Until 2002, peanuts were among a small group of U.S.
commodities regulated by marketing quotas. As with the tobacco and
sugar programs, the peanut marketing quota program originated during
the Great Depression as an effort to stabilize grower incomes with
supply limitations. The result was higher prices for consumers.
With the 2002
Farm Act, however, the longstanding peanut price support system
was scrapped. As part of the new program, peanut quota owners received
quota buyout payments, and peanut producers are now covered by the
same set of supports—marketing loans, direct payments, and
countercyclical payments—available to producers of many other
program crops.
What pressures led to this striking change in policy
and how have farmers fared since? What factors are smoothing, or
complicating, the transition to a more market-oriented system? Although
the circumstances of peanut producers are unique in many ways, their
experience can offer insights for those contemplating similar policy
changes for other crops, such as tobacco.
(See “How Did the Old Program Work? Why Was
It Changed?”)
How
Did the Old Program Work? Why Was It Changed?
Prior to 2002, the marketing
quota system placed a limit on the amount of peanuts (“quota
peanuts”) that could be sold in the domestic market
for food use (e.g., peanut butter, snacks, candy). Under this
system, any peanuts produced beyond the quota level (so-called
additional peanuts) had to be exported or diverted into the
lower value crush market for oil and peanut meal. Producers
who owned or rented quota rights were assured of receiving
high prices based on a government-established “quota
loan rate” of $610 per ton during 1996-2001, with higher
prices passed along to the consumer. This was well above average
production costs, giving growers a strong incentive to produce
the amount of peanuts allocated to them under the quota system.
Producers not controlling quota rights were guaranteed an
“additionals” loan rate of only $132 per ton,
but they typically grew peanuts under contract for export
at world prices ($320-$460 per ton), and responded primarily
to demand in foreign markets.
Before 1994, annual peanut
imports were capped by U.S. trade rules at a very low level,
but in the mid-1990s, trade agreements signed by the U.S.
began to gradually increase foreign access to the U.S. peanut
market, and placed pressure on the marketing quota system.
Under the peanut marketing quota system, import restrictions
were needed to reserve the domestic market for higher priced
quota peanuts. By undercutting the domestic support price,
imports would have sharply reduced the share available to
quota producers. As part of World Trade Organization negotiations,
the U.S. established a tariff-rate
quota (TRQ) system for peanuts, allowing lower-tariff
peanut imports to rise to a current maximum of about 53,000
tons, about 6 percent of domestic consumption. A separate
TRQ in the North American Free Trade Agreement will allow
lower-tariff imports of Mexican peanuts to rise until 2008,
and then become completely tariff-free. Mexico is a relatively
minor peanut producer, but incentives to produce and export
peanuts to the United States would have placed increasing
pressure on the U.S. marketing quota program, as would potential
new trade agreements.
Some observers suggest that
recognition of these competitive pressures resulting from
trade agreements—and the additional government resources
made available to peanut producers in the 2002 Farm Act—facilitated
acceptance of policy change by many growers.
The longer term impacts of policy change are still playing
out in the peanut sector, but some general observations can be made.
First, average farm-level prices and planted acreage have declined
compared with pre-2002 levels, but appear to be stabilizing. Second,
with increased planting flexibility, peanut production is beginning
to shift from some traditional, but less productive peanut-growing
locations to higher yielding land. Third, for producers affected
by the policy change, farm-level revenues have been bolstered by
new sources of government revenue from the 2002 Farm Act, other
sources of farm and off-farm income, and an upswing in domestic
demand. Finally, producers are managing price risk predominantly
through the use of contracting and marketing associations.
Lower Prices Bring Reduced Plantings . . .
The relatively recent passage of the 2002 Farm Act makes
it difficult to generalize about its impacts on individual peanut
growers. Not surprisingly, though, the transition to the new policy
environment has been marked by some uncertainty and adjustment pressures
for U.S. peanut growers—a small but geographically concentrated
group of farmers. For example, farm-level prices and market revenues
dropped substantially following the 2002 Farm Act—particularly
during the first year (2002) under the new policy. Farm revenues
from peanut production fell from an annual average of about $1 billion
during 1996-2001, the period covered under the 1996 Farm Act, to
just over $600 million in 2002, but rebounded to nearly $800 million
in the 2003 marketing year (August-July). With the elimination of
supply controls, producers who previously grew nonquota peanuts
can now channel peanuts into the domestic market, pressuring farm-level
prices down about 30 percent, from $468-$568 per ton during 1996-2001
to $365-$385 in 2002 and 2003.
Lower prices have, in turn, dampened production incentives,
as indicated by 2 consecutive years of reduced U.S. plantings in
2002 and 2003. Although planted acreage remained stable in Alabama
and Georgia and increased in Florida and South Carolina, other peanut-producing
States reduced their acreage significantly. In Virginia and Oklahoma,
plantings fell about 55 percent between 2001 and 2003; in Texas,
they fell 35 percent. National plantings were the lowest since 1982
and second-lowest since 1915. However, plantings in 2004 were up
6 percent from 2003.
