Adapting to a New Peanut Program and a New Risk Environment

1
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

2
Peanut are Grown Primarily in 9 Southern
StatesAlabama, Florida, Georgia, New Mexico,
North Carolina, Oklahoma, South Carolina, Texas
Virginia
Source Dr. John Baldwin, UGA Extension Peanut
Specialist
3
(No Transcript)
4
Who Buys and Process Peanuts?

• Peanut Shellers
• Blanchers
• Oil Mills
• Peanut Butter Manufacturers
• Candy Manufacturers
• Snack Companies

5
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.

6
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.

7
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.

8
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

9
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
  

10
Peanut Quota Buyout by State
Environmental Working Group (www.ewg.org,
accessed 10/21/03), with data from USDA/FSA
11
2003 Peanut Program Base Acres Average Program
Yields by State
12
Minimum and Maximum 2003 DCP Payments by State
Calculated from Base Acres and Program Yields
13
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?

14
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.

15
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

16
Objectives

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

17
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

18
Train-the Trainer Workshops

• Original plan to have a regional workshop in each
  of the three main production regions
• Southeast,
• Southwest,
• Virginia-Carolina.

19
(No Transcript)
20
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
• Lenders Considerations
• Issues Facing the Peanut Industry

21
(No Transcript)
22
(No Transcript)
23
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.

24
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.

25
Excel Peanut Pricing Model
26
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 2004. 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.

27
Georgia Florida

• 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.

28
Other Training

• Southern Extension Committee Meeting in 2003.
  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.

29
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.

30
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
31
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.

32
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

33
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.

34
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.

35
(No Transcript)
36
(No Transcript)
37
(No Transcript)
38
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

39
Tifton Quality Peanut Building an Innovative
Farmer Stock Storage System
40
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.

41
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

42
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

43
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

44
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.

45
Thank You
http//www.ces.uga.edu/Agriculture/agecon/agecon.h
tml