1996 Farm Bill: Implications for Peanuts

1996 Farm Bill: Implications for Peanuts

Stanley M. Fletcher
W. Donald Shurley
Dale H. Carley
Changping Chen

* Professor, Professor and Extension Economist, Professor, and Post Doctoral Research Associate, respectively, Department of Agricultural and Applied Economics, The University of Georgia.

Peanuts is a very important crop to southern agriculture. Seven states (i.e., Virginia, North Carolina, Georgia, Florida, Alabama, Texas and Oklahoma) produce about 98 percent of the U.S. peanut crop. Based on the 1992 Agriculture Census for these seven primary peanut producing states, 36 percent of the peanut producing counties had 35 percent or more of their total crop income from peanuts. Twenty-four percent of the counties had 50 percent or more of their crop income from peanuts. From a state perspective, 70 percent of the crop income in Alabama's peanut producing counties is generated from peanuts. For Virginia, the percentage is 48 percent. In Oklahoma, 21 percent of the peanut producing counties had 50 percent or more of their crop income generated by peanuts. In fact, peanuts accounted for over 80 percent of the crop income in Hughes and Marshall counties in Oklahoma.

The peanut program was scrutinized in great detail during the Farm Bill debate. The key issues revolved around declining domestic demand, oversupply of quota peanuts, domestic price relative to the world price, government program costs and trade agreements. Given the mood of Congress, government cost had to be addressed if the peanut program was to continue. The peanut program had a rising budgetary cost from average annual outlays of $13 million during the FY1983-91 period to $120 million in FY1995. Without any changes to the program, the Congressional Budget Office November 1995 spending baseline projected outlays to average $63.5 million for the FY1997-2002 period.

New Farm Bill Provisions

The key provisions of the new peanut title are summarized in Table 1. While the program retains its price support and supply management elements, the program is no-net cost to the government. The peanut program differs from the grains and cotton programs in that USDA makes no payments to peanut growers. USDA uses supply management in concert with price support to maintain peanut growers income. Greater market orientation was incorporated in the new title relative to the previous peanut programs.

Price Support. The price support or loan rate feature for quota peanuts was changed significantly. The loan rate was reduced 10 percent from the 1995 support level and frozen for the life of the program. In the 1990 Peanut Title, there was a price support escalator feature that allowed the price support to increase by the same percentage that the cost of production for peanuts increased, up to a 5 percent maximum. This feature was eliminated. If a peanut farmer had to put his/her peanuts into the CCC loan, the farmer received a non-recourse loan equal to the support price. The shellers felt that they were competing with the government for the peanuts. Thus, in the new program, if a farmer puts his/her peanuts under loan for two consecutive years even though they had a commercial offer, the producer would not be eligible for quota price support the next marketing year.

Quota Determination. There had been in past peanut programs a quota floor quantity which the Secretary could not go below. The quota floor in the 1990 Peanut Program was set at 1.35 million tons. This floor was based on the growth of the peanut market prior to the 1990 Farm Bill debate. However, the peanut market growth reversed direction in 1990 and has been on a continual decline since. For the 1994 and 1995 crop years, the "true" quota level fell below the 1.35 million tons but due to regulations the quota was set at the 1.35 million tons. This lead to an increase government program costs. Thus, the quota floor was eliminated in the new peanut program.

In addition, the determination of the quota level was also modified. Past peanut programs had quota level determined by domestic edible, seed and related uses. In the new program, seed is to be excluded from the calculation. USDA had stated that seed represented about 8 percent of the quota. Thus, quota holders would see an automatic 8 percent reduction in quota. In the new peanut program, a temporary quota allocation was introduced. This temporary quota category is in addition to the quota level but is for only one year. Furthermore, it is allocated to the actual peanut producer based on the total peanut acreage planted. If the previous USDA seed calculation is followed, this implies that a peanut producer would receive 140 pounds of farmer stock peanuts of temporary quota allocation for every acre planted. The acres planted would be based on the certified acres that the farmer reported to FSA/USDA. However, USDA is considering modifying the allocation based on type of peanut planted. This is because each type of peanut uses a different amount of seed pounds per acre. Spanish and Valencia peanuts are the least amount followed by Runners and then Virginias. The implications is that Spanish peanut producers will receive less temporary quota allocation relative to the previous method of seed calculation while producers of Runners and Virginias will fare better.

Quota Eligibility. During the farm bill debate, the issue of who the quota holders were was scrutinized. While less than 5 percent of the quota was owned by public entities or persons not residing in the state where the quota was produced, Congress perceived that this issue had to be addressed. Two quota categories were given two years to divest themselves of their quota:

Moreover, effective with the 1998 crop, the Secretary of Agriculture will not establish a farm poundage quota for a farm owned or controlled by these two categories. The quota removed from farms will be allocated to eligible farms in the same state. When quota is increased or reduced, except for the above situation, all allocations will be done in proportion.

