Southern Ag Today

Author: Adam Rabinowitz

  • Peanut Cost of Production, the Farm Bill, and Need for Risk Management

    Peanut Cost of Production, the Farm Bill, and Need for Risk Management

    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.

    Source: Calculated using annual yields and costs of production from USDA Economic Research Service Commodity Costs and Returns, November 2023.  2023 yields are based on November USDA estimates.  2024 yields are an average of the previous five 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 Find Marketing Opportunities through Agricultural Cooperatives

    Peanut Farmers Find Marketing Opportunities through Agricultural Cooperatives

    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

  • Outcomes of Chapter 12 Bankruptcy Fillings

    Outcomes of Chapter 12 Bankruptcy Fillings

    There are two primary outcomes of Chapter 12 bankruptcy filings, discharge and dismissal.  The most common objective is the discharge of eligible debts.  After completing all the payments required under the Chapter 12 plan, the debtor will certify that all obligations have been paid.  At that time, the debtor can receive a discharge of eligible debt.  The discharge can release the debtor from all debts, with some exceptions.  Several debts will not be discharged, including child support and alimony payments.  Other debts that would not be allowed to be discharged are those that have been secured or restructured.  With restructured debts, the plan may allow for payments past discharge based on the type of asset and quality of the asset.  For example, claims secured by livestock may be allowed to be restructured over 5 to 10 years.

    At the same time, a debtor may qualify for a hardship discharge.  A hardship discharge is allowed when the debtor fails to meet the plan payments through circumstances beyond the debtor’s control.  For example, if the debtor became seriously ill and unable to work during the plan, this potentially could lead to a hardship discharge.

    An alternative to discharge of debt may occur when the court grants a dismissal order.  

    Dismissals occur for a variety of reasons, including the failure to pay the filing fee, failure to file all required documents, or failure to make plan payments.  Additionally, debtors sometimes will request a dismissal when financial situations change, or negotiations result in the ability to pay back debt without further protection from the courts.

    Figure 1 shows the breakdown of the most common outcomes in the southern U.S. bankruptcy cases that we have looked at in this four-part Southern Ag Today series. From October 1st, 2012 to September 30th, 2022, there was an equal percentage of discharged filings and dismissals.  Only 1% of the discharged cases were in the hardship category, with the other 99% resulting in some form of debt relief.  

    Approximately 19% of the dismissed cases were for failure to make a plan payment.  This may occur when the bankruptcy repayment plan does not provide sufficient relief, or additional financial issues develop.  The remaining 81% of dismissed cases fall into the multiple dismissed categories previously discussed, although the data provided do not allow for identification between those groups.  However, it should be noted that some of those dismissed cases are voluntary, which can be viewed as an optimal decision by the debtor to exit the court process.  

    What is apparent from these data is that filing bankruptcy does not provide automatic relief from dischargeable debt.  There is still a need to negotiate with the court and the creditors throughout the process.  The court protection can hold off other legal action and foreclosures, but this can also be achieved by early communication with creditors when financial problems become apparent.  If necessary, U.S. bankruptcy law does provide farmers with a unique court protection option.

    This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2022-67023-36112/project accession no. 1028056, from the U.S. Department of Agriculture, National Institute of Food and Agriculture.

    Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.

    Rabinowitz, Adam, Paul Goeringer, and William Secor. “Outcomes of Chapter 12 Bankruptcy Filings.” Southern Ag Today 3(8.3). February 22, 2023. Permalink

  • The Peanut-Cotton Price Relationship

    The Peanut-Cotton Price Relationship

    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

  • Projected Decrease in Peanut Acreage Could Have Greater Impacts on Overall Production

    Projected Decrease in Peanut Acreage Could Have Greater Impacts on Overall Production

    Peanut acres in the U.S. decreased 5% in 2021, but with strong yields, total production ended almost 9% higher than in 2020.  The 2022 crop year is shaping up to start with a similar story on acreage. However, early indications point to the potential for a different result at the end of the year.  The prospective plantings report by the USDA was released on March 31, 2022, which showed U.S. peanut farmers intend to plant 3.4% fewer acres in 2022 compared to a year prior.  This decrease in intentions has been driven largely by high prices for other row crop alternatives and thus favorable marketing opportunities for other crops.  This competition for acres has been recognized by shellers who have offered higher contracts over the past few months than had been offered in recent years.

    While a decline in acres of less than 4% does not seem to be very much, especially after a year of high yields, the distribution of that decline has the potential to have a much larger impact on production.  In 2021, the top three states in planted acreage were Georgia, Alabama, and Florida (see Table 1).  These three states accounted for about 71% of the total U.S. peanut acreage last year and are forecast to plant 95,000 less acres this year, a decline of 8.2%. Offsetting some of those lost acres are increases in South Carolina and Texas, with 20,000 additional acres planned in each state.  The challenge here is going to be the weather.

    The West Texas area where peanuts are produced is currently facing extreme drought (U.S. Drought Monitor as of April 14, 2022).  The National Oceanic and Atmospheric Administration (NOAA) expects this drought to continue or expand throughout the spring.  This may make planting extremely difficult in that region.  Even if that intended acreage is achieved, it will be important to watch how yields develop, given the expected continuation of dry weather. Texas is also not the only part of the peanut belt with dry weather.    Abnormally dry and moderate drought continues across the peanut belt in Alabama, the Florida Panhandle, Georgia, South Carolina, and North Carolina (U.S. Drought Monitor as of April 14, 2022).  Beyond spring planting, the southeast expects neutral conditions where tropical moisture will determine if drought conditions persist (Knox 2022).  

    So, on the surface, a small decline in acreage after a large crop may help balance ending stocks for the 2022-23 marketing year.  This would take the current 2021-22 forecasted ending stocks of 2.3 million pounds and significantly tighten market supply.  However, the location of increased acres, current drought and dry conditions, and the potential for persistent drought throughout the summer could significantly impact the fall crop and the peanut market.  The risk of lower yields and less harvested acreage could potentially drop ending stocks significantly to 2016-17 levels of around 1.5 million pounds.

    Table 1. Peanut Acreage in 2021 and 2022 Prospective Plantings 
    State20212022Acreage
    Change    		Percent
    Change
    ALABAMA190,000175,000-15,000-7.9%
    ARKANSAS45,00035,000-10,000-22.2%
    FLORIDA180,000160,000-20,000-11.1%
    GEORGIA790,000730,000-60,000-7.6%
    MISSISSIPPI25,00020,000-5,000-20.0%
    NEW MEXICO6,50011,0004,50069.2%
    NORTH CAROLINA110,000120,00010,0009.1%
    OKLAHOMA17,00013,000-4,000-23.5%
    SOUTH CAROLINA65,00085,00020,00030.8%
    TEXAS170,000190,00020,00011.8%
    VIRGINIA27,00032,0005,00018.5%
    Total U.S.1,625,5001,571,000-54,500-3.4%
         
    Source: USDA NASS Prospective Plantings, March 31, 2022

    Sources:

    NOAA. U.S. Spring Outlook 2022: Drought to expand amid warmer conditions, March 17, 2022. https://www.climate.gov/news-features/understanding-climate/us-spring-outlook-2022-drought-expand-amid-warmer-conditions

    Knox, Pam. April and summer 2022 outlook for Georgia and beyond, April 7, 2022.  https://site.extension.uga.edu/climate/2022/04/april-and-summer-2022-outlook-for-georgia-and-beyond/

    Rabinowitz, Adam. “Projected Decrease in Peanut Acreage Could Have Greater Impacts on Overall Production“. Southern Ag Today 2(18.1). April 25, 2022. Permalink