Will Peanuts Respond to Good Ol' Supply and Demand?

Nathan Smith
University of Georgia

The 2002 farm bill changed the rules for peanut farmers. The new peanut program places peanut farmers in unfamiliar territory and forces them to think differently about how they will market their crop. To get better-than-average prices for their peanuts in 2003, farmers will have to watch the peanut market more closely for pricing opportunities. The main driver for the new pricing system will be good ol supply and demand. Because of this change in drivers, peanut prices are expected to fluctuate and be more volatile in response to changes in the market. With this in mind, farmers planning their 2003 peanut crop should watch and understand the outlook for supply and demand.


The 2001 peanut crop was a near record year and created an oversupply of peanuts which have carried over into the 2002 season. Total US production has averaged around 3.7 billion pounds the last 10 years. However, the 2001 crop totaled 4.28 billion pounds. To get rid of these extra peanuts, farmers need access to foreign markets. Right now, these foreign markets are being met with old crop peanuts, displacing 2002 crop peanuts that normally would be exported. The U.S. Department. of Agriculture estimates that 322,000 tons of U.S. peanuts will be exported during the 2002-03 marketing year. This would be a 10 percent decline from last year. To move the 2002 U.S. crop into the export market, prices will have to drop into the $250 to $300 range to be competitive with peanut exports from other major producers, like Argentine, China and India.


The 2002 crop is not as good as last year. Harvest problems caused by wet weather has dropped the U.S. production estimate to 2,569 pounds per acre on 1.36 million acres for a total of 3.5 billion pounds. This drop in supply could mean higher prices for farmers if demand picks up before next year.


USDA expects U.S. citizens to eat about 4.5 percent more peanuts and peanut products this year. The general viewpoint in the industry is that the lower farm level prices will increase peanut consumption and lower the consumer price for peanut butter and candy and snacks containing peanuts. However, what we are more likely to see is for manufacturers to increase spending for advertising and promotions for peanut products and thus increasing demand.


This year supply outweighed demand because there are more peanuts than needed. While this has been negative on farmer prices the year, the encouraging factor for next year is that demand is doing well enough to work down that supply. Thus, good ol' supply and demand could work more in the farmers favor next year, but we'll have to wait and see.

 

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