Undermarketings: The 1996 Farm Bill eliminated. In the previous peanut titles, undermarketings were limited to 10 percent nationally of the basic quota. While there was a national limit, there were significant regional differences. Historically, the Southwest (Texas and Oklahoma) received between 20 percent and 30 percent of their basic quota in undermarketings. The Virginia-Carolina area and the Southeast (Georgia, Florida and Alabama) received less than 10 percent of their basic quota in undermarketings. This implies that a quota holder in the Southwest could see an additional 20 percent to 30 percent more quota above his basic quota due to undermarketings. That is, the Southwest's effective quota was 20 percent to 30 percent more than their basic quota. Thus, the undermarketings elimination will impact more heavily on the Southwest relative to the other two peanut producing regions. Unless the USDA accounts for the nondelivered quota, setting quota to demand will automatically create a shortage in a normal crop year. Basically, undermarketings took care of the nondelivered quota.

Quota Sale. With a reduction in the support price and the elimination of undermarketings, the economic environment may have been created to where some producers may not be able to produce peanuts. In past peanut titles, spring and fall sale, lease and transfer were restricted to within the same county with certain planting restrictions, or to an adjoining county if the same operator. This restricted movement to potentially more efficient areas. The new peanut title reduced the restriction. For spring sale, lease and transfer, a cap of 40 percent of the county's base quota level as of January 1, 1996 could move across the county line but within the state. There is a small county exception where unlimited transfer is allowed. This exception will have minimal impact. In Georgia, only three counties based on 1994 quota level would meet the criteria. In Oklahoma, eight of the 45 counties would be eligible but they represent only .14 percent of the state's total quota. In Texas, 22 out of 101 counties would be eligible but they also represent only .21 percent of the state's total quota. For fall transfer, the movement restrictions were removed completely except that it had to stay within the state. This will help in the nondelivery of quota.

No Cost. The new peanut title insured that the program would be a no-net cost to the government. In the 1990 Farm Bill, program costs were reduced by having all pool profits within an area used to reduce any losses and then having area cross compliance. There are three area marketing associations that administer the peanut program, acting as agents for the CCC. Within each area, two pools are established - one for quota peanuts and one for additional peanuts. In the Southwest, an extra pool was established for New Mexico's peanuts (i.e., Valencias). This New Mexico pool was excluded in sharing any of its pool profits to reduce any pool losses in the Southwest or other areas. This feature was not changed in the new peanut title. Within an area, all additional peanuts pool profits were used to reduce any quota pool losses. If there was still a loss, any profits from the other areas' pools would be used to reduce the loss. Historically, the Southwest quota pool had losses due to disaster transfers and Spanish quota crushing. In the new peanut title, a new order of priority in covering quota pool losses was established:

  1. The first priority would be individual producer cross compliance. If the producer had any additionals in the additional pool, their profit would be used to offset any quota losses in the quota pool associated to that producer. From this point on in the priority order, any additional pool profits associated with additionals that were crushed or exported would be retained by the pool for distribution to the appropriate peanut producers and not used in offsetting quota pool losses.

  2. The second priority order would be additional pool profits from CCC sales for domestic edible use in the same area. The rational for this is that additional peanuts purchased through the buyback or loan redemption provisions displace quota peanuts if the quota is set correctly.

  3. The third priority order is the producer marketing assessment, followed by any quota pool profits from the other areas.

  4. Next order would be additional pool profits associated with buybacks and loan redemptions in the other areas.

  5. Handlers marketing assessment would then be used.

  6. If there is still a quota pool loss in an area, the Secretary of Agriculture would then increase the assessments on all quota peanuts in that production area. This last assessment would be paid by the producers only. Based on historical data, the possibility exists that the Southwest quota pool may have losses of the magnitude which would require this extra producer assessment. The New Mexico pools are exempt from covering other area quota pool losses. In addition, any profits or gains in the pools associated with a farm that has one acre or less of peanut production are also exempted. The use of buyback and loan redemption profits to offset quota pool losses may make the producer decide that he/she would be better off financially keeping the additional peanuts as additionals and receive about $225-250 per ton than maybe only receiving about $132 per ton.

Disaster Transfer. The disaster transfer provision had a major change from the previous peanut program. If a farm could not meet its quota allocation due to weather causing Segregation 2 and 3 peanuts, a producer could disaster transfer his/her Segregation 2 and 3 peanuts to quota for support pricing purposes less a handling charge typically $25 per ton. The new peanut title restricts the tonnage of disaster transfer to a maximum of 25 percent of the producer's quota at a price of 70 percent of the support price.

