Peanut surpluses pose challenges for USDA, lawmakers

WASHINGTON, May 4, 2016 - A growing glut of peanuts is causing headaches for the Agriculture Department, even as subsidies to peanut growers are posing challenges for farm groups and policy makers as they start discussions on the next farm bill.

In response to changes in the 2014 farm bill, farmers sharply increased plantings of peanuts and supplies have grown dramatically. USDA estimates ending stocks of more than 2.9 billion pounds from last year’s crop, which is roughly equal to the amount of peanuts consumed annually in food and candy in the U.S.

USDA is trying to reduce the surplus a bit by sending 500 metric tons of peanuts (1.12 million pounds) to Haiti as food aid, but the plan has come under fire from Oxfam America and other activist groups who say the donations will hurt Haitian peanut growers. One group went so far as to call it a “plan of death” for Haitian farmers. USDA strongly disputes the accusation that the aid would harm the farmers.

The peanut surplus has its roots in the congressional decision to dismantle price supports for cotton in the wake of Brazil’s successful challenge to their legality under international trade rules.

Lawmakers created the Price Loss Coverage program in the 2014 farm bill to trigger payments to farmers when market prices fall below a reference price. Cotton was almost eliminated from the farm bill commodity title, making it ineligible for PLC, but the bill set a reference price of $535 a ton for peanuts. Farmers with cotton base, now known as “generic base,” are now allowed to claim PLC payments for peanuts or any eligible crop they grow on that acreage.

Peanuts became the crop of choice on generic base acres as cotton prices plunged and the PLC payment made peanuts more valuable than virtually any other crop they could grow.

Last year, farmers planted 1.63 million acres of peanuts, an increase of more than 50 percent from 2013.

Tony Dill, a longtime cotton grower near Brownfield, Texas, southwest of Lubbock, has increased his peanut plantings from about 240 acres in 2012 to about 600 acres now, or about 25 percent of his irrigated land. (That’s about the maximum amount of peanuts he can plant because of rotational limitations. Peanuts develop disease problems if grown on the same ground more than once every four years.)

Dill says farmers in his area have few other options. They can’t break even with cotton at today’s prices; cotton prices plunged after China reversed its supply policy. Corn and soybeans don’t do well in the West Texas climate, and returns for wheat and sorghum are too low, Dill said. Some bankers are pushing farmers to plant peanuts, he said.

“Really nothing pencils out, to be honest with you. Peanuts are the one that maybe you have the chance to make a little bit of money on,” said Dill, who is president of the Western Peanut Producers.

According to the Congressional Research Service, the PLC payment makes peanuts a far more profitable crop for farmers on generic base acreage than corn, soybeans or cotton. The price of cotton would have to rise to 90 cents a pound, a 50 percent increase, to return as much as peanuts, CRS said. Corn, which has been trading for well under $4 a bushel, would have to hit $6.31 a bushel to be as valuable as peanuts.

At the time the peanut reference price was being debated, the price of peanuts was running over $700 a ton, and cotton prices were soaring, too, he said. “We kind of knew that cotton was on the edge… but we didn’t think about cotton falling this far,” he said.

USDA projects that farmers will trim their peanut plantings by 9 percent this year, or about 149,000 acres, but it remains to be seen whether the cut will materialize. Texas producers are expected to cut plantings by 40,000 acres, USDA says, but Shelly Nutt, executive director of the Texas Peanut Producers Board, said she doubts that will happen. Some producers will likely bale the peanut plants for hay, she said.  “The peanuts planted for hay is more for farmers to take advantage of the peanut program while adding nitrogen to the soil,” she said in an email.

PLC payments for peanuts are expected to average well over $600 million every year, more than for any other crop except wheat, according to the Congressional Budget Office. That number is going to be hard for lawmakers to ignore when they start writing the 2018 farm bill. (Subsidies for corn and soybeans under the Agricultural Risk Coverage program exceed the PLC payments for wheat and peanuts. But ARC payments are expected to fall sharply in coming years because they are based on a five-year rolling average of market prices, rather than a fixed reference price.) 

A congressional aide said the $535 reference price was pegged to the cost of production and wasn’t expected to encourage production on generic base acres. 

Even so, the peanut payments will be a tempting source of funding for helping other commodities when lawmakers start writing the next farm bill. If cotton growers want to get back into the commodity programs, the money will have to come from somewhere. 

The industry has been pressing Agriculture Secretary Tom Vilsack to allow PLC payments for cottonseed, which would have the effect of putting cotton back in the commodity title, but Vilsack has steadfastly refused to do that, saying he doesn’t have the legal authority. Making cottonseed eligible for PLC would provide cotton with a critical pot of funding, or “baseline,” as lawmakers write the next farm bill. 

(In exchange for leaving the cotton title, cotton growers were given the new revenue-based insurance product, known as Stacked Income Protection Plan [STAX], but few growers have bought the policies. Dill said the insurance isn’t worth the cost.) 

John Gordley, Washington representative for the American Soybean Association, linked cotton and peanuts in a recent blog post outlining the challenges facing farm groups in the next farm bill. The “sharp increase” in peanut payments due to the conversion of cotton base to generic base poses a problem for “efforts to develop a better cotton program by 2018,” he wrote. 

The Congressional Research Service, in a report last year, outlined several options for policy makers to consider in dealing with peanut policy. One would be to buy out the generic base acres with a one-time government payment. The report didn’t suggest what the payment should be. Another option would be to change how payments are made on generic base acres or to alter the reference prices. 

Carl Zulauf, an economist at Ohio State University, said the buyout would be costly, but he doesn’t see farmers surrendering the generic base without some benefit. “Cotton is unlikely to give this program up without some concession, with the most likely being some form of cottonseed assistance,” he said. 

He also said the peanut payments illustrate the problem of providing government assistance based on fixed commodity prices. The government winds up “providing either little assistance or assistance that becomes very costly,” he said. 

Don Koehler, executive director of the Georgia Peanut Commission, is optimistic that increases in domestic consumption and exports to China and elsewhere will take up some of the extra production. And he says it’s possible that peanut oil could become a viable feedstock for biodiesel if petroleum prices turn around. 

Dill, the Texas farmer, says the ultimate solution is to put cotton back in the commodity title. “If they can get it back in Title I where there’s a little bit of government support… then people will quit planting so many peanuts,” he said.

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