Adapting to a New Peanut Program and a New Risk Environment 2005 National Risk Management Education Conference Nathan Smith, University of Georgia, Jim Pease and Mike Roberts, Virginia Tech, Gary Bullen, North Carolina State University, Kim Anderson, Oklahoma State University, Tim Hewitt, University of Florida, Stanley M. Fletcher, University of Georgia

Peanut are Grown Primarily in 9 Southern States Alabama, Florida, Georgia, New Mexico, North Carolina, Oklahoma, South Carolina, Texas & Virginia Source: Dr. John Baldwin, UGA Extension Peanut Specialist

Who Buys and Process Peanuts? Peanut Shellers Blanchers Oil Mills Peanut Butter Manufacturers Candy Manufacturers Snack Companies

First Buyer Level of Peanut Marketing Two shellers purchase an estimated 80% of the US peanut production. Buying Points handle and store peanuts for shellers. Several also provide farm inputs and supplies. Some are independently owned but typically buy exclusively for one buyer. Majority of peanuts are shelled after which some will be blanched and roasted depending on end use.

Production History Peanuts have been historically grown under a quota program. Quota was limited to domestic use only. Additionals used for export and crush. Quota began as acreage allotment then changed to poundage allotments in late 70s. Based on historical production, no movement across states, limited movement across county lines.

Policy Changes Lead to a New Risk Environment for Peanuts Elimination of “Section 22” blocking imported peanuts under WTO. Declining schedule of Tariff Rate Quotas for imported peanuts. Political economy changes in Congress The 2002 Farm Bill eliminates the peanut quota allotment program that had been in place since 1930s.

2002 Peanut Program Basics Quota Poundage Allotments Eliminated Provided 55 cents/lb Quota Buyout to Quota Owners Established a Marketing Assistance Loan Program for Peanuts Peanut Base (yield and acres) Established –Direct Payment –Counter Cyclical Payment

Program Transition Moving from a supply control program that restricted production through quota poundage allotments and a two-tiered pricing system to a more market-oriented program. Support price lowered from $610 to $355 per ton. Non-quota (additionals) support price was $132 to $175 per ton. DCP payments for peanuts: –Minimum of $36/ton on 85% of base –Maximum of $140/ton on 85% of base –Subject to payment limitations Buyout of quota owners designed to aid transition

Peanut Quota Buyout by State State Quota Buyout ($million) State Quota Buyout ($million) Georgia$440.3New Mexico$5.4 Alabama$136.2Mississippi$4.7 Texas$129.7Arkansas$1.8 North Carolina$98.0Arizona$0.8 Virginia$61.5California$0.6 Oklahoma$56.8Missouri$0.2 Florida$40.4Louisiana$0.1 South Carolina$6.6 Environmental Working Group ( accessed 10/21/03), with data from USDA/FSA

2003 Peanut Program Base Acres & Average Program Yields by State

Minimum and Maximum 2003 DCP Payments by State Calculated from Base Acres and Program Yields

A Lot of Uncertainty How will the marketing loan program work? What are the marketing alternatives for peanut producers? Increased supply risk for peanut buyers (shellers). Peanut buying points (first handler of peanuts and marketing representative of shellers) uncertain of role in new program, who will pay for handling and storage of peanuts? No public exchange or terminal market prices. How will manufacturers respond to lower price for shelled peanuts? Where will peanuts be grown?

Risk Management Education Opportunity Producers, Bankers, Shellers, Buying Point Managers, USDA/FSA, Production Specialists and County Educators. Lot of focus on program provisions, mechanics and base update/establishment decision. Producers used to delivering peanuts and picking up check, need help in evaluating marketing alternatives and developing price risk management strategies.

Southern Region Peanut Risk Management Team Team formed to address marketing risk issues for peanuts. Group supported by Southern Region Risk Management Education Center Organizers were: –Kim Anderson, Oklahoma State University –Gary Bullen, NC State University –Jim Pease, Virginia Tech University –Nathan Smith, University of Georgia

Objectives Develop educational materials for marketing peanuts under the new peanut program. Conduct train-the-trainer workshops. Deliver education programs through local producer meetings.

Activities Two Regional Train-the-Trainer Workshops –Roanoke Rapids, NC - December 16, 2003 –Tifton, Georgia – January 27, 2004 Peanut Marketing workshops for producers and county agents in Florida, Georgia, North Carolina, Oklahoma and Virginia CD with presentations and factsheets Revised factsheets are in development

Train-the Trainer Workshops Original plan to have a regional workshop in each of the three main production regions: –Southeast, –Southwest, –Virginia-Carolina.

Peanut Marketing Train-the- Trainer Workshop Topics Peanut Program Overview and USDA Implementation National Posted Price for Peanuts Domestic and International Structure Peanut Contracting Market Outlook Financial Keys to Success Lender’s Considerations Issues Facing the Peanut Industry

Regional Workshops North Carolina 60 Workshop participants: lenders, county agents, buyers, County FSA personnel Georgia 50 participants: shellers, buying point managers, lenders, agents Participants received CD with copy of presentations and factsheets.

