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U.S. Peanut Program and Issues

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. U.S. Peanut Program and Issues Dennis A. Shields Specialist in Agricultural Policy August 19, 2015 Congressional Research Service 7-5700 www.crs.gov R44156 c11173008 U.S. Peanut Program and Issues . Summary The federal peanut program provides income support for peanut producers and landowners through market-triggered government payments. The payments supplement producer returns from the market when the national peanut price or crop revenue drops below guaranteed levels. Indirect beneficiaries of the program include input suppliers, processors, and communities where economic activity associated with the peanut industry is generated. Consumers in the United States and abroad benefit from lower prices of peanuts and peanut products if the program creates incentives for farmers to produce more peanuts than they otherwise would. Foreign producers could be economically harmed by policy-induced lower market prices. Taxpayers fund the peanut program, as established in the 2014 farm bill (P.L. 113-79) for crop years 2014-2018. The annual cost depends primarily on the “price loss” difference between the annual farm price of peanuts and the “reference price” of $535 per ton. There is no Price Loss Coverage (PLC) payment if the annual farm price is above the reference price. A small amount of peanut acreage is covered by an alternative program (selected by some producers), called Agricultural Risk Coverage (ARC), which makes a farm payment when crop revenue is less than 86% of five-year historical crop revenue. A separate “marketing loan” program provides interim financing for producers and further protects them when prices decline because the government will take ownership of the loan collateral (peanuts) if prices drop below the loan rate ($355 per ton). The peanut program is structured the same as what is available for other “covered commodities” like corn, wheat, soybeans, and rice, but with a reference price that is higher relative to market conditions than for other crops. In the absence of a major supply or demand shock that could cause peanut prices to spike, many analysts expect farm payments to be made in most forthcoming crop years because peanut prices have historically been lower than the reference price established in the 2014 farm bill. Between 2002 and 2014, the annual farm price was below the reference price of $535 per ton in each year except for 2011 and 2012. For some, the policy concern is that the fixed nature of the reference prices has potential to lock in farm payments for an extended period of time, possibly encouraging production on generic base acres (former cotton acreage) that could put additional downward pressure on farm prices, thus incurring even greater government payments. On generic base acres, payments are made in proportion to actual plantings during each crop year (2014 through 2018). Depending on relative crop prices during the next several years, potential payments for peanuts on generic base acres could make peanuts an attractive planting option when comparing cost and returns for competing crops. Policymakers could become concerned with government costs. According to some estimates, government outlays could exceed $800 million per year for crop years 2016, 2017, and 2018 if the farm price for peanuts remains relatively low. Others may have policy concerns because the “coupling” of payments with plantings can encourage plantings that may be contrary to market signals. In both cases, the level of the reference price is directly related to the level of potential payments and peanut farm revenue. If Congress chooses to review U.S. peanut policy, one option would be to “buy out” the generic base acres with a one-time government payment to owners of base in exchange for discontinued eligibility for farm programs on those base acres. Other options would be to re-assess how payments are made on generic base acres or to reconsider the relative levels of reference prices by crop. These and other options would need congressional action. c11173008 Congressional Research Service U.S. Peanut Program and Issues . Contents Peanut Industry Basics .................................................................................................................... 1 Production Areas ....................................................................................................................... 1 Peanut Varieties and Uses ......................................................................................................... 2 Industry Structure ...................................................................................................................... 2 Market Trends and 2015 Outlook.............................................................................................. 3 Farm Policy for Peanuts .................................................................................................................. 6 Marketing Assistance Loan Program ........................................................................................ 7 Price Loss Coverage (PLC) Payments on Peanut Base............................................................. 7 PLC Payments for Peanuts Planted on “Generic” Base ............................................................ 8 Payment Limit and Adjusted Gross Income Limit .................................................................... 9 Expanded Federal Crop Insurance Coverage in 2014 Farm Bill............................................. 10 Implied Planting Incentives for Peanuts Under the 2014 Farm Bill ....................................... 10 Selected Policy Issues ................................................................................................................... 13 Generic Base Acres ................................................................................................................. 13 USDA Program Administration and Potential Loan Forfeitures ............................................. 13 Prospective Government Outlays ............................................................................................ 13 Market Development ............................................................................................................... 14 Future Peanut Policy ............................................................................................................... 14 Figures Figure 1. U.S. Peanut-Producing Areas ........................................................................................... 1 Figure 2. U.S. Peanuts: Planted Area, Yield, and Production .......................................................... 4 Figure 3. Peanut Production, Beginning Stocks, and Farm Price.................................................... 5 Figure 4. Shares of Total Base on Farms with Generic Base ........................................................ 12 Figure A-1. Peanut Prices and Marketing Loan Rate .................................................................... 17 Figure B-1. Peanut Program Price Loss Coverage (PLC) Payment Trigger ................................. 18 Tables Table 1. Peanut Types and Uses ...................................................................................................... 2 Table 2. Number of Peanut Farms and Harvested Acreage, 2012 ................................................... 3 Table 3. Peanut Base, Generic Base, and Peanut Planted Area by State ......................................... 9 Table 4. Peanut Returns and Break-even Price Calculation for Competing Crops ........................ 11 Table C-1. PLC Payment Calculation for a Hypothetical Farm with Peanut Base and Generic Base .............................................................................................................................. 19 c11173008 Congressional Research Service U.S. Peanut Program and Issues . Appendixes Appendix A. Marketing Assistance Loan Program ....................................................................... 16 Appendix B. Price Loss Coverage Calculation ............................................................................. 18 Appendix C. PLC Payments on Generic Base .............................................................................. 19 Contacts Author Contact Information .......................................................................................................... 20 c11173008 Congressional Research Service U.S. Peanut Program and Issues . U.S. farm policy has supported peanut producers and the broader peanut industry for decades. From the 1930s until 2002, peanut price supports and a quota system to limit production elevated the farm price of peanuts and supported farm income. Since 2002, peanut policy has followed the same structure as other farm commodity policies, including farm payments when the price or crop revenue drops below guaranteed levels. The Agricultural Act of 2014 (P.L. 113-79, the 2014 farm bill) made changes to farm policy that could affect peanut plantings during the life of the farm bill (crop years 2014-2018). This report reviews peanut policy and implications for the peanut market, federal government outlays, and policymakers. Peanut Industry Basics Production Areas U.S. peanut production is located primarily in the southeastern United States. The crop is planted in an arc stretching from southern Mississippi to southern Virginia (Figure 1). Georgia accounts for just under half of U.S. production, and Alabama has 12%. Most neighboring states account for single-digit shares. Peanuts are also produced in Texas, Oklahoma, and New Mexico. The geographic location of production reflects the peanut plant’s need for 120-160 frost-free days and soil that is sandy and loamy (relatively equal amounts of sand, silt, and clay) for optimal crop performance. The peanut industry is also geographically concentrated within each state, with peanuts accounting for a large share of farm and related agribusiness income earned in a number of peanut-producing counties. About three-fourths of U.S. peanut acreage is dryland (1.1 million acres in 2012), and the remainder is irrigated (0.5 million acres). Figure 1. U.S. Peanut-Producing Areas Yellow number indicates state share of U.S. production (2006-2010) Source: U.S. Department of Agriculture, Office of the Chief Economist, World Agricultural Outlook Board, http://www.usda.gov/oce/weather/pubs/Other/MWCACP/namerica.htm. Notes: Alaska and Hawaii do not produce peanuts. c11173008 Congressional Research Service 1 U.S. Peanut Program and Issues . Peanut Varieties and Uses The major types of peanuts grown in the United States are Runner, Virginia, Spanish, and Valencia (Table 1). The Runner is the most common variety and is used in the manufacture of peanut butter. Peanut butter is the leading use of peanuts produced in the United States (45%), according to the American Peanut Council (APC). Snack nuts and in-shells account for approximately 30% of use. Candy and confections and peanut oil for cooking account for the remainder. According to APC, peanuts are the leading snack nut consumed in the United States, with a two-thirds share of the snack nut market. Table 1. Peanut Types and Uses Peanut type Share of U.S. peanut crop Primary use and characteristics Where grown Runner 80% Manufacture of peanut butter; kernel size is uniform, which allows for even roasting Georgia, Texas, Alabama, Florida, South Carolina, and Oklahoma Virginia 15% Snack peanuts and in-shell; kernel is large and known as “ballpark” peanut SE Virginia, NE North Carolina, South Carolina, and western Texas Spanish 4% Snack peanuts, peanut butter and confections; kernel is small and round, with red skins Texas and Oklahoma Valencia 1% Used for all-natural peanut butter and sold inshell for roasting and boiling; sweet flavor; each shell contains 3 to 5 kernels New Mexico Source: National Peanut Board and American Peanut Council. Industry Structure

U.S. Peanut Program and Issues

November 18, 2015 (R44156) Jump to Main Text of Report

Contents

Summary

According to the U.S. Department of Agriculture (USDA), the United States is expected to be the fourth largest producer and exporter of peanuts in the world in 2015. In addition to its prominent role in international markets, U.S. peanut production and marketing is an important activity in several states located in the southeastern and southwestern United States. The U.S. peanut crop has been eligible for certain federal farm support programs since the 1930s—initially under a quota system and, since 2002, under the income support programs available for other major program crops like corn, wheat, soybeans, and rice.

Today, under the 2014 farm bill (Agricultural Act of 2014, P.L. 113-79), the major income support programs are marketing loan benefits and either the price loss coverage (PLC) or agriculture risk coverage (ARC) program (as determined by a one-time producer choice). For peanuts, almost all producers (99.7%) chose PLC because they expected it to provide higher payments and greater risk protection than would be available under ARC.

Marketing loan benefits are available immediately after harvest and are coupled directly to planting and production. In contrast, PLC and ARC payments are made to 85% of historical base acres and thus decoupled from producer crop choices. Also, PLC and ARC payments are not available until nearly a full year after harvest—October 1 following the end of the marketing year when full information on farm prices is available. The 2014 farm bill also created "generic" base acres—former cotton base acres from the 2008 farm bill. Generic base is added to a producer's total base for potential payments, but only if a covered crop is planted on the generic base. In other words, PLC payments on generic base acres are coupled to actual plantings (although payments remain subject to the 85% factor applied to eligible acres).

Under current peanut program provisions, peanuts have a separate program payment limit—a consequence of the quota buyout (P.L. 107-171; §1603). As a result of this feature, a farmer that grows multiple program crops including peanuts has in effect two different program payment limits: the first payment limit (of $125,000) is for an aggregation of program payments made to all program crops other than peanuts; and the second (also of $125,000) is for program payments made exclusively to peanuts. Thus, under an extreme scenario involving large payments for both peanuts and other program crops, this could potentially double a farmer's payment limits.

Farm policy economists have noted that peanuts have a statutory reference price that is set disproportionately above historical market prices, particularly when compared to other major program crops. Some contend that this potential advantage favors peanut production on generic base acres. However, the extent to which this scenario might play out is unclear, and both agronomic and market circumstances suggest that it might be somewhat limited.

Estimates of peanut program outlays for FY2016 vary. USDA (February 2015) projects FY2016 costs at $379 million, Food and Agricultural Policy Research Institute (August 2015) projects USDA program outlays for peanuts at $431 million, and the Congressional Budget Office (August 2015) projects $232 million. As a point of reference, the annual market value of U.S. peanut production has traditionally been in the range of $1.1 billion to $1.4 billion.

This report updates and revises an earlier August 19, 2015, version.

U.S. Peanut Program and Issues

Introduction

According to the U.S. Department of Agriculture (USDA), the United States is expected to be the fourth largest producer and exporter of peanuts in the world in 2015.1 In addition to its prominent role in international markets, U.S. peanut production and marketing is an important activity in several states located in the southeastern and southwestern United States. Peanuts have participated in federal farm support programs since the 1930s—initially under a quota system, and since 2002 under the income support programs available for other covered commodities like corn, wheat, soybeans, and rice. This report updates and revises an earlier August 19, 2015, version. It provides a brief overview of the U.S. peanut sector and reviews current U.S. farm policy including a discussion of how peanuts (following market adjustments spurred by a 2002 federal quota buyout) fit within current policy relative to other program crops.

Peanut Industry Basics Production Areas U.S. peanut production is located primarily in the southeastern United States. The crop is planted in an arc stretching from southern Mississippi to southern Virginia, but with some additional smaller clusters of production in Texas, Oklahoma, and New Mexico (Figure 1). Georgia accounts for just under half of U.S. production, and Alabama has 12%. Most neighboring states account for single-digit shares. Figure 1. U.S. Peanut-Producing Areas

Yellow number indicates state share of U.S. production (2006-2010)

Source: U.S. Department of Agriculture, Office of the Chief Economist, World Agricultural Outlook Board, http://www.usda.gov/oce/weather/pubs/Other/MWCACP/namerica.htm.

