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Major decisions required: Growers must adjust to new peanut bill

The passage of a new government program for peanuts leads to a couple of major decisions for farmers, says Nathan Smith, University of Georgia Extension economist. The first decision, he says, is related to the establishment of a peanut base, and the other decision is concerned with what to grow.

The new farm bill replaces the quota system with a marketing loan system of production. “In addition, peanut producers will receive an annual direct payment and a counter-cyclical payment in years of low prices. These two payments will be calculated from a newly established peanut base,” says Smith.

The seven major program crops — corn, cotton, barley, grain sorghum, oats, rice and wheat — currently have payment bases (base acreage times program yield) from which transition (AMTA) payments are calculated through production flexibility contracts, he explains.

“The AMTA payments are ‘decoupled’ from current production, meaning what a producer grows each year under the 1996 farm bill doesn't affect the amount of payment received by the producer. The provision is commonly known as planting flexibility.

“For example, the base acreage does not have to be grown in corn to receive the corn AMTA payment. In most cases, any commodity can be grown on base acreage with the exception of fruits and vegetables, in which there are special rules,” says Smith.

Peanuts, he adds, will have similar rules and payments with the establishment of a peanut base. Producers with a history of producing peanuts from 1998-2001 will be able to establish base acreage and a program yield for peanuts. Unique to peanuts, the producer with peanut base can assign it to a farm on his or on another landowner's land after which it become tied to the land.

The new farm bill, notes Smith, gives producers the option to update base acreage on the major program crops according to 1998-2001 planting history or retain current AMTA bases. Producers also can update program yields to be used in calculating counter-cyclical payments.

Thus, one of the first major decisions for producers, the economist says, is whether to update base production for major program crops or retain their current AMTA base production.

“Several farms have fewer base acres than acres farmed, thus updating to recent history likely is the best choice for these operations. However, a farm cannot have more base acres than owned acres.

“With the establishment of a new peanut base, it's possible some producers could end up with more total base acres on their farm than tillable land they own.

“A decision will have to be made as to which crop base to keep and where to assign peanut base. Since peanut base has a one-time assignment, it can be moved to free up owned acreage.”

Another choice, says Smith, is to decide which base to drop by examining which crop bases provide the larger payments. For example, if the corn direct payment is $20 per acre, cotton is $37 per acre and peanuts $38 per acre, then you might give up corn base to meet owned land restriction.

“An added wrinkle to this decision is the counter-cyclical payment. In years of low prices, a counter-cyclical payment may be made on base acres for each crop. Assume that the maximum counter-cyclical payment for corn, cotton and peanuts is $25, $76 and $111 respectively.

“By adding the counter-cyclical payments to the direct payment, the total potential payments for each crop base would be $45, $113 and $149 per acre for corn, cotton and peanuts respectively. The only guaranteed payment is the direct payment.

“Remember that a low average season price triggers if and how much of a counter-cyclical payment is paid. So, what prices do over the life of the farm bill determines which base will pay more.”

The major adjustment for many peanut farmers will be making planting decisions and deciding what to grow from year to year, says Smith. As a result of the new peanut program, peanut prices will be more responsive to the market. Instead of quota determining supply, market prices (and loan rate) for peanuts and competing crops will be the major factor in how many peanuts are planted.

“Looking at individual decisions, knowing one's cost of production will be very important in accurately projecting and making enterprise decisions. Using University of Georgia Extension budgets as an example, 2002 variable costs for irrigated and non-irrigated peanuts are budgeted at $461 and $404 per acre respectively. Total economic costs are budgeted at $703 and $556 per acre, excluding land management.

“Using a 3,500-pound yield for irrigated peanuts and a 2,500-pound yield for non-irrigated peanuts, the price required to cover total costs — or the break-even price — is $402 per ton and $445 per ton, respectively. When the market isn't offering prices to cover total costs, producers need to at least cover their variable production costs.

“In this case, the break-even price above variable costs is $263 and $332 per ton, respectively. The price received from a contract or the market loan needs to be above these prices at a minimum.”

To compare with other crops such as cotton, look at the returns above variable and total costs for each crop, Smith advises.

Direct and counter-cyclical payments in the new farm bill are not tied to production, he says. “These payments will be received whether you plant peanuts or cotton. This is the new wrinkle of farm programs — planting flexibility. So your planting decisions should be based on the market and your cost of production, not program base payments.”

Summing up the changes in the new farm bill, Smith says the safety net has been increased for program crops, and peanuts now fit under that same policy.

“Though change sometimes is stressful, it also brings new opportunities. By utilizing the marketing loan, producers can have more control over marketing their peanuts. This can be done collectively through cooperatives, for example.”

Access to storage, he adds, will be important in maintaining beneficial interest for marketing loan purposes. “The Georgia grower is agronomically competitive in growing peanuts, so we expect peanuts, along with cotton, to still be grown predominately. An opportunity to emphasize quality is possible under the new program.

“Given current trade policy and future direction, the new peanut program will make U.S. peanuts much more competitive and greatly reduce the threat of imports taking large portions of U.S. market share. Recent increases in domestic demand have gone to imports. Producers and the United States now have the opportunity to recapture this market share.”

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