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Peanuts face potentials and pitfalls

Peanut producers, under a new program that does not include an established price, face new profit potential and possible pitfalls as they develop marketing strategies. “Marketing peanuts is now the sole responsibility of the producer,” Nathan Smith, a Georgia Extension economist, told participants in the recent Southern Peanut Farmers Federation annual conference in Panama City, Fla.

Smith said peanut production is a high input enterprise, capital intensive with relatively high risks, so growers must know precise production costs to establish market objectives.

“It's also a relatively small acreage crop in a concentrated industry, so information about crop outlook and price may be limited. And we don't have enough players involved to make a futures market work.”

Smith said under the new program, established in the last farm law, peanut support prices changed from the old quota support to something similar to other commodities, including loan deficiency payments.

“The price is based on the loan repayment rate,” Smith said. And to qualify for that rate, farmers must retain beneficial interest in the crop. That's one of the pitfalls producers need to consider before they sign contracts on even part of their crop, he said.

Growers have several marketing alternatives: selling to commercial buyers (shellers) through buying points; putting the crop in the CCC marketing assistance loan and forfeiting the loan; and marketing pools.

Marketing tools include forward contracts, selling at harvest for cash, using a marketing pool (a certified marketing association or CMA) or storing, either in an approved warehouse on on-farm.

Storing risk

“Storing on-farm comes with significant risk,” Smith said. “For one thing, farmers do not get paid for storage fees as they would if they store in approved CCC warehouses.”

He said harvest delivery contracts require that peanuts be delivered at or near harvest. “An optional delivery contract allows the buyer to decide when to take ownership and thus move them into the loan program. Consider the total price potential, what you commit to deliver and the effect on beneficial interest,” Smith said.

Growers can expect marketing opportunities during harvest, since stocks may be low. “Price will be based on the National Posted Price and the buyer typically will pay the producer the loan repayment rate plus any premium, adjusted for grade.”

To collect the loan deficiency payment, the producer must complete the appropriate FSA form (CCC-709) before the peanuts are sold.

“Total return includes the payment from the buyer plus any LDP from FSA.

Smith says harvesttime sales bring some disadvantages.

“The buyer determines the selling time and upside price potential is severely limited. The producer completes the FSA forms for loan and LDP and pays the FSA fees. Also, the grower may not receive full payment until the buyer takes ownership of the crop.”

Smith also cautions that the producer could lose beneficial interest if the contract does not meet FSA requirements.

Price guarantee

On the plus side, Smith said harvest cash sales offer a guaranteed market price with no downside price risk. “The producer receives the loan amount minus the FSA fees at harvest and the buyer's premium, if any, comes up front.”

Smith said growers may lose less to shrinkage, as well, since “contracts have used weight from FSA-1007 rather than the warehouse receipt weight that has been shrunk 3.5 percent to 4 percent.”

Smith said the marketing assistance loan is non-recourse, nine-month loan for all peanuts produced. “Growers can elect to take an LDP instead of the loan. Generic certificates are allowed and CCC pays storage, handling and associated costs for loan peanuts.

“The National Posted Price is the Loan Repayment Rate for peanuts.”

For 2002 the loan rate for runner-type peanuts was $355.72 per ton. The National Posted Price was $351.72 and the Loan Deficiency Payment/Marketing Loan Guarantee was $4 per ton. Spanish peanut loan rate was $337.20 with a $333.20 posted price and $4 LDP/MLG. Rates for both Valencias and Virginia were $353.66, $349.66 and $4.

Here's the way the loan works.

“Producers receive the loan and may redeem the loan before the end of nine months by paying the loan repayment rate or by signing a form, FSA-211, giving a buyer power of attorney to pay off the loan.

“The buyer pays the producer any premium offered, adjusted for grade.”

Smith said marketing associations or cooperatives may be used to market peanuts under loan, according to provisions in the 2002 farm law. A cooperative marketing association (CMA) is a CCC approved cooperative permitted to participate in loan and LDP programs. A CMA performs all CCC loan and marketing tasks, Smith said, and farmers may market a portion or all their peanuts through a pool.

Key to success

“Independent storage and volume is the key to pool success,” he said.

Advantages include the marketing expertise a pool association offers. A CMA employs specialists to sell peanuts on the grower's behalf.

Producers “receive the loan rate minus fees at harvest, usually within 15 days. The pool completes FSA paperwork and obtains loans and LDPs for producers. Farmers retain eligibility for loan and LDP benefits.”

Smith said growers may use pools to spread price risks since the association sells throughout the marketing year. Also, pools sell a larger volume and may command a higher price.

“In a CMA pool, growers work together instead of competing against each other,” he said.

The downside of a CMA includes relinquishing control of the peanuts.

“Also, part of the pool dividends may be retains as capital funds and receipt of marketing gains may not be available until all peanut stocks are sold by the pool. Producers may pay pool administrative fees.”

A shrink loss of 3.5 percent to 4 percent may occur with peanuts placed in the CMA.

Smith said peanut farmers need to know the marketing alternatives and the program benefits to get more than $355 for their crop. He cites several possible ways to top that figure.

“Contract when prices are attractive, better than the national posted price, prior to planting or harvest. There is a risk of loss or decline in the LDP if prices increase.

“Sell at harvest if the LDP is large.

Timing critical

“Timing is critical. Take the LDP or MLG when cash market increases relative to the NPP.

“Integrate up the marketing chain.” Smith said cooperative ventures in a shelling facility may add to profit potential, for instance.

“Find a niche market.” He said some buyers may pay premiums for seed production, quality production, and trait specific varieties. “Growers may need storage and segregation capacity to keep the niche market peanuts separate.”

Smith said total income per ton depends on a number of factors: with the U.S. average price ($355) and the estimated LDP (0 in this case), total crop income per ton would be $355 per ton.

But add on the counter cyclical payment ($104) and total hits $459 per ton. A direct payment ($36) pushes the potential to $495 per ton. That's on 85 percent of the farm's base acreage.

“Crop income including LDP varies with yield and price. Direct payments are constant and counter cyclical payments vary with price.”

Smith said one of the best goals for producers who strive to beat the $355 per ton base is to grow high quality peanuts. “Any farmer marketing top quality will be ahead of the game,” he said.

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