Notes: Alaska and Hawaii do not produce peanuts.

This geographic location of production reflects the peanut plant's need for 120-160 frost-free days and soil that is sandy and loamy (relatively equal amounts of sand, silt, and clay) for optimal crop performance. The peanut industry is also geographically concentrated within each state, with peanuts accounting for a large share of farm and related agribusiness income earned in a number of peanut-producing counties. About three-fourths of U.S. peanut acreage is dryland (1.1 million acres in 2012), and the remainder is irrigated (0.5 million acres).

Peanut Varieties and Uses The major types of peanuts grown in the United States are Runner, Virginia, Spanish, and Valencia (Table 1). The Runner is the most common variety and is used in the manufacture of peanut butter. Peanut butter is the leading use of peanuts produced in the United States (45%), according to the American Peanut Council (APC). Snack nuts and in-shells account for approximately 30% of use. Candy and confections and peanut oil for cooking account for the remainder. According to APC, peanuts are the leading snack nut consumed in the United States, with a two-thirds share of the snack nut market. Table 1. Peanut Types and Uses

Peanut type

Share of U.S. peanut crop

Primary use and characteristics

Where grown

Runner

80%

Manufacture of peanut butter; kernel size is uniform, which allows for even roasting

Georgia, Texas, Alabama, Florida, South Carolina, and Oklahoma

Virginia

15%

Snack peanuts and in-shell; kernel is large and known as "ballpark" peanut

SE Virginia, NE North Carolina, South Carolina, and western Texas

Spanish

4%

Snack peanuts, peanut butter and confections; kernel is small and round, with red skins

Texas and Oklahoma

Valencia

1%

Used for all-natural peanut butter and sold in-shell for roasting and boiling; sweet flavor; each shell contains 3 to 5 kernels

New Mexico

Source: National Peanut Board and American Peanut Council.

Industry Structure Peanuts were grown on 6,561 farms in the United States in 2012, according to the 2012 Census of Agriculture Agriculture, with an average farm size of 247 harvested peanut acres per farm (Table 2). Similar to output for other commodities, peanut production is skewed towardprimarily through larger farms that typically have lower per-unit costs of production. Peanut farms with at least 250 acres account for onethirdone-third of all peanut farms and three-quarters of national production. Most peanut farmers also plant other crops such as cotton, corn, or soybeans in multi-year rotations with peanuts in order to maintain soil health and crop yields.12 The farm value of peanut production was $1.1 billion in 2014. After harvest, farmers move peanuts to buying points or stations located throughout the production regions. Buying stations are operated by shellers, independent dealers, or warehouse owners. These “"first handlers”" purchase the peanuts and provide services such as drying, cleaning, and making arrangementsarranging for marketing assistance loans provided by the U.S. Department of Agriculture (USDA). Shellers sell edible peanuts to processors for manufacturing and bid on USDA-owned stocks of peanuts (forfeitures under the marketing loan program) for processing or export. Sales between shellers and processors are arranged by brokers or done directly. 1 The average total acreage of all crops on farms growing peanuts was 2,500 acres in 2013, according to USDA’s Agricultural Resource Management Survey. See http://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/ Ag_Resource_Management/ARMS_2014_Peanuts_Highlights.pdf. c11173008 Congressional Research Service 2 U.S. Peanut Program and Issues . Table 2. Number of Peanut Farms and Harvested Acreage, 2012 Number of Farms Georgia 2,833 731,946 258 Alabama 772 217,940 282 Florida 698 196,320 281 North Carolina 636 105,739 166 Texas 552 148,795 270 South Carolina 493 106,746 217 Virginia 170 20,208 119 Oklahoma 166 21,926 132 Mississippi 128 48,306 377 Other 113 23,705 210 6,561 1,621,631 247 United States Harvested Acres Average Peanut Acres per Farm State Source: directly. Table 2. Number of Peanut Farms and Harvested Acreage, 2012

