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Get contract before assigning peanut base

In 2002, historic peanut producers had the right to receive the direct and counter-cyclical (DCP) payments. However, for the 2003 to 2007 crop years the DCP payments will be made to eligible producers on farms with a peanut base.

The eligible producer may or may not be the historic peanut producer.

In December, county FSA offices notified historic peanut producers of procedures to follow to assign their peanut base to a farm. The FSA letter stated that historic peanut producers had a one-time-only opportunity to designate average acreage and yields to a farm and that the designation must be completed by March 31 this year.

What the letter did not say is that once the designation has been made the historic peanut producer's rights to the 2003-2007 DCP payments are lost unless the producer owns the farm, is a renter of the receiving farm or has a right to receive the payment under a contractual arrangement with the receiving farm's owner.

The best arrangement is for the historic peanut producer to place his peanut base on his own cropland if this can be done without reducing other bases. Some historic peanut producers in West Texas are actively buying cropland to assign their bases.

If the peanut base is placed on rented land, the historic peanut producer is entitled to the DCP payment as long as he continues the lease. With cash rent, all the DCP payment goes to the tenant, and with share arrangements, a proportional share.

If the lease is terminated, all of the DCP payment becomes the property of the landowner.

Therefore, when peanut base is placed on someone else's cropland, a producer needs a written contractual agreement to protect the historic peanut producer's right to the DCP payment.

Landowners accepting peanut base should recognize that they are incurring new obligations before they enter into this contract. First, an owner of a receiving farm may have to adjust crop bases before accepting the new peanut base.

More importantly, to receive the DCP payment in 2003 and after, the landowner accepting peanut base must annually sign a DCP contract and be in conservation compliance.

Neither the historic peanut producer nor the landowner accepting the peanut base is under any obligation to plant peanuts in 2003 or any future year.

Another alternative to a contractual arrangement would be outright sale of the right to receive the future DCP payments. Secondhand information has one historic peanut producer selling his right to the DCP payment for 14 cents a pound.

The expected direct payment (before any cost of receiving the payment) is 85 percent of $36 per ton per year for five years or a total of $153 (7.65 cents per pound).

The counter-cyclical payment could be zero, if national average market price exceeds $459 ($495 less $36) in any one year of the five-year period. However, if market prices stay below $355 per ton, the maximum counter-cyclical payment would be $88.40 (85 percent of $494 less $36 and $355) per year.

If the price is below $355 in every one of the five years, the total counter-cyclical payment would be $442 per ton, or 22.1 cents per pound. Thus, the expected DCP payments over the five years will range between $153 and $595 per ton (7.65 cents to 29.8 cents per pound).

To calculate an expected market value for the DCP payment, one could discount the value of the future DCP payments using an interest rate of 5 percent or less based on the current market.

Before applying any cost to receiving the payments or income taxes on the payment, the discounted value of the DCP payments ranges between 6.6 cents per pound if only the direct payments are made and 25.8 cents per pound if prices stay below $355 per ton. Given this wide range in possible value, few outright sales are likely to occur.

Historic peanut producers and landowners of farms receiving a peanut base should seek the advice of an attorney well versed in contract law and landlord-tenant relationships before any peanut base assignment.

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