New Mexico Pool. The last change in the past peanut program dealt with the New Mexico Valencia pool. During the previous program, a Texas Valencia peanut producer could put his/her peanuts in the New Mexico pool if the farm had a New Mexico farm number. Some Texas producers had farms on both sides of the Texas-New Mexico state line. They combined their farms into one using the New Mexico farm as the farm number. This increased the amount of peanuts placed in the New Mexico pool which resulted in reductions in pool profits. The new peanut title only allowed Valencia peanuts physically produced in New Mexico to participate in the New Mexico pool. However, the new peanut title did "grandfather" those producers that had used the New Mexico pool previously but they could not exceed the average annual quantity entered into the pool for the 1990 through 1995 crops.

National and Farm Level Impacts

National Impacts

Quota Level. Using the USDA's December 1995 quota announcement, the 1996 national quota level is determined based on the new peanut title. The USDA allocated 100,000 tons to seed plus another 12,000 tons for the crushing residual associated with the seed component. Thus, the new 1996 national quota would be 1.103 million tons (table 2). This represents an 18.3 percent reduction from the 1995 national quota of 1.35 million tons. The implication is that quota holders should see an 18.3 percent reduction in their 1996 quota. The Southwest quota holders will observe a larger reduction based on their 1995 effective quota given that on average they usually had a 20 percent to 30 percent increase in their basic quota due to undermarketings. Following the seed provision in the new peanut program and the USDA's total seed poundage per acre, approximately 91,000 tons of temporary quota will be allocated to the peanut producers. Thus, the total 1996 national quota will be approximately 20 percent less than the 1995 effective quota and approximately 12 percent less than the 1995 basic quota. The national acreage needed in 1996 to produce the quota is estimated to be 1.373 million acres. This is 166,000 acres less than planted in 1995. Similar findings are found when the regional values are examined.

Receipts. With a 10 percent decrease in the price support and the projected 1996 quota level, aggregate income to peanut farmers will decrease by approximately $81 million (table 2). This will come from their profit. In a study of the peanut butter market using an imperfect competitive model, consumers' surplus would only increase approximately $23 million given the price support decrease. Given that peanut butter uses approximately 50 percent of the peanuts, one can easily see that society's total welfare will decline.

International Trade. The GATT and NAFTA trade agreements will continue to influence the domestic peanut market. The minimum access levels for edible peanuts and peanut butter under GATT will be fully imported given the price difference between the domestic market and the world market. These import levels are presented in table 3. USDA will need to account for these increasing imports in their quota level calculations. Unless domestic peanut demand turns around, the quota levels will need to be reduced each year. However, with the price support decrease, the tariff levels seem to be sufficiently high where imported peanuts above the minimum access level will not occur during the time period of the GATT and NAFTA agreement up to year 2000 (table 4).

Farm Level. All quota peanut-producing farms will be affected by lower price supports and the elimination of the quota floor (which initially will mean a reduction in quota and possible further reduction during the farm bill). Other modifications in the new peanut program may impact peanut-producing farms differently in each of the 3 major producing regions. This is due to differences in cost of production, peanut type grown in each region, yield variability, location and ownership of quota, and economics of other crop enterprises.

The following analysis is considered representative of peanut-producing farms in south Georgia. Appendix Table 1 shows University of Georgia Cooperative Extension Service cost estimates for 1996 at the quota support price of $610 per ton.

Farm level effects of peanut program changes may be thought of as:

In our analysis, we assume a ratio of 15 percent additionals to quota under typical yield conditions. It has been observed that Southeast peanut farmers often plant an extra 10 - 15 percent more acres to increase the likelihood that the farm's quota poundage will be produced. In effect, this means that the average price per ton is reduced and producing these extra peanuts is a cost to quota production. This practice is independent of any decision to produce additionals specifically for contract.


The analysis considered south Georgia farms only; however, similar results (if not worse) would probably be found in the other production regions. A reduction in the price support coupled with quota reduction will significantly reduce income on peanut producing farms. Quota peanuts are expected to have a continued comparative advantage on the farm but this could be altered by quota value and rental rates and opportunities in other enterprises. Across county line transfer will likely result in some shifts in peanut production with a state from marginal areas to more efficient producers.

Lease rates on quota may not decline initially but may in the longer term depending on land and quota competition and other crop alternatives. The value of quota may actually improve initially due to expanded life of the program. During the farm bill, quota value will decline.

Changes incorporated into the new peanut program will have considerable impact of peanut producers, related agribusinesses and rural areas dependent on peanut economic activity. Some geographical shifts within states, especially Texas and Oklahoma, should occur. Farm income and land values will likely decline causing economic hardship to producers and rural communities.