State

Number of Farms

Harvested Acres

Average Peanut Acres per Farm

Georgia

2,833

731,946

258

Alabama

772

217,940

282

Florida

698

196,320

281

North Carolina

636

105,739

166

Texas

552

148,795

270

South Carolina

493

106,746

217

Virginia

170

20,208

119

Oklahoma

166

21,926

132

Mississippi

128

48,306

377

Other

113

23,705

210

United States

6,561

1,621,631

247
Source: 2012 Census of Agriculture, http://www.agcensus.usda.gov/Publications/2012/Full_Report/ Volume_1,_Chapter_2_US_State_Level/. . Notes: Other states reporting acreage in 2012 were Arkansas (36 farms), Tennessee (22), New Mexico (21), California (15), Louisiana (11), Kentucky (5), Missouri (2), and Maryland (1). Unlike the major crop markets, the Unlike markets for major crops like corn and soybeans, the U.S. peanut market is considered “"thin,”" with only two peanut shellers reportedly buying over 80% of all peanuts from growers. No futures market exists for peanuts, and private contracts between producers and shellers reportedly account for most transactions. Given the industrypeanut industry's structure and pricing practices (contracting), little public price and other market information is available to USDA for operating the peanut program (see “USDA Program Administration”). Market Trends and 2015 Outlook . Production and Market Trends Two opposing but related trends have shaped peanut production during the last quarter century. Planted acreage has declined while productivity (yield measured in pounds per acre) has increased (see Figure 2). Acreage had been declining even prior to a majorthe policy change in 2002 from a quota system, which tended to lock acreage in place, to a traditional commodity policy (see “support programs (see "U.S. Farm Policy forand Peanuts”"). The policy change resulted in a shift of peanut production to allowed market forces to play a stronger role in producer decision making. As a result, peanut production shifted to higher-yielding land with lower production costs. This acreage shift, including a greater proportion of plantings in Georgia, along with improvements in varieties and management practices, propelled thea long-term uptrend in peanut yields. Higher yields in recent years have lifted peanut production (see lower panel in Figure 2). A critical long-run factor influencing peanut output is demand. Domestic food use has grown slowly but steadily over time. Exports, which are about 20% of total use, jumped sharply in 2012. U.S. acreage increased, and China entered the market as a buyer since their regular supplier (India) had encountered yield problems due to drought. Since then, exports have declined somewhat but have remained relatively robust. Canada, the Netherlands, and Mexico are the top export markets and account for about half of U.S. exports. Argentine peanuts compete with U.S. peanuts in the European market. c11173008 Congressional Research Service 3 U.S. Peanut Program and Issues . Figure 2. U.S. Peanuts: Planted Area,Yield, and Production Source: USDA’s National Agricultural Statistical Service and Economic Research Service. In each marketing year, supply, demand, and policy factors influence and determine the farm price for peanuts. For the five crop years 2010-2014, grower prices averaged 26 cents per pound, up from 21 cents per pound in 2000-2009 (see Figure 3). c11173008 Congressional Research Service 4 U.S. Peanut Program and Issues . Figure 3. Peanut Production, Beginning Stocks, and Farm Price Bil. lbs. 10 8 Production Beg. Stocks Price 2000-2009 2010-2014 Ave. production 4.0 bil lbs. 4.8 bil. lbs. Ave. price 21 cents/lb. 26 cent/lb. Cents / lb. 50 40 6 30 4 20 2 10 0 0 2000 2003 2006 2009 2012 2015 Source: Data from Mark Ash, Oil Crops Outlook, USDA, Economic Research Service, OCS-15h, August 14, 2015, http://www.ers.usda.gov/media/1881268/ocs15h.pdf. Notes: Marketing year beginning August 1; 2015 forecast; imports (not shown) averaged 82 million pounds per year during 2002-2014, or about 1% of total supplies. Most of the price gain occurred in 2011/12 when below trend yields and plantings in the United States led to high prices. Prices stayed high in 2012/13 due to strong export demand (China). The market has weakened since then (see green line in chart), under the weight of large domestic supplies (production plus beginning stocks). In 2015/16 (August-July season), the average farm price of peanuts is expected to average 20 cents per pound, according to USDA. The average farm price is a key determinant of farm program payments because the size of the payments increases in proportion to the decline in price below the statutory reference price and loan rate. The peanut payments help stabilize farm income for U.S. peanut producers. In general, low crop prices discourage farmers from planting more acres in the subsequent year. However, acreage of a low-priced crop can actually expand depending on potential returns (including government payments) among competing crops typically planted on the same land. Peanut acreage in 2015 is a good example. Prior to the planting season, with the expectation of relatively low peanut prices, peanut analysts expected government payments of $100 per ton (5 cents per pound) under the Price Loss Coverage program. Farms with “generic base” (see “PLC Payments for Peanuts Planted on “Generic” Base”) were expected to have an effective safety net of $470 to $500 per ton in 2015 (between 23.5 and 25 cents per pound), as provided by the 2014 farm bill.2 Given the favorable prospective returns for peanuts, including government support and relatively low prices for substitute crops (e.g., cotton), farmers increased peanut plantings sharply in 2015. On June 30, 2015, USDA estimated 2015 peanut planting at 1.6 million acres, up 18% 2 Paul Hollis, “Bottom Line Trumps Caution Flags as Peanuts Appear Poised for Increase,” Southeast Farm Press, January 30, 2015, http://southeastfarmpress.com/blog/bottom-line-trumps-caution-flags-peanuts-appear-poisedincrease. c11173008 Congressional Research Service 5 U.S. Peanut Program and Issues . from 2014. With higher expanded plantings, a large peanut crop is forecast for 2015. Average yields are expected to rise slightly from 2014, resulting in a crop of 6.2 billion pounds, up 19% from 2014. According to USDA forecasts, use is expected to expand slightly for all categories (food, crushing for oil, exports, and other), but not enough to prevent an increase in ending stocks at the conclusion of the marketing year. Larger supplies are expected to push down peanut prices to an average of 20 cents per pound in 2015/16, the lowest since 2006/07. The relatively low expected price is well below the price needed to trigger farm program payments for peanuts.3 Farm Policy for Peanuts The federal peanut program provides income support for peanut producers and landowners through market-triggered government payments that supplement producer returns from the market. Indirect beneficiaries of the program include input suppliers, processors, and communities where economic activity associated with the peanut industry is generated. Consumers in the United States and abroad benefit from lower prices of peanuts and peanut products if the program creates incentives for farmers to produce more peanuts than they otherwise would; however, foreign producers can be economically harmed by policy-induced lower market prices. Today’s peanut program is essentially the same as what is available for other “covered commodities” like corn, wheat, soybeans, and rice, except for a reference price that is notably high relative to market conditions, especially when compared to the other program crops.4 Peanuts shifted to a “traditional” farm commodity program in 2002 when Congress eliminated the historical peanut quota and price support program as part of the 2002 farm bill.5 To support producers, the 2002 farm bill extended commodity price support and income programs to peanuts, covering the 2002 to 2007 crops, and subsequent crops through 2013 under the 2008 farm bill and extensions. 6 Peanuts is a “covered commodity” eligible for farm program support established by the Agricultural Act of 2014 (H.R. 2642; P.L. 113-79, the 2014 farm bill).7 Producer support is provided for the 2014-2018 crop years. Taxpayers fund the peanut program, and the annual cost depends primarily on the “price loss” difference between the annual farm price of peanuts and the 3 Note that the 2015/16 price forecast is subject to change depending upon market developments. For the latest USDA forecast for peanuts, see Oil Crops Outlook, USDA, Economic Research Service, http://www.ers.usda.gov/ publications/ocs-oil-crops-outlook.aspx. 4 See CRS Report R43448, Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113-79). 5 For historical peanut policy, see W. C. McArthur et al., U.S. Peanut Industry, USDA, Economic Research Service, Agricultural Economic Report Number 493, November 1982, http://naldc.nal.usda.gov/naldc/download.xhtml?id= CAT83783188&content=PDF. 6 For more on the policy shift, seeCRS Report RL30924, Peanut Program: Evolution from Supply Management to Market Orientation, Peanut Program: Evolution from Supply Management to Market Orientation, and Erik Dohlman et al., Peanut Policy Change and Adjustment Under the 2002 Farm Act, USDA, Economic Research Service, July 2004, http://www.ers.usda.gov/publications/ocs-oil-crops-outlook/ocs04g01.aspx. A discussion of the peanut sector after the 2002 reform is available in The Post-Buyout Experience: Peanut and Tobacco Sectors Adapt to Policy Reform, USDA, Economic Research Service, Economic Information Bulletin Number 60, November 2009, http://www.ers.usda.gov/ media/184740/eib60_1_.pdf. See also Peanut Backgrounder, USDA/ERS, OCS-05i-01, October 2005, http://www.ers.usda.gov/media/864326/ocs05i01_002.pdf. 7 For more information on farm commodity programs for all covered commodities, see CRS Report R43448, Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113-79), and CRS Report R43758, Farm Safety Net Programs: Background and Issues. c11173008 Congressional Research Service 6 U.S. Peanut Program and Issues . “reference price” of $535 per ton as established in the 2014 farm bill (there is no payment if the annual farm price is above the reference price). The 2014 farm bill revised the price- and revenue-based programs for peanuts and other covered commodities for crop years 2014-2018. In spring 2015, producers could make a one-time selection of either Price Loss Coverage program (PLC) or Agricultural Risk Coverage (ARC), for each covered crop for the life of the farm bill. PLC makes a payment when the farm price falls below the statutory reference price (set above the loan rate). ARC makes a payment when crop revenue is less than 86% of five-year historical crop revenue. For peanuts, almost all producers selected PLC because they expected higher payments and greater risk protection than under ARC. (For crops like corn and soybeans, a majority of producers selected ARC.) PLC and ARC payments are made after October 1 following the end of the marketing year. For example, the payment associated with the 2014 peanut crop will be made after October 1, 2015.8 (Marketing loan benefits are available immediately upon harvest for crop years 2014-2018.) Only PLC is described in this report because it covers 99.7% of eligible peanut acreage. For an explanation of ARC, see CRS Report R43758, Farm Safety Net Programs: Background and Issues. Marketing Assistance Loan Program A separate “marketing loan” program provides interim financing for producers and further protects them when prices decline because the government will take ownership of the loan collateral (peanuts) if prices drop below the loan rate ($355 per ton). Marketing loan activity could increase if peanut production expands. See program explanation in Appendix A. Price Loss Coverage (PLC) Payments on Peanut Base In addition to marketing assistance loan benefits, peanut producers are eligible for a second (and higher) layer of price protection under the Price Loss Coverage (PLC) program. Farm payments are made each year when the annual peanut price is below the statutory reference price of $535 per ton (26.75 cents per pound), as established under the 2014 farm bill. For crop year 2015, the current peanut price forecast issued by USDA of $400 per ton would translate into a PLC payment rate of $135 per ton ($535 minus $400 per ton). For individual farms, payments are calculated using the national payment rate (reference price minus season-average farm price) and individual farm information. The PLC payment formula is the payment rate times historical farm payment yield times 85% of historical peanut “base” acres.   8 c11173008 The historical payment yield is equal to 90% of the 2008-2012 average yield per planted acre for the farm. As an alternative, producers during program signup in early 2015 were allowed to keep the program yield used for calculating the farm’s counter-cyclical payments under the 2008 farm bill (generally based on 1998-2001 yields or earlier). Peanut base represents historical peanut planting on each farm, and total 2.0 million acres nationwide. As with program yields, the 2014 farm bill provided farmers with a one-time opportunity to update individual crop base acres by reallocating acreage within their previous base to match their actual crop mix (plantings) during 2009-2012. The 2014 peanut crop marketing season is August 2014 to July 2015. Congressional Research Service 7 U.S. Peanut Program and Issues . In economic terms, when market return plus government payments are above variable costs, producers have an incentive to plant the crop if it compares favorably to other crops. However, an important feature for PLC payments on peanut base acres is that the payments depend on historical plantings, and not current-year plantings of peanuts (or of any crop for that matter), and therefore do not affect the total farm payments or planting incentives. This concept of “paying on base” was included in the 2014 farm bill as a way to minimize potential market distorting effects of the program, i.e., farmers planting peanuts to gain more payments. This is not the case for payments on generic base (see next section). In the absence of a major supply or demand shock that could cause prices to spike, many analysts expect PLC payments to be made in forthcoming crop years because peanut prices have historically been lower than the reference price set in the 2014 farm bill. Between 2002 and 2014, the annual farm price was below the reference price of $535 per ton in each year except for 2011 and 2012.9 See Appendix B for the PLC payment calculation for an individual producer. For some, the policy concern is that the fixed nature of the reference prices has potential to lock in farm payments for an extended period of time if the average farm price remains below the reference price, resulting in perennial government payments. (Also, if a peanut farm has more generic base than what is normally planted, production on generic base acres could put additional downward pressure on farm prices—see next section). For example, USDA expects peanut prices to average $.20 per pound for crop year 2015 and decline to the loan rate of $0.1775 per pound for crop years 2016-2018. Consequently, with a reference price of $0.2675 per pound, PLC payments for peanuts would be triggered each year, and outlays could exceed $800 million per year for crop years 2016, 2017, and 2018 if the farm price for peanuts remains at or below the loan rate. For comparison, the annual market value of production would be $1.1 billion to $1.4 billion, depending on crop size. PLC Payments for Peanuts Planted on “Generic” Base Besides PLC payments on base acres for covered crops, including peanuts, PLC payments are also made on “generic base acres.” Generic base acres, formerly upland cotton base, total 17.5 million acres and are eligible for farm payment if planted to peanuts, corn, soybeans, wheat, or any other “covered crop” specified in the farm bill.10 Unlike PLC payments on peanut base acres, which are made regardless of which crop is planted, the PLC payment on generic base in any given year is proportional to a farm’s plantings of peanuts and other covered crops on the entire farm. More specifically, for each crop year, generic base acres are attributed to a particular covered commodity base (for potential payment) in proportion to that crop’s share of total plantings of all covered commodities on the farm in that year.11 Table 3 summarizes peanut base acres and total generic base for potential attribution to 9 Under the 2002 and 2008 farm bills, the trigger for Counter-Cyclical Price (CCP) payments was $459 per ton, which equaled the target price of $495 per ton minus the direct payment rate of $36 per ton. 10 Generic base acres were included in the 2014 farm bill to address a trade dispute involving Brazil and the U.S. cotton industry. As part of the cotton policy reform, the 2014 farm bill excluded upland cotton from PLC/ARC programs, thus leaving cotton base without any program. To bring cotton base under the new program, it was renamed “generic base” and opened up to any program crop. See CRS Report RL32571, Brazil’s WTO Case Against the U.S. Cotton Program. 11 If the total number of acres planted to all covered commodities on the entire farm does not exceed the generic base acres on the farm, only the amount of acreage actually planted to a covered commodity is attributed to that covered commodity for payment purposes. c11173008 Congressional Research Service 8 U.S. Peanut Program and Issues . peanuts (or any other planted covered commodity such as corn or soybeans) during the life of the 2014 farm bill. Planted peanut acreage for 2012-2015 is also shown. Table 3. Peanut Base, Generic Base, and Peanut Planted Area by State Peanut plantings State Peanut base Generic base 2013 2014 2015 Acres Georgia 753,328 1,456,949 430,000 600,000 800,000 Texas 401,032 7,204,323 120,000 130,000 135,000 Alabama 260,991 657,231 140,000 175,000 215,000 N. Carolina 157,643 866,638 82,000 94,000 82,000 Florida 152,206 105,308 140,000 175,000 180,000 Oklahoma 93,010 589,031 17,000 12,000 10,000 S. Carolina 78,770 347,713 81,000 112,000 115,000 Virginia 75,516 103,423 16,000 19,000 23,000 New Mexico 24,267 98,088 7,000 5,000 5,000 Mississippi 14,144 1,623,887 34,000 32,000 35,000 Subtotal 2,010,907 13,052,591 1,067,000 1,354,000 1,600,000 Arkansas 6,177 1,148,575 — — — Louisiana 1,288 995,813 — — — Tennessee 1,125 743,850 — — — Arizona 428 406,931 — — — Missouri 211 440,015 — — — Colorado 75 0 — — — Nebraska 34 8 — — — 0 795,128 — — — 17,582,911 1,067,000 1,354,000 1,600,000 Other states Total 2,020,243 Source: Base acres from USDA/Farm Service Agency (FSA); planted acreage from USDA/National Agricultural Statistics Service (NASS). Notes:—= not estimated by USDA/NASS. Some of the planted acreage in 2014 and 2015 will be considered “attributed” for payments on generic base acres. For a discussion on prospective planting incentives for generic base, see section below on “Implied Planting Incentives for Peanuts Under the 2014 Farm Bill.” An example of PLC payments on peanut base and generic base appears in Appendix C. Payment Limit and Adjusted Gross Income Limit For peanuts, the enacted 2014 farm bill sets a $125,000 per person cap on the total of PLC, ARC, marketing loan gains, and loan deficiency payments. A separate $125,000 limit applies to the total c11173008 Congressional Research Service 9 U.S. Peanut Program and Issues . from all other non-peanut covered commodities (for both, limits are doubled with a spouse). Peanut payments have a separate limit because producers have been successful in convincing Congress that a combined limit would interfere with the value of the safety net when the supply control policy was eliminated in 2002. Under a scenario of a maximum annual peanut PLC payment ($180 per ton = $535 - $355), the number of peanut base acres that would be needed for a farm to reach the payment limit is approximately 545 acres.12 As with other farm program crops, payment eligibility depends on a gross income limit and rules on “actively engaged.” To qualify for any commodity program benefits, recipients must pass an eligibility requirement based on adjusted gross income (AGI) used for federal taxes. The AGI limit is a single, total (farm and non-farm) AGI limit of $900,000 (using a three-year average). Also, to be eligible for payments, persons must be “actively engaged” in farming. Actively engaged, in general, is defined as making a significant contribution of (i) capital, equipment, or land, and (ii) personal labor or active personal management.13 Expanded Federal Crop Insurance Coverage in 2014 Farm Bill Federal crop insurance provides a separate safety net to protect against yield loss due to weather, if purchased by producers. The insurance guarantees are established just prior to planting, based on historical yields and expected market prices (not statutory prices used in farm programs). The insurance premiums are subsidized by USDA, and subsidy rates vary based on the type of policy and coverage selected. See CRS Report R40532, Federal Crop Insurance: Background. The 2014 farm bill mandated a peanut revenue insurance product for the 2015 crop year so farmers could choose between a traditional yield-based policy and one that protects against declines in revenue (yield times price). Revenue policies have been available for many other farm program crops for almost two decades, but developing one for peanuts has been problematic because its relatively small market is considered “thin” and futures market prices are not available for setting the price guarantee. After considerable study, USDA’s Risk Management Agency decided to base prices for the new revenue product on several factors, including the futures prices of cotton, wheat, soybean oil, and soybean meal, as well as the Brazilian price of peanuts, peanut stocks, and the FSA loan rate for peanuts.14 Implied Planting Incentives for Peanuts Under the 2014 Farm Bill As discussed above, farm program payments (PLC or ARC) are made on generic base acres in proportion to actual plantings of covered commodities (on entire farm) during each crop year (2014 through 2018). Depending on relative crop prices in the next several years, the potential PLC payment for peanuts on generic base acres could make peanuts an attractive planting option when comparing cost and returns for competing crops. Such a comparison can be done by first calculating an expected “minimum per-acre revenue” provided by the PLC program for peanuts, and then using this figure to calculate prices at which other crops must reach (“break even”) in order for farmers to have a similar price incentive to plant something other than peanuts. If crop 12 545 acres = $125,000/(0.85 x 1.5 tons per acre x $180 per ton). The 2014 farm bill instructed USDA to write regulations that define “significant contribution of active personal management” to more clearly and objectively implement existing law. The proposed rule was issued in March 2015, and the comment period ended May 26, 2015. Issuance of the final rule is pending. 14 For more information, see http://www.rma.usda.gov/help/faq/peanutrevenue.html. 13 c11173008 Congressional Research Service 10 U.S. Peanut Program and Issues . prices rise above the reference prices, no PLC payments would be made, and planting decisions would be market driven. In general, for peanuts during crop years 2014-2018, the expected minimum return is driven largely by the PLC reference price of $535 per ton and an individual farmer’s program payment yield. As detailed in the upper part of Table 4, after accounting for variable costs, the prospective net return acre for planting peanuts on generic base acres is $223 per acre. Higher or lower costs would alter the net return estimate, and fixed costs are excluded from the calculation because they must be paid regardless of which crop, if any, is planted. Table 4. Peanut Returns and Break-even Price Calculation for Competing Crops Returns to Planting on Generic Base Peanuts Return Minus Variable Cost Market Revenue Government Payment Total (Market + Gov.) Total Return – Variable Cost $355/ton x 1.5 tons /acre = $532.50/acre ($535/ton - $355/ton) = $180/ton x 1.5 tons/acre x 0.85 (base factor) = $229.50/acre $532.50 + $229.50 = $762/acre $762/acre - $539/acre = $223/acre Break-even price calculation using peanut return minus variable cost of $223/acre Step 1 Step 2 Step 3 Break-even Price for Competing Crops Start with peanut returns minus variable cost (above) Add variable cost of crop (Univ. of GA) Divide by estimated crop yield (Univ. of GA) Price below this level would favor planting peanuts Corn $223/acre $223/ac.