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USDA looking at fine-tuning system: National peanut prices are set each week, but process confusing

Every week of the year, Dan Stevens pulls together information from domestic and international sources, puts the data into a formula and produces the national weekly price for peanuts.

To those in the peanut industry and even those who “set” it, the price that emerges from a black box bears as much resemblance to an arbitrary announcement as to one based on the numbers that go into the box. Gaps in the price discovery information for peanuts account for the reality. One industry observer says the price information is put in to the black box and then emptied in a trash can. Under the old program, the USDA set quota and price.

While the weekly national price for peanuts is announced on Tuesday and becomes effective on Wednesday, many in the industry are still scratching their heads at the end of the week, trying to figure out from whence the price came. Stevens, director of the USDA Peanut and Tobacco Analysis, and his staff are aware of the concerns.

The 2002 farm bill changed the peanut program to resemble other commodities and provided for a national price, but “the law was silent on methodology” of how to set the weekly national price.

Everyone assumed peanuts would operate similar to cotton and rice, Stevens recalls. That is, he notes, everyone outside of the peanut industry.

Peanut markets aren't like those in cotton and rice. There's no futures market and no regular market for the trade of peanuts. And the volume is a fraction of other traded commodities.

At a recent seminar in North Carolina, Stevens conceded, “We don't have the slightest idea — we're still working to perfect the system.

“We need to be proactive rather than reactive,” Stevens says. “We need to be out in front.”

USDA has appointed a task force to make the process more transparent to people in the peanut trade. “J.B. Penn, USDA under secretary, says he wants transparency in the price discovery mechanism, where people can see where it came from,” Stevens says. “We don't have it now.”

Two years into a new farm bill, confusion still reigns as to the price discovery mechanism for setting the national weekly price.

In setting up the current system, USDA met with people in the peanut industry and foreign buyers, discussed how other commodities set prices, and used conversion factors, including the Rotterdam price for peanuts and the shelled farmer-stock price.

The price for Southeastern medium runners is used as a reference point. In setting the national price, USDA checks peanut prices from a variety of sources, including the AMS Weekly Peanut Report in Thomasville, Ga.; the NASS Monthly Price Report; FSA Market activity reported from Form 1007 at harvest; Oil World Weekly prices from Rotterdam, The Netherlands; the Georgalos newsletter, published in Argentina; Public Ledger; and confidential company reports from China and Argentina.

The national posted prices take into account the Commodity Credit Corporation's (CCC) responsibility to minimize loan forfeitures and accumulation of peanut stocks.

“It's like trying to herd a bunch of cats,” is how Floyd Gaibler, deputy undersecretary for farm and agricultural services and chairman of the USDA task force, describes the process.

One of the major problems is inconsistent price information. “There are big gaps in the price history,” Stevens says. Some reports give weekly prices; others, monthly prices.

On a graph, the price history among the various sources looks like a child's work on an Etch-A-Sketch, with gaps between the ups and downs.

“Nobody knew how to do this,” Stevens told a group of Extension agents, bankers and shellers in December at a meeting in Roanoke Rapids, N.C. One week, two national prices were announced.

One solution would be a daily trading market. The New York Board of Trade is looking at a peanut futures market, Stevens says.

Despite the gap in price history, the national price of peanuts has remained consistently at or near — and even above — the target price of $355. On Jan. 13, 2004, the price for medium runners was $374.98 per ton. The price for Virginias was $372.27 per ton; $357.67 per ton for Spanish; and $372.27 per ton for Valencias. It has dipped on occasion, but in December was $45 above the target price on the strength production problems in Argentina and China and anticipation of an increase in acreage for the 2004 season in the United States. In the United States, there are currently some 400,000 tons of peanuts needing to be exported from the 2003 crop.

Where do we go from here?

Setting the national weekly price for peanuts is currently an inexact and flawed science, Stevens says. A USDA task force is seeking a new price date and working on fine-tuning the “black-box concept,” Stevens says.

“We've been an advocate of getting the national price closer to the international price,” Stevens says. “We're struggling with this thing.”

While the price discovery mechanism has its problems, Stevens points out there have been very few forfeitures in the loan during the past two years. Production problems in Argentina and China will likely keep the loan forfeitures to a minimum in 2004.

“We've essentially been lucky,” Stevens says.

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