Thursday, June 5, 2008

Why the Concern Over Differentials

The Concern over Floyd Gaibler's disastrous differential proposal should not be take lightly by anyone.

The current system of differentials is longstanding and was arrived at with great consternation in the peanut industry. To say that there were differential fights in the old days might be an understatement. An agreement was reached and it has worked for decades and is not at all broken. Why then does Floyd Gaibler seem to want to turn the apple cart upside down? What will be the result?

I cannot answer the first question, though I will say that Floyd has been the most difficult man I have ever dealt with in the USDA.

The answer to the second question is much easier. If you choose to support 81% of the US Peanut Crop at $7 below the loan rate and then push Spanish, Virginia, and Valencia peanuts significantly higher than the loan the differential becomes significant. Growers in Georgia can grow any of those varieties. University numbers show that we have a $70 advantage in producing Virginia peanuts over the VC.

Don't laugh at that prospect. In the 90's the Planters buyer got irritated at the VC leadership and came to Georgia and contracted more acres of Virginias in Georgia than there were in Virginia. That would not at all be hard now. Is that what we need to do? Absolutely not but economics will dictate such shifts. And with a high price for Spanish as has been proposed our guys could manage a real issue that has been of concern, late cotton plantings which some blame for a slight decline in cotton fiber quality. We need to plant some Georgia Browne seed to get the increase going. Problem is who then will supply those Jumbo Runners? And we can grow Georgia Reds and do pretty well in the Valencia market too.

Remember that prices paid are tied to the loan rate. Reduce the differential for Runners and we need to grow something else.

So next year in Georgia we buy up all the non-runner seed varieties we can. Let's just flood the market. What runners we do grow will be in short supply and will bring a premium price. Mr. Farmer don't contract your runners. And the other peanuts are supported at a higher price so the price has to be higher no matter what. Of course we will help drive the price of the other types down and maybe that will go ahead and put the VC and Oklahoma out of business.

Hey this might be sounding like a good idea?

Wait! What if USDA then flips the differentials? Man, now we need to find some runner seeds and plant them. That will even push the price of runner seed up now. That will help the seed producer, right? Hey, we can push up non-runner seed prices all across the country short term under the USDA proposal? Under the US Proposal for everyone to be supported at $355 you would have to have equal quantities of each type of peanut. Is that good for our industry. Doesn't the market largely determine what we plant?

Do you get the feeling this is like a yo yo on a string?

The Peanut Shellers expressed their opposition for ONE year. I cannot see why they didn't just say no but they have a hard time doing that.

The manufacturers see this as a way to get cheap peanuts but they have not looked at what will really happen. They haven't decided yet to comment but will likely stay silent.

As an industry we need to look at what volatility in price and supply, not just total supply but supply among types will do. This is an all around bad proposal.

We don't want to see other farmers get out of producing peanuts. We don't want to see uncertainty. We need to have stability in the peanut world for a while. USDA will undo all of that with a stroke of a pen if they do this, not to mention that they just cut the price that is going to be paid this year on 81% of the peanuts produced int he US. We need peanut production over a broad distribution to manage the vagaries of weather and to keep a broad base for political support.

Now are you going to contact your Senators and Congressman?

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