+$313/ac. = $536 /ac. $536/ac. divided by 85 bushel/ac. =$6.31/bushel Soybeans $223/acre $223/ac.+$212/ac. = $435/ac. $435/ac. divided by 30 bushel/ac. =$14.50/bushel Cotton $223/acre $223/ac.+$423/ac. = $676/ac. $676/ac. divided by 750 lbs./ac. =$0.90/pound Source: CRS calculations using peanut program yield from USDA and variable costs and crop yields (corn, soybean, and cotton) from University of Georgia “2015 Peanut Update,” http://www.gapeanuts.com/growerinfo/ 2015_ugapeanutupdate.pdf. Notes: Costs of production and yields are for non-irrigated crops. PLC payments (paid on 85% of base acres) are made when the farm price is below the 2014 farm bill reference price ($535 per ton). The payment rate is the reference price minus the farm price (or loan rate, if higher). The calculation above assumes peanut farm price equals the loan rate ($355 per ton) and actual yield is the same as the program yield (1.5 tons/acre). When prices are below the loan rate, additional benefits accrue under the Marketing Loan Program (paid on actual production). If the peanut price is higher or if the actual yield is higher, then break-even prices would be higher than shown here. To determine potential planting incentives, the prospective peanut return of $223 per acre can be used to calculate break-even market prices for competing crops that would make farmers generally indifferent between planting peanuts or another crop. In coming years, if prices for other crops are below the calculated break-even prices, the potential PLC payment would generally encourage farmers to plant peanuts on generic base because they could expect to receive a higher return than if they planted other crops. Other factors, such as agronomic need for rotations or marketing constraints, could also affect producer decisions in ways that would moderate the effective price incentive. c11173008 Congressional Research Service 11 U.S. Peanut Program and Issues . Break-even prices for the primary crops that compete with peanuts are calculated in Table 4. They are $6.31 per bushel for corn, $14.50 per bushel for soybeans, and $0.90 cents per pound for cotton. Each of these calculated break-even prices is above the expected level for 2016, 2017, and 2018, as projected in 2015 by USDA, the Congressional Budget Office (CBO), and the Food and Agricultural Policy Research Institute (FAPRI).15 Thus, the economic incentive, as created by the 2014 farm bill, appears to be tilted toward planting peanuts on generic base for the foreseeable future, unless prices for competing crops rise to at least these break-even levels. In fact, projections by major forecasters show an increase in peanut area from average plantings of 1.28 million acres in 2011-2013. By 2018, CBO projects 1.545 million acres, FAPRI projects 1.43 million acres, and USDA projects 1.925 million acres. Farms with generic base acres are most likely to be influenced by the potential government payments. The largest impacts on planting decisions could be in states where the generic base is large relative to the total base (see Figure 4) because the planting mix determines the payment. At one extreme is a farm with 100% generic base, when acreage eligible for specific crop payments corresponds directly to the covered crops that are planted. At the other extreme, for a farm with no generic base acres, the farmer cannot “chase” a potential payment because the payment acres are predetermined and will not change regardless of what the farmer plants, namely the individual crop base acres (e.g., peanut, corn, soybeans, wheat). Figure 4. Shares of Total Base on Farms with Generic Base Peanut Base Other Crop Base Generic Base 100% 80% 60% 40% 20% 0% AL TX GA MS FL NC SC NM VA OK Source: CRS, using data from USDA’s Farm Service Agency. Notes: Other crop base includes primarily corn, soybeans, rice, and sorghum. As shown in Figure 4, the share of generic base is relatively high for several major peanut producing states, including Georgia, Alabama, and Texas. These states could see additional plantings of peanuts in future years if relative returns (including government payments) favor peanuts. 15 The projections are available at http://www.ers.usda.gov/media/1776036/oce151.pdf, https://www.cbo.gov/sites/ default/files/cbofiles/attachments/44202-2015-03-USDA.pdf, and http://www.fapri.missouri.edu/wp-content/uploads/ 2015/03/FAPRI-MU-Report-01-15.pdf. c11173008 Congressional Research Service 12 U.S. Peanut Program and Issues . Selected Policy Issues Generic Base Acres A market distortion might emerge when peanut prices are low. The domestic and trade policy concern with generic base is that farmers might pursue potential farm program payments by planting certain covered crops in low-price years. As detailed above, producers with generic base might have an economic incentive to plant more peanuts if the combination of expected payments and market returns is greater for peanuts than for alternative crops. In some cases, if producers expect a sizeable peanut PLC payment rate, farmers could plant their entire farm to peanuts (or peanuts and no other covered crop), and their PLC payments on generic base would be calculated using the payment rate for peanuts. Alternatively, if expected market returns and PLC payment rates do not favor peanuts, farmers could plant their entire farm to crops other than peanuts. An outcome between these extremes is expected to prevail if farmers maintain typical rotations, which are needed to maintain soil health and long-term yield potential for all crops. Nevertheless, high potential PLC payments on generic base could cause producers to “stretch” their rotations and benefit from additional peanut payments on generic base. USDA Program Administration and Potential Loan Forfeitures In a future oversupply situation, USDA could face challenges with the marketing loan program for peanuts. If supplies are large enough to depress prices indefinitely, but farm subsidies provide incentives to plant peanuts, a large amount of peanuts could go under loan. Once under loan, and if prices remain below the loan rate, farmers could repay the loan (pocketing the marketing loan gain difference between the loan rate and posted price), and sell the peanuts to interested buyers. However, producers who can’t find a buyer or fear that incurring a marketing loan gain (or loan deficiency payment) might cause them to surpass the payment limit of $125,000, could simply forfeit the collateral to USDA (via the Commodity Credit Corporation) and keep the original loan value. The CCC would then be responsible for handling and storage costs and the eventual marketing of the peanuts. For background on the marketing loan program, see Appendix A. In a severely depressed market, USDA might have difficulty finding a buyer without offering a deep discount, which would result in large net outlays for the government. The Department could wait for a price recovery but doing so would result in additional storage charges. Sufficient storage capacity might also be an issue if stocks increase substantially. In its current projection, USDA expects peanut prices to be near the loan rate in the next five years, resulting in annual storage and handling charges of between $8 million and $50 million. Prospective Government Outlays With ongoing congressional concern for budget deficits and federal spending, the cost of the peanut programs might garner the attention of policymakers who want to reduce federal spending in the 114th Congress. Using the most recent program and price data as of June 2015, USDA expects peanut costs of $360 million for crop year 2014, including nearly $350 million in PLC payments (payments for the 2014 crop are made in FY2016). In June 2015, the Food and c11173008 Congressional Research Service 13 U.S. Peanut Program and Issues . Agricultural Policy Research Institute (FAPRI) projected farm program outlays for peanuts at $424 million for the 2014 crop.16 Government payments for the 2015 crop will depend on how low the average peanut price is relative to the reference price. Based on the current price outlook for peanuts ($400 per ton or 20 cents per pound), a total peanut base of 2.0 million acres, and an average PLC payment yield of 1.5 tons per acre, total PLC payments on peanut base acres would equal $344 million for the 2015 crop or about $52,000 per farm using the number of peanut farms (6,561) in the 2012 Census of Agriculture.17 Additional PLC payments on generic base (attributed to peanuts) could drive total PLC payments to more than $550 million, according to USDA projections, and more than $800 million per year in 2016 and beyond. (Also, given the expected larger peanut crops and the ensuing low market prices, additional costs would be associated with the marketing loan program, including storage and handling costs.) FAPRI’s projections are somewhat lower, at $474 million for net government outlays associated with the 2015 crop. For 2016-2018 crop years, FAPRI projects peanut costs at or near $500 million per year. Market Development In the coming years, any increase in U.S. peanut plantings would enhance the need for the peanut industry to develop export markets to absorb additional peanut production. The American Peanut Council (APC) administers the U.S. peanut industry’s export market development program, receiving approximately $2 million per year in government funds under the Market Access Program (MAP).18 MAP aids in the creation, expansion, and maintenance of foreign markets for U.S. agricultural products.19 The program has been targeted for cuts by some Members of Congress, who maintain that it is a form of “corporate welfare,” or to help offset increased expenditures on other programs. Such efforts have been unsuccessful. For the domestic market, some in Congress have begun encouraging the U.S. Department of Agriculture to purchase more peanut butter for domestic food programs and for international food aid as a way to increase peanut usage.20 Future Peanut Policy The eventual response to current U.S. peanut policy by farmers has implications for future peanut supplies and prices. One possibility is expanded production; another is little or no change. In the first scenario, if producers plant more peanut acreage in response to potential payments on generic base acres, production could expand, which would likely lead to lower peanut prices and higher government outlays. Another implication is that the international community could take 16 Food and Agricultural Policy Research Institute (FAPRI), U.S. Crop Program Fiscal Costs: Revised Estimates with Updated Participation Information, June 2015, http://www.fapri.missouri.edu/wp-content/uploads/2015/06/ FAPRI_MU_Report_02-15.pdf. 17 PLC payments on peanut base = 0.85 times 2 million acres of base x $135 per ton x 1.5 tons per acre = $344 million. 18 U.S. Department of Agriculture, “USDA Helps Open and Expand Export Markets for U.S. Agriculture Through 2014 Farm Bill Programs,” press release, April 16, 2014, http://www.usda.gov/wps/portal/usda/usdamediafb? contentid=2014/04/0063.xml&printable=true&contentidonly=true. APC is the trade organization that represents all segments of the peanut industry. It operates a number of marketing, research, and other programs for the peanut industry. 19 CRS Report R43696, Agricultural Exports and 2014 Farm Bill Programs: Background and Issues. 20 “House Ag Members Quiz Vilsack on Wide Range of Issues,” The Hagstrom Report, February 11, 2015. c11173008 Congressional Research Service 14 U.S. Peanut Program and Issues . note if the generic base policy is considered trade distorting under World Trade Organization (WTO) rules. In the case of generic base and peanut production, it is possible that policy changes could lead to separate WTO-related concerns if peanuts (or any other covered crop) expands significantly due to program payment incentives rather than market incentives. In the second production scenario, namely little or no change in peanut production, peanut plantings could remain relatively level if farmers maintain typical crop rotations and farmers encounter relatively higher prices for competing crops. Other industry limitations could also come into play. The peanut processing and marketing industry is geared for about 1.5 million acres, which has been toward the upper end of annual plantings for the last 20 years. Without additional storage and processing capacity, as well as market development, the industry could be hard-pressed to deal with significantly larger acreage. Additional investments in capacity from the farm-level through processing and manufacturing would likely be based on long-term expectations. The current farm bill covers the crops through the 2018 season, or three more planting seasons beyond 2015. Given current farm policy, higher peanut production appears likely in the coming years unless weather problems or something unforeseen affects plantings or yields. Some policymakers could become concerned if the higher production scenario unfolds and government payments increase substantially. Others may have trade policy concerns because the “coupling” of payments with plantings can encourage plantings on generic base that may be contrary to market signals. In both cases, the level of the reference price is directly related to the level of potential payments and peanut farm revenue, as well as potential plantings on generic base acres. If Congress chooses to review U.S. peanut policy, one option would be to “buy out” the generic base acres with a one-time government payment to owners of base in exchange for discontinued eligibility for farm programs on those particular acres. This would sever the link between planting and farm payments. However, it could be expensive for the federal government, and farmers would no longer have risk protection on these particular acres as designed by policymakers. Another option would be to re-assess how payments are made on generic base acres or to reconsider the relative levels of reference prices by crop. Yet another option would be to make PLC/ARC payments on generic base acres that are proportional to a previous year (such as 2014 or 2015) rather than on the planting shares each year, which is currently the case. These and other options would need congressional action. c11173008 Congressional Research Service 15 U.S. Peanut Program and Issues . Appendix A. Marketing Assistance Loan Program The Marketing Assistance Loan (MAL) program provides a government loan to participating farmers of peanuts and other designated crops. The program provides interim financing for producers and protects them when prices decline because the government will take ownership of the loan collateral (peanuts) if prices drop below the loan rate ($355 per ton). A farmer must produce a crop to benefit from the program because the crop serves as loan collateral if the producer applies for a loan. These benefits are in addition to payments under Price Loss Coverage or Agricultural Risk Coverage (see “Farm Policy for Peanuts”). The MAL process begins after harvest, when farmers may request a marketing loan, which is offered by USDA at a loan rate established in statute ($355 per ton for peanuts, or 17.75 cents per pound). If farmers “take a loan” on their crop, they receive loan proceeds equal roughly to the quantity of peanuts placed under loan times the loan rate. Prior to loan maturity (9 months), a farmer may repay the loan principal and interest if the weekly national posted price for peanuts, which is an estimate of current farm price of peanuts as determined by USDA, is at or above the loan rate. In this case, the loan provides interim financing, allowing the farmer to receive cash as soon as the crop is harvested and avoid selling the crop during harvest when prices tend to be low. Besides interim financing, marketing assistance loans also serve as a financial backstop in extremely low price environments, with benefits accruing to the producer when the posted price is below the loan rate. In this case, farmers are allowed to repay the loan at the lower posted price, thus receiving a “marketing loan gain” from the government because farmers do not repay the loan in full. The marketing loan gain is equal to the difference between the loan rate and the weekly national posted price. Also, accrued interest is waived, but the producer pays storage and handling charges for the quantity of peanuts under loan. As an alternative to putting the crop “under loan” when prices are low, farmers may request a “loan deficiency payment (LDP),” with a payment rate equal to the difference between the loan rate and the posted price (same as marketing loan gain). Farmers then receive a payment without going through the loan process. Yet another option for loan repayment is “forfeiture.” Rather than repaying the loan with cash, farmers can choose to fulfill their loan obligation by forfeiting the crop pledged as collateral. This option can be attractive for producers if the posted price is below or even slightly above the loan rate because the government, by law, then pays for costs associated with storage, handling, and interest. For large producers, another key feature of the forfeiture option is that the “gain” associated with forfeiting the crop, unlike a gain from repaying the loan with cash (or receiving an LDP), does not count toward the payment limit of $125,000 per person. Producers decide which route to pursue (repay loan with cash or forfeit) depending on the expected value of each option, their need for loaned funds, and their likelihood of exceeding the payment limit.21 If a farmer chooses to forfeit the crop, USDA takes ownership of the crop. Storage costs continue to accrue to USDA until it sells the crop or use the peanuts for domestic nutrition programs. For most of the last decade, the farm price of peanuts has been above the loan rate, so annual marketing loan benefits have been either zero or limited. See Figure A-1 for a comparison of the weekly posted price and loan rate since the loan program became available for peanuts in 2002. During several periods, weak prices resulted in marketing assistance loan benefits, including $49 million for crop year 2002/03 and $31 million for crop year 2005/06. 21 For more information on the peanut MAL program, see 7 C.F.R. Part 1421 and the USDA fact sheet at http://www.fsa.usda.gov/Internet/FSA_File/mal_ldp_2014.pdf. c11173008 Congressional Research Service 16 U.S. Peanut Program and Issues . Figure A-1. Peanut Prices and Marketing Loan Rate Producers receive benefits when the weekly National Posted Price is below the Loan Rate $ per ton National Posted Price Loan Rate 1,400 1,200 1,000 800 600 400 200 0 08/28/02 08/28/06 08/28/10 08/28/14 Source: Data from USDA/Farm Service Agency. Notes: Data are for Runner-type peanuts, with an average loan rate during entire period (August 2002 - June 2015) of $355 per ton. When the program was “in the money” (weekly price falls below loan rate), the average benefit was: $22.11 per ton for 47 weeks of the 2002-03 crop year, $11.67 for three weeks in 2004-05, $17.77 per ton during the entire 2005-06 year, $13 per ton for six weeks in 2006-07, $22 per ton for two weeks in 2008-09, and $24 per ton for one week in 2013-2014. c11173008 Congressional Research Service 17 U.S. Peanut Program and Issues . Appendix B. Price Loss Coverage Calculation For an individual farmer, the potential PLC payment in 2015 could be approximately $172 per base acre using USDA’s August 2015 price forecast. This estimate is determined by multiplying the estimated payment rate of $135 per ton ($535 - $400) by an average yield of 1.5 tons per acre times the 85% base acre factor. Total returns would be approximately $772 per acre, which is the summation of the PLC payment of $172 per base acre and estimated market returns of $600 per acre (equal to USDA’s price forecast of $400 per ton times an average yield of 1.5 tons per acre, assuming actual yield happens to equal the payment yield). For 2015, an estimated total return of $772 per acre is above the expected variable cost of production in major peanut-producing regions. The 2015 variable cost of production for peanuts, as estimated by the University of Georgia, is $539 per acre for non-irrigated peanuts and $642 per acre for irrigated peanuts.22 Thus, the current outlook for peanut “net farm income” is very positive. Figure B-1 compares the peanut reference price, historical peanut prices, and the previous payment trigger. The levels of statutory prices (loan rates and reference prices) are determined during the political process of passing a farm bill. Figure B-1. Peanut Program Price Loss Coverage (PLC) Payment Trigger Payment Rate = Reference Price Minus National Farm Price (or Loan Rate, if higher) $ per ton 700 600 500 2014 Farm Bill Annual farm price Reference Price = $535 2002 and 2008 Farm Bill CCP trigger = $459 400 Loan Rate = $355 300 2006 example: Counter-cyclical payment (CCP) rate = $459 - $355 = $104 per ton 200 100 Forecast 2015 Price Loss Coverage (PLC) payment = $535 - $400 = = $135 per ton 0 2002 2006 2010 2014 2018 Source: CRS, using 2014 and 2015 price forecasts by USDA. Notes: Under the 2014 farm bill, the PLC payment rate is the Reference Price minus annual farm price (or loan rate if higher). An estimate for the 2014 PLC rate is $95 per ton ($535 - $440). Under the 2002 and 2008 farm bills, the trigger for Counter-Cyclical Price (CCP) payments was $459 per ton, which equaled the target price of $495 per ton minus the direct payment rate of $36 per ton. The loan rate is part of the formula because marketing loan benefits provide additional price protection when prices fall below the loan rate. 22 Nathan B. Smith and Amanda R. Smith, 2015 Peanut Outlook and Cost Analysis, University of Georgia Extension Peanut Team, 2015, http://www.gapeanuts.com/growerinfo/2015_ugapeanutupdate.pdf. c11173008 Congressional Research Service 18 U.S. Peanut Program and Issues . Appendix C. PLC Payments on Generic Base Table C-1. PLC Payment Calculation for a Hypothetical Farm with Peanut Base and Generic Base (Farmer selects Price Loss Coverage [PLC] for peanuts, with Generic Base attributed to peanuts and soybeans) Step 1. Step 2. Step 3. Step 4. Data Payment Formula Calculation Payment Price Loss Coverage (PLC) for peanuts: payment occurs when actual farm price ($400/ton) is below reference price ($535/ton) Reference Price = $535/ton 2015 Actual Price = $400/ton Peanut Base = 200 acres Soybean Base = 0 acres Farm Program Yield = 1.5 tons/acre of peanuts 2015 Total Plantings = 300 acres (250 acres of peanuts and 50 acres of soybeans) Note: payments on Peanut Base do not depend on same-year plantings. Payment = (Reference Price – Actual Price) x Base Acres x 85% acreage factor x Program Yield Peanut Payment = ($535/ton - $400/ton) x 200 acres x 85% x 1.5 ton/acre = $34,425 Peanut payment = $34,425 Generic Base = 100 acres (formerly Upland Cotton Base) Note: payments on Generic Base depend on same-year plantings of covered crops. For plantings on Generic Base: Payment = same formula as above but Generic Base acres are attributed to a particular covered commodity in proportion to actual plantings for that crop year. In this case, Generic Base (100 acres) are attributed to: peanuts = 250 / 300 x 100 acres = 83 acres soybeans = 50 / 300 x 100 acres = 17 acres Payment on Generic Base = ($535/ton - $400/ton) x 83 acres x 85% x 1.5 ton/acre = $14,286 No PLC payment for soybean plantings because soybean price is above the reference price (payment rate is zero) Payment on Generic Base = $14,286 Total farm payment = PLC for peanuts + PLC for Generic Base (planted/attributed to peanuts and soybeans) $48,711 Source: CRS, based on statutory provisions of P.L. 113-79, hypothetical data (acreage and yields), and USDA crop prices (2015 “actual” prices are forecast as of August 12, 2015). Notes: Statutory parameters include the reference price and the payment acreage factor (85%). For each crop year, generic base acres are attributed to (i.e., temporarily designated as) base acres to a particular covered commodity base in proportion to that covered crop’s share of total plantings of all covered commodities in that year. The loan rate is used in the payment calculation if it is higher than the actual price. c11173008 Congressional Research Service 19 U.S. Peanut Program and Issues . Author Contact Information Dennis A. Shields Specialist in Agricultural Policy dshields@crs.loc.gov, 7-9051 c11173008 Congressional Research Service 20 that helped to lift peanut production in recent years (Figure 2). Another phenomenon associated with the 2002 peanut quota buyout has been a substantial increase in market volatility as evidenced by the sharp up-and-down cycle of plantings and production since 2002.

