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Oversupply from record 2012 peanut crop points to fewer acres this year

Oversupply from record 2012 peanut crop points to fewer acres this year
“There’s no doubt in anyone’s mind that we need a decrease in peanut production for 2013,” says Marshall Lamb, research leader of the USDA/Agricultural Research Service National Peanut Research Laboratory at Dawson, Ga., who spoke at the annual meeting of the Mississippi Peanut Growers Association. “The question is: What do we need to produce in 2013 in order to get back to a reasonable carryout that is healthy for the industry?"

“Incredible, mind-boggling yields” for U.S. peanut producers last year left the industry with a worrisome carryover going into 2013 — which could bring acreage cutbacks of as much as 40 percent this year, says Marshall Lamb.

“There’s no doubt in anyone’s mind that we need a decrease in production for 2013,” the research leader of the USDA/Agricultural Research Service National Peanut Research Laboratory at Dawson, Ga., said at the annual meeting of the Mississippi Peanut Growers Association at Hattiesburg.

“The question is: What do we need to produce in 2013 in order to get back to a reasonable carryout that is healthy for the industry? We had a record carryout of roughly 1.35 million farmer stock tons going into 2013 — some analysts say as high as 1.5 million.

“We need to get back to a reasonable carryout level, which would equate to production this year of about 1.5 million farmer stock tons. With an average 3,400 lb. U.S. yield, that would suggest 900,000 acres for 2013, or about a 38 percent decrease from last year and a 30 percent decrease from the 2008-12 average. I’d like to see a bit more acreage than that as a buffer in case weather or other problems should cause yields to drop to around 3,000 tons.”

The saving grace for last year’s record crop has been demand, chiefly unexpected purchases from China, Lamb says.

“China has come into the market because they couldn’t get the peanuts they usually buy from India, so they’ve purchased significant amounts of U.S. peanuts, which has been great for us in terms of dealing with our oversupply.

“Demand in the export market has basically doubled compared to a year ago, due mainly to China’s purchases. China crushes about 80 percent of the peanuts they import, which results in about half oil, half meal. They’ve been buying peanuts from India, which are often contaminated with aflatoxin, and crushing concentrates the aflatoxin in the meal.

“We’re hoping that as they crush our U.S. peanuts, they will see how good the resulting meal is, and may realize it’s not all about price, but also quality, which we deliver. Hopefully, they will remain a more stable customer, although I have a feeling price may drive their buying decisions ahead of quality.”

Also helping boost demand, Lamb says, U.S. manufacturers are introducing new product lines for peanuts and are expanding existing product lines.

“We need to move out as many peanuts as possible so shellers don’t have to store them too long. Our shellers

are working as hard as they can to get these peanuts shelled, but they may not be able to have them all shelled by the time we start delivering the 2013 crop this fall.”

At the time of the Mississippi grower meeting, no contracts had been offered for 2013 peanuts, Lamb said, and there were still uncontracted peanuts in the loan.

“Given prices for other crops, we should be able to reduce peanut acres in order to get supply and demand back in balance, and hopefully attractive prices for other crops will offer farmers some economic stability with reduced peanut acreage.

Peanuts compared to competing crops

“With corn at $7 bushel, that equates to about $500 for non-irrigated peanuts, or $700 for irrigated. Cotton at 75 cents equates to $518 non-irrigated peanuts and $609 irrigated. For soybeans at $14, that equates to $601 for non-irrigated peanuts and $667 for irrigated.

“We do not, and we will not, ever have a trading floor for peanuts, as other commodities do with the futures markets. There aren’t enough consistent round turn sales for a liquid peanut futures market, which prevents you from hedging to manage risk, or forward contracting on a daily basis off the board.

This “puts risk into every aspect of every segment of the U.S. peanut industry,” Lamb says. “In 2010 and 2011 shellers bore the majority of the risk from the quality problems. They couldn’t get full utilization of the peanuts they were buying because they had to push a lot of them into the oil market. And with the short crop that occurred in 2011, farmers who had completely contracted all their production in advance weren’t able to take advantage of the $1,000 offers at the end of the year.

“In 2012, some farmers who didn’t contract for the good prices early now have their peanuts sitting in the loan because of the huge production.”

The amount of volatility in production creates risk for growers, Lamb says, and “frankly, I don’t think there’s much that can be done about it.

“What I recommend — and what I’ve said for years — is to take a balanced approach to marketing. You should almost always have some of your peanuts contracted up front, but also have some open at the end of the year to take advantage of any higher prices that may occur if there are crop problems.

