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.
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:
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:
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.
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.
Assuming no change in input costs (except for crop insurance and marketing assessment), the decline in peanut price support is expected to reduce per acre net returns above variable costs by 22 percent for non-irrigated production and 18 percent for irrigated production (table 5). Because variable costs are almost exclusively actual cash outlays, this is expected to have a significant impact on debt servicing ability for highly leveraged operations. Per acre net returns to operator labor and management, land and quota are expected to decline 33 percent for non-irrigated production and 26 percent for irrigated. Assuming a 15 percent reduction in quota effective with the 1996 crop and quota price of $610 per ton, gross income will decline 23 percent and net returns above variable cost will decline by 39 percent in 1996.
Several key factors are unknown at present which could partially mitigate the 10 percent reduction in price support: seed prices and chemical prices. Prices paid by farmers for peanut seed are typically about 2.4 times the support price. Peanut seed prices are expected to decline beginning in 1997 because they are no longer supported, but it is uncertain. Some peanut pesticides and other chemical inputs are a small, specialized and competitive market. Reduced income and net returns in peanut production could increase competition and lower price.
As discussed earlier, a significant reduction in quota is expected for the 1996 crop. Further reductions in quota are also likely during the new farm bill period due to increased imports under the minimum access levels of GATT. Assuming a 1996 quota reduction of 15 percent and an additional 10 percent reduction over the remaining 6 years, gross peanut income would decline 10 percent and net returns above variable costs decline by 16 percent during the farm bill period (table 6).
Compared to the 1995 baseline ($678 per ton price support and no quota reduction), gross returns decline 31 percent and net returns decline 39 percent. This decline in peanut income will be partially offset, however, by income from other crops produced on land formerly used for peanuts. Also, it is likely that quota reduction during the period 1997-2002 will be smaller than otherwise would have been experienced had price support not been lowered.
In the Southeast, recent data shows that the quantity of additional peanuts produced and marketed has been approximately one half the amount of quota marketed. For purposes of this analysis, peanuts are budgeted at 0, 15 and 50 percent additionals.
In the short run, producers will choose the enterprise mix that brings the best return above variable cost per acre. Three peanut enterprises are budgeted with varying amounts of additionals. As more additionals are produced, the average price per ton declines.
Peanuts (the average of quota and additionals) still produce the highest net return above variable costs. This can be misleading, however. Producing additionals competes with land available for other crops. The variable cost of production per ton is approximately $332 per ton for non-irrigated and $263 per ton for irrigated. Per acre net returns are approximately $23 per acre for non-irrigated (2,600 lbs per acre) and $113 per acre for irrigated (3,700 lbs per acre).
Because fixed cost requirements are different for each crop alternative the net return to land and management, not returns above variable cost, should be used to compare the long run economic position of each enterprise. In the case of peanuts, a separate quota charge must also be considered since the quota poundage can be separated (sold) from the farm. The appropriate quota charge is approximated by the rental rate. Subtracting typical 1995 rental charges from the net returns to land and management in tables 7 and 8 would show peanuts not to be competitive with other enterprises unless rental rates decline.
Georgia peanut producers leasing quota have typically paid 8 to 12 cents per pound rent per year plus $25 to $30 per acre. For irrigated production, rent is typically $70 per acre or about 2 cents per pound higher. Non-irrigated land for corn and soybeans typically rents for the same amount as peanut land. Cotton, due to rapid acreage expansion and high demand, has typically rented for mostly $50 to $75 per acre for non-irrigated and $100 to $150 per acre for irrigated land. Irrigated land for corn and soybeans has generally rented for $90 to $95 per acre.
If adding rental charges to the variable costs of each crop in tables 7 and 8, net returns above variable costs for peanuts may not be competitive with other enterprises if other rental land and crop alternatives are available. Under this scenario, rental rates on quota would have to decline or peanut prices increase to keep peanuts in production or from shifting to other areas.
Whole-farm flexibility concepts provided under the "freedom to farm" philosophy of the 1996 Farm Bill could result in increased plantings of additionals in years where contract prices and net returns are favorable compared to other enterprises. Increased base acreage flexibility will allow farmers more opportunity to respond to price signals.
The return to quota (table 5) is an "economic" rent or the amount that a producer could afford to pay if variable costs and all other fixed charges are deducted from total income. At a support price of $678 per ton, the rates shown are within the range of prices paid by Georgia farmers in 1995. A decline in the price support to $610 per ton, reduces the return to quota by 32 percent for non-irrigated production and 24 percent for irrigated. Since fixed costs are essentially the same regardless of price support, lowering the rental rate by these magnitudes would give the producer the same net return above variable costs as at the higher rates.
As discussed in the previous section, if rental rates should remain at pre-1996 Farm Bill levels, this could result in some producers releasing their rental agreement in favor other crop opportunities, if available. Should this happen on a widespread scale within a county, rental rates would decline or quota owners may seek opportunities to sell or lease across county lines.
Because quota has value separate from the land and can be transferred from farm to farm, producers purchasing quota would not want to pay an amount that, when amortized over it's useful life, would net the producer less than what the land could have earned in it's next best use.
Table 9 shows the value of peanut quota at the $678 per ton price level and the new $610 per ton level over a useful life of 7 years. In recent years prior to the 1996 Farm Bill, quota in Georgia generally sold for 30 to 45 cents per pound. This was due to uncertainties about the future of the peanut program (limited useful life). These prices are within the range shown at $678 per ton in table 9.
The values at $610 per ton assume a land opportunity charge of $30 per acre (the land can earn $30 without purchase of quota) and the returns to quota given in table 5. Given a full 7-year use of the quota, the value (bid price) of quota would be approximately 32 cents per pound for non-irrigated and 49 cents per pound for irrigated. If purchase is delayed into the 2nd or future years of the farm bill, the bid price declines. These estimates do not consider the impacts of cost-price squeeze and do not consider any reduction in quota after the purchase which would raise the effective price paid per pound.
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.