Peanut industry transition has relatively few casualties

The most recent farm bill has thrown everyone in the peanut industry into a brave new world — a world in which growers, shellers and manufacturers have been forced to deal with issues that heretofore were foreign to them.

“After producing, buying, selling and marketing the 2002 crop, often without any regulations to guide us, and without any history to predict the market's course, we've emerged from a challenging transition with relatively few casualties,” says George Lovett of the brokerage firm Lovett & Rushing.

Armed with the knowledge from last year's experience, it's now time for those in the peanut industry to begin thinking about how to successfully market and produce U.S. peanuts around the world, says Lovett.

And, he adds, it can be helpful to look at the industry's most recent history. The “high-water mark” for U.S. domestic peanut consumption came in 1988, he says.

“On average, shellers handled about 1,274,000 tons of domestic peanuts and 457,000 tons of export peanuts in 1988, for a total of more than 1,700,000 tons. It appears to me that 1.7 million is a threshold. Shellers have said that if they're to operate their plants efficiently, they need to figure a way to handle about 1.7 million tons,” says Lovett.

That number could go up, he says, as new shelling capacity comes on line this year.

Not dependent on U.S.

“That number also tells us that under no circumstances can we be solely dependent on U.S. consumption to efficiently operate those shelling plants. Consumer purchases on the domestic side don't quite equal demand,” he says.

U.S. demand for peanuts reached an all-time high in 1988 with 1,464,000 tons, says Lovett. However, a big part of that domestic market was lost in 1990 when drought spelled crop failures, poor quality and higher prices, he says.

Demand rebounded somewhat in 1991 at 1,435,000 tons, only to be followed by a slow decline in 1992-1995, hitting a bottom in 1995.

“That was when we founded the Peanut Institute and began to actively promote and research the qualities that make peanuts such an outstanding product. We've been in a slow growth mode since that time.

“For the 2001 crop, I've estimated demand at 1,371,000 tons, which is substantially above the 1995 level but still about 100,000 tons below 1988. We have not been in an actively growing business for the past 15 years.”

Export demand numbers have gone up and down over the last 15 years, says the broker, primarily depending on the crop size and shellers' willingness to handle additional peanuts.

Treated as leftovers

“Since U.S. or quota peanuts sold at about twice the price of the world market, additional peanuts were treated as leftovers priced against the world market.”

U.S. peanut carry-out varied from 295,000 tons in 1995 to 680,000 tons in 1998.

Lovett estimates carry-in from the 2002 U.S. peanut crop at 547,000 tons of edible peanuts, with only 271,000 tons available for the domestic market.

“Manufacturers and shellers saw that the price paid for farmer stock and shelled peanuts dropped from roughly 60 cents per pound in 2001 to 40 cents in 2002, and they had no interest in carrying a pound more than was necessary going into the new crop, so domestic carry-over was exceedingly low.”

Production for 2002 is estimated at 1,644,000 tons, and Lovett says this is a “guess” on his part. “We had no crop estimate from USDA this past April, and the final 2002 crop estimate isn't expected until October.”

Lovett also estimates that available supply will be reduced by 70,000 tons because of Seg. 2 and Seg. 3 peanuts that ultimately will be crushed. Imports are estimated at 35,000 tons, or about one-third of what is permitted by GATT and NAFTA.

“I'm estimating a total available crop of 2,156,000 tons. For domestic demand, I show a less than 1 percent increase from 2001. I'm told that just as shellers and manufacturers recognized that lower prices were on their way as we moved into the 2002 crop, retailers recognized the same thing, and they closely managed their inventories this past fall.

“They knew that lower prices for finished products were headed their way. Once the lower prices arrived after the first of the year, retailers stuffed that money into their own pockets and didn't pass it on to consumers.”

Exports challenge

Lovett estimates that only about 99,000 tons are being exported from the 2002 U.S. crop. “And this is from an industry that usually handles about 450,000 tons. As I look forward to the 2003 crop, our challenge certainly will be on in the export market. We can't operate the shelling facilities efficiently without having a wider export market, and 99,000 tons won't cut it.”

Lovett sees a total demand this year of 1.7 million tons with 400,000 tons of carry-out. “When you consider the carry-out, we'll run out of 2002 crop peanuts in the middle of October.”

Using an average yield of 2,550 pounds per acre, Lovett estimates a 2003 U.S. crop of 1,858,000 tons or 200,000 tons more than was handled this past year.

“While crop conditions look excellent in all areas of the country, we're a long way from being in the barn. We could import about 60,000 tons in the current crop year. GATT and NAFTA allow the importation of 93,000 tons. We'll have more imports this year than next year but still less than the maximum.”

Lovett sees a substantial increase in U.S. demand for this year's crop, as lower prices and new peanut products reach consumers. “I'm guessing 4 percent. That'll still be less that we had in 1988 or 1989, but we're headed in the right direction.”

Loan repayment rate

If the United States is to compete with China and Europe and maintain its export market, there must be a significant reduction in the loan repayment rate, he says, from $60 to $80 per ton.

“It's important to understand that there's no mandate from the USDA that says the loan repayment rate must be lowered. If the crop begins to deteriorate during harvest, just as last year, we may not see a significant reduction in the repayment until the crop is in the barn.

“On the other hand, if we don't see any deterioration, and we see a huge crop coming out, a rapid reduction in repayment will help us participate in the export markets earlier than otherwise would be the case. A dramatic reduction in the repayment rate will help clear CCC stocks and help CCC maintain costs.”

Everything depends, says Lovett, on the crop size and exports, and exports are dependent on the repayment rate. He encourages growers, shellers and manufacturers all to work together with USDA to achieve success.

“A crop of 1,800,000 tons won't walk out of these warehouses, and who knows what'll happen if we have a crop of 2 or 2.1 million tons. The Chinese usually grow about 15 million tons of peanuts and they export about one-half million. That number can go up or down depending on how aggressive the Chinese government chooses to be.

“We'll never compete with the Chinese on the basis of price. We can't lower our prices to the point of driving the Chinese out of the market. If we're to maintain our position in the export market, we'll have to provide our customers with value and special quality at a reasonable price. If we could eliminate aflatoxin from our crop, the high-end customer would beat a path to our door.”

Huge Chinese crop

The other part of the Chinese problem, says Lovett, is that due to China's crop size, it's difficult to see U.S. farmer stock selling for more than $355 per ton on a sustained basis if the United States is going to participate in the export markets.

“Argentina probably will increase acreage next year by 25 to 30 percent, and they'll continue to play an important role in the world market, especially in Europe. They'll play a significantly less important role in the U.S. market.”

It's important that U.S. growers remember that the consumer is king, says Lovett. “If we're to increase U.S. peanut production in any significant way, consumer demand must determine any acreage increases. If we start planting peanuts on a ‘wildcat’ basis because $355 per ton looks attractive to some amateur peanut growers, we'll increase peanut program costs and place the entire program in jeopardy.”

Buying and selling peanuts, he says, is all about risks, especially in the new legislative environment.

“We need to be very careful managing these risks. Manufacturers who want to use U.S. peanuts must recognize that it no longer is a quota supply, set aside for U.S. peanut product manufacturers. This introduces potential new competitive pressures that previously were not part of the U.S. peanut industry.”

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