Contents

• Introduction
• Peanut Industry Basics
• Production Areas
• Peanut Varieties and Uses
• Industry Structure
• Production and Market Trends
• U.S. Farm Policy and Peanuts
• A Separate Program Payment Limit for Peanuts
• Marketing Assistance Loan Program
• Special Marketing Loan Benefits
• Forfeiture of the Pledged Crop
• Price Loss Coverage (PLC) Payments on Peanut Base
• PLC Payments for Peanuts Planted on "Generic" Base
• Expanded Federal Crop Insurance Coverage in 2014 Farm Bill
• Adjusted Gross Income Limit
• Relative Planting Incentives Under Farm Programs
• Selected Policy Issues
• Generic Base Acres
• Potential Marketing Loan Forfeitures
• Prospective Government Farm Program Outlays
• Market Development
• Arguments For and Against the Peanut Support Program

Summary

According to the U.S. Department of Agriculture (USDA), the United States is expected to be the fourth -largest producer and third-largest exporter of peanuts in the world in 20152016. 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.

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USDA estimates of peanut program outlays for FY2015 were modest at $74 million. However, most analysts expect substantial peanut program outlays in the future under both the PLC program and the marketing assistance loan program, as well as from storage and handling costs associated with peanut loan forfeitures. In February 2016, USDA projected annual average peanut program costs at $800 million for FY2016-FY2019. However, record U.S. peanut exports during the 2015/16 crop year, coupled with record domestic usage, have substantially reduced domestic peanut stocks and have likely dampened the outlook for program costs in FY2016. Going forward (FY2017-FY2019), outlays will depend on producer behavior and market conditions. As a point of reference, the annual market value of U.S. peanut production over the past 30 years has been primarily in the range of $0.8 billion to $1.2 billion.

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 third-largest exporter of peanuts in the world in 20152016.¹ 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 providesuses the most current public information available (as of September 2016) to provide 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 hasand Florida each have 12%. Most neighboring states account for single-digit shares.

2010-2014)

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).²

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.

Industry Structure

Peanuts were grown on 6,561 farms in the United States in 2012, according to the 2012 Census of Agriculture, with an average farm size of 247 harvested peanut acres per farm (Table 2). Similar to output for other commodities, peanut production is primarily through larger farms that typically have lower per-unit costs of production. Peanut farms with at least 250 acres account for one-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.²3 The farm value of peanut production was $1.12 billion in 20142015.

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 arranging for marketing assistance loans provided by the U.S. Department of Agriculture (USDA)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.

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 peanut industry's structure and pricing practices (contracting), little public price and other market information is available to USDA.

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 the policy change in 2002 from a quota system, which tended to lock acreage in place, to traditional commodity support programs (see "U.S. Farm Policy and Peanuts"). The policy change 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 a long-term uptrend in peanut yields 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.

Crop Production, September 12, 2016. Some policy watchers are concerned that a new set of government policies established under the 2014 farm bill (discussed in the next section of this report) have artificially reversed the downward trend in peanut planted acreage as seen by higher plantings in 2015 and 2016.

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.³4 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 averagingIn contrast, the international marketplace has grown in importance in recent years. U.S. peanut exports averaged a 14% share of total use during the 2002 to 2011 period, U.S. peanut exports but jumped sharply in 2012 and have over 20averaged 23% of total use since. China entered the market that year as a buyer because their (Figure 3). Canada, the Netherlands, and Mexico are the traditional top export markets and account for about half of U.S. exports. However, it was China—which entered the market in 2012 as a buyer because its regular supplier (India) had encountered yield problems due to drought—that was behind the surge in U.S. peanut exports. In 2015/16, China again entered the U.S. market to purchase peanuts, causing U.S. exports to jump 43% from the previous year to a record 1,544 million tons.⁵

Figure 3. U.S. Peanut Use Since 1990

Source: ERS, USDA, Oil Crops Outlook, OCS-16l, September 2016.

Note: The peanut marketing year begins August 1.

This export surge was combined with a 28% jump in domestic peanut use to a record 5.1 million pounds, partly due to government purchases of 37.5 million pounds of processed peanut products (for distribution through domestic feeding channels) in FY2015 and another 39.1 million pounds in FY2016.⁶ This surge in total demand (+31%) contributed to an estimated 15% drop in U.S. ending stocks (Figure 4), thus avoiding early-year expectations for large producer forfeitures under the marketing assistance loan program. In 2015/16 (August-July season), the average farm price of peanuts is expected to be 19.3 cents per pound—well above early-year predictions as low as 17 cents per pound.⁷

Figure 4. Peanut Ending-Stocks-to-Use Ratio 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, farm16l, September 2016. The 2016 peanut farm price is projected by the Food and Agricultural Policy Research Institute based on February 2016 market conditions.

