[Senate Hearing 109-622]
[From the U.S. Government Publishing Office]
S. Hrg. 109-622
TO REVIEW THE IMPLEMENTATION OF THE
PEANUT PROVISIONS OF THE FARM SECURITY AND RURAL INVESTMENT ACT OF 2002
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HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MAY 2, 2006
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
Available via the World Wide Web: http://www.agriculture.senate.gov
______
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COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
SAXBY CHAMBLISS, Georgia, Chairman
RICHARD G. LUGAR, Indiana TOM HARKIN, Iowa
THAD COCHRAN, Mississippi PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky KENT CONRAD, North Dakota
PAT ROBERTS, Kansas MAX BAUCUS, Montana
JAMES M. TALENT, Missouri BLANCHE L. LINCOLN, Arkansas
CRAIG THOMAS, Wyoming DEBBIE A. STABENOW, Michigan
RICK SANTORUM, Pennsylvania E. BENJAMIN NELSON, Nebraska
NORM COLEMAN, Minnesota MARK DAYTON, Minnesota
MICHEAL D. CRAPO, Idaho KEN SALAZAR, Colorado
CHARLES E. GRASSLEY, Iowa
Martha Scott Poindexter, Majority Staff Director
David L. Johnson, Majority Chief Counsel
Steven Meeks, Majority Legislative Director
Robert E. Sturm, Chief Clerk
Mark Halverson, Minority Staff Director
(ii)
C O N T E N T S
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Page
Hearing(s):
To Review the Implementation of the Peanut Provisions of the Farm
Security and Rural Investment Act of 2002...................... 01
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Tuesday May 2, 2006
STATEMENTS PRESENTED BY SENATORS
Chambliss, Hon. Saxby, a U.S. Senator from Georgia, Chairman,
Committee on Agriculture, Nutrition, and Forestry.............. 01
Dayton, Hon. Mark, a U.S. Senator from Minnisota................. 03
Lugar, Hon. Richard, a U.S. Senator from Indiana................. 03
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WITNESSES
Panel I
Gaibler, Floyd, Deputy Under-Secretary of Agriculture, Farm and
Foreign Agriculture Services, United States Department of
Agriculture, Washington, DC.................................... 04
Panel II
Fletcher, Stanley, Ph.D., Professor, Department of Applied
Economics, University of Georgia, and Director, National Center
for Peanut Competitiveness, Griffin, Georgia, Accompanied by:
Armond Morris on behalf of the Georgia Peanut Commission,
Tifton, Georgia and Jimbo Grissom on behalf of the Western
Peanut Growers Association, Seminole, Texas.................... 16
Plowden, Evans, General Counsel, American Peanut Shellers
Association, Albany, Georgia................................... 18
Rasor, Gary, Consultant on behalf of the American Peanut Products
Manufactures, Inc., and the J.M. Smucker Company, Rittman, Ohio 20
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APPENDIX
Prepared Statements:
Fletcher, Stanley, Ph.D...................................... 48
Gaibler, Floyd............................................... 30
Plowden, Evans............................................... 52
Rasor, Gary.................................................. 56
Document(s) Submitted for the Record:
Biographies of the Field Hearing Witnesses................... 66
Statement of the National Peanut Buying Points Association... 62
TO REVIEW THE IMPLEMENTATION OF THE
PEANUT PROVISIONS OF THE FARM SECURITY AND RURAL INVESTMENT ACT OF 2002
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TUESDAY, MAY 2, 2006
U.S. Senate,
Committee on Agriculture, Nutrition, and Forestry,
Washington, DC.
The committee met, pursuant to notice, at 9:36 a.m., in
room SH-216, Hart Senate Office Building, Hon. Saxby Chambliss,
chairman of the committee, presiding.
Present or submitting a statement: Senators Chambliss,
Lugar, and Dayton.
STATEMENT OF HON. SAXBY CHAMBLISS, A U.S. SENATOR FROM GEORGIA,
CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
Chairman Chambliss. This hearing will now come to order and
good morning.
First of all, let me must say to my colleagues up there and
to the folks in the audience, we have been presented with a
nice little gift here. Mr. Bell from Bell Plantation in Tifton,
Georgia, has given us a little gift box here, gentlemen, that
contains some products that they are making there at Bell
Plantation and we appreciate very much your thoughts here, Mr.
Bell. I assure you, since we get our hands on it before staff
does, we may get to enjoy them rather than staff.
[Laughter.]
Chairman Chambliss. We welcome everyone this morning to our
hearing to review the implementation of the peanut provisions
of the Farm Security and Rural Investment Act of 2002. I would
like to thank our witnesses for the time, trouble, and expense
that they were willing to incur today to help us obtain a
sector-wide review on the peanut program. In addition, I would
like to welcome members of the public attending this hearing,
as well as those who are listening through our website.
The peanut provisions in the 2002 farm bill were a radical
departure from those authorized in past farm bills. Congress
repealed the Depression era quota system, which dates back to
the 1930's and which limited the amount of peanuts that were
allowed to be marketed for domestic food use and dramatically
altered the entire peanut sector. Although the old program had
served the industry well for many years, many felt the program
needed to be changed and refined to an ever-changing global
marketplace.
As many of you remember, changing a 60-year-old program was
not an easy feat. The quota program was intricately intertwined
in the roots of many small communities from Virginia and
Georgia to Florida over to Texas and Oklahoma. Although some
producers were understandably reluctant to accept change, the
majority recognized the need to respond to the pressures of the
market.
As a result, policymakers were able to rewrite the
direction of Federal peanut policy. In a historic moment, all
facets of the peanut industry reached a united provision that
allowed us to move the industry in the next generation.
I would just like to add a personal note here that that
took a great deal of fortitude and commitment on the part of
folks involved in the peanut industry. We have not always had
the cooperation of growers, shellers, and manufacturers in the
peanut industry and the history of the program was that there
was a lot of, I don't know exactly what word to use, but there
was not always total agreement between those three sectors of
the industry, particularly in my State, which is the largest
peanut growing State. And while I had friends on all sides of
the issue, it was a delicate line that we had to walk.
But from one segment of the growing part of the country to
the other, from one segment of the sheller industry to the
other, as well as the entire manufacturing community, it came
together in really an unprecedented way and allowed us to
proceed in a very positive way in the last farm bill. I have
told my friends in each segment of the industry over the years
that I appreciate that commitment, but I want to say that again
publicly today.
The fact is that while I came under a lot of criticism from
a lot of my growers who thought that the program we wrote in
2002 was the wrong direction, virtually 100 percent of those
growers have come to me since then and agreed that we were
right and they were a little bit emotional in some of their
comments and some of their way of thinking in 2002. I think the
fact of the matter is that the 2002 farm bill has worked very
well from a peanut perspective and has been a very positive
bill.
The new program allowed producers to transition from the
old quota program by providing compensation to quota owners and
users while establishing a three-prong program that is similar
to the programs available to producers of many other
commodities. With the establishment of direct payment,
countercyclical payment, and marketing loan programs for
peanuts, today's peanut program allows producers to be more
competitive in the marketplace both domestically and abroad.
The program has worked largely in the manner that was
envisioned in 2002, and since then, numerous producers,
especially those who were reluctant to accept the historic
changes, have told me that the program is working well.
That is not to say, however, that the program has worked
perfectly. Those areas which historically have produced peanuts
have shifted to other areas since the enactment of the 2002
farm bill. Acreage in many traditional peanut producing areas
has shifted both within States and across State lines and there
has been a significant expansion of acreage in new producing
areas.
