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Economics drive peanut perspective

If a picture is worth a thousand words, then Stanley Fletcher's slides at recent peanut meetings are figuratively worth at least two thousand for the perspective they provide to the changes in the peanut industry.

In one slide, a tractor rides a giant wave, with peanuts about to be drowned in the background. In the other, a rainbow completes its arch on a peanut field.

Whatever your perspective, “the whole thing comes down to demand versus supply, basic economics,” says Fletcher, coordinator of the National Center for Peanut Competitiveness and University of Georgia ag economist. He participated in a panel discussion at the 34th annual American Peanut Research and Education Society that looked at the impact of the new peanut farm bill on runners, Virginias and shellers.

For runners, the new farm bill means an increase in use and better returns than cotton. But it also means wholesale changes in the way peanuts are stored and marketed.

In the Virginia-Carolina region, the situation isn't as rosy. “There are very few bright spots here in the V-C,” says Blake Brown, North Carolina State University Extension economist. He sees production shifts inside and outside of the V-C area — as well as decreased domestic use of Virginia-type peanuts.

From a sheller's perspective, “there are many more good points than negative points,” says Marshall Lamb, ag economist at the National Peanut Research Lab in Dawson, Ga. On the legislative front, the strategy of the Senate to increase the House's original funding for peanuts resulted in a higher target price and payment of storage and handling costs that are put under the loan,” says David Rouzer, senior policy advisory to U.S. Sen. Jesse Helms. Rouzer said the debate on the pros and cons of the old program was over once the bill came out of the House. Had the Senate used any other strategy, “we would have ended up with the same new program, but the funding we were able to secure for peanuts would have gone to dairy, sugar and other titles of the new farm bill.

“There would have been just too big a split between producer regions and the industry as a whole for us to hold funding even at the House level,” Rouzer says. “Considering the politics and the split between grower regions, we are fortunate to get what we did.”

In the runner market, it's a classic demonstration of supply and demand. The demand has been generated by the work of the National Peanut Board, state grower organizations and the Peanut Institute. “Given time, you'll see an increased demand,” Fletcher says. The demand will fuel the supply.

Even at $355 per ton, runner peanuts still beat cotton when looking at variable costs, Fletcher says. Researchers at the NCPC looked at nine representative peanut farmers in Georgia, Alabama and South Carolina. Fletcher looked at 1997-98 production costs for a farm averaging 3,000-4,000 pounds per acre.

“Peanuts at $355 per ton will give the producer much better returns than cotton under irrigation,” Fletcher says. “Dryland production doesn't look as good, however.”

Outside of the production arena, the new peanut program exposes grading, storage and vertical integration issues that will force farmers “to think outside the box,” Fletcher says.

“Grading issues present a drastic change and need to be translated down to the producer,” Fletcher says. “Storage is also a big concern: How will on-farm storage take place?”

The most drastic change of the peanut farm bill occurs at the buying point level, the place where the farmer delivers his peanuts, Fletcher says. Many of the newer varieties will have the high-oleic characteristic.

The changes will move the runner market to some form of vertical integration, while two shellers hold a market concentration of 70 percent to 80 percent.

“If the peanut industry goes the route of grain marketing vertical integration, producers will have less and less control,” Fletcher says. He encouraged producers to “think outside the box and move up the line,” supplying directly to manufacturers. He points to wheat growers in North Dakota who market pasta.

Despite the increase in demand for runner peanuts, there will be fewer research dollars, because funding from state grower organizations is based on tons produced. “Research is going to make or break us,” says Bob Sutter, CEO of the North Carolina Peanut Grower's Association, who moderated the panel.

“I may not be able to tell you how much it's going to rain,” said Blake Brown, North Carolina State Extension ag economist. “But the clouds are pretty full and it looks like it's going to rain.”

An increased substitution of runners for shelled uses of Virginias will likely lead to a net decline in the use of Virginia-type peanuts, Brown says. “Shellers have greater incentives to maximize fancies for in-shell use and minimize use of Virginias for peanut butter.” Contracts will become more important in the V-C region as processors and shellers work with farmers to “vertically coordinate” to increase supplies of in-shell peanuts.

In the short-term, before trade liberalization takes effect, price will probably settle on the lower side of a range from $375 to $400 per ton. Some contracts in Virginia and North Carolina this summer are trending around $30 above the loan rate, although there's still a lot of uncertainty.

The move from quota implies that production will decline in the Virginia-Carolina region. In North Carolina, counties such as Northampton and Halifax will see declines, while North Carolina “Blackland” counties and southeastern counties may increase.

In a nutshell, that's the situation in the V-C. The forecast revolves around questions such as, “At what price will a west Texas producer choose to grow an acre of Virginias instead of an acre of runners?” Brown asks. In the “Prairie Gateway,” total production costs are below loan rate.

Overall, there will be a decrease in Virginia-type production in Virginia and North Carolina and an increase in west Texas, Brown says.

If the price of Virginias settles at $375-$400 per ton, this would be above the previous price for additionals, meaning that exports should decline, creating an upward pressure on the world prices for in-shell peanuts.

He believes producers in the V-C area will have to look to a gourmet-type market, to minimize the erosion of their market.

From the shellers' perspective, the new peanut bill goes a long way toward reducing market exposure and decreasing fixed costs for shelling a ton of peanuts, says Marshall Lamb, ag economist at the National Peanut Research Lab in Dawson, Ga. It spreads out the purchase of farmer-stock peanuts up to nine months, potentially benefiting both the farmer and the sheller.

“There are far more positives than negatives,” Lamb says.

The new law also means improved shelling efficiencies, increased domestic consumption and an increase in market share. “Only 2,500 to 5,000 tons of the imported peanuts that have been coming into the U.S. were shelled by U.S. shellers,” Lamb says.

About 25 percent of the total shelling costs is fixed cost, and doesn't include the cost of the peanuts. “At optimum capacity, a 10,000-ton change in farmer stock peanuts equates to an $8 a ton change in fixed costs.”

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