Farm Commodity Programs: Peanuts

Remy Jurenas

Specialist in Agricultural Policy
Environment and Natural Resources Policy Division

August 26, 1998

98-715 ENR

Industry Profile

Peanuts are a regional crop. with most production occurring in three areas In 1995-1997. the Southeast (Georgia. Alabama. and Florida) accounted for 58% of U.S. peanut output. The Southwest (Texas. Oklahoma and New Mexico), 26%, and the Virginia-North Carolina region. Georgia was the top-producing state. accounting for 39% of total peanut output. followed by Texas with 19%. Production nationwide, while fluctuating from year to year due to variable weather, averaged almost 36 billion pounds (1.8 million short tons) annually in the 1995-97 period. Peanut output in 1995-97 generated almost $1.0 billion each year in cash receipts for producers. Production is geographically concentrated in each state (see map on next page). accordingly, peanuts account for a large share of farm and related agribusiness income earned in a number of peanut-producing counties In 1992. there were 16,194 peanut producers in the United States. 2 Imports in marketing year 3 (MY) 1996/97 accounted for 2.8% of total peanut supplies.

Growers sell peanuts to local buying points operated by shellers, independent dealers, or warehouse owners. These "first handlers" dry, clean, purchase, or accept for price support the harvested peanuts they receive. At buying points, peanuts are inspected and graded for quality - a process that determines the price level for commercial sales and price support loans. 4 Shellers also separate kernels from the peanut shell, screen them for size, inspect for rejects, and either sell the best-quality peanuts (usually using the services of a broker) to domestic processors or place them into refrigerated storage. With respect to further marketing, processors use edible-quality peanuts to manufacture various products for retail sale or export. Also, shellers sell roasted and ballpark in-shell peanuts to outlets for retail sale, engage in exporting shelled and crushed peanuts, and sell lower-quality and non-quota peanuts to crushers for conversion into oil and meal, some of which is also exported.

Slightly more than half (53%) of the peanut supply is consumed as food domestically. of the remainder, 20% is crushed into oil (viewed as a premium cooking oil) and meal (used as a protein supplement in livestock feed rations). Sales overseas account for 19%, with the European Union, Canada, and Japan being major markets. In a reversal of the previous 6-year trend, U. S. peanut consumption for food since MY 1995/96 has increased about an average 2.5% each year. Observers speculate that this recent trend might reflect a decline in concern over fat in foods, a growing awareness by consumers that peanut use may be beneficial to health, and increased retail promotion by peanut product manufacturers. Of the peanuts used for food in MY1996/97, 47% were processed into peanut butter (a staple in American diets), 23% were used in peanut candy, 19% went into snack peanut products, and 9% were marketed as cleaned in-shell (i.e., ballpark, roasted).

Peanut Program Features and operations

The program's purpose is to support the incomes of peanut producers and ensure ample domestic peanut supplies. To accomplish this, the U.S. Department of Agriculture (USDA) under the 1996 farm bill extends price support benefits to growers and places a limit on the amount of peanuts eligible for the higher level of price support. Separate trade authority restricts imports of foreign peanuts. Significant changes made to the program in 1996 reduce by 10% the minimum price guarantee available for peanuts sold domestically and bring the amount permitted to be marketed domestically in line with food demand. The main program provisions applicable to the 1996-2002 peanut crops are described below.

The peanut program differs from the grains. rice and cotton programs in that USDA makes no payments to peanut growers. Also, unlike the voluntary nature of USDA's grain and cotton programs. the peanut program's features are mandatory on all farmers if those that produce quota peanuts for the U.S. food market vote to approve marketing limits. In a December 1997 referendum, 94.8% of eligible producers voted to use the "quota" system to market peanuts through the 2002 crop.

Price Support. Two levels of price support benefits are available to producers, depending on the end use and destination of the peanuts sold. Peanuts marketed for food use in the United States (quota peanuts) are eligible for a high level of price support. Peanuts exported or crushed into peanut oil and meal (called additionals) are eligible only for a much lower level of support. The higher "quota" support level reflects the historical premium assigned to peanuts sold domestically into the high-value edible use market, and through 1995, was set at a level reflecting production costs. The lower level for additionals" reflects the much lower market value of peanuts sold for export or crushing.

Benefits are extended in the form of "non-recourse" loans that USDA makes available to three marketing associations (see Administering Agencies below). Non-recourse means that an association pledges the peanuts acquired from growers (to whom loan benefits are paid) as collateral for funds received from USDA. operating under complex procedures, each association (under contract with USDA's Commodity Credit Corporation (CCC)) then sells and disposes of acquired quota peanuts at not less than specified price levels. Acquired additionals, though, are sold at market prices. To the extent that sales do not fully cover loan proceeds extended to growers, the difference ("losses") are made up by tapping association "profits" or other collected funds (see Loss Sharing and other No Cost Provisions below).