Unfortunately, the new peanut program has not been free of
challenges. Under the Marketing Quota Program, peanut prices
were largely determined by government policy. Under the new
program, which allows the marketplace to determine peanut
prices, timely and current market price information for peanuts
is lacking. This is understandable because of the small number
of U.S. peanut producers, sporadic sales, and the absence of a
market exchange. However, the lack of such timely market
information has complicated USDA's task of implementing the
program, particularly the establishment of weekly loan
repayment rates, which is vital to ensuring that U.S. producers
are competitive in the export market has proven to be a
substantial challenge.
I look forward to hearing from all sectors of the peanut
industry this morning. I am hopeful that the witnesses'
testimony will help us all gain a better understanding of the
successes and problems facing the industry today.
Before I turn to the first panel, I would first turn to my
colleagues for any opening statements they wish to make.
Senator Lugar, any comments?
STATEMENT OF HON. RICHARD LUGAR, A U.S. SENATOR FROM INDIANA
Senator Lugar. Thank you, Mr. Chairman. On my farm, we are
not able to grow peanuts, so I have always approached the
peanut hearings with a sense of eagerness to learn much more
about the industry from my colleague, the Chairman, and from
the distinguished witnesses. We very much appreciate each one
of you coming today and we look forward to a great learning
experience.
Chairman Chambliss. Thank you. Under the new program,
Senator, you can grow peanuts in Indiana. It is just that we
don't want you growing peanuts.
[Laughter.]
Senator Lugar. Maybe that is what I will learn today.
Chairman Chambliss. We don't grow soybeans and corn in
Georgia, but seriously, that is one thing about the program,
the new program, is a lot of folks in other areas outside of
traditional peanut areas can grow peanuts.
Senator Dayton?
STATEMENT OF HON. MARK DAYTON, A U.S. SENATOR FROM MINNESOTA
Senator Dayton. Mr. Chairman, thank you. I apologize in
advance for having to leave just before ten. The Homeland
Security Committee is marking up this Hurricane Katrina report.
But I just want to say, I don't know of anyone who is a
stronger proponent for a commodity in his home State than you,
sir, starting with these, which are available at all of our
hearings. I try to be as good a proponent for my State, but one
of our favorite Norwegian foods is lutefisk, which, for those
who don't know, is cod soaked in brine, and I can't quite get
the same enthusiasm in the committee or whatever for that
product as you.
[Laughter.]
Senator Dayton. I just salute you for that. You also have
been very gracious and fair as a committee chairman on behalf
of all the different commodities that do reflect the diversity
of agriculture throughout our country, and I thank you for
that, as well. Thank you, Mr. Chairman.
Chairman Chambliss. Thank you. You need to bring some of
that cod to meetings from now on. We will pass it around and
see what reaction we get.
Senator Dayton. You will get a reaction.
[Laughter.]
Chairman Chambliss. Our first panel today is a longtime
good friend, Mr. Floyd Gaibler, who is Deputy Under Secretary
of Agriculture for Farm and Foreign Agricultural Services,
obviously located here in Washington, D.C. Floyd, you have been
here many times. You have been a great advocate for agriculture
at USDA and we are always pleased to have you here and we look
forward to your comments.
STATEMENT OF FLOYD GAIBLER, DEPUTY UNDER SECRETARY, FARM AND
FOREIGN AGRICULTURAL SERVICES, U.S. DEPARTMENT OF AGRICULTURE,
WASHINGTON, DC
Mr. Gaibler. Thank you very much, Mr. Chairman and members
of the committee. We appreciate the opportunity to appear
before you today and share information that the Department has
obtained from our experience in administering the new peanut
program over the last 4 years and suggest what we think are
some areas of attention.
As you are well aware, the aim of the Congress has been to
make commodity programs more market oriented. And, as you
mentioned, the 2002 farm bill significantly modified the peanut
program, shifting it from a rigid two-price program with quotas
to one providing more farmer flexibility along with direct
countercyclical and marketing assistance loan program payments.
While we have had few problems in the direct and
countercyclical payment programs, one of the most perplexing
questions of the merge is why the Marketing Assistance Loan
Program for peanuts does not function like that of the
marketing loan programs for other commodities. That is a very
high proportion of our annual peanut program is placed under
loan and very little use is made of loan deficiency payments.
Our conclusion is that the storage and handling payments
encourage heavy loan placements and that some holdover industry
practices from the previous program era impede price discovery.
Price discovery is important to the administration of all
of our marketing loan programs because it provides the
requisite information for establishing an accurate loan
repayment rate. However, the peanut industry has not
traditionally operated in an open market environment. Thus,
there is no readily available transparently established market
price for setting the loan repayment rate as exists for other
commodities.
This largely results in the widespread use of contracting,
the primary method of marketing peanuts. Peanut shellers and
peanut growers enter individual contracts, often before
planting. These option contracts provide little in the way of
publicly available price information, and dependence on them
precludes the emergence of a cash market in an industry with so
few buyers.
In trying to establish a loan repayment rate or a National
Posted Price, one source of information we explored using was
the Weekly Agricultural Marketing Service Shelled Peanut
Report. However, several problems have emerged when we examined
the information contained in this report. Particularly, the
information is based on a low volume of transactions with a
thin market and the potential exists for manipulation of
reported prices through this selected reporting of trades that
occurred.
In our view, the only dependable source of price
information is the National Agricultural Statistics Service
Agricultural Prices Report. NASS reports monthly average prices
received for farmers in shelled peanuts, which includes option
prices paid to farmers. However, NASS only reports a single
price that encompasses all types of peanuts and does so only
once a month, which may reflect a several-week lag in actual
transaction prices.
Another major factor that negatively affects the loan
program operations is the provision for peanut storage and
handling costs for all peanuts under loan through the 2006 crop
year. This benefit is generally not available to producers of
any other covered commodity. To capture the peanut storage and
handling subsidy, peanut shellers offer option contracts that
both require producers to place peanuts under loan at harvest
and allow shellers to redeem the peanuts from under the loan at
will.
We believe this provision inhibits price discovery and the
administration of the marketing loan program for peanuts and
further facilitates the industry's reliance on option contracts
rather than actual cash markets. I think it also helps to
explain why the outlays for these payments are so much higher
than the estimate that was originally provided by the
Congressional Budget Office for this aspect of the program when
it was implemented.
Expiration of the provision of mandating these payment of
storage and handling costs, in our view, would help the peanut
industry adjust to the Marketing Assistance Loan Program and
allow it to function in a manner more consistent with those of
other commodities, resulting in lower loan placements and a
greater use and availability of loan deficiency payments.
In addition, our experience with operating the Marketing
Assistance Loan Program for peanuts suggests that a shorter
loan duration for peanuts would improve program functionality.
Currently, marketing assistance loans for peanuts and other
program crops have a term of 9 months. Shortening the term to
no more than 6 months with an expiration date of June 30 each
year would mitigate the market conflict that we now have
between old and new crop peanuts. June 30 was the date used in
the prior peanut program and we believe this change would
encourage peanuts from the previous crop year to be moved into
market before the start of the harvest of the new crop.
Finally, most of the criticism that we have heard and seen
focuses on the determination of the National Posted Price. Some
in the industry have argued that the National Posted Price is
too high to allow domestic producers to compete in the export
market. However, we believe these arguments fail to recognize
that the peanut program was fundamentally changed from a two-
tier price support program to a single price program for all
peanuts.
The National Posted Price is intended to be a market
clearing indicator for all peanuts, regardless of end use. As
such, the National Posted Price reflects the combined value of
all end users as revealed by the market price and does not seek
to direct peanuts to one market over another as was true in the
previous program. The current program does not distinguish
peanuts by end use or destination.
And were USDA, as has been requested, to intentionally
reduce the repayment rate to capture additional exports, it is
our view that it would likely present World Trade Organization
concerns. Analysis by USDA Foreign Agricultural Market Service
indicates that the systematic decrease in the National Posted
Price would also capture few additional exports and that this
minor gain in export sales would come at significant cost to
the taxpayer.
