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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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