US Peanut Situation and Outlook For 1999/2000 *

W. Don Shurley
Professor and Economist- Cotton and Peanuts
Department of Agricultural and Applied Economics
University of Georgia



* Paper presented at the Georgia Peanut Producers Association Annual Buying Points Meeting, August 12, 1999, Albany, GA.

Introduction and Overview

The peanut industry continues to be impacted by a myriad of economic and political factors. Effective with the 1996 crop, the revised peanut program reduced quota price support by 10% and eliminated the cost of production price support escalator.

Most peanut producers/quota owners also rent quota poundage from non-producer quota owners. Rental rates have not decreased in conjunction with the reduction in peanut price. The reduction in price support was also accompanied by a large (19%) reduction in quota in 1996 and this effectively increased the demand for quota pounds to rent and bid rates upward.

Politically, the peanut program appears on solid footing. The program still has it's detractors but it has not been seriously challenged in budget negotiations since the new farm bill. Likely, debates on price support levels and the program in general will heat up as new farm bill talks begin in earnest in 2001.

The most pressing issues in the peanut industry at present are cost of production and competitiveness, the demand for peanuts and peanut products, and trade issues.
 
 

Production and Supply Situation

Crop Condition and Outlook. As of early-to-mid August, prospects for the 1999 peanut crop are deteriorating due to continued dry conditions over much of the southeast peanut belt (Figure 1). Although conditions are ahead of last year, concern is mounting. US peanut yield is currently forecast at 2,657 pounds per acre compared to 2,702 lbs per acre last year. Last year's crop appeared a complete disaster in mid-summer but was saved by late season rainfall.







Yield and Acreage Trends. A problem plaguing US peanut producers, particularly in the Southeast, has been a downward trend in yield. After peaking during the period of the late '70's to mid '80's, yields have since trended downward. There is evidence to suggest, however, that yields may now be on the rebound. This is demonstrated using a "moving average" (Figure 2).






For example, the 3-year moving average for 1997 would be the average yield for 1995-97. The 3-year moving average for 1998 would be the average for 1996-98. The 3-year moving average of yields in Georgia began to trend upward in 1993 and the 5-year moving average began to trend upward in 1994.

This change is likely due to lower peanut acreage, improved rotation and increased acreage of cotton, switch to higher-yielding varieties, and improved management of Tomato Spotted Wilt Virus (TSWV). Growers need to monitor their yields and yield trend closely and account for yield improvements in planting decisions when matching plantings to the farm's quota pounds.

The 1996 farm bill ushered in an era of lower peanut acreage (Figure 3). In '96, the US peanut quota was reduced from 1.35 million tons to 1.1 million tons and the undermarketing provision eliminated.







The US quota has increased steadily since 1996. The 1999 quota is 1.18 million tons-- a 1% increase from '98. US growers planted 1.47 million acres in 1999-- down 52,000 acres from 1998. Most of this reduction (50,000 acres) came from Texas where the probability of high Loan Deficiency Payments may have attracted cotton acreage. The 1999 yield is forecast at 2,657 pounds per acre.

There appears some evidence to suggest that peanut acreage planted for production of additionals (non-quota pounds) has declined during the '90's (Figure 4). Assuming farmers would plant acreage sufficient to meet their quota based on the average yield for the previous 5 years, any acreage above that amount would be grown for the express purpose of marketing as additionals. Acreage in Georgia shows that intended plantings for additionals has declined since 1991. This is likely due to competition from cotton and fairly stable contract prices for additionals.







Quota, Production, and Stocks. Given slightly lower acreage and yield, the 1999 peanut crop is forecast at 3.85 billion pounds or 1.925 million tons-- down 2.9% from last year (Figure 5). Production of 1.925 million tons compares to the quota of 1.18 million tons.






Since 1996, we have seen increased use of the "immediate buyback" provision which essentially allows additional peanuts to be utilized as quota. It has been argued that the buyback now serves as a buffer to provide additional supplies as needed much as the effective quota (basic quota plus undermarketings) did prior to the revised peanut program. This is not true. Additional peanuts, if needed for the domestic market, could be purchased from CCC loan for that purpose. The buyback provision has simply allowed buyers to obtain these peanuts at prices below the loan rate.

In 1996, 137,000 tons of additionals were purchased as buybacks, 113,000 tons in '97 and 209,000 tons in '98. Fortunately, increased buybacks have not resulted in large amounts of quota peanuts being placed in CCC loan. However, peanut stocks have steadily risen (Figure 6). Beginning stocks or carry-in of previous crop peanuts into the 1999 crop year that began August 1 totaled approximately 600,000 tons farmer stock equivalent. This is the largest level since 1995 and 100-200,000 tons above normal.