An examination of U.S. peanut trade data indicates that the
U.S. is not losing export markets under the new program, but
nor are we experiencing any significant levels of imports. U.S.
peanut exports have remained at or around 250,000 tons annually
since 2002, on a par with export performance during many of the
preceding years.
In summary, our 4 years of experience in administering the
Peanut Marketing Assistance Loan Program and working with the
industry allow us to offer some suggestions that we believe
would enhance the operation of the program. These include
exploration of an incentive-based or mandatory price reporting
system, allowing the exiration of storage and handling payments
after the 2006 crop, and shortening the maturity loan from 6
months with the term expiring on June 30 each year.
As we have in the past, we stand ready to work with you,
others in Congress, and all segments of the peanut industry in
developing reliable and consistent market price information to
assist in the more effective operation of the Peanut Marketing
Assistance Loan Program.
Thank you for your continued support of USDA programs and
allowing us to share our views with you on these very important
issues. Thank you, Mr. Chairman.
Chairman Chambliss. Thank you, Mr. Gaibler.
[The prepared statement of Mr. Gaibler can be found in the
apendix on page 30.]
Chairman Chambliss. Since implementation of the 2002 farm
bill, the administration of the peanut program has shifted away
from the Peanut and Tobacco Division at USDA. Who is actually
administering the current program, and is there any particular
reason for that change away from the Peanut and Tobacco
Division?
Mr. Gaibler. I can't tell you the reasons for the change
because that occurred prior to my coming to the Department in
this position. However, that function is primarily conducted in
the Farm Service Agency, by the Economic Policy and Analysis
Staff. They are composed of economists that are very familiar
with the industry and are responsible for actually making the
determination week to week of the National Posted Price.
And I would just also say parenthetically that we have
looked at this issue from a broad perspective. We put together
a task force in 2003 that involved people from the Office of
Chief Economist, our World Agriculture Outlook Board, the
Foreign Agriculture Service, Economic Research Service, and the
Agricultural Marketing Service. We brought together all the
expertise the Department has in trying to figure out how best
to administer this program.
Chairman Chambliss. Do we basically do that with all
programs in the commodity title?
Mr. Gaibler. Yes, in a similarl fasion. We have officials
within the Farm Service Agency, beyond those in EPAS, some in
other divisions of the Farm Service Agency. But again, they are
all people who have expertise in the programs, and the markets
and the commodities that they are dealing with.
Chairman Chambliss. In your written testimony, you indicate
in the course of the 200 crop year for peanuts, USDA paid $50
million in marketing assistance loan benefits even though other
supply and use factors for the crop year suggested a robust
market. Could these benefits be attributable to growers slowly
adjusting to the new program?
Mr. Gaibler. Well, When the program was initially
implemented, we were faced with the conundrum of what actual
kind of market prices that we could use and should use in
trying to determine the loan repayment rate. The initial
decision was to use the AMS shelled prices, and that was used
in the initial implementation operation of the program. But it
became clear, to the analysts and others who monitor this that
the loan repayment rate was going down rapidly when all other
market and supply-demand indicators, suggested that prices
should be at a higher level. So this led the agency to take a
different look at how we implement this program and the
decision was made then to make an adjustment and to place more
reliance on the NASS price, the in-shell farmer price.
Chairman Chambliss. I share the same concern you do on this
issue relative to virtually 100 percent of peanuts going into
the loan. I think that is one of the provisions in the new
program that is an unintended consequence of the program and we
have got to figure out a way to ultimately get out of that
because I think it has caused more problems than it has
benefits.
But one of the problems I see is that you have got a little
bit of a catch-22 situation in that you attribute the fact that
so many of the peanuts are going into the loan in part to the
storage and handling fees being paid under the program, and
that may be right. But if you had no storage and handling fees
paid under the program, then we know who is going to pay those
storage and handling fees and that is the farmer, which means
they are going to have smaller contracts than they would have
otherwise. So if they have smaller contracts that are below the
loan price, because most of these contracts now are in the
range of the loan. So if they are going to get less, there is
going to be more incentive on the farmer to put peanuts under
the loan.
So I am a little bit puzzled as to how we should address
this program as we think about rewriting this title to, No. 1,
encourage more sales under contract versus more of the crop
going into the loan, and I am not sure that elimination of
storage and handling fees is the solution to that. I understand
you have another portion of that which is shortening the loan
time period from 9 months to, I believe, to 6 months is what
you recommend. Again, I don't know that even the combination of
those two would be the total answer. Any comments you want to
make on that relative to what we ought to be thinking about?
Mr. Gaibler. Well, I do believe that shortening the loan
period, in reference to your last comment, would make a lot of
sense. We reference in our testimony, how we think that some of
the industry practices should be modified. But this is a case
where we think the practice that was conferred and utilized
under the existing program makes a lot of sense. I think there
is at least some majority level of support for doing that. The
primary reason for, I think, not doing it is that the Committee
and Congress obviously aren't going to take on trying to make
that kind of change unless there is some industry consensus.
With respect to the storage and handling payments, the only
thing that is really comparable there is the cotton program.
The cotton program offers a recourse loan for seed cotton and a
non-recourse loan for the lint. So the cotton ginners typically
take that seed from ginning as payment for the ginning process,
so the cotton farmers actually pay for the ginning of their
cotton through that foregone seed revenue.
So if you made a change in the program and the marketing
loan were operated similar to cotton, we would have to offer a
recourse loan for the in-shell peanuts and a non-recourse loan
for the shelled peanuts.
But I do think that there has to be some recognition of the
problems that the option contracts, as they are currently
structured, provide, because they do require the producers to
put all their peanuts under loan as part of the contract. I
believe if we can get away from that process and encourage more
on-farm storage by the peanut producers themselves or through
these cooperative marketing associations who can take in
peanuts and market them on behalf of a number of peanut
producers, it would be another avenue as a means to transition.
But again, we are willing to look at options and try and
figure out how we can make this transition work most
effectively.
Chairman Chambliss. That is an interesting concept,
thinking about shelled versus unshelled. The cotton is a little
bit hard to compare because ginners usually take the seed for
the ginning costs. It is usually an offset there unless there
is some high demand for seed, which there hasn't been in the
last several years, and I am not sure we would have that same
scenario with shelled versus unshelled, but I see what you are
saying.
Current farm law requires the Secretary to establish a
repayment rate for commodities that minimizes forfeitures,
accumulation of stocks and storage costs, and allows
commodities to be marketed competitively in domestic and
international markets. It appears that the Secretary is
determined that the county posted price for grains and oil
seeds can be used to establish a repayment rate that meets the
criteria in the statute. For rice and cotton, the repayment
rate is not solely based on U.S. domestic price because it
would not result in a repayment rate that achieves the
objectives stipulated in the statute.
The peanut industry has expressed concern that the current
method of calculating a repayment rate for peanuts is not
achieving the objectives in the statute. Please explain how the
repayment rate is currently calculated and what additional
authority and/or data, particularly international price data,
would be necessary to enable the Department to calculate a
repayment rate that more accurately reflects rural prices and
allows U.S. peanuts to be marketed more competitively in
domestic as well as international markets.
Mr. Gaibler. The process uses a mathematical formula that
tries to draw on all available price information, particularly
the NASS price, also the AMS shelled price. We have tried to
look at international prices, but we have found them to be
infrequent, we are unable to determine whether they are just
price quotes, or are they tied to an actual sale. We had an
independent third-party consultant look at this sale and their
observation was that the international prices were not reliable
and that we should not focus on international prices.
We have a different situation with rice and cotton in that
there are more established international prices for them to
rely on in terms of their calculation.
