Even though peanut farmers may see the crop as their best opportunity for profit this year, increased acreage and another good crop will add to an increasingly large glut that threatens to add to market woes.
“It will take at least two years to clear out the oversupply of peanuts,” says George Lovatt, Lovatt and Rushing, peanut brokers, Roswell, Ga., who offered a somewhat grim outlook at the annual Oklahoma Peanut Expo at Altus.
Looking only at crop budgets, peanut production is a runaway favorite among major southern commodities. Cotton, figured at 56 cents a pound and a $500 per acre variable cost, would compare favorably with peanuts at $316 a ton. The current loan rate for peanuts is $355 per ton, plus any Price Loss Coverage (PLC) payments from the farm program.
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“It’s the same for corn,” Lovatt says. “The numbers favor planting peanuts.” But the industry still faces the challenge of finding a place for those peanuts after they are harvested — and that may not be easy. “We’re looking at the largest carryout for peanuts we’ve seen in 15 years,” he says.
Shellers are not likely to redeem peanuts out of the loan unless they can see a means of “making a little money — that’s why they haven’t already redeemed them.”
The budget numbers may look good, but supply and demand numbers tell a different story. Under normal circumstances, those figures would indicate looking at alternate crops and cutting acreage to reduce supplies.
TOO MANY PEANUTS
The problem traces back to the financial crisis that began in 2007, Lovatt says, when “the Fed lowered interest rates to almost zero. Commodity prices went up worldwide, and planted acreages increased significantly. The 2007 and 2011 peanut crops were down, so prices shot up.
“The next years following 2007 and 2011, we produced too many peanuts.” In one year, peanuts on hand jumped from a 94 day supply to a 191 day supply. The next year following a loss saw the supply jump from an 81 day supply to 198 days.
“We use about 50 tons a week,” Lovatt says, and anything below a 90-day supply results in tightening stocks and higher prices. In 2014, supply stood at 146 days, with a stocks-to-use ratio of 40 percent. In 2015, planted acreage across the peanut belt increased by 18 percent, and a decent crop resulted in a 3 million ton crop, a 202 day supply, and a stock-to-use ratio of 55 percent — a nine-month carryout.
“It’s grim,” he says.
China is buying some farmer stock and kernel peanuts. “Their buyers have been in the Southeast recently, buying perhaps 100,000 tons,” Lovatt says, “But we still have too many peanuts.” He says the industry should not pay much attention to March planting reports, but should be concerned about where supply and demand will go if the 2016 crop adds another 3 million tons.
SKEPTICISM ABOUT DATA
As a peanut broker, Lovatt says his company brings buyers and sellers together, and both need to understand the numbers. “Good decisions require good data,” he says. “We are skeptical of some of the data we have available — but it’s the best we have. We use some government figures because it’s what we have.”
He says depressed commodity prices “are bad for everyone — growers, shellers, and manufacturers. We have an abundance of peanuts, cotton, and corn.”
Potential supply factors include China’s purchases and U.S. farmers opting to stay as close as possible to best rotation practices. If China continues to buy peanuts, that will help reduce stocks. “Also, common sense says farmers will stay with their rotations. But producers will plant what makes sense in May.”
Lovatt says Georgia planted about 700,000 acres last year and growers typically follow a three-year rotation. “I don’t think they can maintain that rotation if they plant 750,000 acres.”
The U.S. currently has a 2 million acre peanut base, he notes. But the farm bill created generic base 2.5 times larger. “How will that play out? We simply don’t know.”
Lenders could influence planting decisions. “Bankers may encourage farmers to plant more peanuts instead of cotton or corn. That puts growers in a tough spot.”
Farmers across the country are in a tough spot, with all their usual commodities trading at or below break-even, and little reason to expect much change in the near term. Peanut producers understand the basic economics of supply and demand, and that continuing to build supplies will not help eliminate the glut of peanuts available to the market. They also understand the basic theory of economics that they need to plant something profitable.
“The incentive is to plant peanuts,” Lovatt says.