan?

“We’ve got about two million tons in there now,” Spearman says. The Commodity Credit Corporation (CCC) is waiting to see if any peanuts will be forfeited.

“Forfeited means at the end of the line, you walk away with your $355. The sheller can redeem them at any time he wants to pay you and take your name off that loan. However, if those peanuts have not moved into the market, they are given to CCC. Then it’s the government’s peanuts.”

What happens then? Spearman says CCC can sell them, or they can barter them.

“Last year, the government bartered them for peanut butter for nutrition and hunger programs. They can also crush them for oil or they can just sit on them.”

Cotton says forfeiting the uncontracted peanuts would help, but only so much. “It’s not going to be enough to solve our problems.”

Also, he says, peanuts in the loan tie up warehouse space. “It’s a nine-month loan, and peanuts are not forfeited until the nine months are up.”