We still come back to the fact that if we can get a price
that reflects what farmers are receiving for their payments and
obtain more robust price information, more frequently, on a
weekly basis instead of a monthly basis, and have reported by
type, as opposed to all general peanut price, we believe that
that would help much improve the NASS price series. It would
help in some instances keeping it from being overinflated
because it does encompass all peanut types. The higher-value
peanuts are factored in and it is very hard to factor out the
value of the higher-value, for example, Virginia peanuts with
the lower-priced runner peanuts.
So if we could get prices differntiated by type, we could
have a more accurate reflection of what the market price is and
we would also obtain it on a more frequent basis so that when
we do make adjustments, they are more timely and we would be
more closely following the market. And I think that would help
clear the market and we would not be in this conundrum of
having potential forfeitures.
Chairman Chambliss. I am assuming from what you said
earlier that it is your thought, and I kind of agree with this,
that if you have fewer loans, or fewer peanuts going into the
loan, and more sales, then you are going to have more data from
which to have a posted price. So the one is tied to the other.
Mr. Gaibler. Yes. There is really some circularity there
and then that makes it much more difficult. We also have
actually brought in the industry to meet with experts from the
Commodity Futures Trading Commission, the Chicago and New York
Board of Trade, to see about the potential for establishing a
futures price that could be another reference point that we
could work with. I think that we are not there yet, but I think
it is something that we should continue to explore, as well. So
there are a whole number of avenues I think we need to continue
to work on.
Chairman Chambliss. I have talked with both the Board of
Trade and the Chicago Mercantile folks over the last several
years about the potential for having an option contract on
peanuts, and particularly as we were talking about the change
in 2002, and there doesn't seem to be a way to do that at this
point in time. But as we look at the next farm bill, I think we
ought to again explore that to see if there is the potential
for that.
Senator Lugar?
Senator Lugar. Thank you very much, Mr. Chairman.
I am curious. I think your testimony indicates that
domestic demand for peanuts has increased in recent years, and
since the 2002 farm bill, perhaps because of more innovative
products and ways in which peanuts are marketed to consumers.
In the same period of time, exports have declined from about
half, by and large, and you attribute that essentially to the
price being too high. Of course, prices go up and down in
export markets over the years as they do domestically.
But characterize overall just from your standpoint, what is
the status of the industry? Is this a growth situation? Is it
one of stability in which people who are involved in it now
essentially will continue to be involved and produce about what
is required? Can you give any feel for whether this is a--it is
not a dynamic market, but what growth potential is there,
either domestically or abroad?
Mr. Gaibler. Yes, Senator Lugar, you are correct. The
modifications made by the 2002 farm bill have produced, I
believe a much more vibrant industry. Food use has typically
been about 50 percent of the annual outtake of peanut
production and we have seen that grow 15 percent since the
implementation of the new program.
I think it has created the opportunities for entrepreneurs
like Mr. Bell here today, who would not have had the ability to
come up with up to 20 new products that he is trying to
develop, or has developed and is trying to expand the niche
markets of these products. So we think that is very productive.
We have also seen that the production has shifted and it has
shifted to the areas where there is more productive soil. We
have seen a very sharp increase in peanut yields. So it is a
better allocation of economic resources that are being applied
out there in terms of the production of peanuts.
With respect to exports, again, peanuts have traditionally
been a residual market for this industry. They average about 15
percent of the total annual offtake, and we have seen that one
of the positive things is that imports dropped to almost
nothing as a result of that program. So while some of what we
have lost on the international market, that has been offset,
primarily because imports have dropped dramatically to less
than 1 percent of their previous levels.
I think there will always be an opportunity for the export
markets, that we do have a strong competitor out there in
China, and China has expanded their production and their
exports. Their quality, as I understand it, is not quite as
good as ours and a lot of what is traded on the world markets
is the lower-value crushed peanuts for use in meal and oil
markets. But again, Mr. Bell has the right idea, not only
trying to introduce new products in the domestic market, but he
is also trying to find opportunities in the export markets. He
has come to the Department with a very concise marketing plan
and we are going to try and help them. I think this should be
an encouragement and fostering of the industry to do a lot more
of those Kinds of initiatives. Given the potential amount of
peanuts that Mr. Bell has told me he could utilize, marketing
his products would represent a lot of the surplus that people
are concerned about with today.
Senator Lugar. How would you characterize the flow of
information, cooperation, however you want to describe it,
between growers and people like Mr. Bell, who are
manufacturers, users of the product? In other words, is there a
pretty good rapport so there is an understanding of what is
best for the entire industry from the time of growth, the types
of peanuts, that there are varieties, the location of them, the
logistics of moving them? I am just wondering how much
infrastructure of information there is.
Mr. Gaibler. Well, I can't tell you a lot of the specifics,
but I had the opportunity to meet Mr. Bell at an industry
meeting that has involved a lot of the producers. He has set up
a corporation of which farmers, peanut farmers are actually
members. He has a very unique idea of trying to provide what he
describes as an industrial rate of return, something beyond
just a normal market-price returns. He has had a lot of
interaction with the industry. I would have to defer to others
as to how specific it is, but I think he is on the right track
here.
Senator Lugar. Let me just dwell on two points that you
have made that are, I think, critical, and this is the price
finding situation in one form or another. That seems not to be
absent from the process now, but nevertheless, you have tried
to tweak the system to get some indicators going at some point.
And the other factor, storage costs, as you suggest, might be
dispensed with under certain circumstances. How are the storage
costs incorrect? Who has those costs? Who receives the money?
What is the process currently?
Mr. Gaibler. Under the 2002 farm bill, the provision was
made to provide storage and handling costs to whoever would be
storing and holding and warehousing the peanuts. Since there is
little on-farm storage, those payments primarily go to the
buying points or the warehouses of the peanut industry. The
biggest portion of it is the handling charges. The storage
charges are very minimal, I think in the neighborhood of $2.71
a ton.
And the fact that we have a 9-month loan, again, creates
the opportunity for and the incentive, frankly, to keep them
under loan longer than they might otherwise be and that has
resulted in the costs going up much more than either the
Department or the Congressional Budget Office has estimated. I
think it has had some unintended consequences in terms of
adding costs to the program but also impeding our ability to
obtain the price discovery information that we need.
Senator Lugar. The payments now being made in the chart you
furnished to us for storage and handling are $124 million in
the 2006 situation, which is a third of the whole cost of the
program. The direct payments are $61 million, the
countercyclical $165. So the storage and handling is a very
large part of it.
The point you are making is if, I gather, you have greater
price discovery to begin with and less reliance on revenues
from storage and handling, more of the peanuts would move so
they would not be stored and handled and rehandled and so
forth.
Mr. Gaibler. Right.
Senator Lugar. You sort of made that point gently, but an
economist sort of looking into this situation who is not a
friend of the family would say, well, this is sort of axiomatic
in a market. You have to have price discovery. There has to be
enough movement and activity so that you are not consumed,
really, just in what amount to the administrative costs, which
in this case happen to be the storage and handling situation.
You have suggested several reasons, and I will not
reiterate those, but it is essentially the burden of your
testimony today that as we look at the farm bill coming up,
this is the area in which we should concentrate and maybe spend
more time trying to find out why the price discovery really
doesn't work at home or abroad, for that matter, for us, at
least, for our peanut growers, and likewise, how we can
mitigate the storage and handling fees, because this is money
that doesn't go for growth or for incentives or really for
income maintenance particularly.
Mr. Gaibler. Yes. Senator, these are issues that we have
struggled with throughout the implementation period since the
beginning of the farm bill and we have had robust and quite
interesting conversations with the peanut industry on these
issues. I think we still have some fundamental differences of
opinion here on some of these issues. But we do think that we
do need to try and correct and improve the ability to make
these programs work as the Congress intended. So these are
considerations that we will continue to work with the industry
and Congress on.
There are some considerations, I believe, that you could
take into account as you reconsider the 2007 farm bill, but I
don't want to give you the impression that these are formal
policy recommendations that relate to the 2007 farm bill. These
are just ongoing considerations that we have experienced and
dealt with over the last 4 years.