. . . But Some Producers Gain From Greater
Flexibility
With the elimination of historical quota entitlements,
less competitive peanut producers are now reducing output, most
likely by switching to other crops. At the same time, production
has begun to expand in areas where—perhaps reflecting better
growing conditions or management practices—peanut yields tend
to be higher. This is not entirely surprising, as the old program
may have hindered planting flexibility of peanut farmers. Under
the old quota program, the high cost of acquiring quota rights and
restrictions on transferring quota peanuts had concentrated production
in areas originally granted quota acreage “allotments.”
Starting in 1981, nonquota growers were allowed to produce peanuts
anywhere they chose, but only for the lower priced export or crush
market, which dampened their incentives to expand. In addition,
high prices encouraged less efficient quota holders to continue
producing peanuts, and it became costly or impossible for more efficient
producers elsewhere to acquire quota rights and expand production.
The majority of quota peanut production was by growers renting quota
rights, but renting quota rights was expensive, equivalent to 25
percent of operating costs in 2001.
Since the 2002 Act, some peanut-producing areas—mainly
in parts of the Southeast and western Texas—have significantly
expanded acreage over their “base” plantings (peanut
“base” refers to producers’ average peanut acres
planted during 1998-2001, which are used to determine, in part,
government payments to farmers). In 2003, counties that planted
more peanut acres than their peanut base saw an increase of at least
220,000 acres over the 1998-2001 average. The increases suggest
that production has become more profitable in these areas following
the elimination of restrictions on the domestic sale of nonquota.
In areas with declining acreage, at least 25 percent of available
peanut base acres were not planted to peanuts in 2003. Counties
that gained acreage typically have better yields than counties where
plantings fell, which could help explain the record national average
yields achieved in 2003. Ultimately, program changes have spurred
growers to base planting decisions more on expected market returns
of competing crops, rotational considerations, and yield potential.
Other Income Sources Cushion Transition to New
Program
The elimination of the marketing quota system clearly
affected peanut growers in different ways. Inefficient farms that
relied on the quota loan rate (support price) of $610 per ton to
cover production costs are on the wane. And despite lower average
market prices, other more efficient producers—those who grew
nonquota peanuts for export or now have lower costs since they no
longer need to rent quota rights—are on the rise.
In either case, the economic impact of losing the quota
system has been cushioned by several factors, including new sources
of government revenue, off-farm income sources, and the relatively
large and diversified structure of typical peanut farms (see “The
Peanut Economy”). According to the President’s fiscal
year (FY) 2005 budget, for example, government
payments to current and historical peanut producers with enrolled
base acres would average $275 million during 2002-07. Combined with
projected market revenues ($693 million annually), sector revenues
would amount to $968 million annually during 2002-07, about 5 percent
less than average revenues during 1996 to 2001. In addition to these
government payments, persons owning a farm with peanut quota as
of May 13, 2002, are eligible for a peanut quota buyout program.
The buyout includes five annual payments of $0.11 times the number
of pounds of 2001 quota during FY2002-06— or the quota owner
could opt for an equivalent lump-sum payment. A total of about $1.3
billion is expected to be disbursed to nearly 70,000 eligible quota
owners, with most having already taken their payment under the lump-sum
option.
New sources of government payments include marketing
loan benefits, direct payments, and countercyclical payments. For
example, all peanut growers can receive marketing assistance loans
of $355 per ton on current production. Farmers with peanut base
are eligible for fixed direct payments of $36 per ton, and countercyclical
payments that, depending on market prices, could reach $104 per
ton. To receive direct and countercyclical payments, historical
producers were required to establish peanut base acreage and payment
yields on their farms, which most—covering about 96 percent
of eligible land—elected to do. These payments are available
even if the eligible farmer chooses not to produce peanuts, so a
portion may go to farmers no longer growing peanuts. Direct and
countercyclical payments equal 85 percent of the farmer’s
base acres times their recent yield history (payment yield) times
the direct or countercyclical payment rate.
In crop year 2002, marketing loan benefits to peanut
producers amounted to $49.7 million, direct payments totaled $73.1
million, and countercyclical payments came to $195 million. Marketing
loan benefits are not expected to contribute to peanut sector revenue
during the remainder of the 2002 Farm Act since prices are expected
to remain above the marketing loan rate, but annual direct and countercyclical
payments are projected to be about the same as in 2002.
