Before a good play or concert can be performed, the stage must be set. I might be a little premature in my thinking, but I believe the stage is being set for a very interesting situation to unfold in the peanut industry during the 2004 planting season. And guess what? It's not directly because of peanuts but instead because of the recent price increases we've seen in cotton, soybean and small grain prices.
The question is whether these price increases will be sustained so farmers can contract or expect higher prices for these crops. If the answer to the question is no, then farmers will go through the same old drudgery of planting a balanced mix of crops including peanuts, cotton, corn, soybeans and other grains to “spread their risk” because no one crop or combination of crops is “asking” for our land. However, if the answer is yes, then all bets are off and we must carefully consider our farm planning decisions regarding which crops and how much to plant.
Just because you own equipment that is specific to harvesting a crop doesn't mean you have to plant that crop. Yes, you may have to make payments on the equipment. But if another crop is generating more income to allow you to do this, then you need take this into account.
Money generated from peanuts doesn't have pictures of peanuts on it and money from cotton doesn't have cotton bolls printed on it. Money is just little pieces of green paper with pictures of dead presidents on them. Please don't think that I am being a smart aleck here. I'm simply trying to illustrate the point that we have to start thinking of farm profitability and not just crop profitability.
The new farm bill makes this especially important because increases in the market price of a commodity decreases the counter-cyclical payment (CCP) that farmers receive. Conversely, if you have base, and the price of a commodity stays relatively low, then farmers will receive some if not potentially all of the CCP for that commodity.
In the past two years, it is unfortunate for farmers, but they haven't had to worry about this because virtually all crop prices have been in the pits. But, hopefully, this is changing. I said numerous times that a strong price increase in one of our major commodities could be a price leader for others because that is what this farm bill is designed to do.
Let's generalize and set-up a simple, straightforward case farm to illustrate. Let's make the following assumptions:
200 acres of cropland.
100 acres of base in cotton and peanuts with base yields of 900 and 3000 pounds per acre for each.
Variable cost of production for both peanuts and cotton is $400 per acre.
Our expected yields are 900 and 3,000 pounds per acre for cotton and peanuts (same as our base yields: reasonable expectation).
We have enough equipment to plant, produce and harvest more of one crop.
Returns above variable cost plus our direct payment (DP) and CCP are used to make equipment payments. So we want the highest return above variable cost because our equipment payments are going to be the same regardless of what we plant.
With this case farm, our DP for peanuts is $4,590 and cotton is $5,102 for a total of $9,693 and the DP will not change with changes in crop prices. The payment that can potentially change is the CCP which has a range of $0 to $104 per ton on peanuts and $0 to $0.133 per pound on cotton.
If the average market price for both peanuts and cotton stays at or below loan rate, the maximum CCP for this case farm could be $13,260 and $10,350 for peanuts and cotton with a combined maximum potential of $23,610. Thus, the range of our total government payments on our peanut and cotton base is $9,693 up to $33,303.
Let look at some very simple scenarios to think about different options:
Let's start by assuming that we plant 100 acres of both peanuts and cotton and receive loan rate prices for both. This scenario generates $23,983 in revenue (including DP and CCP) net of production cost and land cost left to make our equipment payments, pay overhead, taxes, feed our families, etc. (you get the message — not much left at these crop prices). This figure provides an interesting baseline for comparison to the current market situation whereby cotton prices have increased. As of the day I am writing this article, cotton price per pound to the farmer (net of basis deductions) is $0.7425 per pound, corn is $2.45 per bushel, soybeans are $7.40 per bushel, and wheat is contracting for $2.88 per bushel. These are better prices than we've seen in many years.
So, let's go back to the scenario leaving acres the same (100 peanuts and 100 cotton) and conservatively enter in $0.70 per pound for cotton, which we will simplistically assume that the CCP for cotton is eliminated and only the DP is paid. The revenue net of production cost and land cost here increases to $29,203.
Now let's assume that we planted all 200 acres in cotton with no CCP on cotton and leave peanut prices at the loan rate, which assumes that the full CCP on peanuts is paid. This scenario results in a net revenue of $38,953.
Now let's think that since I don't plant peanuts, my neighbor and his neighbor don't plant peanuts, and so on, I could lose about half my CCP on peanuts because the price went up due to lower production. This lowers the net revenue to $32,322.
Continuing with Scenario 4, if all of the CCP for peanuts was lost, the resulting net revenue is $25,693. The returns for each scenario rank are shown in the accompanying table.
Before the phone starts ringing too much (I know I'll get some “unhappy” calls, but I'm used to it by now), please understand that these are very simplistic scenarios addressing a very, very complicated business — farming.
Such decisions carry different amounts and different types of risks, and the decisions must be made specific to YOUR farm and not from generalizations. We finally have options, and proper whole farm planning will be critical.
Billy Sauls, a farmer in Randolph County, Ga., made a statement years ago, “Nobody ever went broke making a profit,” and that statement will stand the test of time. Let's hope the current commodity prices remain high so that options remain open and numerous and profits can be made.
The whole farm planning system (WholeFarm) developed at the National Peanut Research Laboratory can quickly and accurately analyze virtually all scenarios specific to YOUR farm to start developing a game plan for next year. Let us help you.