Senator Lugar. Thank you very much. Thank you, Mr.
Chairman.
Chairman Chambliss. You mentioned this, but I think it is
significant to note that the imports have decreased
dramatically and I think that truly is a positive sign and it
is a sign that when we negotiated the 2002 farm bill between
the three groups, that the manufacturers said that if we do
this, you are going to see us using more domestic peanuts than
we have in the past and that is exactly what has happened,
which has been good.
I think we have got to figure out a way to make sure that
our manufacturers not only continue to grow their purchase of
domestic peanuts, but that the purchase of those peanuts
increases, particularly in light of the fact that this year, we
are going to see an increase in the peanut planted acres. In my
State, we are going to lose some cotton acres and see an
increase in peanuts. I am not sure what the rest of the country
is doing, but we have got to continue to try to make sure that
the market is growing from a policy standpoint.
We talked about shelled versus unshelled peanuts. I am told
that, currently, the price for farmer stock peanuts is going up
and the price for shelled peanuts has currently been dropping.
Does that seem inconsistent in some way to you, particularly in
light of what we are talking about relative to the loan issue?
Mr. Gaibler. Well, yes, and this has occurred over time
historically where we have seen the NASS price going in one
direction in conflict with where the shelled price is going. So
that has concerned us because when we look at the other market
fundamentals of supply demand and reach a conclusion,
obviously, one of those price factors is out of sync. It has
been a perplexing challenge to us in terms of what price should
we be focusing on, which one do we think is right, and which
one should we try and improve upon and represent an accurate
portrayal of where the market is heading and reflect that in an
actual loan repayment rate.
We have tried, again, very hard to look at what the
industry has suggested with the AMS shelled price. We had a
third-party consultant provide an analysis. They recommended
using the shelled price. I actually had staff put the formula
they suggested in place and recalculate the loan repayment rate
under that formula. But what we found was that we ended up
having a very huge outlay of marketing loan gains that would
have occurred under that program. At the same time, we incurred
106,000 tons of forfeited peanuts and the cost of disposing of
the peanuts and the marketing loan gains was over $30 million
less than what would have occurred under using the AMS shelled
price formula.
That gave us great pause, so we again came to the
conclusion that we think the NASS price is probably the one
that is probably best price to utilize. It is the price that we
use to calculate our countercyclical payment for farmers and it
is the price farmers receive. This is the program for farmers.
We believe that is the correct price. And again, I think if we
can achieve the robustness that we need from that in terms of
weekly price information, and by type of peanut, I think we
could go a long way toward getting away from this price
discrepancy that shows up in different price series.
Chairman Chambliss. I am not sure what the answer to this
is. You have got some very smart folks down there at USDA, I
know, that are thinking through this. As we go into the next
farm bill, we need to see if we can set some policy in the farm
bill that is going to help be able to establish this price.
As I think about other commodities that you compare us to,
in peanuts, we have got competition from Argentina and China on
the world market. You are right, the quality of our peanuts is
better than both those. Argentina is getting better and better,
getting pretty close to our quality. But by the same token, you
have got corn that is grown in Senator Lugar's State that is
better in quality than, I think, the competition is putting out
there, even though countries like Brazil are getting closer,
but we have got other issues that factor into the corn market
and yet we are able to establish a price there. A lot of that,
I know, has to do with the futures markets and what not. But I
hope we are able to help you from a policy perspective to
establish those prices.
In looking at the chart that you were talking about where
we see the handling charges increase, you have got decrease in
direct payments as you see increase in storage and handling.
You have got some change in the countercyclical payments. You
have got, again, the marketing loan changes that virtually go
to this year you are going to have a little bit of expense. You
have got a projected 2007 of zero. LDPs virtually are non-
existent.
Is this the way that the--well, let me rephrase that. What
is the best scenario in looking at these numbers that the
Department would like to see? In other words, would you like
for direct payments to correlate in some way to storage and
handling fees? Would you like countercyclical payments. You
have got, again, the marketing loan changes that virtually go
to this year you are going to have a little bit of expense. You
have got a projected 2007 of zero. LDPs virtually are non-
existent.
Is this the way that the--well, let me rephrase that. What
is the best scenario in looking at these numbers that the
Department would like to see? In other words, would you like
for direct payments to correlate in some way to storage and
handling fees? Would you like countercyclical payments to be
increased as you have other payments decrease? What is the best
scenario from USDA's perspective?
Mr. Gaibler. Well, Mr. Chairman, I think, again, as we
mentioned in the testimony, we don't think we see any real
problems with the direct payments. As you know, they are fixed.
They are decoupled. So they are fairly static in the amount
year in and year out for peanuts or any other of the program
commodities.
The countercyclical payment, again, is based off of the
NASS prices. They use the season average price. I think that
works fairly effectively.
I think the problem is that we need to see more ability of
the farmers to take advantage of the marketing loan programs.
The marketing loan programs are designed to provide the
opportunity for farmers to take advantage of putting a
commodity under loan during harvest time if he or she prefers,
or in lieu of putting it under a loan and capturing a loan
deficiency payment when prices are typically depressed around
harvest time. The other option is if you put it under a loan,
to receive a marketing loan gain.
Since peanuts are put under loan right away, there is very
little use, then, of the ability for a loan deficiency payment
and that is why you have such low numbers there. In terms of
the marketing loan gains, under the option contracts, the
producer gets a set price. He gets the loan rate plus an option
payment above that, but then he transfers the right of
redeeming that loan to the sheller so that any marketing loan
gain that is captured is not captured by the farmer, it is
captured by the sheller and that is not the intention of the
commodity programs. They certainly don't operate that way for
the wheat, corn, soybeans that I am familiar with from my farm
in Nebraska.
I think what we really need to see is, again, a better
price discovery series and the ability for farmers to have more
flexibility to make more decisions and to avail themselves of
the ability to take a loan deficiency payment or a marketing
loan gain. The fact that we don't have good price discovery,
makes it very difficult to calculate what the magnatude of
outlays and they are not going to be as variable as they are
with other commodities.
Chairman Chambliss. Last, one of the major considerations
that we are going to be thinking about in writing the 2007 farm
bill is what consideration we need to give to the WTO,
particularly in light of the fact that it looks like it is
going to be very difficult now to achieve even general
modalities relative to agriculture. In looking at your chart
again, there are certain of those payments in there that,
without question, are in the green box. Some of them are in the
amber box. Is the Department going to have any recommendations
relative to any of the portions of the current program as it
might potentially fly in the face of current WTO regulations?
Mr. Gaibler. Well, I have to be circumspect here, Mr.
Chairman, and not get too far out on a limb here. Obviously,
the administration has put forward a very aggressive proposal,
as you well know, before the WTO, and clearly, that proposal
does make a dramatic cut in the amber box, the trade distorting
subsidies that would involve the marketing loan programs. But
that only will occur if we can get effective, real market
access for our commodities, and without that, without getting a
robust agreement in the WTO, that is going to change the
reflection of how we approach the farm bill. Obviously, it will
have the same reflection on how the committee is going to deal
with the 2007 farm bill depending on what the outcome of the
Doha Trade Development Agenda.
But I think that if we are successful and we do reduce the
trade distorting subsidies down from 19.1 to as much as 7.6
million under our proposal, that would obviously force us to
drastically rethink the structure of the price and income
support programs that we would provide for farmers because we
are simply not going to have enough room left to continue to
include the costs of the marketing loan programs for all of our
program commodities, nor the costs incurred by the sugar
program and the dairy program that are counted as part of our
total aggregate measure of support.
Chairman Chambliss. As I said earlier, I am still somewhat
hopeful that we can achieve some agreement within the WTO, but
I think with the attitude of the EU being what it is today, the
chances of that are not very good.
