Key Changes
The 2002 Farm Act substantially revamped the peanut program.
Under previous legislation, the peanut program was a two-tier
price support program based on nonrecourse
loans. Production for domestic edible consumption was
limited to an annually established quota designed to uphold
prices at the $610-per-ton quota loan rate. Nonquota (additional)
peanut production was permitted only for export or domestic
crush and was eligible for an "additional" loan
rate of $132 per ton (in 2001). Under the 2002 Farm Act, the marketing quota system
is eliminated and peanuts are treated similarly to "program"
crops, such as grains and cotton—with identical marketing
loan provisions available to all peanut producers. Farmers
no longer have to own or rent peanut marketing quota rights
to produce for domestic edible consumption. Compensation (a
buy-out) is provided to quota holders for elimination of the
peanut quota system. All farmers with a history of peanut
production during 1998-2001, whether quota holders or not,
are eligible for fixed direct payments and counter-cyclical
payments based on an established target price.
Summary of Provisions
A marketing assistance loan program is available for peanut
producers—with or without a history of peanut production—for
any quantity of peanuts produced on the farm. The peanut
loan rate is fixed at $355 per ton. Producers can pledge
their stored peanuts as collateral for up to 9 months and
then repay the loan at a rate that is the lesser of 1) $355
per ton plus interest or 2) a USDA-determined repayment
rate designed to minimize loan forfeiture, government-owned
stocks, and storage costs. Alternatively, the producer may
forgo the marketing loan and opt for a loan deficiency payment
(LDP) at a payment rate equal to the difference between
the loan rate and the loan repayment rate.
For producers with a history of peanut production, a direct
payment of $36 per ton of eligible base-period (1998-2001)
production is available. Eligible production would equal the
product of average or assigned base-period yields (with the
option of substituting average 1990-97 county yields for up
to 3 of the base years) and 85 percent of base-period acres
(payment acres) planted to peanuts (with provisions for prevented
plantings). These payments are made regardless of current
prices or the actual crop planted, so long as the farm remains
in approved agricultural
uses.
Producers with base acreage are also eligible to receive
a counter-cyclical payment (CCP) when market prices are
below an established target price of $495 per ton minus
the $36 per ton direct payment. These payments are not related
to current production, so long as the farm remains in approved
agricultural uses. The payment rate is the difference between
the target price and the "effective price," calculated
as follows:
Payment rate = (target price) - (direct payment rate)
- (higher of peanut market price or loan rate)
The total counter-cyclical payment to each eligible producer
equals the product of the payment acres (85 percent of base
acres), the program payment yield, and the specified payment
rate:
CCP = 0.85 x (base acres) x (payment yield) x (payment
rate).
Owners of peanut quota under prior legislation will receive
a quota buy-out as compensation for the loss of quota asset
value. Payments may be made in five annual installments of
$0.11 per pound ($220 per short ton) during fiscal years 2002-06,
or the quota owner may opt to take the outstanding payment
due in a lump sum. Buy-out payments are based on the quota
owner's 2001 quota, regardless of temporary leases or transfers
of quota, so long as the person owned a farm eligible for
the peanut quota. Continued eligibility for compensatory payments
remains with the established quota owner regardless of future
interest in the farm or whether the person continues to produce
peanuts.
Economic Implications
Production incentives created by the new programs will vary
among different types of producers. Broadly speaking, those
producers who primarily produced quota peanuts (those marketed
for domestic edible consumption) will likely face lower prices
for their peanuts, but they will receive quota buy-out, direct,
and (depending on market prices) counter-cyclical payments.
Production incentives for these producers will now be guided
by the higher of market prices or the new $355 per ton loan
rate, rather than by the old $610 per ton quota loan rate.
Producers whose variable costs of peanut production exceed
market prices plus any marketing loan benefits would be expected
to switch to other crops or idle the land.
A second broad group of producers would be those who were
previously growing additional peanuts. These producers were
likely receiving an export or domestic crush price higher
than the additional loan rate and probably will be able to
cover their variable production costs. To the extent that
domestic market prices or the new peanut loan rate exceeds
prices they received under the previous system, these producers
would likely to increase production. Revenues for these producers
would also be augmented by direct payments and potential (depending
on market prices) CCPs, since they also have a production
history. Similarly, producers who previously rented quota
rights from quota-holders may maintain some peanut production,
if market prices or the peanut loan rate exceed their variable
costs (which would no longer include a rental fee for the
right to sell quota peanuts).
A third group would be new producers with no history of peanut
production. The new legislation may result in these producers
switching to peanuts if they perceive market prices plus marketing
assistance loan benefits as resulting in higher net returns
compared with other crops. Some of these producers may also
receive direct and (depending on market prices) counter-cyclical
payments on other crops for which they have established base
acreage.
As with other program crops, direct support payments and
counter-cyclical payments to peanut producers are contingent
on historical acreage but not on current production, while
marketing loan provisions are linked to current production.
Analysis of marketing loans for other crops indicates that
the program can create incentives to maintain production at
a level higher than would occur in the absence of the program,
and that relative loan rates between crops can be an important
determinant of cropping patterns when prices are below loan
rates. Decoupled (direct) payments create minimal incentives
to increase production. (See U.S.
Farm Program Benefits: Links to Planting Decisions and Agricultural
Markets.)
The basis for the distribution of CCP benefits may affect
producers' expectations of how future benefits will be dispersed.
Payments that are linked to past production may lead to expectations
that benefits in the future will be linked to now-current
production. Such expectations can thereby affect current production
decisions. Since CCPs are based on current market prices,
producers may view the payments as an income hedge when electing
to produce peanuts.
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