The good news for U.S. peanut producers is that the demand for their crop is likely to remain relatively strong, and the market will need more peanuts next year than it does this year.

The bad news is that we have a relatively weak commodity futures market, and this may affect what shellers are willing to pay for peanuts next spring. That's the assessment of George Lovatt of the peanut brokerage firm Lovatt & Rushing.

Commodity markets have made a drastic swing in a little more than a year, he says, with corn trading at more than $6 per bushel last summer, soybeans at more than $13, and cotton at 82 cents.

“And peanuts were not immune to this rise in commodity prices — we thought the great bull market in commodity prices was finally here, and we thought it would last forever,” says Lovatt.

The strength in the peanut market, he adds, was due to two things: A belief that strong commodity prices would continue forever, and a supply/demand balance that was “adequate to tight” coming off the 2007 crop.

Coming out of 2006, he says, the U.S. market was carrying out about 783,000 tons of farmer stock peanuts. In 2007, the crop was about 1.87 million tons. The United States imported about 40,000 tons and exported 407,000 tons, an increase of about 25 percent from the year before. Approximately 529,000 tons were carried out from that crop, 32 percent fewer than the year before, with the stocks-to-use ratio coming out of 2007 at 24.6 percent.

“Runners are the engine that drives the peanut market,” says Lovatt. “Virginia, Spanish and Valencia are all a sideshow compared to runners.”

Last year, he said, shellers responded to a tight carry-out with contracts of $500 per ton, and growers responded by planting more peanuts.

“After a couple of years — in 2006 and 2007 — when we planted 1.24 million and 1.23 million acres of peanuts, respectively, we saw a big increase last year. As the prices got strong last summer and prices rose, the rain fell. The increased acres and extremely favorable growing season last year gave us a crop of 2.574 million tons,” says Lovatt.

From a supply and demand standpoint, the U.S. crop started with 529,000 tons in the 2007 crop, he says. “We reduced our imports because we obviously don't need them with a crop of this size.

“Domestic demand is up slightly and there's a substantial drop in seed sales, all resulting in a carry-out of 986,000 tons, representing a stocks-to-use ratio of 46 percent or about 170 days. We went from about a 90-day carryout to about 170 days. This is why we see a weakness in the peanut market.”

Historically, from 2000 to 2008, U.S. peanut supply and demand has varied, going “up and down like a yo-yo,” says Lovatt. “A year ago, we knew we had an adequate supply, and there was quite a bit of concern about what we would have to pay to contract the 2009 crop. Commodity prices were strong and there was some fear that the price of oil would go to $200 per barrel. But the great commodity boon ended. Oil went from $140 per barrel to $40 per barrel, corn went to $3.28 per bushel, beans down to $9.17, and cotton down to 62 cents. Runner peanuts went from about 80 cents last August down to about 40 cents this past March.”

In a reversal of what happened with the 2008 crop, falling commodity prices caused shellers and growers to react, says Lovatt, this time by reducing peanut acres. According to USDA, growers have reduced acres by 438,000 this year. This is fewer acres than was planted before World War I — almost 100 years ago. Southeast acreage is down 27 percent.

Under the old peanut program, says Lovatt, whenever you received the USDA numbers in June on planted acreage, you could be fairly certain that the actual acres were about 2 to 4 percent more. “With the new program, we're about 8 percent over the estimate. Last year, we were 5 percent more. Acreage estimates are made on the basis of farmer surveys that are taken between June 1 and June 15. But we planted a lot of peanuts this year between June 15 and July 10.”

Under the new program, yields have been as low as 2,571 pounds in 2002, but have been strong in the past three years, he says. For his forecast, Lovatt used the three-year average, the two-year average, and last year's average.

“It's unlikely we'll see last year's average again. But under this new program, peanuts are being grown on better land, using better varieties and chemicals, and they're being grown by better farmers. I believe the recent success we've had growing peanuts is probably going to continue.”

Using the three-year average, Lovatt forecasts a crop of 3,148 pounds per acre, adding 1.681 million tons to the supply and demand balance. Approximately 986,000 tons are carried in, and he doesn't change the imports or the domestic demand numbers.

“I do show a 30 percent increase in seed usage, because the carry-out number will demand more acres are planted in the 2010 crop. If I keep the export numbers and the crushed numbers unchanged, I have a crop carry-out of 534,000 tons, or a stocks-to-use ratio of 25 percent or about 91 days. This is about where we were coming out of the 2007 crop, but instead of rising commodity prices, we have falling prices, and I suspect that will have a dramatic impact on the price we can expect from peanuts going forward.”

Lovatt says the U.S. could see a 30 percent increase in peanut acreage next year. “To keep products on the shelf, we'd need a crop in the neighborhood of 2.1 million tons. In general, I think we're going to have to see an increase in acres from 1.1 million this year to 1.4 million, give or take, next year. Couple that with the fact we're using these larger-seeded varieties. We're putting in more pounds per acre when we plant these.”

The new peanut program, he says, changed the way in which farmers have to think about themselves. “You're no longer a peanut farmer — you're just a farmer. As farmers, it's your job to manage your farm in such a way as to make the highest returns available to yourselves and your families over time.

“Nothing in this program requires you to grow peanuts. Farmers also choose to grow peanuts when the market tells them peanuts are the best crop available to them as opposed to the alternatives.”

The willingness to reduce acres this year has not been lost on shellers and manufacturers, says Lovatt.

Looking forward, the carryout from June 2009 is sufficient to cover manufacturers well into calendar year 2010, he says.

“Theoretically, manufacturers do not need this 2009 crop until the middle of January next year. Obviously, shellers will deliver before then. In theory, there's no pressure to buy the 2009 crop until well into the fall of this year. Given normal weather conditions, I don't see prices skyrocketing. There's always a possibility, but I don't see that in the future. I think prices will stabilize about where they are now, but next spring manufacturers and shellers will recognize the need to increase supply and I expect contracts next spring will be offered at levels that will encourage additional acres.”

If corn is $2.50 per bushel, soybeans at $6 or $7, the price of oil is $30 per barrel, and cotton is 50 cents, Lovatt says growers shouldn't expect shellers to offer them $500 for peanuts. “They will offer whatever is necessary to get the acres planted. On the other hand, if commodity prices rally, peanut prices will rally as well.”