As time draws ever closer for a new farm bill, peanut producers might want to consider improving a program that hasn’t exactly worked according to plan.
“We took a model from other commodities, slapped it on peanuts, and expected it to work,” says Tiffany Arthur, an economist with the Farm Service Agency’s Economic and Policy Analysis Staff. “Peanuts are a different commodity, and maybe we need a more unique program for peanuts.”
When the marketing loan concept was first introduced, says Arthur, the intent was to provide farmers with a portion of their expected revenue up front at harvest for the purpose of repaying creditors.
“Farmers then have nine months to market their crops and repay loans, allowing them to time their sales to capture higher revenues, rather than selling at harvest, when prices are usually lowest. But peanut option contracts circumvent this process,” she says.
Most farmers contract peanuts prior to planting or harvest, making the loan irrelevant to them, and shellers use the marketing loan in their stead, says Arthur.
“Base prices of option contracts are set equal to the loan repayment rate. Shellers pay less for peanuts when the loan repayment rate decreases (a marketing loan gain), with farmer price unaffected,” she says.
Peanut shellers, says Arthur, heavily influence planting decisions, determine whether or not marketing loans are redeemed, and are typically the eventual buyers of any forfeited peanuts.
They also hold all price information, she adds.
“The result is a program that often puts the interests of shellers at cross-purposes with those of USDA. In the past, this has bred mistrust rather than a search for common ground,” says the economist.
In speaking with peanut producers, Arthur says she has found that many factors influence their marketing decisions. One of those is financing, as many banks will not provide financing without evidence of a higher price than the $355 marketing loan.
Minimal marketing alternatives
“Also, there are minimal marketing alternatives. With only a handful of shellers to buy peanuts, the perceived risk associated with waiting to sell peanuts may be too great. What if the sheller won’t buy my peanuts next year?”
Another factor influencing marketing decisions is storage, says Arthur. “Few farmer-owned peanut storage facilities also reduce the number of marketing alternatives. Shellers typically cover storage costs for growers with contracts. Growers without contracts must obtain a higher price from the eventual buyer just to cover the $60 storage and handling. If 3.5 percent shrink is deducted, add $12.50. Growers also may pay out-handling ($8-$45), and any other fees. Assuming four to five months in storage, a non-contracted grower must negotiate an additional $68.50 per short ton to be equal to a contacted grower,” she says.
Producers need to ask themselves, as time nears for a new farm bill, if they want to seek solutions to the problems that currently plague the peanut program, says Arthur.
“Are peanut farmers happy with the status quo? Are they interested in more marketing alternatives or do they prefer to leave marketing to shellers? Also, what are some realistic program adjustments we can make? Do farmers need additional guidance in identifying funding opportunities, and are peanut farmers in a position to capitalize on enthusiasm for local foods?”
Solutions currently being considered by USDA would be geared towards empowering growers, says Arthur. “A lot of people say a lower National Posted Price is the answer, but we don’t see that as a cost-effective way to empower growers.”
Interest in a peanut revenue insurance program appears to be increasing grower support for mandatory reporting requirements, she says. Expected benefits include reduced risk for insurers considering revenue insurance, as well as higher coverage levels under such a program, increased coverage levels under the existing disaster program, a higher price guarantee under ACRE, higher coverage under SURE, and better price information for peanut growers negotiating contracts or cash prices.
“USDA will soon provide draft legislation for peanut mandatory price reporting to Congress. This is in response to a recommendation made by the Office of the Inspector General,” says Arthur.
One idea being discussed is whether or not peanut loans should be made on shelled peanuts, she says. “This is just an idea, with no details. We’re not trying to push it on growers, but it’s something that might be considered. Since upland cotton loans are made on ginned cotton, should peanut loans be made on shelled peanuts?”
Some advantages, she says, would include eliminating the need to convert shelled prices to farmer stock prices; allowing farmers more direct involvement in peanut marketing and pricing, which may lead to increased marketing alternatives and better planting decisions; bringing the program focus back to the needs of farmers; and possibly prompting earlier shelling/processing of peanuts.
Such a change might also lead to improved freshness of edible kernels, a possible competitive advantage for U.S. peanut exports, says Arthur, and quicker access to oil stock peanuts.
USDA, she says, does not support the continuation of the storage and handling subsidy. “Shellers cover storage and handling under most option contracts and pass the cost on to consumers. The current program provides shellers with a strong incentive to forfeit even when market prices are well above the loan rate.”
Growers might want to consider revising storage and handling benefits so they are available only to non-contracted peanuts, she says. This would reduce the risk to USDA and provide support to those producers who truly need it.