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Diversification has become key in good peanut marketing plan

Don't put all of your eggs in one basket — it's a time-tested piece of advice that'll serve peanut producers well during the current marketing season.

“We must diversify in terms of how we market our peanuts to spread our risks under this new program,” says Marshall Lamb, economist with the National Peanut Research Laboratory in Dawson, Ga., and advisor to the Farm Press Peanut Profitability Awards. “We also need to diversify in terms of who we market with. Some shellers may be more aggressive than others in buying peanuts. We also have cooperative marketing associations that can help take you to the next level, pooling your crop with others to take advantage of selling in large volume.”

It's important that growers know their marketing timetable under the new program, says Lamb. “We're actually planting one crop while we're still marketing the previous year's crop. It's important to remember that when you plant your crop, you're not actually in the marketing year of that particular crop. So you've got to take marketing further into the year under this new program,” says the economist.

There isn't a futures market for peanuts like those in cotton and grain crops, he adds. “If you have base, the only way to hedge against a decrease in the counter-cyclical price — due to an increase in the average peanut price — is to produce peanuts and market them properly,” says Lamb.

A farmer who has base but doesn't plant peanuts is at the mercy of the market, he adds.

“If you have base, you don't have to plant to collect the direct and counter-cyclical payments. However, this is a potentially dangerous game. The only guarantee in this case is $36 per ton. Depending on the average peanut price, you could collect a counter-cyclical payment anywhere from zero up to a maximum of $104 per ton. With no futures market, you cannot protect yourself from declining counter-cyclical payments.”

But production alone won't guarantee a good price for your peanuts, says Lamb. Marketing properly also is vital.

“If a price increase starts, you must own the peanuts to sell them. If you sell all of your peanuts at delivery, and then later in the marketing year the price of peanuts increases, you won't be able to take advantage of the price increase. You could be hurt by declining counter-cyclical payments and you could end up netting less than target price.

“The option contracts have the same implications as losing ownership. On option contracts, if the price starts to increase, the farmer does not have the ability to sell at the higher price. If a grower has base, he should — by some mechanism — try to reach the target price of $495 per ton. If the price increase occurs after you lose ownership of your peanuts at a lower price, you have no way of managing your risks under that situation.”

Looking back at this past year, in September through about December, the U.S. average peanut price stayed at about $355, says Lamb. The average peanut price then began to trend upwards in January through May, he says.

“If a grower didn't have any peanuts to take advantage of that increase, then his counter-cyclical payments could have been coming down, meaning that he actually was losing money.”

The average peanut price, he explains, can go from $355 per ton up to $459 per ton while the direct payment of $36 per ton doesn't change.

“For every $1 increase in the average peanut price during the marketing year, the law states that there will be a $1 decrease in the counter-cyclical payment. The way to reach the target price is through the market price plus any loan gains. But this requires production. The range of the counter-cyclical payment is zero to $104, which means that when added to the direct payment, we have a range of $36 minimum up to a potential of $140 maximum for government payment on base acres.”

It's helpful as growers approach harvest, says Lamb, to look at recent trends in U.S. peanut production. The average U.S. peanut acreage, from 1974 through 2002, has been just over 1.4 million acres. The average yield during that same time period has been 2,472 pounds per acre.

“The yield trend line is up in the last five to six years because we've had good breeding programs. Our growers have adopted new varieties, and we're beginning to see a good trend line developing in relation to average yields.”

The average long-term production in the United States, says Lamb, has been about 1.8 million tons. “Looking at our current pipeline, we'll need at least 1.8 million tons this year, if not 1.9 million tons. We'll need above-average yields to replenish the pipeline and to fill demand in the coming year. The markets could get extremely tight this year.”

Estimates of U.S. acreage for 2003 are at about 1.32 million acres or 3 percent below the 2002 crop. Yields are expected to average a record high 3,102 pounds per acre.

The national posted price is a key variable to watch as growers make their marketing decisions, says Lamb. “We all look at the national posted price every Tuesday afternoon and decide if we're going to run down to the FSA office and make a decision.

“It started off above the loan rate, dipped down to its lowest point at about $312 to $313 during the middle of the marketing year and has come back to almost $4 under the loan rate. How has that affect the loan deficiency payment? Early on, there was no loan deficiency payment, which is simply the loan rate minus the posted price. It went to a maximum of about $43 for four five weeks and came back down to about $3 to $4.”

Depending on your marketing strategy last year, the average LDP was about $29 per ton, he says. The average market loan gain, which developed later in the year, was almost $40 per ton.

Some growers who had peanuts in the loan without an option on them were able to capture $398 for a period last year, if the peanuts were under their control, says Lamb.

Inverse relationship

“As the posted price started going back up, these prices came down. I saw an inverse relationship between what the growers were able to receive and the posted price. But that was last year, and there's no guarantee it'll happen every time.”

Lamb reminds growers that a 2-million-ton crop initially was predicted last year, only to drop to 1.6 million tons due to weather difficulties during harvest.

“We'll need above-average production to fill the supply and demand and still have a good pipeline going into next year to stabilize the market. Remember - these are your peanuts, and you have to market them. Your goal is to exceed the target price or at least meet it.”


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