U.S. Peanut Markets Adjust to Policy Reform

With the recent (2002) elimination of the longstanding "marketing quota" system that supported domestic peanut prices at well above world levels, the U.S. peanut sector is in the initial stages of adjusting to a more uncertain, market-oriented environment. At the aggregate level, some early indications are that the adjustment process for U.S. peanut farmers has been difficult, resulting in deep losses of revenue and a rapid exit from peanut production by some producers. In 2003, the value of U.S. peanut production was down 30 percent and prices fell by nearly 25 percent compared with 2001. U.S. peanut planted acreage is at its lowest since 1915, and planted acreage has declined sharply in several important peanut producing States-55 percent in Virginia and nearly 40 percent in Texas since 2001. Peanut production is concentrated geographically, with a relatively small subset of counties in just 7 States accounting for the bulk of output. As a result, changes to the peanut program have potentially important economic implications not just for the individual farm households that produce peanuts, but perhaps for some rural communities as well. At the same time, it appears that adjustment difficulties for many current (and historical) producers may be mitigated by a number of factors, including: (1) an already diversified farm enterprise structure, with peanut (harvested) acreage accounting for an average of only 20 percent of peanut farmers' overall cropland, and a substantial share-72 percent of total household income already coming from off farm sources; (2) lower production costs for some producers stemming from policy-induced reductions in factor or input costs (e.g. land rental rates, seed prices); and (3) government revenue support and asset-loss compensation for current and historical peanut producers. It appears that one of the main difficulties faced by U.S. peanut producers following the elimination of the marketing quota system has been the loss of price stability, and a lack of price transparency and price discovery mechanisms under the new peanut program. Sources of price information and risk management tools -such as futures markets - are not available to peanut producers. Marketing alternatives may also be limited by a concentrated market structure at the buyer/processor level. Beyond detailing the more aggregate-level indicators of market adjustment, examining the adjustment experience and strategies of peanut producers at the household/farm enterprise level represents an opportunity to identify policy and market factors that facilitated or hindered adjustment, and to inform producers and policy-makers contemplating reform in other commodity programs. In particular, other U.S. commodities that are geographically concentrated or have a similar program history of production/import controls (tobacco, sugar, dairy) could draw lessons from the experience of peanut producers. Variations by region, demographic and household financial characteristics, and other factors such as institutional setting "market structure, trading/price discovery institutions, macroeconomic context or market orientation of the economy" are relevant to the analysis of policy reform both in the United States and other countries.