Market Watch – If the cotton market goes higher, peanut offers may increase

Markets for key commodities grown in the peanut belt are doing some crazy things this fall, and the excitement is spilling over into the peanut market.

Two years ago, it was the corn market and the expansion of ethanol that had corn competing for peanut acreage, but now it’s the cotton market. World demand for cotton has increased as production in China, India and Pakistan dropped, sending cotton prices from 82 cents per pound to a record $1.51 per pound. Suddenly, cotton is the alternative farmers in the peanut-cotton belt cannot ignore, especially since most farmers rotate peanut land with cotton.

That’s the good news. The bad news is that several key leaders were defeated in fall elections. The loss of these supporters will eventually hurt the farmer as public support continues to erode.

Farm Bill Posturing Begins
Already, negative stories have surfaced about government spending in the Farm Bill. One article said that the U.S. government spends $58 per person per year on the Farm Bill and nutrition giveaway programs. For consumers to help the farmer produce the safest, most affordable, most abundant food, fiber, feed and fuel supply in the history of the world with such a small investment is a modern miracle.

Farmers and agriculture advocates need to gear up for a battle. The 2012 Farm Bill discussions will start slow as Congress re-organizes and gives the economy an opportunity to catch up. Agriculture has weathered part of the storm, but budget cuts will chip away at recovery funds needed in rural America and especially any farm subsidies.

Peanuts will have to unite with other commodities to weather any storms in the halls of Congress. Uniting all the farm groups on whether the market loan program or ACRE or another type program is best for farmers and ranchers will be the first challenge.

2009 Crop Is History
USDA estimated the 2009 crop had 1,844,175 tons with a crop average price of $434 per ton. With the price below the target price of $495 per ton, farmers received a counter-cyclical payment of $25 per ton.

Farmers and shellers placed 1,674,000 tons of peanuts in 2009 in the market loan, and as the 2010 crop developed, shellers optioned to redeem all but 2,955 tons. The peanut program worked as designed – USDA advanced the loan and storage and handling, as all was repaid except for the 2,955 tons forfeited, and those will likely be sold at a profit.

2010 Crop Totals
The 2010 U.S. peanut crop totals over 2,025,000 tons, about two percent above the estimate. Planted acreage was up 17 percent from 2009, but the average yield of 3,142 pounds per acre was down 279 pounds from last year. Heat and drought, especially in Alabama, sections of Georgia and Virginia, not only hurt yield, but caused quality problems for these states, with lots of variation on grades and yields. The new varieties were tested under harsh drought conditions.
Southeast producers had a new problem this season: the burrower bug. This pest tends to be a problem in reduced-tillage fields and drought stress. No problem from the bug on irrigated peanuts. Peanuts graded Segregation 2 will likely go to peanut oil production.

Supply And Demand
Domestic and export demand is predicted at 2,120,000 tons, about 200,000 tons short from the 2010 crop. USDA predicts U.S. demand will increase two percent. However, usage is up an amazing 10 percent. In the snacking and candy categories, the peanut is still the best buy. Peanut butter continues to set consumption records, up 8.1 percent. USDA predicts exports to increase seven to 10 percent, depending on the world economy and production in Argentina, but so far, it is down 17 percent.

The carry-forward to next year should be less than the 800,000 tons. More peanuts in the drought stricken states will be diverted to peanut oil and already more blanching has been reserved to clean up the quality problems.

2011 Contracting
Peanut buyers were concerned about the farmer’s commitment to cotton acreage. Peanut markets were quiet, but some shellers felt market action was needed to keep farmers from forgetting about peanuts and planting cotton.

In the Southeast, option contracts for $145 per ton ($500 total) were available for non-contracted 2010 tonnage in the Southeast. Option contracts for 2011 were available for $195 per ton or $550 per ton on runner-type peanuts. Tonnage under contract was limited to about 3,200 pounds per acre dry-land and 4,000 pounds per acre irrigated. Seed contracts were added at $25 per ton and even some $10 per ton hauling fees were offered.

In the Virginia-Carolina region, option contracts were offered for Virginia-type peanuts for $270 per ton or ($270 plus $355 per ton) $625 per ton for 2011 crop. Response is reportedly low. Virginia-type contracts in South Carolina are for $245 per ton option or $600 per ton due to freight differential to Virginia plants. Some runner contracts specific to Florida 07 were offered for a total of $575 per ton.

Option contracts for $295 per ton for runner-type peanuts or $650 per ton were offered in the Southwest. Buying points report little or no response. Also offered in the Southwest were a total of $650 per ton for Spanish-type peanuts and $675 per ton for Virginia-type peanuts. Again, buying points indicate some farmers have signed a portion, but will reserve final peanut contracts as they watch the cotton market.

Contracts have been pulled except for areas where shellers match competition as farmers meet with buying points. Financial organizations are often requiring a contract before approving operating funds. Market experts estimate that about one-third of Southeast producers signed the $550 per ton contract. Unless the cotton market goes higher, offers may not improve.

This Market Is Not Over
The supply of peanuts will tighten as the lower quality is removed from the 2010 crop. The carry-forward into 2011 will be lower, and the cotton market is likely to continue strong.
All indicators are that producers can contract at higher prices for 2011 and hold the key to acreage. Wise counsel would be to book a portion at a profitable level, and when prices rise, book another portion. You can’t go broke selling at a profit, and, if we can keep input costs down, 2011 should be a profitable year for peanut producers.

Leading Market Indicators (as of Dec. 13, 2010)

• 2009 Crop Forfeited – 2,955 tons
• 2010 Crop (est up 7%) – 1,981,000 tons
• 2010 Crop Inspections – 2,026,596 tons
• 2010 Crop In Loan – 1,645,742 tons
• 2010 Crop Redeemed – 199,532 tons
• 2010-11 Usage (3 mo.) – up 10.6%
• 2009-10 Exports (12 mos.) – dn 16%
• National Posted Price (per ton): Runners $524.54, Spanish $516.68,
Virginia/Valencia $528.06.