Author: Adam Rabinowitz

The Nonrecourse Marketing Assistance Loan Program (MAL) is a marketing tool available for select commodities.  Authorized through Title I of the farm bill, MALs provide cash to producers at harvest to allow storage and marketing of the crop for a nine-month period following harvest.  Producers repay the MAL (with interest) or forfeit the crop that was pledged as collateral to the Commodity Credit Corporation (CCC).  MAL rates are defined in the farm bill for each eligible commodity and are thus a point of negotiation in farm bill debates. 

On May 1, 2024, the Senate Majority released their farm bill position, which details an escalator based on the percentage increase in cost of production compared to the previous five years, as estimated by the USDA Economic Research Service (ERS).  There is a cap in the Senate Majority position of a 10% increase over the 2018 Farm Bill loan rates.  

The House Committee on Agriculture then proposed new loan rates that are predominately 10% higher than the existing loan rates for the major crops listed in Table 1.  This proposal passed out of Committee on May 24, 2024.  Details of the two farm bill positions can be found in the May 24, 2024 Southern Ag Today article.

The purpose of this article is to explore the differences between the Senate Majority position and the House Ag Committee bill, as well as to illustrate the degree to which the MAL can be used as a marketing tool to cover operating costs of production.  Table 1 shows the ERS cost of production estimates, FAPRI projected commodity prices, the current loan rate, and the proposed Senate and House MAL rates.  The “percentage increase in operating cost” compares the 2024 estimate to the five-year average 2019-2023 operating costs.  In all crops listed there is at least a 10% increase in operating costs compared to the previous five-year average, with rice operating costs estimated at a 16.7% increase.  Therefore, the Senate position would trigger the 10% cap on the increase in MAL rates.  This means that both the Senate position and House committee bill would result in the same loan rate at the present time for all but peanuts and cotton.  There is an additional $0.50/ton in the Senate position for peanuts compared to the House bill.  The calculation of the upland cotton loan rate is more complicated than illustrated in the Senate summary document.  The 2018 Farm Bill specifies a range of $0.45-$0.52/lb for the loan rate.  At a 10% increase, that would result in the Senate position of $0.50-$0.57/lb.  The House bill specifies $0.55/lb, thus being higher or lower than the Senate position, depending on how it is implemented.    Furthermore, the Senate position would require an annual calculation for all loan rates and then an adjustment based on the current 2018 Farm Bill loan rates. 

The other question is the degree to which the MAL can be used as a marketing tool to provide short term funding compared to the operating cost of production for these crops.  Table 2 shows the ratio of the 2018 loan rate to the 2018 operating cost per unit.  For all but sorghum and upland cotton, the ratio was greater than 1.0, indicating coverage greater than 100% of the operating cost of production at the time the 2018 Farm Bill was written.  The Senate proposal at the 10% loan rate increase and the House bill produce the same ratios for all but upland cotton.  In both of these bills, there is a decrease in the ratio of the loan rate to the operating cost per unit for all crops other than barley and upland cotton.  In fact, corn, oats, rice, sorghum, and upland cotton all have a ratio below 1, indicating loan amounts less than 100% of the operating cost of production.  Farmers who use this marketing tool should consider this relationship to better understand how much of their operating costs can expected to be covered at harvest by this program.

References

Fischer, Bart. 2024. Battlelines Are Being Drawn: Comparing Current Farm Policy Proposals.  Available at: https://southernagtoday.org/2024/05/24/battlelines-are-being-drawn-comparing-current-farm-policy-proposals/

Rabinowitz, Adam. “Current Farm Bill Negotiations for the Marketing Assistance Loan Program.” Southern Ag Today 4(26.1). June 24, 2024. Permalink

Marketing peanuts can be challenging for producers due to the lack of a futures market and relatively concentrated first buyers. This makes it even more important for producers to evaluate their cost of production to help control input costs and make strategic risk management decisions. 

According to the USDA Commodity Cost and Returns for peanuts, the cost of production increased in 2022 and has stayed at this new higher level, much like other commodities. Figure 1 shows the 2024 forecasted operating cost of production at $336/ton. This covers such items as seed, chemicals, fuel, repairs, and interest. Meanwhile, allocated overhead includes general farm expenses that are allocated to the peanut operation, such as labor, the cost of machinery, and the opportunity cost of land. When including allocated overhead, the total cost of production is forecasted for 2024 at $598/ton, a 28% increase from 2014. These costs are slightly lower than the $648/ton total cost peak forecasted for 2023, but nowhere near the levels seen in earlier years.

In a Southern Ag Today article on December 4, 2023, it was shown that peanut prices are continuing to rise since the low in 2015. It was noted that the USDA expects prices to be about $550/ton for the 2023-2024 marketing year. This is still below the cost of production shown above. 