Anything else, Senator Lugar?
Senator Lugar. I would just underline again, Mr. Chairman,
what really has been sort of the theme of the testimony, that
whether we have a robust marketing loan program or an LDP after
Doha or with Doha, both of those things really depend upon the
price finding mechanism. It would be hard for me to imagine, as
somebody who sort of avidly reads the ag newsletters every day
as well as the Wall Street Journal or what have you and looking
for the corn price or the soybean price, to be denied that
opportunity if I were in the peanut business. This seems to me
such a glaring difference and one that is not helpful if you
are a grower, not to have those options. So part of our work,
it seems to me, working with you and the staff of USDA,
economists, others that you bring into play, is to figure out
really how to make headway on this subject.
But I appreciate very much the testimony of Mr. Gaibler and
his service to the Department for some time. Thank you.
Chairman Chambliss. Mr. Gaibler, thank you very much. We
look forward to continuing to stay in touch as we go through
this in preparation for the next farm bill.
Mr. Gaibler. Thank you again, Mr. Chairman, Senator Lugar.
I appreciate the opportunity to be here.
Chairman Chambliss. Thank you.
Chairman Chambliss. Our second panel that we will ask to
come forward at this time is Dr. Stanley Fletcher, who is at
the National Center for Peanut Competitiveness, the Department
of Applied Economics, a professor at the University of Georgia.
He is located in Griffin, Georgia. He is accompanied by Mr.
Armond Morris on behalf of the Georgia Peanut Commission and
Mr. Jimbo Grissom on behalf of the Western Peanut Growers
Association.
We have also Mr. Evans Plowden, General Counsel of the
American Peanut Shellers Association, and Mr. Gary Rasor,
consultant with the American Peanut Products Manufacturers,
Inc., of the J.M. Smucker Company from Orville, Ohio.
Gentlemen, we welcome you here today, and Dr. Fletcher, we
will look forward to any comments from you. Mr. Plowden and Mr.
Rasor, certainly Jimbo and Armond, any comments you all want to
inject into it, you are welcome to. Welcome to all of you.
Stanley, we are glad to have you back and we appreciate
your comments here today.
STATEMENT OF STANLEY M. FLETCHER, PROFESSOR, DEPARTMENT OF
APPLIED ECONOMICS, UNIVERSITY OF GEORGIA, AND DIRECTOR,
NATIONAL CENTER FOR PEANUT COMPETITIVENESS, GRIFFIN, GEORGIA;
ACCOMPANIED BY ARMOND MORRIS, ON BEHALF OF THE GEORGIA PEANUT
COMMISSION, TIFTON, GEORGIA; AND JIMBO GRISSOM, ON BEHALF OF
THE WESTERN PEANUT GROWERS ASSOCIATION, SEMINOLE, TEXAS
Mr. Fletcher. Good morning, Chairman Chambliss and members
of the committee. My name is Stanley Fletcher. I am a professor
at the University of Georgia and the Director of the National
Center for Peanut Competitiveness. I am truly honored today to
be invited to present testimony on the implementation of the
peanut provisions of the Farm Security and Rural Investment Act
of 2002.
First, like you stated in your testimony, Mr. Chairman, I
wanted to commend you and the members of the committee for your
willingness to work with your colleagues and a group of peanut
leaders to develop a new and more globally market-oriented
competitive peanut program. It was a true challenge, as you
mentioned earlier, but I feel like I experienced many of the
same things you did and I feel like we are on the right road.
However, I am not here today to say that the implementation
has been flawless. The new peanut program can be viewed as
being successful on the domestic front. In fact, one can
observe market forces at work in the peanut sector. There have
been significant changes in cropping patterns. Areas have
shifted from peanut production while other areas have expanded.
We have new areas that have never grown peanuts before. As a
matter of fact, when you look at some of the data, we have had
some grown up in Idaho and Wisconsin, some of these other
places, New Jersey. Basically, what that is, peanut producers
are responding to market signals.
During the 1990's, domestic peanut consumption was
basically viewed as being relatively stagnant. However, the new
peanut program, which included the lowering of the peanut
price, has allowed the domestic peanut industry to be
competitive in the marketplace. Since 2002, U.S. total peanut
domestic consumption has increased by 16.5 percent.
With the passage of the trade agreements in the 1990's, the
peanut imports were increasing significantly, reaching a high
of approximately 100,000 tons of farmer-stalked peanuts, which
exceeded the production and sale of our peanut-producing States
in 2001. The new peanut program allowed the domestic industry
to compete with these imports. In 2005, our peanut import level
dropped approximately 83 percent. This clearly indicates the
U.S. peanut industry can compete and be successful.
While the U.S. peanut industry can be successful in the
domestic market, this does not hold true for the international
market. The U.S. peanut industry used to have over 30 percent
of the world peanut trade. In 2005, the industry had
approximately 13 percent of the world trade. If one looks at
the trends since 1992, the U.S. peanut export volume has
dropped 54 percent.
The problem does not lie with the peanut program itself.
Rather, the problem exists due to the method USDA is using to
implement the language of the law.
U.S. peanut exports are highly dependent on a National
Posted Price set by USDA. For the 2005 crop year, 98 percent of
the crop moved through the loan program. The majority of the
peanut crop moving through the loan has an option contract
between the farmer and the sheller. If the sheller exercises
the option, the price paid to the farmer is the loan repayment
rate, which is the lesser of the National Posted Price or the
loan rate. Thus, in reality, USDA is setting the market price
for farmers.
USDA commissioned a third-party study for recommendations
on calculating the National Posted Price. This study
recommending using the shelled peanut prices between shellers
and processors as the key factor. The shelled peanut prices are
the only prices determined from a competitive market
environment.
In contrast, the USDA NASS peanut prices reported have
serious flaws. The prices they collect do not necessarily
reflect the price that farmers actually receive for the peanut
crop. Furthermore, there is no separation of prices by peanut
type, which is critical.
Thus, shelled peanut prices should be the major factor in
the calculation as recommended by the USDA third-party study.
This would be a step in the right direction in improving our
recapturing our export market.
How does the peanut program work in terms of a safety net
for peanut farmers, which is a key component of the program? To
address this issue, the Peanut Center has 11 peanut
representing farms from the Southeast and is working with the
Ag Food Policy Center at Texas A&M, utilizing their FLIPSIM
model. On a side note, we have expanded it out to 19 farms
representing all the peanut regions in the United States.
In the fall of 2004, the overall economic viability of
these farms over the period of 2005 through 2010 was relatively
good. However, this past week, the Peanut Center reexamined
these farms using the January 2006 baseline information that
basically comes from FAPRI and eliminating storage and handling
for the 2007 through 2010 crop years. Only one representative
farm was in the ``good'' classification of overall economic
viability. One farm was in ``moderate'' and nine farms were in
``poor'' classifications. The primary factors were the
elimination of storage and handling fees, energy costs, and
interest rates. This does not paint a good picture for the
long-term health of Southern agriculture and peanut farming.
This concludes my testimony. Thank you very much.
Chairman Chambliss. Thank you.
[The prepared statement of Mr. Fletcher can be found in the
appendix on page 48.]
Chairman Chambliss. Mr. Plowden?
STATEMENT OF EVANS J. PLOWDEN, JR., GENERAL COUNSEL, AMERICAN
PEANUT SHELLERS ASSOCIATION, INC., ALBANY, GEORGIA
Mr. Plowden. Thank you, Mr. Chairman. I know everybody has
talked about how good this program is in comparison to the last
one and I don't want to be redundant, but I just am compelled
to say to you particularly, because I know you played a large
role in converting this industry from the old supply management
program to a new viable program, we were before, as you know--
and when I say ``we,'' I talk about the entire industry,
growers, buying points, shellers, and manufacturers--we were
stagnant at best and dying at worst and we are no longer. We
are viable. We are growing. We have had some good years with
consumption and we feel very good about the industry. I think
you deserve credit, this committee deserves credit and Congress
does overall. It has been a real success story. So I don't want
to minimize that.