The
Peanut Economy
Peanuts are a relatively
minor crop in the U.S. During the 1996 Farm Act (1996-2001),
peanuts were grown on about 12,000 farms, averaging $1 billion
annually in peanut revenues—only 1 percent of U.S. crop
production value. Due to the crop’s soil and climate
requirements, virtually all peanut production occurs in just
a few States. The Southeast (Georgia, Alabama, Florida, and
South Carolina) had 60 percent of national production during
1999-2001; the Southwest (Texas, Oklahoma, and New Mexico)
had 28 percent; and the Mid-Atlantic (Virginia and North Carolina)
had 12 percent. In Georgia and Alabama, peanuts accounted
for over 20 percent of total State crop value in 2000/01-2001/02,
but the peanut share of production value was lower (2 to 7
percent) in the other States.
According to the
2002 Agricultural Resource Management Survey (ARMS), peanut
farms tend to be larger than average farms in peanut-growing
areas—averaging 676 acres of cropland—and are
fairly diversified. Peanuts are typically grown in a 3- to
4-year rotation on farms that grow cotton, soybeans, corn,
and wheat. Cotton is the most common crop alternative. Peanut
acres averaged only one-fifth of cropland on peanut-growing
farms, but peanuts provided nearly 30 percent of total crop
revenue. Producers exiting peanut production would thus likely
emphasize crops already grown on the farm, avoiding additional
investments in equipment and skills to grow new crops.
ARMS data also show
that peanut producers had comparatively high overall household
(farm and off-farm) incomes, which averaged about $77,000
in 2002. This was about 30 percent higher than average incomes
for nonfarm households. Combined with a diversified farm enterprise,
sources of off-farm income will likely help offset changes
in revenue under the new program.
Outlook Optimistic as Demand Accelerates . .
.
One clearly optimistic note for the peanut sector has
been the rebounding demand for peanuts and peanut products in recent
years. In fact, the estimated 10- percent growth of U.S. peanut
consumption in 2003/04 was the fastest annual growth in more than
a decade, raising food-use demand to record levels.
Despite the lower farm-level prices since 2002, it’s
not clear whether policy changes in the 2002 Farm Act or other factors
are responsible for this demand growth. Since peanuts are affordable
to begin with, the responsiveness of consumers to changes in prices
is likely low. Plus, consumption growth had already been on an upward
trend since the mid-1990s. At the same time, retail
prices for peanut butter—the leading use for peanuts—are
now starting to trend down after initially rising following passage
of the 2002 Farm Act. It is also likely that increased advertising,
the introduction of new products, and reduced input costs for peanut
processors have boosted overall peanut demand. Of course, the popularity
of high-protein low-carbohydrate diets hasn’t hurt demand
either. A July 2003 FDA ruling allowing packaged peanuts to contain
“qualified health claims” associating peanut consumption
with reduced risk of heart disease could further this momentum.
While domestic demand has been rising, the outlook for
U.S. exports looks less promising. “Additionals” (nonquota)
peanut producers had been exporting peanuts for decades, with exports
typically accounting for 15 to 25 percent of U.S. production. A
reputation for high quality has allowed U.S. sellers to command
a price premium in international markets (primarily the European
Union, Canada, and Mexico), but the U.S. has faced more competition
from lower cost exporters of late. As a result, U.S. peanut exports
have been on a downward trend since the early 1990s. China now controls
more than half of global exports, with India, Argentina, and Vietnam
significant too. Although the U.S. remains the world’s second
leading peanut exporter, the 2002 Farm Act may have weakened export
incentives, as U.S. producers who grew nonquota peanuts for export
can now market their peanuts domestically. On the other hand, lower
domestic prices have reduced import incentives, and peanut imports
have fallen by more than half since the 2002 Farm Act.
Limited Price Information Remains Challenging
Issue for USDA, Peanut Growers
Under the marketing quota program, peanut prices had
been determined directly by government policy for many years. But
now, current and timely market price information for peanuts has
become elusive due to the relatively small number of U.S. peanut
producers and purchasers, sporadic sales, and the absence of a market
exchange. This has posed challenges for policy implementation as
well as for farmers’ risk management strategies.
For example, the lack of consistent price information
has complicated USDA’s task of establishing the weekly marketing
assistance loan repayment rate for peanuts—the market price
barometer used to determine the level of potential marketing loan
benefits. In addition, with fewer sources of price information,
peanut growers also have fewer marketing options than producers
of bulk commodities, who can spread risk by timing sales based on
cash or futures prices. As a result, most peanut farmers are managing
price risk by using government marketing loans and by entering into
private marketing contracts with peanut buyers. Another option is
to participate in one of the three Cooperative Marketing Associations
that have been formed since 2002. These associations can process
marketing assistance loans on behalf of USDA and have the authority
to market peanuts on behalf of their members—providing participants
with increased flexibility and bargaining power.
Despite these complications, the major policy shift
introduced by the 2002 Farm Act has increased the market orientation
of the peanut sector. As peanut growers continue to adapt to the
new environment, production decisions will increasingly be guided
by demand conditions, as well as by growers’ assessments of
the relative profitability of producing peanuts compared with other
crops.
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