The farm bill provides for a safety net for peanut producers with base acres through the ARC/PLC and Marketing Loan programs. These programs have statutory price levels that have not changed since the 2014 Farm Bill. For the PLC program, the statutory reference price is $535/ton. While the 2018 Farm Bill allowed for an escalation through the Effective Reference Price, that has not triggered for peanuts. Meanwhile, the Marketing Loan has been set at a rate of $355/ton. This does not provide a safety net at these higher cost levels. 

While Congress continues to debate the next farm bill, producers need to look at alternative marketing strategies and other ways to help mitigate the rising costs of growing peanuts. Cross hedging is a popular marketing strategy used to mitigate risk, but there is little empirical evidence that it is effective for peanuts. That leaves contracting, cost control, and crop insurance as the most viable risk management tools for peanut producers.

Rabinowitz, Adam. “Peanut Cost of Production, the Farm Bill, and Need for Risk Management.” Southern Ag Today 4(2.1). January 8, 2024. Permalink

Peanut farmers in the post-quota era have historically had limited marketing opportunities.  There is no futures market for peanuts, and the market is defined as relatively thin with a high concentration by two major buyers, Golden Peanut Company and Birdsong Corporation (Adjemian, Saitone, and Sexton 2016).  In economics, this is known as an oligopsony – a market that is dominated by a very few disproportionately large buyers.   Sellers in an oligopsony market have little ability to influence the price they receive for their product.  Here the seller is the peanut farmer looking to market their crop who often must just accept what shellers will pay.

The agricultural cooperative model allows farmers to work together to sell their product, achieve greater bargaining power, and provide profit sharing opportunities.  Grower-owned peanut shellers provide member peanut farmers an opportunity to share in the downstream profit that is otherwise not passed through to the farmer.  Over the past decade, there has been considerable growth in grower-owned peanut shellers.  A few examples include Premium Peanut that was formed in 2014 in Georgia, Delta Peanut that was founded in 2018 in Arkansas, and Coastal Growers that came together in 2021 in Alabama.

The table below shows the current USDA approved peanut warehouse storage capacity in the United States.  While the top two firms control 47.2% of the storage capacity, we see five grower-owned shellers (listed in bold) that combine for 28.3% of the storage capacity.  Furthermore, that share of grower-owned capacity has more than doubled since 2017 from both increases by existing grower-owned shellers and the entry of Delta Peanut and Coastal Growers.  While storage capacity is not fully reflective of market share, it represents a reasonable approximation and is indicative of marketing opportunities that farmers are leveraging through agricultural cooperatives.

References:

Adjemian, M.K., Saitone, T.L. and Sexton, R.J. (2016), A Framework to Analyze the Performance of Thinly Traded Agricultural Commodity Markets. American Journal of Agricultural Economics, 98: 581-596. 

Rabinowitz, Adam, and Festus Attah. “Peanut Farmers Find Marketing Opportunities through Agricultural Cooperatives.” Southern Ag Today 3(32.1). August 7, 2023. Permalink

Peanut production in the U.S. can be described as having a symbiotic relationship with cotton production as the two crops are produced in rotation throughout the southeastern states.  This can create a competitive environment between these crops, with prices a key factor in determining the number of acres to plant in a given year.  Since the peanut quota system was eliminated with the Farm Security and Rural Investment Act of 2002, peanut prices have been determined through market transactions with the first buyers of farmer stock peanuts, in what can be described as a highly concentrated market.  Alternatively, there is more transparency and price data available for cotton with the existence of a futures market.

Figure 1 shows the relationship between peanut and cotton marketing year average (MYA) prices from 2003 to 2021. The unusually high peanut prices in 2011 and 2012 are from weather-related supply issues.  While there is not a strong trend in the data due to some of the notable outliers, a visual inspection of Figure 1 highlights the positive relationship between these two commodity prices.  For example, when cotton prices have been above 75 cents per pound, peanut prices have been above $450 per ton.  

Figure 1. Peanut and Cotton Price Relationship: 2003-2021 Marketing Year Averages

A recent Southern Ag Today article, Navigating the “Winter” in Cotton Farming in 2023, projects an optimistic 2023 futures price for cotton to be 80-85 cents per pound.  Current December 2023 cotton futures prices have been hovering around 80 cents per pound.  At this futures price for cotton, history would suggest a peanut price between $450 and $500 per ton.  

While this can give farmers a good first estimate of expected prices it must be acknowledged that there can be significant deviation from this range as other factors may affect the price of one commodity that do not move the other prices in the same fashion.  For example, within the range of $450 to $500 per ton for peanuts, the cotton price ranged from a low of $0.478/lb in 2008 to a high of $0.914/lb in 2021.eanut

Author: Adam Rabinowitz

Assistant Professor & Extension Specialist 

adam.rabinowitz@auburn.edu

Rabinowitz, Adam. “The Peanut-Cotton Price Relationship.” Southern Ag Today 3(2.1). January 9, 2023. Permalink