“In the absence of a futures market and the volatility that we have because of the geographic limitations of where peanuts are grown, this balanced approach to marketing is the best way to protect yourself against risk.”

U.S. peanut markets — and acreage and production — have been “a roller coaster ride” of variability since government quotas were phased out in 2002, Lamb says.

“There were drops in 2006 and 2007, an upturn in 2008, then back down for a three-year period, followed by 2012’s steep climb, when we planted roughly 1.6 million.

“Last year at this meeting, following 2011’s very short crop, I estimated we needed about 1.4 million to 1.5 million acres for 2012, based on average yields. We went a bit too high on the acreage response, but that wouldn’t have been too bad if we’d had on average yields.

“What happened, though, was good weather, good rains, cooler temperatures — and everything came together for yield.”

Yields following the end of the quota system in 2002 had been averaging about 3,040 pounds per acre, until 2008, when new cultivars started becoming available that boosted the average to about 3,350 pounds.

“But 2012 blew all that away,” Lamb says. “We had a U.S. average of almost 4,200 pounds per acre. Absolutely unbelievable! Mississippi averaged 4,400 pounds per acre, Alabama about 4,000 pounds, and Georgia 4,550 pounds on about 800,000 acres. These were incredible, mind-boggling yields, and the U.S. produced just under 3.4 million farmer stock tons in shell.”

Carryout is key number to watch

In the supply/demand picture, he says, carryout is the key number watched by the industry. “This number represents the amount of peanuts available in the pipeline at the end of the marketing year July 31 to carry processors until new crop deliveries start in October.

“A carryout of about 500,000 tons is when the system gets a little nervous. Shelling capacity in the U.S. is about 165,000 farmer stock tons per month, which means that over the three-month August-October period, we need about 500,000 tons to keep the mills in operation. If carryout gets to or below 500,000, that’s when the price signal starts coming down the chain to the growers in the form of attractive contracts.”

But, says Lamb, that encourages growers to increase production, only adding to the roller coaster effect.

“In 2006, we brought forward roughly 630,000 tons and produced 1.8 million tons, with a demand of 2 million tons. This gave us a forward carryout for 2007 of roughly 500,000 pounds. Contracts were offered early in 2008, and producers responded by planting more peanuts, plus it was a good production year, roughly 2.5 million farmer stock tons. Adding peanuts brought forward from 2007, plus some imports, gave us a 3.2 million ton supply to work with in 2008. Subtract demand, and we had roughly 1 million tons of carryout going into 2009.

“In just one year, we went from 500,000 ton carryout and a nervous market to over 1 million tons of carryout a year later — an excessive amount. It took a while to work that off.

“From 2008 up to 2009, we produced a significantly smaller amount of peanuts, but with carry forward and imports we still were dealing with roughly a 3 million ton crop. Subtracting demand, we still had about 900,000 tons to carry forward.

“In 2010, drought in the Wiregrass area of Alabama and in southwest Georgia, helped alleviate some of the oversupply. But production of 2 million farmer stock tons, carry forward of 900,000 tons, plus imports, put us back to dealing with 3 million tons of peanuts. For three years, we had 3 million farmer stock tons of peanuts to cope with.”

In 2010, Lamb says, there were large losses due to aflatoxin, which cost millions of dollars, primarily to shellers, and extensive product loss.

“The quality problems in 2010 got us back down to a more reasonable carryout of 665,000 tons. Then came 2011 with weather problems again in the Southeast and a significant drought in Texas. We only produced 1.8 million farmer stock tons and imported 70,000 tons, which gave us only a 2.5 million ton supply to work with. There were additional losses due to quality problems, which resulted in a carryout in 2011 of only 380,000 tons — the reason uncontracted peanuts at the end of 2011 were bringing as much as $1,000 a ton.

“That carried forward into 2012, with early contract offers in the $1,000 range, and farmers responded by planting a lot more peanuts. We brought forward only 380,000 tons, but we produced a 3.4 million ton crop. Add 10,000 tons of imports, mostly products, and we get roughly 3.76 million farmer stock tons.

“We thought the supply was high when it was 3 million tons for three consecutive years, and then all of a sudden we were dealing with 3.7 million farmer stock tons. What a difference a year made.”

The oversupply, Lamb says, “is putting a lot of risk on the entire system — growers, shellers, purchasers, sellers of shelled stock peanuts, and manufacturers, although to a much lesser degree.”

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