Market Faces Uphill Climb
What can you do to ride out the storm?
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
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
“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
“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 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
“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.
What’s Needed For 2009?
Cotton says a total crop of only 600,000 tons is
“That’s about 40 percent less than what we produced this year,” he says. “Using 3,000 pounds per acre
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
“And we continue to compound our problems,” he says.
Unfortunately, there are very little in the way of alternatives, says Spearman.
“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.
Who Pays Handling And Storage?
Smith says, in the absence of contracts, you’ve got to be planning on the possibility of
“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.
“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.
“Storage is $2.71 a
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.
Looking For A Silver Lining
“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.”
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.”