We have got a problem. Everybody has talked about the
problem. Mr. Gaibler talked about it. Dr. Fletcher talked about
it, and I can't but do but talk about it myself, and that is
the National Posted Price. It is a problem.
In the early years of this program, we had an empty
pipeline. We had increasing domestic demand. The export market
then in those years was not all that important. Our increasing
demand, our empty pipeline that needed filling masked the
problems with the National Posted Price at that time.
We now have a full pipeline. In fact, some would say the
pipeline is double-full. Demand has leveled. I don't mean to
paint a poor picture of demand. Demand is good, but we could
not expect the dramatic increases that we saw in the early
years to continue. So the demand has leveled. The pipeline is
over-full. Plantings have increased. Farmers have found that
peanuts are a good crop for them to grow in areas that perhaps
did not grow them before.
So now, we don't have anything--we don't have these boom
times that are covering up the difficulties with the National
Posted Price. We have got to sell more peanuts. Farmers are
growing more peanuts. That is a good situation. We don't want
to be satisfied with a stagnant situation. Two-hundred-and-
fifty thousand tons in the export market, we are not satisfied
to sit on 250,000 tons. We need to grow it. Farmers are growing
peanuts. We have got to sell them here or overseas and we
believe the National Posted Price is too high to do that.
It is interesting, a number of us have followed the WTO
negotiations, the Doha Round, and it is interesting that
Ambassador Portman, Ambassador Crowder, Under Secretary Penn,
Secretary Johanns are working tirelessly for market access for
U.S. agricultural products. Well, fortunately, that is just not
a problem with peanuts in our market. We have market access to
our major and significant markets.
Our problem, if you want to call it a market access
problem, our problem is our price. We can't be as competitive
as we need to be to move the peanuts that are being grown and
we need a posted price that is going to allow that to grow. Our
competitors, particularly China, have a market price that is
less than ours and we simply have to be competitive.
We believe, and I think this committee believes, that its
language in the statute, that the posted price was to be one
that would allow peanuts to be marketed competitively
domestically and internationally, was a direction to do just
that and we do not believe that it has accomplished what the
statute seems to demand.
The Chairman alluded to this a little earlier. The market
price for shelled peanuts since about mid-January has been
declining, in some weeks declining fairly dramatically. At the
same time, the National Posted Price, which is the price, like
it or not, that affects the end price, has been rising
significantly. That is just a situation that won't work. I
think you don't need an economics degree to know that won't
work in the end.
I don't attribute ill motives to anybody in setting the
posted price. I know it is difficult. It would be easy if there
were a futures market, but there is not. We have kind of got to
take this industry as we find it. We can't simply change the
entire system to suit the methodology of setting the posted
price. We are going to have to adapt the methodology of setting
the posted price to the system that exists. It may change over
time, but we have got to dance with the one that brung us here
today. This is the system that we have.
Now, I am compelled to say one other thing, Mr. Chairman
and Senator Lugar, that I think is simply incorrect that has
been stated in this hearing today and that is two things about
options that growers sign with buyers of peanuts. It has been
stated repeatedly that the option requires growers to place
their peanuts in the marketing loan and that the option gives
the buyer the right to redeem the peanuts and pay off the loan.
Both of those are simply incorrect.
I have seen a number of options. I have been fortunate
enough to be asked to draw one or two. And I have never seen an
option that gives the buyer or the person holding the option
the right to place the peanuts in the loan. Similarly, I have
never seen an option that gives the buyer the right to redeem
those peanuts. In fact, I would suspect that if a grower
actually contractually agreed to place the peanuts in the loan,
there would be a beneficial interest issue and, therefore,
ineligible for market loans. So I don't want the committee to
leave with the impression that these option contracts between
growers and buyers require the growers to put peanuts into
loans. That simply is not the case.
I see my red light blinking, Mr. Chairman, and I will hush
at this point.
Chairman Chambliss. Thank you, before I raise the gavel on
you. But being a lawyer like you and you being my dear friend,
I appreciate your concluding your comments at this time. We
will talk some more about that issue, though.
[The prepared statement of Mr. Plowden can be found in the
appendix on page 52.]
Chairman Chambliss. Mr. Rasor?
STATEMENT OF GARY RASOR, CONSULTANT, ON BEHALF OF THE AMERICAN
PEANUT PRODUCT MANUFACTURERS, INC., AND THE J.M. SMUCKER
COMPANY, RITTMAN, OHIO
Mr. Rasor. Thank you. I don't wish to be redundant, either,
but being the last person to give testimony, I am going to be
redundant.
The APPMI members who I represent here have always
preferred to buy U.S.-owned peanuts and were appreciative of
this new farm bill, which allows us to purchase these U.S.
peanuts without limitation. We believe the new marketing loan
program has worked extremely well and we strongly support this
new program for peanuts. It was designed to make the U.S.
peanut industry more competitive and we feel it has succeeded
in doing so.
We believe the program has served the entire peanut
industry by making each segment more efficient. These
efficiencies have allowed the manufacturers to maintain, and in
some cases reduce, our prices in the face of sharp increases in
other areas, such as energy and packaging. The program has also
allowed the manufactures to expand advertising and promotion of
peanut products and created a compelling incentive to develop
new peanut products.
The new program has led to remarkable increases in both
U.S. peanut production and peanut consumption. According to
USDA's Stocks and Processing Report, total peanut usage has
increased by almost 32 percent since the implementation of the
new program in 2002. Increased peanut product consumption is
great news for our peanut industry. We believe the usage is up,
at least in part due to the additional advertising of peanut
products, the introduction of a number of new products using
peanuts, and a more favorable impression of peanuts among
consumers. Industry research and promotion have touted the
nutritional benefits of peanuts and peanut butter and consumers
are increasingly recognizing them and recognizing the halo over
peanuts today.
The peanut program has delivered clear benefits to the
entire industry and the transition into this new program has
gone smoother than any of us had anticipated. However, we want
to also take this opportunity to discuss the issue of
establishment of the repayment rate. We think this committee
needs to closely examine the process that USDA is using to
establish this since the current approach for setting the
weekly price appears to be not including or not factoring in
the world market price, as it does for cotton, rice, and other
commodities.
The approach has undermined the export market for U.S.
peanuts, which has dropped by 40 percent since the
implementation of this new program. The statute sets forth
clear criteria for administering the repayment rate, and
unfortunately, the Department has failed to recognize all of
these key factors and its less-than-transparent approach has
caused much frustration and confusion among all segments of the
industry. We feel greater transparency in the method of
establishing the National Posted Price would allow our industry
to improve the decisionmaking process.
Simply put, we feel we need an approach that is easily
understood and of use to the entire peanut industry and we also
would be willing to work with this committee, USDA, and the
rest of the peanut industry to help develop a solution to what
has become a 3-year concern about this repayment rate.
The second area we would like to mention is our support for
the extension of the payment of handling and storage costs. As
you all know, the government payment for these costs expires at
the beginning of the 2007 crop. Peanuts are a semi-perishable
crop, requiring adequate storage to maintain their viability as
an edible commodity. To protect the producers and allow orderly
marketing, adequate storage and handling are necessary. The
peanut handling and storage feature has been an important part
of the loan program and we feel should be restored for the 2007
crop and included in the peanut provisions of the next farm
bill.
In summary, we think this peanut program is an excellent
program. It has sparked greater industry competition. It has
spurred innovation for new products and increased overall
peanut consumption. And all segments of the peanut industry--
the growers, the shellers, the manufacturers, and the allied
partners--are unified in our support of each other and in our
support of the current peanut program. We hope you will
consider these minor modifications that we have suggested, as
we all speak with one voice.