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

The unexpected jump in 2015/16 demand is in contrast to the trend that has evolved since 2012. High farm prices in 2011 encouraged U.S. producers to sharply increase plantings in 2012 (up 44% from the previous year). 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. The 2012/13 marketing year ending stocks were also record large in terms of their relative size as a share of total use (54%). The large domestic peanut supply has contributed to a strong downward trend in U.S. farm prices for peanuts since 2012 and helps to explain the pessimistic outlook for government program outlays under the new farm revenue programs of the 2014 farm bill as expressed by USDA and CBO in their February 2016 long-run outlooks.⁸

U.S. Farm Policy and Peanuts 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.⁶9 In 2002, Congress eliminated peanut quotas under a new farm bill (Farm Security and Rural Investment Act of 2002, P.L. 101107-171, §1301-§1309) through a series of payments that offset the loss of quota rights—these payments are referred to as a "buyout."⁷10

Since the 2002 buyout, farm policy for peanuts has followed essentially the same structure as for other "covered" program commodities.⁸11 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 9nine-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:

• ¹²Marketing 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, or forfeiture;
• 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 cancould 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(c)). 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 45).

Figure 45. Peanut Prices and Marketing Loan Rate Producers receive benefits when the weekly national posted price is below the loan rate

Source: Data from USDA, 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-September 2016) 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 56).⁹13

Figure 56. 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; farm16l, September 2016. Farm program parameters are from respective farm bills—2002, 2008, and 2014. The 2016 peanut farm price is projected by the Food and Agricultural Policy Research Institute based on February 2016 market conditions. 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.¹⁰14 As a result, government payments arrive more than a year after the crop is harvested. For example, the paymentany payments associated with the 2014 peanut crop (planted in spring 2014 and harvested in summer 2014) willwould be made after October 1, 2015.¹¹15 (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.¹²16 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.¹³17 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.¹⁴18 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.¹⁵19 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.¹⁶20

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 FSAUSDA loan rate for peanuts.¹⁷

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The rapidRapid 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 23,434419 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, $9.622 In 2015, $96.2 million was paid out in indemnities, including $7.177.3 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.¹⁹23

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 onon both irrigated and non-irrigated acres when comparing cost and returns for competing crops (Table 3).

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 Furthermore, it is unclear how market conditions may evolve in 2017 and, thus, whether future prices will be near current levels. The outlook for 2016 PLC and ARC payments for major covered commodities—using USDA data from September 2016—suggests that peanuts are 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.

290 per acre. This compares with $86/acre for wheat, $66/acre for corn, and $60/acre for sorghum.

When potential PLC and ARC program payments (Table 4 and Table 5) are combined with potential market returns (Table 3), peanuts appear to have ana strong 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.²⁰24 Since the peanut quota buyout in 2002, monthly peanut farm prices have been below their respective reference price 8788% of the time, and below the marketing loan rate 1817% of the time.²¹25 This compares with monthly corn farm prices (5658% of the time below the reference price and 5% of the time below the marketing loan rate); soybeans (39% and 4%), wheat (2255% and 4%), sorghum (59% and 1211%), and barley (6561% and 0%). Rice has comparable "in-the-money" percentages with 91% of the monthlythe announced Adjusted World Price (AWP) for rice with 90% of monthly farm prices falling below the reference price, and 3229% 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 67) 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 67. 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, Georgia, Mississippi, and Floridaand Georgia (Figure 67 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. PlantedIn addition, annual planted peanut acreage for major producer states for 2012-2015 is also shownis shown for each of 2012 through 2016.

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.²²26

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 peanuts27 However, record large U.S. exports and domestic use caused USDA to substantially lower the estimate for 2015/16 peanut ending stocks to 1.79 billion pounds, or 27.1% of total use.²⁸ This revised outlook significantly reduced both the likelihood of any forfeitures and the expected level of peanut-related program outlays in 2015/16. However, the prospects for large peanut plantings—relative to recent years—remains in place heading into 2017 as farm subsidies (via generic base) provide significant incentives to plant peanuts. If future U.S. peanut supplies are large enough to depress prices for successive years, 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 (excludingincluding storage payments and the buyout) have averaged $192averaged over $300 million per year. Additionally, through 2007. This includes peanut storage payments averagedof $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 (Figure 8). From 2008 through 2015, federal peanut program outlays have averaged about $90 million. However, recent long-term budget projections suggest that federal peanut program outlays could become much larger in the future. In February 2016, USDA projected peanut program costs of $503.6 million in FY2016, $870 million in FY2017, and at least $910 million through FY2025.²⁹ This included substantial peanut storage and handling costs (related to marketing loan forfeitures) that were projected to rise from $31.2 million in FY2017 to $52 million in FY2021. More recently, in August 2016, CBO projected CCC program outlays for peanuts at $413 million for FY2016, and averaging $548 million through the remainder of the 2014 farm bill period.³⁰ However, CBO projections do not include costs associated with loan forfeiture but are limited to PLC, ARC, and marketing assistance loan benefits. 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

31 Future government payments for U.S. peanut programs will depend on how market conditions evolve and how the average farm price for peanuts compares to the PLC reference price.

