Survival means bringing supply more in line with demand

The American peanut industry has been jolted by the low prices caused by increased acreage, increased yields and a generic base from cotton that resulted in even more peanut acreage.

J. Tyron Spearman Contributing Editor

J. Tyron Spearman
Contributing Editor

Because other commodities that could compete with peanut acreage offer low prices as well, producers have little choice in an effort to survive. The situation creating the need to go into survival mode, caused in part by the Farm Bill, could ruin the peanut market before adjustments can be made.

Buying points and shellers are recognizing that immense overproduction is causing their boats to take on water, and they are making drastic moves to downsize and restrict contracted tonnage.

Manufacturers are pleased with the lower prices; however, they recognize a disaster of any ingredient segment spells trouble in maintaining a constant supply, having it delivered on time and achieving the quality and price consumers enjoy and are willing to pay for.

Drastic Changes

The 20 percent increase in peanut production in one season has not given industry infrastructure time to adjust. Peanut warehouses are being built, but construction is costly and government rental payments for storage will not support the costs of newly constructed warehouses. The uncertainty of what could happen in three years with the Farm Bill has investors looking elsewhere.

Diverting peanuts to peanut oil is not possible with three factories already at capacity. Investing in a food processing facility is expensive and takes time and market distribution.

Restrictive Contracts

Shellers opened in early 2016 trying to secure runner-type loan peanuts not contracted from the 2015 peanut crop. Shellers must redeem these peanuts from the loan before shelling. Most shellers also returned shrink costs that had been deducted. Farmers responded favorably to the offers.

Contracts were offered in the Southeast for the 2016 peanut crop but with restrictions. Buying points had limited tonnage at $375 per ton plus $25 for seed production and even $25 per ton for high-oleic production. Some shellers offered $390 per ton on irrigated runners plus $10 per ton for hauling or $400 per ton. Then, tonnage was limited to 75 percent of last year’s production.

Some grower cooperatives are requiring their farmers to cut back 25 percent on acreage planted last year. If more peanuts are delivered, the farmer will not be guaranteed warehouse space to secure a loan, and they must pay the cost of storage and handling and all sheller tariffs will be applied.

Another sheller offer on runner-type peanuts in the Southeast was $420 per ton on the first ton of high-oleic peanuts and $375 per ton on the remainder. Some contracts differ for commissioned buying points and company-owned buying points.
Additionally, shellers are downsizing by releasing buying points, terminating commission contracts or lowering commissions. These buying points are struggling to find another sheller for their farmers as most are already shelling at capacity.

MarketWatch3-2016PhotoThe New Reality

Peanut farmers are being advised by their grower leadership and university agronomists and economists not to plant peanuts unless they have secured storage at the local buying point or sheller. No government-approved storage means no $355 per ton loan. Shellers have to leave peanuts in warehouse storage until requested by the manufacturers. Manufacturers want fresh-shelled peanuts, and the market will not support shelling ahead of time and placing that stock in cold storage.

Will producers increase peanut planting anyway because all other commodities are losers? The industry is telling farmers that the peanut program is slowly choking markets and a plan to survive involves cutting back and moving toward a balance of supply and demand. Without a major weather disaster in the next 12 or 24 months, peanuts will continue to be priced below the cost of production. That’s where the government peanut program comes in. While many people may understand the need to help farmers during low commodity prices, pushing prices even lower because of government rules and even some double dipping is sure to give critics more ammunition and momentum.

Marketing Facts Today

USDA estimates 3,106,895 tons of production. Demand is estimated for domestic and export markets at 2,750,000 tons. That’s about 350,000 tons too many, and coupled with last year’s carry-forward of 1,050,000 tons, we have 1,400,000 tons carry-forward or about half a crop. Domestic markets are up only 2.9 percent and exports up 2.6 percent.

A milder winter in the U.S. and Europe is one reason sales are down. Peanut butter usage is reported down about 4 percent with snacks up 24 percent. Milder weather means U.S. consumers are on the go and choosing more portable snacks that offer a nutritious energy boost.

Government officials are aware that the peanut program has encouraged more production and have stepped up to increase nutrition food purchases of peanut butter and roasted peanuts. For the first five months, government purchases are up 70 percent compared to the same period last year.

2016 Peanut Farming

Team up with your local buying point and plant peanuts that can be stored. Restoring commodity marketing certificates should help farmers up against payment limits. The government does not want peanuts and may drop the price anytime to sell them, which creates a Market Gain that is charged to the farmer. Do what you can to avoid that. Eat peanuts every day, maintain a crop rotation plan and do not plant too many peanuts.