High peanut prices mean more acres, but margins are key
Rodney Dawson is nuts for peanuts. And why not—the industry has come rolling back after surviving a major foodborne illness scare in 2009. The Hawkinsville, Ga., farmer realized gross profits more than $1,000 per acre in 2011. He’s so satisfied, he plans to commit an additional 15% of his acreage to the crop in 2012.
Peanut butter might be a staple on every shelf, but growing the raw ingredient is often a high-risk proposition. The equipment littering Dawson’s farmyard is one clue that something different is growing here. Blue Amadas-brand combines, a vine lifter and a contraption called a digger/shaker/inverter line up next to peanut carts and rotary disks that look more like construction tools.
According to 2011 University of Georgia Enterprise Budgets, total machinery costs for peanuts average more than $265 an acre. That’s 25% of total irrigated costs of production and 35% of non-irrigated costs.
But peanut profits are healthy right now, thanks to strong con-sumer demand for the low-cost
protein source and a shortage of product due to extreme drought in the South, explains Marshall Lamb of the National Peanut Research Laboratory.
Higher cotton prices also have factored into fewer acres. In Georgia, area planted to peanuts is the lowest since 1982, and planted acres in Texas are the lowest since 1926. Planted area continues to decrease in the Virginia–North Carolina region as growers have switched to more profitable crops such as corn, soybeans and cotton.
Dawson currently farms 7,200 acres of cotton and 950 acres of peanuts—substantial acreage by Georgia standards, which produces 45% of all U.S. peanuts. His plan is to plant at least 1,000 of his cotton acres to peanuts this year. Georgia farmers received an average 29¢ per pound of peanuts in December, which is 23% higher than the same time in 2010, according to USDA.
For those with a decent crop and a handle on managing fixed costs, such as equipment, profits look strong for 2012. Prices are better than they were in 2011 going into spring, notes Nathan Smith, a farm economist with the University of Georgia. There’s a lower supply, so more acres are needed, he says. Early contracts for 2012 peanuts are going between $650 and $750 per ton, still good prices. The question is whether farmers should hold out for even higher prices and plant without a securing a contract first.
Dawson took this risk last year and saw his contract jump $500 or more per ton. "It was the second year in history I didn’t take a contract before planting, and I made a great marketing decision that really paid off," he says.
Conventional wisdom is that the industry might have learned to come with contracts to farmers earlier, says Don Koehler, executive director of the Georgia Peanut Commission. "The big question is, what kind of contracts will they come with? It has been my observation that the first price has never been the best price offered," Koehler notes.
Peanut production has always been high risk/reward, but never as much as it is today with risk of drought. Southern weather forecasters are predicting this spring will be warmer and drier than normal, and ponds and lakes are low, making them hard to draw on for irrigation.
This past summer’s long, hot drought pummeled farmers, but Dawson put all of his peanut production under irrigation and plans to do the same this year. "We started adding irrigation 30 years ago," he says. In the ’80s, irrigation cost between $700 and $900 per acre. Today, it costs between $1,400 and $2,500 per acre.
"It’s a big expense, but it’s really paid off in the long run," says Dawson, who, with his two brothers, is the fourth generation to farm the land. His grandfather started here with 100 acres, and they now have nine employees. "It would have been hard to grow like we have without irrigation," he adds. "We could not farm dryland with any success given the way the weather patterns have changed over time."
If the region doesn’t get a recharge for irrigation, another dry year could be a disaster. So Dawson also has been paying attention to market types of peanuts and working to keep his margins tight. There are different kinds of market peanuts, but the most popular are runners and Virginia and Spanish peanuts. The market needs runners now, which mostly go into peanut butter.
"Runners are all I will grow," Dawson says. He’s also incorporating more strip tillage, which cuts down on labor and disturbs the land less. He’s invested in newer technology in all of his equipment, including guidance systems on his tractors to make him more accurate with peanut planting and harvest.
After harvest, peanuts are dried and cured to allow for storage until shelling throughout the year. Farmers place their wagons under a cover with warm air blowing through until peanuts reach a moisture of 10% or less. Dawson has built his own dryer system, which allows him to back in 30 wagons and dry peanuts in less time than a commercial dryer, at a lower cost.
No Middle Man. Known as an innovator in his area, Dawson was one of the first farmers to invest in and own a peanut buying point and warehouse in order to increase the quality of the crop and capture a higher price for his peanuts. With rising fuel prices, it would have cost him about as much to truck peanuts to a buying point farther away as it did to purchase equipment and start his own buying point locally.
"It was an easy decision," he says. "Now I don’t have to wait in line at a buying point during harvest to dump peanuts. I can schedule labor and plan for trucking logistics based on my harvest schedule. I keep 30 wagons going at a time."
Owning a buying point comes with the burden of regulators eyeing you at all times. The 2002 farm bill established a Peanut Standards Board, and one of its many provisions requires that all peanuts
marketed in the U.S. be officially inspected and graded at buying stations by federal inspectors or
federally licensed state inspectors. Regulators have become stricter after the Food and Drug Administration found a Lynchburg, Va.–based peanut manufacturer, the Peanut Corporation of America, allowing salmonella-contaminated peanut butter products into the food supply in 2009.
"The salmonella outbreak hurt our industry, but it also made us all step up a bit and do things better," Dawson says. "We now all work hard to communicate to consumers that our product is safe."
High prices have been a good lift for the peanut industry, but many farmers worry about the long-term future of this high-risk crop. Southern crops of peanuts, cotton, corn and soybeans all have contracts, but, unlike cotton and corn, peanuts do not have a futures market to help with hedging contract risk. Therefore, if production is not there, you have no place to go to fix the situation, Koehler notes.
Even more worrisome to Dawson is that there are fewer and fewer young peanut growers; even his own son is not sure he wants to farm. Dawson serves on the Southern Peanut Growers board as well as the Georgia Peanut Commission. He says the future of his own farm is representative of many growers’.
"We have been blessed with some good years and were able to expand and grow, but the sad thing is we don’t have anyone in the next generation coming along behind to take over the farm," Dawson says. "It’s just so expensive to get in this business; equipment is $200,000 to $500,000. A guy told me the other day that he could build a Huddle House restaurant for less than a tractor costs. Add the high cost to high risk, and it’s a tough sell."
At this point, all Dawson knows is that 2012 is going to be an interesting year, especially if cotton prices hold. He’s managing margins and risk so that if his son comes back, there will be a profitable business and legacy to pass on.
How High Can Peanuts Go?
How high can it go? Southern farmers who have been asking this question about cotton prices and corn this past year are now asking the same thing about peanuts. The USDA Weekly National Posted Prices (NPP) for Peanuts reached a record high of more than $1,000 per ton last year
compared to $450 per ton in October 2010.
Unlike other commodities, there is no futures market for peanuts because there’s not a large enough volume of trade, and pricing can be an inexact science. The Farm Service Agency determines the NPP that the Commodity Credit Corporation uses to set the repayment rate for loan peanuts. When the NPP falls below the national loan rate of $355 per ton, the NPP becomes the repayment rate.
It’s not an actual price. The actual formula is a "black box," meaning the formula is not made available to the public.
Keep in mind that just because the NPP is rising, it doesn’t mean growers can get a contract for that higher amount. Contracting is a tight-lipped business and depends on relationships with buyers and buying houses.