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Peanut Program: Evolution from Supply Management to Market Orientation

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Abstract:

The 2002 farm bill radically overhauls the peanut program, by completely replacing the supply and price management system in place for more than 60 years. It repeals the limit set on the amount of peanuts that farmers can sell domestically for food consumption, and substitutes in large part the revenue this "quota" system with its high level of price support had guaranteed them, with an infusion of annual government payments to "historic" peanut producers. The new program's price support and income subsidy features (covering the 2002 to 2007 crops) are similar to those authorized for producers of other crops. These will ensure that "historic" producers receive a return roughly comparable to what they accessed in the past, after taking into account they will no longer have to rent or buy quota. Actual returns will vary among farmers, depending on whether they had produced quota peanuts and had incurred the additional cost of renting quota. As part of this historic change, owners of peanut quota will be compensated for elimination of an income-generating asset.

As background, the 1996-2001 peanut program largely kept intact the broad outlines of previous policy except for two changes. Reflecting a compromise between growers and shellers (the marketers of peanuts to food manufacturers) and calls by others for the program's repeal, Congress in 1996 reduced the quota loan rate by 10% to $610 per ton. Other changes were intended to ensure the program operated at "no-cost" to taxpayers. The House during farm bill debate rejected program opponents' efforts to modify the Agriculture Committee-reported package by a 3-vote margin. From 1996 through 1998, program opponents pressed for further change, but failed in securing passage of amendments offered to agriculture spending bills. In other action, three emergency farm aid packages in the 1999-2001 period provided a total of $170 million in supplemental income payments to peanut growers. Another issue that lawmakers addressed in 2000, and may again face, is whether to assist growers to cover their share of program losses.

The new program reflects an approach proposed by many peanut farmers in the Southeast (the largest peanut producing region ) and some in the Southwest who had concluded that the quota program could not be sustained for political and economic reasons. They were concerned that the quota system could not be defended much longer against opponents (food manufacturers and those ideologically opposed to government management of a food commodity) who had sought for many years to "reform" the program. These farmers also realized changes were needed to address competitive pressures from increased peanut and related product imports under the terms of current and anticipated trade agreements, and that additional budget resources made available for commodity programs could facilitate a policy change.

With peanuts marketed internationally at a price much lower than the level at which the past program supported the U.S. price of food peanuts, the peanut quota structure and import restrictions (by controlling the supply and significantly affecting the price) placed the cost of the peanut program largely upon the buyers of peanuts (manufacturers and consumers). The new program's changes shift these costs largely to the federal government and taxpayers.