Figure 2. U.S. Peanuts: Planted and Harvested Area, Yield, and Production

Source: National Agricultural Statistical Service, USDA, October 9, 2015.

A critical long-run factor influencing peanut output is the nature of demand for peanuts. In general, the demand for peanuts and peanut products (especially peanut butter) is fairly inelastic.3 This implies that even small changes in supply can result in large price movements.

Domestic food use has grown slowly but steadily over time. After averaging a 14% share of total use during the 2002 to 2011 period, U.S. peanut exports jumped sharply in 2012 and have over 20% of total use since. China entered the market that year as a buyer because their regular supplier (India) had encountered yield problems due to drought. Canada, the Netherlands, and Mexico are the top export markets and account for about half of U.S. exports. Argentine peanuts compete with U.S. peanuts in the European market.

High farm prices in 2011 encouraged U.S. producers to sharply increase plantings in 2012 (up 44% from 2010 plantings). A record U.S. peanut harvest in 2012—driven by both large plantings and record yields—resulted in record large domestic ending stocks despite record exports and strong domestic use (Figure 3). The 2012/13 marketing year ending stocks were also record large in terms of their relative size as a share of total use (54%). Large domestic supplies have contributed to a strong downward trend in U.S. farm prices for peanuts since 2012. In 2015/16 (August-July season), the average farm price of peanuts is expected to be in a range of 16.75 to 19.25 cents per pound (with a midpoint of 18 cents per lb) and ending stocks are projected at a new record high.4

Figure 3. Peanut Ending Stocks and Season-Average Farm Price

Source: ERS, USDA, Oil Crops Outlook, OCS-15k, November 13, 2015.

Notes: Farm prices are in current dollars. The peanut marketing year begins August 1.

U.S. Farm Policy and Peanuts

Current U.S. farm policy provides three income support programs for several major crops including peanuts.5 However, farm policy for peanuts has followed a different policy trajectory from the other program crops for most of the last century. From the 1930s until 2002, peanuts operated under a system of marketing quotas that rigidly controlled domestic supplies and prices.6 In 2002, Congress eliminated peanut quotas under a new farm bill (Farm Security and Rural Investment Act of 2002, P.L. 101-171, §1301-§1309) through a series of payments that offset the loss of quota rights—these payments are referred to as a "buyout."7

Since the 2002 buyout, farm policy for peanuts has followed essentially the same structure as for other "covered" program commodities.8 In addition to eligibility for major farm support programs, peanuts initially retained their long-standing eligibility for Commodity Credit Corporation (CCC) monthly storage payments (similar to the cotton storage payment program) when put under a 9-month nonrecourse marketing loan. However, eligibility for storage payments was terminated with the 2007 peanut crop.

