Peanuts: A Thin Market With a Government-Set Price Floor

Peanuts have never had an active cash or derivative market. Farm bill changes in the early 2000s eliminated traditional price supports and altered the way growers are paid; farmers now contract with one of a handful of major domestic shellers to market their product.

Two shellers account for about 70 percent of all peanut handling. Shellers contract with peanut growers, typically for a 1-year term, and pay the USDA repayment loan rate of $355 per ton plus a premium. The premium, however, varies substantially from year to year, based on inventory carryover, expected production, and expected harvest-time price of competing crops that growers may also choose to plant, such as corn, soybeans, and cotton. Given these options, shellers must tailor the premium to attract enough quality growers, ensuring a stable supply of peanuts to downstream buyers.

Thus, even though peanut shelling is a highly concentrated industry, farmers have the advantage of a price floor established by the loan rate, and their ability to plant other crops gives them a degree of bargaining power in the price-setting process.

From an efficiency standpoint, however, the existence of a known price floor (and supplemental Government “price loss” payments if national prices drop below a statutorily-set reference price), even for noncontracted peanuts, can encourage periodic excess plantings and surplus supplies, delayed contracting, and, ultimately, a breakdown in the longrun relationship between growers and processors. Since the marketing assistance loan rate was introduced to peanuts beginning with the 2002 Farm Act, the average peanut price received by farmers has approached the Government-set price floor several times but never meaningfully dropped below it.

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From: Thinning Markets in U.S. Agriculture, by Michael Adjemian, B. Brorsen, William Hahn, Tina L. Saitone, and Richard J. Sexton, USDA, Economic Research Service, March 2016


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