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JUNE, 1999
The basic peanut program we are operating under was originated by legislation in 1938 with a plea for farmers to grow peanuts with the primary purpose being a food source to the military. After world war II the farmers who grew peanuts for this plea were given quotas to grow peanuts which were supported from a financial standpoint by the commodity credit corporation.
In 1978 a new bill was passed whereby the quota was maintained by this group of farmers. However, part of the bill allowed the quota growers or any other farmer to plant as many peanuts as they wanted, but the government would only support these peanuts at a value equal to oil and meal prices. These peanuts are called additionals and can only be exported as edible nuts or crushed.
The above bill set the quota for domestic use of peanuts at 1.3 million tons, which was suppose to be actual domestic usage. A problem developed in the late 1980's where consumption of peanuts in the U.S. started to decline. The decline continued into the 1990's and we ended up with excess peanuts in the government loan. By law, these peanuts have to be sold for domestic crush or fragmented and exported for crush. This event led us to enjoy many years of government crush of between 200,000 and 365,000 tons depending on our crop size. During this time these quota peanuts were supported by the CCC at a range of $625/675 per ton with the crush value being in the $250/$350 per ton range. As you can see, during these years, the government incurred substantial losses in their loan program.
Now the changes come into play. The 1996 farm bill was upon us and, of course, much talk about the balancing of the budget. Under the 1996 farm bill, the CCC enacted a "no cost" loan program. To fulfill this no cost system, the CCC reduced the loan value from $670 per ton to $610 per ton and reduced the quota tonnage from 1.3 million tons to 1.1 million tons. The reduction in the quota tonnage creates a problem for oil, as the CCC, in a stroke of a pen, took 200,000 tons of crush out of the market.
We immediately realized that under the new farm bill there would not be enough peanut oil produced in this country to meet present demand. The effect of this is that prices will move higher and seek the world market as we will have to bring import oil into this country. In early 1996 we were trading oil in the mid $.30 per lb. range. As reality set in, we moved to $.40 lb. By fall of 1996. Prices continued to rise in 1997 but at a slower pace, as we were living off of a huge carryover from the 1994 and 1995 loan crush which was in excess of 350,000 tons each year. Finally, our time ran out as the carryover dwindled during the 1997 year and our CCC loan crush was reduced to 35,000 tons in the 1996/1997 crop year. Early fall 1997 prices were around $.48 lb. and rose in late 1997 and early 1998 to the $.51/$.52 lb. range. All this time we were watching the situation in Argentina, as they would be our primary supplier realizing that Argentina had planted record acres, it had become evident in mid February, 1998 that there was also a possibility of record yields with favorable weather the balance of the growing season. With this record crop, Argentina could produce 125,000/130,000 tons of peanut oil compared to a normal production of 50,000/60,000 tons. At this point we issued a no buy recommendation for the shipping period of June through December of 1998 thinking a large amount of oil should come to the market in late May or early June. The crude oil market fell from $.51 lb. in February, 1998 to $.44 lb. in June, 1998. A slight problem developed about 10% into the Argentine harvest. It started to rain and continued to rain. With extensive harvest delays and crop deterioration, we felt that instead of 125,000 tons of oil starting in May or June, we were looking at around 95,000 tons starting in August or September. Still there would be enough oil to take care of our needs.
In the U.S. we had a very dry summer in the southeast and southwest but saw improvements in the crop with some timely rains in August. As El Nino would prove once again to be in effect, it starts raining in the southeast just as the peanut harvest is under way. We normally get peanuts into the crushing plant in mid/late September but this year we're looking at October 10/15. With the delay in both the Argentine and U.S. crops, we have a squeeze going on trying to get from old crop to new crop and oil values have risen from s.44 lb. To $.47 lb. This will correct itself over the next 3/5 weeks as harvest here continues and the fact that Argentine oil is entering our market.
The above was actually written October 6, 1998. To bring us up to date, I will commence in January of 1999 where the market dropped from $.47 to $.41 on anticipated USDA peanuts coming to the market.
In February, 1999, the industry discovered that there would be somewhere around 28,000 metric tons of Argentine peanut oil entering the country. With this amount of oil, coupled with the USDA stocks, we were suddenly in an oversupply situation and the market reacted with a vengeance. From early February, 1999 through mid April, 1999, peanut oil traded from $.38 down to $.28.
At $.28 the market was overdone on the downside and some major consumers were caught with little or no coverage. The oil that was left on the open market was in very strong hands and the shorts had to pay up. From early May, 1999 to present, we have traded the market back to $.39.
Today the peanut crop looks excellent. Actually the crop looks so good that it can only go backwards. This being said, we anticipate more usda peanuts for crush this year vs. last year thereby putting downward pressure on the value in mid December, 1999/mid January, 2000.
Our recommendation today is to be fully covered through December, 1999 and wait on the January 2000 forward position.