The current farm commodity program provisions in Title I of the 2014 farm bill (Agricultural Act of 2014; P.L. 113-79) include three types of support for covered commodities for crop years 2014-2018:

  • Marketing Assistance Loan benefits, which offer interim (up to nine months) financing for loan commodities (covered crops plus several others) at statutory loan rates and, if prices fall below loan rates, additional low-price protection in the form of marketing loan gains or loan deficiency payments;
  • Price Loss Coverage (PLC) payments, which are triggered when the national season average farm price for a covered commodity is below its statutorily fixed "reference price"; and
  • Agriculture Risk Coverage (ARC) payments, as an alternative to PLC, which are triggered when annual crop revenue is below its guaranteed level based on a multiyear moving average of historical crop revenue.

Under the 2014 farm bill, farmers with base acres of covered commodities were given a one-time irrevocable choice between PLC and "county" ARC (based on a county guarantee) on a commodity-by-commodity basis for each farm. Alternatively, all covered crops on a farm can be enrolled in "individual" ARC, which is based on a farm-level guarantee. If no choice was made, the producer forfeited any payments for the 2014 crop year and the farm was enrolled automatically in PLC for the 2015-2018 crop years.

For peanuts, almost all producers (99.7%) selected PLC because they expected it to provide higher payments and greater risk protection than would be available under ARC. Similarly most rice producers (100% for long grain and 96% for medium grain) and large majorities of barley (75%), canola (97%), sorghum (66%), and minor oilseed producers (56% to 84%) also selected PLC. In contrast, a near-unanimous majority of corn (93%) and soybean (97%) producers, and a large majority of wheat producers (56%), selected ARC.

A Separate Program Payment Limit for Peanuts

Under current peanut program provisions, the primary advantage that peanuts have over other program crops is that peanut producers participating in government support programs have a separate program payment limit—a consequence of the peanut quota buyout (P.L. 107-171; §1603). As a result of this feature, a farmer that grows multiple program crops including peanuts has essentially two different program payment limits:

  • the first payment limit of $125,000 per person is for an aggregation of program payments made to all program crops other than peanuts;
  • the second payment limit of $125,000 per person is for program payments made exclusively to peanuts.

Thus, under an extreme scenario involving large payments for both peanuts and other program crops, this could potentially double a farmer's payment limits to as much as $250,000.

Marketing Assistance Loan Program

Peanuts and other designated crops are eligible for benefits under the Marketing Assistance Loan (MAL) program. MAL provides interim financing in the form of a government loan for up to nine months for participating producers following harvest of their crops.

A farmer must produce a crop to benefit from the program because the crop serves as loan collateral if the producer applies for a loan. The MAL process begins after harvest, when farmers may request a marketing loan, which is offered by USDA at a loan rate established in statute for pledged production (P.L. 107-171; §1202)—for peanuts the loan rate is $355 per ton or equivalently, 17.75 cents per pound. If a farmer puts their crop under a marketing loan, then they receive loan proceeds equal roughly to the quantity of peanuts placed under loan times the loan rate. Farmers then closely watch the relationship between market prices and the loan rate. In the case of peanuts, USDA estimates and announces a weekly national posted price to be used in determining the marketing loan repayment rate and other benefits. Prior to loan maturity, a farmer may repay the loan principal and interest if the posted price is at or above the loan rate. As a result, the loan provides interim financing, allowing the farmer to receive cash as soon as the crop is harvested and avoiding sale of the crop during harvest when prices tend to be at their seasonal low. The program essentially provides a price floor for producers because the government will take ownership of the loan collateral (i.e., the pledged crop) if prices drop below the statutory loan rate.

Special Marketing Loan Benefits

Defaults (or forfeitures) on marketing loans are not common because USDA provides the producer the opportunity to capture benefits even when the posted price is below the loan rate. In this case, farmers are allowed to repay the loan at the lower posted price, thus receiving a "marketing loan gain" (MLG) from the government because farmers do not repay the loan in full. The MLG is equal to the difference between the loan rate and the weekly national posted price. Also, accrued interest is waived, but the producer pays storage and handling charges for the quantity of peanuts under loan. As an alternative to putting the crop "under loan" when prices are low, farmers may request a "loan deficiency payment (LDP)," with a payment rate equal to the difference between the loan rate and the posted price (same as the MLG). Farmers then receive an LDP payment without going through the loan process.

For most of the last decade, the farm (and posted) price of peanuts has been above the loan rate, so annual marketing loan benefits have been either zero or minimal (Figure 4).

Figure 4. Peanut Prices and Marketing Loan Rate

Producers receive benefits when the weekly national posted price is below the loan rate

Source: Data from Farm Service Agency, USDA

Notes: Posted price data are for Runner-type peanuts, with an average loan rate during entire period (August 2002 - June 2015) of $355 per ton. During periods of weak market prices marketing assistance loan benefits have resulted, including $49 million for crop year 2002/03 and $31 million for crop year 2005/06.

Forfeiture of the Pledged Crop Forfeiture of the pledged crop in lieu of loan repayment is an option that is available for all marketing loan crops. Rather than repaying the loan with cash, farmers can fulfill their loan obligation by forfeiting the crop pledged as collateral. This option can be attractive for peanut producers if the posted price is below or even slightly above the loan rate because USDA, by law, then pays for costs associated with storage, handling, and interest. For large producers, another key feature of the forfeiture option is that the "gain" associated with forfeiting the crop, unlike a gain from repaying the loan with cash (or receiving an MLG or LDP), does not count toward the payment limit of $125,000 per person. Producers decide which route to pursue (repay loan with cash or forfeit) depending on the expected value of each option, their need for loaned funds, and their likelihood of exceeding the payment limit. If a farmer chooses to forfeit the crop, USDA takes ownership of the crop. Storage costs continue to accrue to USDA until it sells the crop or, in the case of peanuts, uses the CCC-owned peanuts for domestic nutrition programs. Price Loss Coverage (PLC) Payments on Peanut Base In addition to marketing assistance loan benefits, producers with base acres for any covered commodity (including peanuts) are eligible for a second (and higher) layer of income protection under the Price Loss Coverage (PLC) program. For peanuts, PLC payments are triggered when the annual farm price is below the statutory PLC reference price of $535 per short ton (i.e., 2,000 lbs) or equivalently, 26.75 cents per pound, as established under the 2014 farm bill (Figure 5).9

Figure 5. Peanut Income-Support Program Price Triggers Since 2002

Payment rate = Reference price minus national farm price (or loan rate, if higher)

Source: Farm price data are from ERS, USDA, Oil Crops Outlook, OCS-15k, November 13; farm program parameters are from respective farm bills—2002, 2008, and 2014.

Notes: Under the 2014 farm bill, the PLC payment rate is the reference price of $535 per ton minus the annual farm price (or loan rate if higher). Under the 2002 and 2008 farm bills, the trigger for counter-cyclical price (CCP) payments was $459 per ton, which equaled the target price of $495 per ton minus the direct payment rate of $36 per ton. The loan rate is part of the formula because marketing loan benefits provide additional price protection when prices fall below the loan rate.

PLC and ARC payments are made after October 1 following the end of the marketing year.10 As a result, government payments arrive more than a year after the crop is harvested. For example, the payment associated with the 2014 peanut crop (planted in spring 2014 and harvested in summer 2014) will be made after October 1, 2015.11 (In contrast, marketing loan benefits are available immediately upon harvest for crop years 2014-2018.)

For individual farms, payments are calculated using the national PLC payment rate and individual farm information on historical program yield and acres. The PLC payment formula is the PLC payment rate times historical farm program yield times 85% of historical peanut base acres.

  • The national PLC payment rate is equal to the PLC reference price minus the higher of the season-average farm price or the marketing loan rate.
  • With respect to farm program yields, during program signup in early 2015, producers were given the choice of keeping the same farm-level program yield used for calculating the farm's counter-cyclical payments under the 2008 farm bill (generally based on 1998-2001 yields or earlier) or updating the farm program yield according to the formula of 90% of the 2008-2012 average yield per planted acre for the farm.
  • Peanut base represents historical peanut planting on each farm and totals 2 million acres nationwide.12 As with program yields, the 2014 farm bill provided farmers with a one-time opportunity to update individual crop base acres by reallocating acreage within their previous base to match their actual crop mix (plantings) during 2009-2012.

A new feature of the 2014 farm bill income support programs is that, unlike income support programs from previous farm bills, payments under PLC and ARC are made on base acres, not current plantings. This feature—decoupling payments from current plantings—is intended to better comply with World Trade Organization (WTO) commitments on domestic support and to minimize any influence on producer behavior and subsequent market distortion. The payments are considered "partially decoupled" because the payment amount remains connected to current market prices. An exception to the decoupling is payments associated with generic base acres, whereby current plantings can affect payment acreage.

PLC Payments for Peanuts Planted on "Generic" Base

PLC payments can also be made on "generic base acres." Generic base acres are the renamed cotton base acres from the 2008 farm bill. Under the 2014 farm bill, cotton is no longer a covered commodity and thus no longer eligible for PLC or ARC payments. Instead, the former cotton base, now "generic base," is added to a producer's total base for potential payments, but only if a covered crop is planted on the generic base.13 In other words, PLC payments on generic base acres are fully coupled to actual plantings (although payments remain subject to the 85% factor applied to eligible acres).

Unlike PLC payments on peanut base acres, which are made regardless of which crop is planted, the PLC payment on generic base in any given year is proportional to a farm's plantings of peanuts and other covered crops on the entire farm. More specifically, for each crop year, generic base acres are attributed to a particular covered commodity base (for potential payment) in proportion to that crop's share of total plantings of all covered commodities on the farm in that year.14 The coupled nature of PLC payments on generic base is an important new program feature because of the large number of generic base acres available under the 2014 farm bill—17.5 million acres.15 Substantial coupled plantings could potentially occur to the extent that this land remains under cultivation (as discussed below in "Relative Planting Incentives Under Farm Programs"). It is likely that many of the former cotton base acres are no longer used for annual crops—similarly, the original decoupling under the 1996 farm bill resulted in base acres in many places returning to pasture or fallow, but still remaining eligible for assistance).

Expanded Federal Crop Insurance Coverage in 2014 Farm Bill

Federal crop insurance is available for about 130 crops, including peanuts. Traditionally, a yield-based federal crop insurance policy was available for peanut producers to protect against yield loss due to weather, if purchased by producers. The insurance guarantees are established just prior to planting, based on historical yields and expected market prices (not statutory prices used in farm programs). The insurance premiums are subsidized by USDA, and subsidy rates vary based on the type of policy and coverage selected.16

The 2014 farm bill mandated a peanut revenue insurance product for the 2015 crop year so farmers could choose between a traditional yield-based policy and one that protects against declines in revenue (yield times price). Revenue policies have been available for many other farm program crops for almost two decades, but developing one for peanuts has been problematic because its relatively small market is considered "thin" and futures market prices are not available for setting the price guarantee. After considerable study, USDA's Risk Management Agency decided to base prices for the new revenue product on several factors, including the futures prices of cotton, wheat, soybean oil, and soybean meal, as well as the Brazilian price of peanuts, peanut stocks, and the FSA loan rate for peanuts.17

The rapid adoption of the new revenue insurance policy by peanut producers suggests that there was a strong demand for this product. For the 2015 crop, peanut producers purchased a total of 23,434 federal crop insurance policies covering nearly 1.5 million acres. Of this total, 44% of the policies and 68% of the covered acres were enrolled in revenue insurance.18 Under the 2015 peanut policies, $9.6 million was paid out in indemnities including $7.1 million under revenue policies.

Adjusted Gross Income Limit

As with other farm program crops, payment eligibility depends on a gross income limit and rules on being "actively engaged." To qualify for any commodity program benefits, recipients must pass an eligibility requirement based on adjusted gross income (AGI) used for federal taxes. The AGI limit is a single, total (farm and non-farm) AGI limit of $900,000 (using a three-year average). Also, to be eligible for payments, persons must be "actively engaged" in farming. Actively engaged, in general, is defined as making a significant contribution of (i) capital, equipment, or land, and (ii) personal labor or active personal management.19

Relative Planting Incentives Under Farm Programs

Crop planting choices in general, and on base acres in particular, are based on relative net returns among competing crops, plus rotational considerations. Farm program payments do not figure in the determination because they are decoupled from planting decisions. In contrast, crop choices on generic base acres must consider both relative net returns as well as potential proceeds from government programs (i.e., both ARC and PLC) because of their coupling to crop plantings.

Market conditions vary widely based on relative crop prices, yield prospects (both irrigated and non-irrigated), and production costs. A preliminary assessment of potential market conditions for 2016 using a combination of data from USDA and the University of Georgia suggests peanuts could be a very competitive option for producers behind soybeans on irrigated acres and wheat on non-irrigated acres when comparing cost and returns for competing crops (Table 3). Table 3. Comparison of Net Returns for Peanuts and Competing Crops, 2015/16

Crop

 

Prices Projections

Expected Yield

Expected Revenue

Variable Cost (VC)

Net Returns Above VC

Irrigated Crops

             

Cotton

 

$0.59

$/lb.