The for the 1996-2002 crops is frozen at $610 per short ton (ST) or 30.5 cents per pound. This change effectively reduces quota support by 10.1% from 1995's $678.36/ST (33.92 cents/lb.) level. Quota loan rates do vary, though, by type of peanut produced (Runner. Virginia, Spanish, or Valencia) and by quality level. USDA set the additionals loan rate for the 1998 crop at $175 per ST (8.75 cents/lb.), $43 higher than that available in the 1992-97 period. USDA is required to set the additionals support level at a level that ensures the CCC does not incur losses from their sale and disposal, and that takes into account the demand for peanut oil and meal, expected prices of other vegetable oils and protein meals, and the export demand for peanuts.

A producer is ineligible for price support benefits for one year if he places peanuts under price support for two consecutive marketing years rather than selling to a handler who makes a written offer to buy at or above the quota support level. Also, the amount of quota price support benefits available to a producer who does not have enough food quality peanuts to sell against his entire quota now is limited.

Supply Management Two mechanisms limit the amount of peanuts allowed to be sold in the U.S. market: the national poundage quota and import quotas. Both tools seek to balance the supply of peanuts with projected food use. 5

Poundage Quotas A national poundage quota limits the quantity of peanuts that producers can sell for domestic consumption (see "buyback" exception below). The national quota is distributed among eligible states based on each state's 1997 share of the quota, and then distributed by "farm" to quota holders based largely on past production history. A producer holding or leasing farm quota receives price protection at the high "quota" support level, whether selling to commercial buyers or effectively transferring ownership of unsold peanuts to USDA's designated marketing association or agent. A farmer may sell peanuts produced in excess of his farm quota (referred to as "additionals") primarily for export or crushing into peanut oil and meal. A farmer without a quota can produce as much as he wants, but must sell them as additionals. However, when quota peanuts fall short in meeting domestic food demand (as a result of lower production due to poor weather and/or of changing manufacturer preferences for peanut type), any farmer may sell additionals as quota peanuts under the "buyback" provision.

By law, USDA is required to announce a national poundage quota equal to projected U.S. peanut consumption for food and related uses (excluding seed). Use of this marketing tool is intended to ensure that a surplus does not develop, which if it did, would increase the program's budget exposure. on December 15, 1997, USDA announced that the 1998-crop national poundage quota will be 1.167 million ST (2.334 billion pounds). This quota level is a 13.5%. reduction from the 1991-95 statutory minimum, 6 but represents a 3%. increase over the 1997 crop quota.

Each state's poundage quota is further distributed among individual peanut operations based on past production history. In general, a poundage quota is established for each farm that: (I) had a quota in the previous year, and (2) produced peanuts to sell in at least two of the three preceding crop years, if a state's poundage quota is increased. 7

The 1996 act allows an owner of farm poundage quota. or a producer with the permission of a quota owner, to now lease or sell such quota across county lines within the same state. The law also phases in stages through 2000 the aggregate amount of quota that can be 'transferred" out of a county, but limits such transfers to not more than 400%. This limit on the share of each county's quota that can be transferred does not apply to those states that receive small amounts of the national poundage quota and to those counties with less than 100,000 pounds of quota. Though relaxed, these restrictions continue to ensure that farmers do not move too much poundage quota away from those areas where handlers have developed an extensive infrastructure to market peanuts.

Import Restrictions. The United States imposes tariff rate quotas (TRQs) on peanut Imports. One TRQ permits imports up to a specified amount (the in-quota) from most countries to enter at a "bound," or fixed, tariff under two separate bilateral agreements, a TRQ allows the in-quota amount to enter on a duty-free basis. Imports above this amount may also enter, but face a very high tariff. Though each above-quota tariff declines during the life of each trade agreement, foreign-origin peanuts are not expected to be price competitive in the U.S. market for many years. U.S. market access commitments made under the WTO Agreement on Agriculture, NAFTA, and the U.S.Israel Free Trade Agreement mean that the "in-quota" amount (compared to the previous import quota's absolute 1.7 million pounds) will be 105.4 million pounds in 1998. increasing further to 125.8 million pounds in 2000. Under the WTO Agreement, Argentina is allocated more than an 80% share of the global TRQ. Mexico has duty-free access to the U.S. market for Mexican-produced peanuts under a TRQ that gradually rises through 2008, after which they will be allowed to enter in unlimited quantities. Israel has duty-free access for Israeli-produced peanuts under a small TRQ that expires in 2001. Also, another import quota caps U.S. imports of peanut butter and paste at slightly above the 1993 level. However, such imports from Mexico under NAFTA are exempt from this quota, as long as the peanuts processed into these products are grown in Mexico.