Oklahoma Schedule conflicts and logistics precluded a regional meeting. Kim Anderson partnered with Shelling Firms and Southwest Peanut Cooperative Marketing Association to do a series of meetings. Developed Marketing Oklahoma Peanuts factsheet, Excel pricing model, and powerpoint presentations to help producers identify and manage price risk. 12 workshops in Oklahoma where material and information developed by the Southern Region Peanut Risk Management group was shared with about 360 producers, buyers, agricultural industry professionals and educators.

Excel Peanut Pricing Model

North Carolina & Virginia Gary Bullen and Blake Brown conducted 8 peanut meetings with North Carolina producers with a total participation of about 500. Multi-state meeting was organized by Mike Roberts in Virginia, January Risk management information presented regarding peanut processing, peanut production, peanut cost analysis, marketing alternatives with and without contracting. 277 producers (169 Va, 108 NC), 5 shellers/processors, 27 lenders. Participants received CD containing 2004 budgets and seminar proceedings.

38 county level producer meetings in GA during 2003 and 2004 covering peanut marketing, 1,483 participants. Agent training in both GA and FL. Southern Peanut Growers Conference, Panama City, FL – Peanut Marketing Options by Nathan Smith, Tim Hewitt and Marshall Lamb, about 125 participants, mostly producers. Series of articles during 2003 on peanut marketing in the Southeastern Peanut Farmer Magazine. Georgia & Florida

Other Training Southern Extension Committee Meeting in Kim Anderson made a presentation on marketing peanuts to joint committees on Farm Management, Marketing and Public Affairs. Nathan Smith presented marketing alternatives to 150 producers at 2003 Ag Expo in South Carolina.

Key Marketing Issues Quota was often contracted by shellers to insure their market share. “Loan” peanuts prior to 2002 were thru CCC approved regional grower Cooperative Marketing Associations. Marketed on behalf of the grower through pool. Marketing Assistance Loans are made on individual basis and must be stored in CCC approved warehouse (federal license). Marketing pools allowed through Cooperative Marketing Associations, but not the sole loan servicing agent for CCC as before. Concentrated buyers market with little price information.

Sources of Peanut Income Under New Peanut Program Market –Cash Sales –Contract Sales Government –Marketing Loans –Direct Payments –Counter-Cyclical Payments –Buyout Tied To Production Not Tied To Production

What are the Marketing Alternatives for Peanuts? Sell peanuts to commercial buyers (shellers) through buying points. Place peanuts in the CCC marketing assistance loan and forfeit the loan. Place the peanuts in a marketing pool. Farmer-owned shelling and marketing.

Marketing “Tools” Forward Contract Sell at Harvest for Cash Marketing Pool (CMAs such as GFA) Store in Approved Warehouse and Use Marketing Loan Store On Your Own – Risky! Pros and Cons covered in workshops

Marketing Loan Peanuts Heavily used by shellers in an indirect way through “option” contracts. Two big benefits to sheller: –Financing inventory through the marketing loan program, major savings for shellers –Ditto for handling peanuts at the buying point, sheller was paying before 2002 Shellers have more control once peanuts in their warehouses and/or under contract. Nine month loan is potential challenge for cleaning out warehouses in time for harvest.

Response to New Risk Environment Heavy use of market contracts. Price is tied to loan repayment rate. Right of first refusal on surplus production. Contracted peanuts go into market loan which pays handling and storage fee. Has “Act of God” clause for short deliveries. Shift in where peanuts are grown. New grower-owned ventures in peanut processing and marketing.

Barriers to Entry New peanut program provided window of opportunity for entry of new shellers, Two groups of farmers have invested in their own shelling plant in Georgia, –Donalsonville, Georgia –Tifton, Georgia CMA and DMAs designed to allow farmers to market peanuts in a pool –GFA, Concordia, SWPGA, VCPGA

Tifton Quality Peanut Building an Innovative Farmer Stock Storage System

Price Variability To date price volatility has not been a problem, It is fortunate that the economic fundamentals of peanut market have been in balance during the implementation of new program, Price Contract is the main marketing tool with farmers to date.

Risk Management and Efficiency Gains Electronic warehouse receipts Semi trailer hauling and drying Electronic grading Green weight grading Cleaning and drying systems Storage technology to reduce shrink and damage System is currently inefficient for segregation by variety and grade

Control Beyond the Farm Gate THE DAY IS COMING OF IDENTITY PRESERVED. 14 varieties grown in Georgia in 2004, Integration will happen, will farmer be integrated or will they integrate up? Aflatoxin, genetic traits such as hi-oleic, size, color, taste… Mandatory chemical testing

Challenges Export market –Same peanut competes for domestic and export markets –$355 historically higher than world market –Stricter specifications in EU market, i.e. Aflatoxin level –Argentina can deliver similar quality, except for taste Nine month marketing loan for a semi-perishable crop Price Discovery –Shellers wanted the government to set the price –Government wants market to set the price Price Transparency –Does National Posted Price reflect the market price –Does the Average Season Price reflect what the farmer receives? Handling and Storage Fees Integration and Control

Challenges in Delivery of Risk Management Education Smaller commodity relative to acreage and states producing peanuts – fewer resources dedicated to peanuts. Distance and logistics of collaborating with other states. Extension specialists have major responsibilities in other areas: commodities, subject area, teaching Evaluation of impact.

Thank You