Figure 78. USDA CCC Net Outlays for Peanuts Fiscal years 1996 to 2016 estimated; 2017-20182019 projected

Source: Farm Service Agency (FSA), USDAFSA, "Table 35—CCC Net Outlays by Commodity & Function, Fiscal Years 2007-2016E," CCC Budget Essentials, February 2015; and CBO, "August 20152016; FSA, "Commodity Estimates Book, FY2017 President's Budget, CCC," February 9, 2016; and CBO, "August 2016 Baseline for Farm Programs," August 26, 201525, 2016. 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

Data for 2016 through 2019 are CBO projections. 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).³⁰32 MAP aids in the creation, expansion, and maintenance of foreign markets for U.S. agricultural products.³¹33 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

34 In FY2015, USDA purchased 37.5 million pounds of processed peanut products (for distribution through domestic feeding channels) and another 39.1 million pounds in FY2016.³⁵

Arguments For and Against the Peanut Support Program

The argumentsArguments 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

Acknowledgments

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

Footnotes

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.

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

13. FSA, "Commodity Estimates Book, FY2017 President's Budget, Commodity Credit Corporation," CCC Budget Essentials, February 9, 2016. USDA's analysis for the President's FY2017 budget,http://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/AboutFSA/Budget/pdf/pb16_commodity_estimatespb17_commodity_estimates.pdf. 31.pdf.

33.

1.	USDA, Production, Supply, and Demand (PSD) database, November 9, 2015September 12, 2016.
2.	USDA's National Agricultural Statistics Service (NASS) does not break out irrigated and non-irrigated peanut acreage in its annual survey of planted acreage, as reported in Acreage. Instead, this breakout is reported in the quinqennial Census of Agriculture—most recently 2012.	3.
34.	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, 5.	USDA, Foreign Agricultural Service (FAS), Oilseeds: World Markets and Trade, September 2016.
6.	USDA, Agricultural Marketing Service (AMS), AMS Purchases by Commodity FY10-FY16 YTD, Thru Week Ending 9-16-16; https://www.ams.usda.gov/sites/default/files/media/AMS%20Purchases%20by%20Commodity%20FY10-FY16%20YTD.pdf.
7.
58.	For details on current farm income support programs, see CRS Report R43448, Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113-79).
6ERS, USDA Agricultural Projections to 2025, http://www.ers.usda.gov/publications/oce-usda-agricultural-projections/oce-2016-1.aspx; and Congressional Budget Office (CBO), U.S. Mandatory Farm Programs, CBO's March 2016 Baseline for Farm Programs, https://www.cbo.gov/sites/default/files/51317-2016-03-USDA.pdf. 9.	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.
710.	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.
811.	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.
912.	For details on current farm income support programs, see CRS Report R43448, Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113-79).	See Table 4 for a comparison of PLC reference prices for selected program crops.
1014.	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.
1115.	The 2014 peanut crop marketing season is August 2014 to July 2015.
1216.	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.
1317.	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.
1418.	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.
1519.	Table 6 summarizes peanut base acres and total generic base under the 2014 farm bill.
1620.	See CRS Report R40532, Federal Crop Insurance: Background.
1721.	For more information, see http://www.rma.usda.gov/help/faq/peanutrevenue.html.
1822.	Federal Crop Insurance Corporation (FCIC), , "Nationwide Summary of Business—By Commodity," as of November 16, 2015September 19, 2016, http://www.rma.usda.gov.
1923.	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 pendingfinal rule was published on December 16, 2015: 80 Federal Register. 241, pp. 778119-78130.
2024.	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.
2125.	Calculations are by CRS using monthly farm price data from the National Agricultural Statistical Service, USDA, from January 2002 through September 2015July 2016.
2226.	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.
2327.	ERS, USDA, Oil Crops Outlook, OCS-15k, November 13, 2015.
2428.	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:See earlier discussion in the section entitled "Production and Market Trends".	29.
30.	CBO, "August 2016 Baseline for Farm Programs," August 25, 2016.
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.
2832.	APC is the trade organization that represents all segments of the peanut industry. FAS, "Market Access Program (MAP), funding allocations data available at: http://www.fas.usda.gov/programs/market-access-program-map.	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 Current Issues.
3234.	"House Ag Members Quiz Vilsack on Wide Range of Issues," Hagstrom Report, February 11, 2015.
35.	USDA, Agricultural Marketing Service, AMS Purchases by Commodity FY10-FY16 YTD, Thru Week Ending 9-16-16; https://www.ams.usda.gov/sites/default/files/media/AMS%20Purchases%20by%20Commodity%20FY10-FY16%20YTD.pdf.