1,200

lbs./acre

$708

$524

$184

Soybeans

 

$8.90

$/bu.

60

bu./acre

$534

$294

$240

Peanuts

 

$0.18

$/lb.

4,700

lbs./acre

$846

$653

$193

Corn

 

$3.65

$/bu.

200

bu./acre

$730

$662

$68

Wheat

 

$5.00

$/bu.

75

bu./acre

$375

$323

$52

Sorghum

 

$3.60

$/bu.

100

bu./acre

$360

$349

$11
   

         

 

 

Non-irrigated Crops

 

     

   

Peanuts

 

$0.18

$/lb.

3400

lbs./acre

$612

$550

$62

Cotton

 

$0.59

$/lb.

750

lbs./acre

$443

$423

$20

Wheat

 

$5.00

$/bu.

55

bu./acre

$275

$199

$76

Soybeans

 

$8.90

$/bu.

30

bu./acre

$267

$212

$55

Corn

 

$3.65

$/bu.

85

bu./acre

$310

$313

-$3

Sorghum

 

$3.60

$/bu.

65

bu./acre

$234

$223

$11
Source: Calculations are by CRS. Prices are from USDA, WASDE, November 9, 2015, and ERS, USDA, Oil Crops Outlook, OCS-15k, November 13, 2015; yield and variable costs of production data are from University of Georgia, College of Agricultural and Environmental Sciences, Extension, Cost Enterprise Budgets, January 2015, http://www.agecon.uga.edu/extension/budgets/cct/index.html.

Notes: The calculations above are illustrative only. They combine 2015 pre-planting yield and costs estimates from Georgia—the leading U.S. peanut-producing state, with USDA post-harvest price estimates. Individual farm agronomics including irrigation availability and rotational considerations related to cropping patterns, soil types, plant disease and insect infestations, etc. are also important factors in crop selection, but are not included here.

It is important to note that Table 3 excludes fixed costs and thus does not attempt to predict actual profitability across crops. In the short run, crop choices can be made by comparing returns above variable costs; however, to ensure economic viability in the long run, producers must also cover fixed costs, which are not considered in this table. This consideration is particularly valid for peanuts, where equipment lines are unique to the crop and represent significant up-front costs. Also, the variable cost estimates used in Table 3 represent the estimate for a single point in time and are subject to changing market conditions for a host of farm inputs including fuel, fertilizer, pesticides, labor, and land. A similar preliminary outlook for 2016 PLC and ARC payments for major covered commodities—using a combination of data from USDA and the Food and Agricultural Policy Research Institute (FAPRI)—suggests that peanuts may be an attractive planting option on generic base acres relative to most other competing crops (Table 4). Peanut program payments under PLC (the program choice of over 99% of peanut base owners) are projected at $270 per acre. However, most corn and soybean base owners chose the ARC program. Under the ARC scenario presented in Table 5, corn and soybeans are projected to receive ARC payments of $33 and $43 per acre, respectively. Table 4. Comparison of Potential PLC Program Payments for Peanuts and Competing Crops, 2016 Projections

Crop

Prices

 

National Average Program Yield

National Average Payment Rate

($ Per Acre)a   PLCb SAFPc Per-Unit Payment Rated

Unit

   

Peanuts

$535.00

$392.20

$142.80

$/ton

1.897

tons/acre

$270.85

Peanuts

$0.2675

$0.1961

$0.0714

$/lb.

3,793.4

lbs./acre

$270.85

Corn

$3.70

$3.71

$0.00

$/bu.

132.0

bu.acre

$0.00

Sorghum

$3.95

$3.73

$0.22

$/bu.

67.6

bu.acre

$14.87

Soybeans

$8.40

$9.15

$0.00

$/bu.

37.4

bu.acre

$0.00

Wheat

$5.50

$5.05

$0.45

$/bu.

45.3

bu.acre

$20.39

Source: CRS calculations using national average program yields (FSA, USDA) and expected national season-average farm prices (SAFPs) for 2016/17 from FAPRI, Baseline Update for U.S. Agricultural Markets, FAPRI‐MU Report #03‐15, August 2015.

Notes: This table is illustrative only. Program yields used here are the national average for both irrigated and non-irrigated crops. The calculation above assumes that the farm program yield is the same as the national average program yield. In practice, each individual farm has its own specific program yield for each program crop (differentiated by irrigated versus non-irrigated) based on its historical data. PLC payments (paid on 85% of base acres) are made when the SAFP for a crop is below its 2014 farm bill reference price. At this early stage, projections for the 2016 SAFP are speculative and subject to substantial variation with changing prospects in domestic and international markets.

a. The per-acre payment rate equals the per-unit payment rate times the program yield. It is applied to 85% of an eligible producer's base acres for the respective program crop. b. The statutory PLC reference price. c. The FAPRI August 2015 projection of national season average farm-prices received for 2016/17. d. The payment rate is the PLC reference price minus the SAFP (or loan rate, if higher). If the SAFP exceeds the reference price, then no payment is available. If the SAFP is below the marketing loan rate, additional benefits accrue under the MLP (but paid on actual production). Table 5. Comparison of Potential ARC Program Payments for Peanuts and Competing Crops, 2016 Projections  

Prices

Yield

Revenue ($/acre)

 

Crop

ARC MAa SAFPb

Unit

ARC MAa US AVGc

Unit

ARC Guaranteea US AVGd ARC Payment Rate ($/acre)d

Peanuts

513.33

392.20

$/ton

2.0

1.9

st./ac.

$870.16

$750.47

$101.18

Peanuts

0.257

0.196

$/lb.

3,942

3,827

lb./ac.

$870.16

$270.85

$101.18

Corn

4.79

3.71

$/bu.

158.2

166.8

bu./ac.

$652.09

$618.83

$33.26

Sorghum

4.77

3.73

$/bu.

60.6

64.0

bu./ac.

$248.35

$238.27

$9.63

Soybeans

11.87

9.15

$/bu.

44.5

44.9

bu./ac.

$454.19

$410.84

$43.36

Wheat

6.70

5.05

$/bu.

44.5

45.9

bu./ac.

$256.63

$231.80

$24.84

Source: CRS calculations using national average farm prices and yields (NASS, USDA) and expected national season-average farm prices (SAFPs) for 2016/17 from FAPRI, Baseline Update for U.S. Agricultural Markets, FAPRI‐MU Report #03‐15, August 2015.

Notes: This table is illustrative only. Yields used here are national averages. The calculation above assumes that county-level yields are the same as the national average yield. In practice, each county will have its own specific program yield for each program crop based on its historical data. ARC payments (paid on 85% of base acres) are made when the county-level revenue for a crop is below the calculated product of the 5-year Olympic moving averages for national prices and county yields. At this early stage, projections for 2016 prices and yields are speculative and subject to substantial variation with changing prospects in domestic and international markets. Peanuts are added to this table purely to facilitate comparisons with other crops. Less than 1% of peanut base owners chose to participate in the ARC program.

a. ARC moving averages (ARC MA) are calculated using the Olympic average (i.e., throw out the high and low years) of the preceding five years. The ARC guarantee equals 86% of the ARC benchmark revenue for each commodity as determined by the product of the ARC MAs for national prices and county yields. b. The FAPRI August 2015 projection of national season average farm-prices received for 2016/17. c. The U.S. average (US AVG) is a FAPRI August 2015 projection for 2016/17. d. The payment rate is the ARC Guarantee minus the actual county revenue. If the actual county revenue exceeds the ARC Guarantee, then no payment is available. When potential PLC and ARC program payments (Table 4 and Table 5) are combined with potential market returns (Table 3), peanuts appear to have an advantage over other program crops in competing for generic base acres. This competitive edge will vary across producing zones with yield and cost conditions, as well as changes in relative prices.

In an extreme case, if a producer with generic base acres expected a sizeable peanut PLC payment rate relative to other program crops, their entire farm could be planted to peanuts (or peanuts and no other covered crop), and their PLC payments on generic base would be calculated using exclusively the payment rate for peanuts. Alternatively, if expected market returns and PLC payment rates do not favor peanuts, farmers with generic base acres could plant their entire farm to crops other than peanuts. An outcome between these two extremes is expected to prevail if farmers maintain typical rotations, which are needed to maintain soil health and long-term yield potential for all crops. Nevertheless, high potential PLC payments on generic base could cause producers to "stretch" their rotations and benefit from additional peanut payments on generic base.

Farm policy economists have noted that peanuts (and rice) have a statutory reference price that is set disproportionately above historical market prices, particularly when compared to the reference prices for other major program crops.20 Since the peanut quota buyout in 2002, monthly peanut farm prices have been below their respective reference price 87% of the time, and below the marketing loan rate 18% of the time.21 This compares with monthly corn farm prices (56% of the time below the reference price and 5% of the time below the marketing loan rate); soybeans (39% and 4%), wheat (22% and 4%), sorghum (59% and 12%), and barley (65% and 0%). Rice has comparable "in-the-money" percentages with the announced Adjusted World Price (AWP) for rice with 90% of monthly farm prices falling below the reference price, and 32% below the marketing loan rate. Some contend that this potential advantage favors peanut production (relative to other program crops) on generic base acres. However, the extent to which this scenario might play out is unclear, and both agronomic and market circumstances suggest that it might be limited.

The outlook for average farm prices across major program crops is likely to be a key determinant of both farm program payments and crop planting choices on generic base. This is because the size of the farm program payments increases in proportion to the decline in farm price below the reference price and loan rate. The largest impacts on planting decisions could be in states where the generic base is large relative to the total base (Figure 6) because the planting mix determines the payment. At one extreme is a farm with 100% generic base, when acreage eligible for specific crop payments corresponds directly to the covered crops that are planted. At the other extreme, for a farm with no generic base acres, the payment acres are predetermined and will not change regardless of what the farmer plants—namely covered crops to the individual crop base acres.

Figure 6. Shares of Total Base on Farms with Generic Base

Source: CRS, using data from USDA's Farm Service Agency.

Notes: Other crop base includes primarily corn, soybeans, rice, and sorghum.

The share of generic base is more than 50% for several peanut-producing states, including Alabama, Texas, and Georgia (Figure 6 and Table 6). These states could see additional plantings of peanuts in future years if relative returns (including government payments) favor peanuts. Table 6 summarizes peanut base acres and total generic base under the 2014 farm bill. Planted peanut acreage for major producer states for 2012-2015 is also shown. Table 6. Peanut Base, Generic Base, and Peanut Planted Area by State        

Peanut plantings

State

Peanut base

Generic base

 

2012

2013

2014

2015

               

Georgia

753,328

1,456,949
 

735,000

430,000

600,000

790,000

Texas

401,032

7,204,323
 

150,000

120,000

130,000

165,000

Alabama

260,991

657,231
 

220,000

140,000

175,000

200,000

N. Carolina

157,643

866,638
 

107,000

82,000

94,000

90,000

Florida

152,206

105,308
 

210,000

140,000

175,000

185,000

Oklahoma

93,010

589,031
 

24,000

17,000

12,000

10,000

S. Carolina

78,770

347,713
 

110,000

81,000

112,000

113,000

Virginia

75,516

103,423
 

20,000

16,000

19,000

19,000

New Mexico

24,267

98,088
 

10,000

7,000

4,500

5,000

Mississippi

14,144

1,623,887
 

52,000

34,000

32,000

43,000

Subtotal

2,010,907

13,052,591
 

1,638,000

1,067,000

1,353,500

1,620,000
   

 

         

Arkansas

6,177

1,148,575
 

NA

NA

NA

NA

Louisiana

1,288

995,813
 

NA

NA

NA

NA

Tennessee

1,125

743,850
 

NA

NA

NA

NA

Arizona

428

406,931
 

NA

NA

NA

NA

Missouri

211

440,015
 

NA

NA

NA

NA

Colorado

75

0
 

NA

NA

NA

NA

Nebraska

34

8
 

NA

NA

NA

NA

Other states

0

795,128
 

NA

NA

NA

NA

   

 

         

Total

2,020,243

17,582,911
 

1,638,000

1,067,000

1,353,500

1,620,000

Source: Base acres: Farm Service Agency (FSA), USDA; planted acreage: NASS, USDA, October 9, 2015.