Loss Sharing and other No Cost Provisions - Even with changes made to reduce most of the program's budget exposure, losses will occur as area marketing associations' and/or CCC-owned peanut inventories acquired under price support activity are sold at below-acquisition cost. To cover losses that may arise, the "gains" (i.e., profits) of individual producers and the three producing regions, plus marketing assessment finds collected by USDA (see Marketing Assessments below), will be tapped under a complex, prioritized order. Changes made in the steps to be followed to cover losses are intended to place greater responsibility for absorbing losses on individual producers and regions that actually generate them.

Marketing Assessments. A budget deficit marketing assessment applies only to marketings of domestically produced peanuts. Imports are not subject to this level. Assessments collected from growers and "first purchasers" represent the peanut sector's contribution towards budget deficit reduction. A 1996 change, however, allows USDA to tap these funds at a specified step if needed to offset losses on loan operations (see Loss Sharing above). The assessment rate for the 1997-2002 crops is 1.2% of the "quota" or "additionals" loan rate, whichever applies. Growers pay 52% of this assessment rate, the first purchasers' share is 48%. At these rates, USDA expects to collect about $l0-$12 million each year in assessments.

Administering Agencies. Three area marketing associations help to administer the peanut program, acting as agents for the CCC - the entity that finances USDA farm programs. These regional associations arrange for warehousing peanuts brought under loan, keep track of quota and additional peanuts that are sold, and operate other aspects of the price support program. The CCC finances each association's price support operations and overhead costs with funds borrowed from the U.S. Treasury. Separately, county offices of the Farm Service Agency administer poundage quotas, maintain farm data, and perform other functions by dealing directly with producers and quota holders.

Legislative Authority. Authority for price support and to levy marketing assessments is found in section 155 of the Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-1277 U.S.C. 7271), signed into law on April 4, 1996. The supply management features (poundage quotas and other provisions regulating the sale of peanuts) are authorized in the Agricultural Adjustment Act of 1938 (7 U.S.C. 1358-1, 1358b, 1358c. and 1359a). as amended by the 1996 act.

Program and Consumer Costs

Prior to 1996. peanut program costs varied from year to year, largely reflecting the impact that weather had on the size and quality of a crop, USDA poundage quota and loan rate announcements. and farmers' production and marketing decisions. As a result, budget outlays in FY92-96 averaged almost $57 million annually. The 1996-enacted changes effectively result in a "no-cost" program by: (1) eliminating two quota-related provisions that had noticeably increased outlays. and (2) changing the way that any remaining operating losses are covered.

U.S. peanut policy maintains the price for domestically marketed peanuts above those traded internationally. Due to this price differential, consumers pay more for peanuts and peanut products than they likely would if U.S. food manufacturers could import peanuts without any restriction and/or if market forces could operate freely to yield a perfectly competitive price. A 1993 General Accounting office report estimated that the program adds from $313 to $513 million each year to manufacturers' costs. A University of Georgia analysis. however, indicates that if manufacturers paid a lower price for peanuts under a lower quota price support level, household consumers would not pay correspondingly less for peanut products. This study holds that food companies would not pass through all their savings to consumers, in large part because only a few firms account for most product sales.

References

1 Unless noted. sources are various publications of thc U.S. Department of Agriculture. For additional information on changes made by the 1996 farm bill and ongoing congressional debate on the peanut program in recent years. See CRS Issue Brief 95118. Peanuts Policy Issues.

2 U.S. Department of Commerce Bureau of the Census 1992 Center of Agriculture: United States Summary and State Data Vol 1. Part 5 . p. 384.

3 The peanut marketing year runs from August 1, as harvest begins in southern growing areas, through July 31 of the following year.

4 Peanuts are classified into three categories or segregation to reflect level of quality. only segregation 1 (highest quality) peanuts can be used in edible products. Segregation 2 and 3 peanuts can be marketed only for non-edible uses.

5 Other conditions are placed on peanut marketing activities in order to balance competing interests. maintain discipline on producers and others that market peanuts, ensure adequate supplies are available to the domestic marketplace, and limit budget exposure. among others.

6 Under 1991-95 peanut program authority USDA each year was required to set the national quota (defined then to cover domestic food, seed and farm use) at not less than the 1.35 million ST statutory minimum, even if USDA projected that food use would be lower. The 1996 farm bill eliminated this quota minimum.

7 Additional provisions stipulate that the size of each farm's quota is equal to that in the previous, year. adjusted to reflect changes in the national poundage quota. Any increase in a State's quota must be allocated proportionately among those farms that meet the the criteria based on their production in the previous three years. This provision also allows first time access to the higher quota price benefits to those farmers who previously had only produced additionals for export or domestic crushing. Any decrease in a State's quota must be distributed among all farms that had poundage quota in the previous with the change in the definition of the national poundage quota USDA will make a temporary seed quota allocation for each "farm" equal to the pounds of seed peanuts planted. All growers will receive this allocation, irrespective of whether or not they own or lease poundage quota to place greater responsibility for absorbing losses on individual producers and regions that actually generate them.