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Peanut broker explains the market now and his view of where it’s going

Peanut broker explains the market now and his view of where it’s going
How big the U.S. peanut surplus, or carryout, will be is becoming clearer if you know how to read the numbers. U.S. farmers planted about 642,000 hectares of peanuts this year. In comparison, India planted 5.3 million hectares, and China farmers planted 4.7 million hectares.

U.S. peanut farmers are winding down harvest on what looks to be another strong production year to bolster the country’s current surplus supply. How big the surplus, or carryout, will be is becoming clearer if you know how to read the numbers.

Over his four-decade career as a peanut broker, George Lovatt says he has learned to read peanut market reports with a dose of skepticism. Not that the data is unhelpful. “It’s the best we got,” he says, but you have to drill down into the data sometimes to find solid ground.

“The official USDA carryout from the 2015 crop is 895,000 tons. And while I have some disagreement on how they calculate that, I think that is reasonably close to being accurate. It means we have a comfortable carry-out,” Lovatt said, during an interview after he spoke at the 2016 Southern Ag Outlook Conference in Atlanta Sept. 27.

He pointed out that the June Peanut Stocks and Processing Report, published in July, had the peanut supply grossly overstated. The July report, published in August, adjusted the reported carry-out by 842,000 tons. Where those tons went, he said, really can’t be accounted for. “But they are gone,” said Lovatt, who put those mystery tons down in his figuring as “disappearance not tabulated.”

USDA has the 2016 peanut crop production at 3.2 million tons. As harvest proceeds across the U.S. peanut belt, the effects of adverse weather and pests in primary growing regions is becoming clearer. The USDA total production is likely too high. Lovatt’s adjusted number shows total U.S. production closer to 3,050,000 tons in 2016.

Demand high note

Demand for U.S. peanuts abroad has been good and stable for the last three years, but it hit a high note the last few months of the 2015 marketing year, reaching about 818,000 farmer stock tons during that time. This historical bump in exports came from record-size purchase from China and Vietnam.

“As far as I am concerned, nothing is predictable from China, but I do believe the Chinese are going to be a consistent buyer of U.S. peanuts. But the quantity of that buy is going to vary from year to year. Most of the peanuts we are shipping to China are going for the oil market, and they can buy peanuts from Senegal and other places in the world perhaps cheaper than they can from the U.S. But for now, China will be a major customer for U.S. peanut exports,” said Lovatt, who is president of Lovatt & Rushing, Inc. based in Georgia.

For the first decade after the end of the peanut quota system, he said, U.S. exports hovered between 20,000 tons to 40,000 tons per month. The Chinese started buying more U.S. peanuts consistently four years ago, and when they did the plateau of exports settled between 40,000 tons and 60,000 tons per month. With China’s historic purchase this year, he believes the new plateau could move up and U.S. exports could settle in between 60,000 tons and 80,000 tons per month. “But we don’t know that until we know,” he said.

U.S. peanut farmers have increased the country’s average peanut yield by 1,000 pounds in the last decade, and that has gone a long way to help the industry keep up with demand, which has been positive. “U.S. demand has been growing (on average about) 2 percent a year, which puts us at increasing demand by about 40,000 tons a year. That kind of growth will justify new peanut shelling capacity as we go forward.

How many days’ worth of peanuts?

When it comes to peanut supply, the peanut market looks at one number particularly: How many days’ worth of peanuts will carry-out from the previous season and carry-in to the next? Peanut shelling facilities need to shell year-round. The industry needs a carry-out each year to keep things shelling as the old crop supply dwindles and new crop supply, which happens between August and the end of October, giving the new crop time to be harvested and delivered to shellers.

By Lovatt’s calculations if domestic and export demand remains constant, the industry will have about 96 days’ worth of peanuts going into the 2017 marketing year. That’s the kind of stocks/uses ration to support current market prices.

The world’s carry-out of peanuts annually has been dropping since 2013, when there was a record 3 million metric ton carry-out into the 2014 year. The 2016 world carry-out supply is pegged closer to 2 million.

The U.S. farm economy is going through rough times, rougher than those not close to the farmgate understand. Commodity prices are low and sluggish. The critical concerns for peanut farmers and other agronomic-crop farmers going into next year will be financing and cash flow. With that in mind, he said:

“When you start looking at the 2017 crop, farmers are going to have to take a hard look at the average market price paid for the 2016 crop and try to make a projection on what the PLC payment may look like in October of ’17 (which is when payments are issued), and use that calculation and measure that against the options are available to them for cotton, corn and soybean. I suspect we are going to see a slight decrease in peanut acres next year but everything is dependent on what these competitive crops can offer.”

Reality check

Though the U.S. is a primary source for high-quality edible peanuts, he said, it is a good reality check to know just how big, or little, the U.S. is when it comes to planted peanut acres in the world. Converted to hectares, which is about 2.5 acres, U.S. farmers planted about 642,000 hectares of peanuts this year.

In comparison, India planted 5.3 million hectares, and China farmers planted 4.7 million hectares this year. Nigeria planted three times more peanuts and Sudan twice as much as U.S. farmers this year.

To illustrate how tough it is to get solid market data for peanuts domestically at times, and certainly the almost impossible notion of gaining solid market numbers from other peanut countries, he referred to a conversation he recently had with a friend in the peanut industry:

The U.S. has roughly 6,500 peanut farmers and they planted, to round things off, roughly 650,000 hectares of peanuts this year; that averages to about 100 hectares, or about 250 acres, planted per U.S. peanut farmer. “And we still have trouble getting reliable data,” he said.

China is said to have planted 4.7 million hectares of peanuts this year. His friend told him the number of peanut farmers in China is likely close to 20 million, which averages out to half-an-acre or at best one acre of peanuts per Chinese peanut farmer, which in essence means there are no peanut ‘farmers’ in China; there are peanut “gardeners,” he said.

“How in the world can you expect to get reliable numbers if that is the case?” Lovatt said. “The truth is you don’t.”

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