Notes: NA = not estimated by NASS, USDA.

Selected Policy Issues Generic Base Acres

The domestic and trade policy concern is that farm program payments made to plantings on generic base are fully coupled to production and thus potentially market distorting. As a result, program payments made to generic base would likely count toward the U.S. amber box limit of $19.1 billion. Furthermore, if such payments are substantial and can be linked to a surge in exports, they could potentially be vulnerable to challenge by another WTO member.22

Potential Marketing Loan Forfeitures

As mentioned earlier, large peanut producers who have pledged their peanut crops as collateral for nine-month USDA marketing loans could confront a payment limit issue leading to forfeiture of their crop to USDA. This situation could result if incurring marketing loan benefits (i.e., marketing loan gains or loan deficiency payments) would cause them to surpass the payment limit of $125,000. In such a situation, a producer could simply forfeit the collateral peanuts to USDA (via the Commodity Credit Corporation) and keep the original loan value. The CCC would then be responsible for handling and storage costs and the eventual marketing of the peanuts.

USDA, in its November 2015 crop forecast, projected U.S. peanut ending stocks for the 2015/16 crop year to be record large at 2.87 billion pounds or 52.3% of total use.23 If such an oversupply situation continues into the future, USDA could face challenges with the marketing loan program for peanuts. If supplies are large enough to depress prices for successive years, but farm subsidies (via generic base) provide incentives to plant peanuts, a large amount of peanuts could go under loan and forfeitures could accumulate. In a severely depressed market, USDA might have difficulty finding a buyer without offering a deep discount, which would result in large net outlays for the government. USDA could wait for a price recovery, but doing so would result in additional storage charges. Sufficient storage capacity might also be an issue if stocks increase substantially.

Prospective Government Farm Program Outlays Following the 2002 buyout of the peanut quota program, federal peanut income support payments (excluding storage payments and the buyout) have averaged $192 million per year. Additionally, peanut storage payments averaged $79 million per year from 1996 to 2007 (the last year of eligibility), and $0 since their elimination in 2007 (Figure 7).

With ongoing congressional concern for budget deficits and federal spending, the cost of the peanut programs might garner the attention of policymakers who want to reduce federal spending. In April 2014, two months after the 2014 farm bill was signed into law, the Congressional Budget Office (CBO) projected CCC program outlays for peanuts of $84 million for FY2016 and an annual average of $71 million for the five-year 2014 farm bill period (FY2014-FY2018). As new information on market conditions as well as producer participation and program outlays for FY2014 and FY2015 have become available, projections of potential outlays have been revised upward. In February 2015 USDA projected peanut program costs of $379 million for FY2016.24 In June 2015, FAPRI projected farm program outlays for peanuts of $431 million for FY2016 and an annual average of $337 million for the five-year 2014 farm bill period (FY2014-FY2018).25 Finally, in August 2015, the CBO projected CCC program outlays for peanuts at $232 million for FY2016, and at an annual average of $198 million the five-year 2014 farm bill period.26 As a point of reference, the annual market value of U.S. peanut production has traditionally been in the range of $1.1 billion to $1.4 billion, depending on crop size.27

Figure 7. USDA CCC Net Outlays for Peanuts

Fiscal years 1996 to 2016 estimated; 2017-2018 projected

Source: Farm Service Agency (FSA), USDA, "Table 35—CCC Net Outlays by Commodity & Function, Fiscal Years 2007-2016E," CCC Budget Essentials, February 2015; and CBO, "August 2015 Baseline for Farm Programs," August 26, 2015.

Notes: FY2003 costs include the CCC buyout of peanut quotas. CBO projections do not include storage and handling costs of CCC-owned peanuts. 2016 is a USDA forecast; 2017 and 2018 are CBO projections.

Government payments for the 2016 crop will depend on how low the average peanut price is relative to the reference price. USDA will make its first forecast of 2016 farm prices in May 2016. The current 2015 outlook for peanut farm prices of $360 per ton (or 18 cents per pound) implies a PLC payment rate of $175 per ton. When combined with a total peanut base of 2 million acres and an average PLC payment yield of 1.5 tons per acre, total PLC payments on 85% of peanut base acres would be $446 million for the 2015 crop or about $68,000 per farm using the number of peanut farms (6,561) in the 2012 Census of Agriculture.28 Additional PLC payments on generic base (attributed to peanuts) could push total PLC payments substantially higher in 2016 and beyond. Under expectations for larger peanut crops and the ensuing low market prices, additional costs would be associated with the marketing loan program, including storage and handling costs.29

Market Development

The American Peanut Council (APC) administers the U.S. peanut industry's export market development program, receiving approximately $2 million per year in government funds under the Market Access Program (MAP).30 MAP aids in the creation, expansion, and maintenance of foreign markets for U.S. agricultural products.31 MAP funding has been targeted for reductions by some Members of Congress, who maintain that it is a form of "corporate welfare," or to help offset increased expenditures on other programs. Such efforts have been unsuccessful.

For the domestic market, some in Congress have begun encouraging USDA to purchase more peanut butter for domestic food programs and for international food aid as a way to increase peanut usage.32

Arguments For and Against the Peanut Support Program

The arguments for and against the peanut support programs are the same as those for U.S. farm programs in general. Proponents argue that an income safety net is needed to help producers deal with the substantial price volatility associated with commodity markets. They say a marketing assistance loan program is needed to provide greater marketing options for producers who are at a distinct market-power disadvantage when dealing with a small number of powerful buyers. And in peanut's particular case, proponents argue that farm program support is needed to help offset the substantial market volatility that has emerged since the elimination of the peanut quota system.

In contrast, critics argue that market signals are sufficient to allocate resources within the sector, and that subsidies distort resources away from more efficient uses. Some critics argue that farm subsidies actually keep small, inefficient operators in business and that, in the absence of subsidies, the inefficient operators would not be competitive and the land would be maintained and operated by more efficient, technologically savvy operators who would get better yields and returns from the same acreage. Others argue further that funds allocated to farm support would have greater returns if spent in other sectors.

Author Contact Information

[author name scrubbed], Specialist in Agricultural Policy ([email address scrubbed], [phone number scrubbed])

Acknowledgments

This report was originally written by Dennis Shields, who left CRS in August 2015.

Footnotes

1.

USDA, Production, Supply, and Demand (PSD) database, November 9, 2015.

2.

The average total acreage of all crops on farms growing peanuts was 2,500 acres in 2013, according to USDA's Agricultural Resource Management Survey. See http://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Ag_Resource_Management/ARMS_2014_Peanuts_Highlights.pdf.

3.

Inelastic demand means the percentage change in quantity demanded of a product following a change in its price is less than the percentage change in price.

4.

Economic Research Service (ERS), USDA, Oil Crops Outlook, OCS-15k, Table 8, November 13, 2015.

5.

For details on current farm income support programs, see CRS Report R43448, Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113-79).

6.

For historical peanut policy, see W. C. McArthur, V. N. Grise, H. O. Doty, Jr., and D. Hacklander, U.S. Peanut Industry, AER 493, ERS, USDA, November 1982.

7.

For more on the policy shift, see CRS Report RL30924, Peanut Program: Evolution from Supply Management to Market Orientation, and E. Dohlman, L. Foreman, and M. Da Pra, The Post-Buyout Experience: Peanut and Tobacco Sectors Adapt to Policy Reform, IEB 80, ERS, USDA, November 2009.

8.

Major program crops, referred to as "covered commodities" include wheat, oats, and barley (including wheat, oats, and barley used for haying and grazing); corn, grain sorghum, long grain rice, medium grain rice, and pulse crops (dry peas, lentils, small chickpeas, and large chickpeas); soybeans, other oilseeds (including sunflower seed, rapeseed, canola, safflower, flaxseed, mustard seed, crambe, and sesame seed), and peanuts.

9. See Table 4 for a comparison of PLC reference prices for selected program crops. 10.

Only PLC is described in this report because it covers 99.7% of eligible peanut acreage. For an explanation of ARC, see CRS Report R43758, Farm Safety Net Programs: Background and Issues.

11.

The 2014 peanut crop marketing season is August 2014 to July 2015.

12. Table 6 shows program base for peanuts and the other major program crops. Base acres are the historical planted acreage on each FSA farm, using a multi-year average from as far back as the 1980s. Base acre provisions since 1981 are described in C. E. Young, D. W. Skully, P. C. Westcott, and L. Hoffman, Economic Analysis of Base Acre and Payment Yield Designations Under the 2002 U.S. Farm Act, ERS, USDA, September 2005, pp. 36-41. 13.

Generic base acres were included in the 2014 farm bill to address a trade dispute involving Brazil and the U.S. cotton industry. As part of the cotton policy reform, the 2014 farm bill excluded upland cotton from PLC/ARC programs, thus leaving cotton base without any program. To bring cotton base under the new program, it was renamed "generic base" and opened up to any program crop. See CRS Report RL32571, Brazil's WTO Case Against the U.S. Cotton Program.

14.

If the total number of acres planted to all covered commodities on the entire farm does not exceed the generic base acres on the farm, only the amount of acreage actually planted to a covered commodity is attributed to that covered commodity for payment purposes.

15. Table 6 summarizes peanut base acres and total generic base under the 2014 farm bill. 16.

See CRS Report R40532, Federal Crop Insurance: Background.

17.

For more information, see http://www.rma.usda.gov/help/faq/peanutrevenue.html.

18.

Federal Crop Insurance Corporation (FCIC), Nationwide Summary of Business—By Commodity, as of November 16, 2015, http://www.rma.usda.gov.

19.

The 2014 farm bill instructed USDA to write regulations that define "significant contribution of active personal management" to more clearly and objectively implement existing law. The proposed rule was issued in March 2015, and the comment period ended May 26, 2015. Issuance of the final rule is pending.

20.

D. Orden and C. Zulauf, "The Political Economy of the 2014 Farm Bill," invited paper, AAEA session The 2014 Farm Bill: An Economic Post Mortem, ASSA Annual Meetings, January 4, 2015, Boston, MA.

21.

Calculations are by CRS using monthly farm price data from the National Agricultural Statistical Service, USDA, from January 2002 through September 2015.

22.

When the effects of domestic subsidies—such as expanded production and exports—spill over into international markets and can be shown to induce price suppression or altered trade patterns, then those subsidy programs may be subject to challenge under WTO dispute settlement proceedings. See CRS Report RS22522, Potential Challenges to U.S. Farm Subsidies in the WTO: A Brief Overview.

23.

ERS, USDA, Oil Crops Outlook, OCS-15k, November 13, 2015.

24.

Farm Service Agency (FSA), USDA, "Table 35—CCC Net Outlays by Commodity & Function, Fiscal Years 2007-2016E," CCC Budget Essentials, February 2015. USDA's analysis for the President's FY2016 budget includes projections of peanut PLC outlays that rise to $679 million in FY2017 and continue to grow to $799 million in FY2025. In addition, USDA projects substantial peanut storage and handling costs (related to marketing loan forfeitures) that rise from a projected $31.2 million in FY2017 to $85.3 million in FY2025; available at: http://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/AboutFSA/Budget/pdf/pb16_commodity_estimates.pdf.

25.

FAPRI, U.S. Crop Program Fiscal Costs: Revised Estimates with Updated Participation Information, June 2015.

26.

Congressional Budget Office (CBO), "August 2015 Baseline for Farm Programs," August 26, 2015.

27.

An exception occurred in 2012 when record production combined with high prices to push crop value to $2 billion.

28.

PLC payments on peanut base = 0.85 times 2 million acres of base x $135 per ton x 1.5 tons per acre = $344 million.

29.

Both CBO and FAPRI project annual peanut production of 5 to 6 billion pounds over their extended forecast periods: CBO, "August 2015 Baseline for Farm Programs," August 26, 2015; and FAPRI, U.S. Crop Program Fiscal Costs: Revised Estimates with Updated Participation Information, June 2015.

30.

U.S. Department of Agriculture, "USDA Helps Open and Expand Export Markets for U.S. Agriculture Through 2014 Farm Bill Programs," press release, April 16, 2014, http://www.usda.gov/wps/portal/usda/usdamediafb?contentid=2014/04/0063.xml&printable=true&contentidonly=true. APC is the trade organization that represents all segments of the peanut industry. It operates a number of marketing, research, and other programs for the peanut industry.

31.

CRS Report R43696, Agricultural Exports and 2014 Farm Bill Programs: Background and Issues.

32.

"House Ag Members Quiz Vilsack on Wide Range of Issues," Hagstrom Report, February 11, 2015.