The Demand Side

Consumption Trends. Edible consumption of peanuts continues to rebound from the low of 1995 (Figure 7). USDA forecast edible consumption at 1.085 farmer stock tons for the 1999 crop-- up 1.6% from last year Consumption dropped dramatically during the 1990 crop marketing year due to lower production, high retail prices, and loss of government purchases for food/nutrition programs. Demand bounced back in the 1991 crop year but then declined annually until 1996.







USDA reports use of shelled peanuts and roasting stock from all origins. Use includes imported edible peanuts. Imports, not allowed under previous legislation, have grown in significance since passage of the GATT and NAFTA treaties. If food use is adjusted for the quantity of imports, you get a more accurate picture of "the US demand for US peanuts" or a better view of market share. Adjusted for imports, US consumption has yet to reach levels enjoyed in the late 1980's and early 1990's.

For the first 11 months of the '98/99 crop marketing year (August through June), total use of shelled edible peanuts is running 2.8% above the same period of a year ago (Figure 8). Despite the overall rebound in demand, peanut butter continues to be of some concern. For the 98/99 season, use of peanuts for peanut butter is running 1.6% behind the previous year. Use in candy (up 8.3%) and snacks (up 12.3%) continues to be a bright spot.

Government Purchases Fall. Government purchases of peanut butter and roasted peanuts for it's food and nutritional programs fell tremendously during the 1998 crop marketing year (Figure 9). Purchases fell from 37,000 tons farmer stock equivalent during the '97 crop marketing year to only 18,000 tons for the August-June period of the '98 crop year.










Government purchases amount to about 3% of the US peanut quota. Reasons for the recent decline are unknown. Purchases have been almost non-existent since February 1999. The decline may be related to the peanut allergy situation or simply the price and availability of competing food items.

Oil Complex and Lower Prices. Additional peanuts not contracted by September 15 must be placed in CCC loan. Loan additionals may be sold for export, for US edible use if quota supply is short, or may be sold for crushing to produce oil and meal. Both quota and additionals in loan not sold by the end of May must be sold for crushing. Crushing quota peanuts results in large CCC losses.

The price of peanut meal f.o.b. Southeast has declined from $210 per ton for the 97/98 crop marketing year to approximately $106 per ton for the 98/99 crop marketing year (Figure 10). Likewise, peanut oil has declined from 49 cents per pound to 40 cents per pound (Figure 11).

Recent trends in peanut oil and meal prices suggest that CCC loan resale prices for peanuts for crushing has declined. This has been brought about by increased world supplies of soybeans and other crops in the oilseed complex. Lower prices for crushing suggest lower loan profit and/or greater loss.









1999/2000 Peanut Supply and Disposition

It is very likely that the buildup of stocks coupled with the '99 quota and expected size of the '99 crop will lead to quota peanuts being placed in CCC loan this year. Let's go through the numbers (Table 1).

USDA in it's August forecast estimates the 1999 crop at 1.92 million tons farmer stock. Assuming 2% (typical) Segregation 2 and 3 grades, total Seg 1 delivery would be 1.89 million tons. The 1999 US quota is 1.18 million tons. Assuming a 98 to 99% (typical) delivery of the quota and adding 25,000 tons of buybacks, total quota supplies would be 1.186 million tons. With large carry-in stocks it is doubtful there will be many buybacks but there are always some small amounts.
 


Table 1. Estimated 1999 Peanut Supply and Disposition Worksheet






Food use adjusted for imports is estimated to be about 1.06 million tons. This would leave about 128,000 tons of quota residual.

The total available supply of Seg 1 additionals is forecast at approximately 700,000 tons. Given the '98 crop shortfall in Argentina, exports are expected to be above recent levels. Exports are forecast at 400,000 tons-- about 75,000 tons above recent levels. This would leave about 300,000 tons residual.

A further build-up of stocks is likely unless significant crush takes place. Given the already high levels of carry-in, it is unlikely that buyers will over-purchase the market again this year. At least 100,000 tons of quota may go to CCC loan.
 
 

Trade Issues

The major issue continuing to face the peanut industry is trade and more specifically the importation of peanuts. Under the GATT agreement, imports of peanuts have increased. Argentina is considered the major competitor to US markets.

Tariffs placed on foreign peanuts, though initially high, decline over time. As tariffs decline, the cost of foreign peanuts to US manufacturers becomes closer and closer to US peanut program support levels for quota peanuts.

NAFTA has also impacted the US peanut industry although to a lesser extent. Under the NAFTA agreement, tariffs on imports from Mexico decline to zero during the 15-year phase-in. Should Mexico become a major producer and supplier of peanuts for export, the treat to US peanut farmers would be increased.

Of larger concern is FTAA, the Free Trade Agreement of the Americas. Under current FTAA proposals, Argentina may fall under NAFTA rules allowing free and unrestricted access. This would be a major threat to US peanut farmers given the current price support-quota structure of the peanut program.

The future of the peanut industry may well depend on finding a balance between the need for profit on the part of the grower and the realities of trade. Currently, the peanut program appears at odds with the trade agreements and vice-versa.

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