Chairman Chambliss. Thank you, Mr. Rasor, and thanks, Mr.
Plowden and Dr. Fletcher.
[The prepared statement of Mr. Rasor can be found in the
appendix on page 56.]
Chairman Chambliss. You all talked around it a little bit,
but I want to see if we can narrow this down and be specific
relative to the factors that need to be considered in trying to
establish this National Posted Price. Starting with you, Dr.
Fletcher, can you just sort of succinctly give us your thoughts
of really how is the best way to establish this National Posted
Price?
Mr. Fletcher. Mr. Chairman, I think that is why we have
been kind of dancing around it. There is no clear formula. I
have spent many years looking at this, trying to sort through
this, and have been asked many times. In my testimony, I do not
believe using the USDA's NASS price numbers are an accurate
reflection. There are serious flaws in those numbers. They
don't actually reflect what farmers are receiving.
There is the data that came from the 1007s that tell you
what the farmers received for their peanuts, you know, the 1007
forms, but in the market situation, that, to me, is where I
think those shelled market prices--which is what that third-
party study that USDA recommended, that they should go down
that path. And the interesting thing is that during the trade
negotiations in the United States International Trade
Commission, which does the analysis for USTR, used shelled
prices to convert back to what would be for farmer stock when
they calculated the AMS to figure what would be in the green
box.
So, to me, those numbers should be the major weight because
that is showing what is, you know--because the peanut is not
homogeneous. It is a product that is being used in the process
of manufacturing a food product. Either it can be--or it
maintains its integrity like it is. That is the market where
you get that information and that is where I think should be
the key component of it.
Looking at what the contracts, because those contracts are
signed and which are reported on the 1007, the prices, those
could be entered into them. For some reason, the USDA does not
want to use the 1007s. And so I think that should be the key
aspect in this. The ITC was using it with USTR in our trade
negotiations. Then that should be a key basis to it.
Chairman Chambliss. Evans?
Mr. Plowden. Mr. Chairman, we think there are two
possibilities that would greatly improve what is being done
now. The first is if you have a true open, public market, known
market, and we do have that in part of the time. CCC has
contracted with an organization in Memphis, Tennessee, called
the SEAM that, in fact, auctions to anybody wishing to
participate in that auction, auctions CCC-owned peanuts. Those
prices are competitive to all comers at the time. They are
accurate at the time, not a year ago.
We have seen those auctions in the fall. CCC decided for
reasons I am not aware of to suspend them for a while and they
began again in, I believe, January of this year and continued
through perhaps March, when they had sold their peanuts, or
sold all their stocks of peanuts. So that is an open market
auction system that provides some pretty good data.
Now, when that is not available within some reasonable time
period, we believe that the Department could inquire of people
that are in the business--the buyers of peanuts, people that
buy peanuts from farmers, what they are paying at the time in a
cash market if it existed, which it often doesn't, or what they
would pay based on their judgment of the shelled market at the
time, what they would pay for farmer stock peanuts at the time.
So those are two methodologies that we think would greatly
improve the current situation.
I know you understand that we have a circumstance today
where the National Posted Price is, in fact, the farmer stock
price, and it will always be that unless the market gets above
the loan rate. So to report the NASS price is not the true
reflection of what the market is today. It is a reflection of
what the Department of Agriculture has set the National Posted
Price, but we can get into a dog chasing its tail there and
that is about what we have.
In summary, we would suggest that the SEAM be significant
credit when those--we use the SEAM prices in a significant
manner when those prices are available within some reasonable
time period, and if they are not, we inquire of buyers of
peanuts what they would pay in their view of the current
market.
Chairman Chambliss. Mr. Rasor?
Mr. Rasor. I don't think I have anything additional to add.
The SEAM does seem to be the most logical approach if that
information is available. The second part, trying to get the
shellers to report what actual trades are with the growers, is
the ideal, but I imagine that has got its difficulties, too.
Chairman Chambliss. Dr. Fletcher, you talked about the
decrease in the percentage of export market going from 30
percent to 13 percent. Maybe I should be, but I am not as
alarmed over that number as I might otherwise be because of the
change in the program and because of the fact that we now have
less imports coming in. I think that has got to have a direct
impact on our percentage of the export market. Plus, how much
of that is attributable to just the fact that the export market
worldwide has grown? You have got China and Argentina as major
players in that market now.
Mr. Fletcher. The market has expanded, and while you may
say the percentage, I was looking at, like when you talk about
the volumes, our volume is not as much as it used to be back in
the 1980's and 1990's.
I do think, as I try to track the world prices, it always
seems to be that Argentina and China always stay a certain
percentage below our price so they can work in. But when you
deal with a good quality product, you have to be competitive
out there and it basically comes down to price. A lot of the
European buyers, I have heard many of them say that, you know,
if they were a little bit cheaper. They are looking at their
bottom line, just like corporate America is. So we are
basically priced out of the markets.
I think that has hurt us where we could be expanding,
because basically there have been studies by ARS on peanut
quality, as you mentioned earlier about U.S. quality. They have
shown that even the European consumers prefer U.S. peanuts over
Argentina or China. So we have that, but if we keep our prices
where we can't enter into it, we lose them, and once you lose a
market, it is hard to recapture it.
Chairman Chambliss. If we saw a reduction in the price of
our peanuts worldwide, do you see that as, under the current
system, as being a benefit to farmers?
Mr. Fletcher. The way the current program is, the price
being lowered given what it is today, it probably will not
impact the farmers any more one way or the other, but it will
help improve our shares, and if we get the markets out there
where there is more demand, and some of the companies over in
Europe found out that, really, the U.S., they need to stay with
it because just like the domestic manufacturers say they prefer
U.S. peanuts because there is a certain quality and a known,
reliable supply that reduces their total manufacturing costs.
Once we get that recaptured, then hopefully that will build a
market where then the demand will increase enough that there
will be an increase in price down in the long run.
Chairman Chambliss. Who are our primary countries that we
now export peanuts to?
Mr. Fletcher. Our primary ones are Canada, Mexico, and
Europe. Those are the three primary ones----
Chairman Chambliss. Has that changed since the 2002 farm
bill?
Mr. Fletcher. Our Mexican imports have increased more. I
think our Canadian exports have increased some where we have
pushed out with our pricing now that we have for domestic. We
were allowed to recapture some of that, just like we are
recapturing our domestic market. Canada was using a lot of
foreign peanuts, but now they have kind of shifted back into
the U.S. because of the pricing and knowing arrival supply and
the quality of it.
Chairman Chambliss. Mr. Plowden, you talked about the fact
that contracts don't give the buyer the right to redeem the
peanuts out of the loan, and I understand that that probably is
not in the contract, but let us look at this as a practical
matter. Is that, in fact, what is actually happening, though,
and is an unintended consequence of the program?
Mr. Plowden. I am not sure I would classify it as a
consequence of the program, Mr. Chairman, but in fact, what
farmers often do is give powers of attorney to somebody else to
handle the paperwork associated with the loan or other FSA
matters. And so we do often see a farmer choose to give a power
of attorney to a buyer of the peanuts to repay that loan. Yes,
that is often the case. But it is not a contractual
requirement. If the farmer chooses not to give a power of
attorney, then that is fine. The farmer then has to do his own
redemption.
Chairman Chambliss. Who are the buyers at these CCC sales
and are they different than the buyers in the normal open
market?
Mr. Plowden. I think that they are similar, Mr. Chairman.
If there are any buyers other than the typical buyers, I am not
aware of it. Now, let me say that we have seen in the peanut
industry droughts and shortages. I think we would see other
buyers enter the market with the SEAM if that should occur. But
under SEAM sales ever since August of 2005, I think the buyers
from the SEAM are similar to the buyers--or the same, frankly.
Now, that does not mean that a buyer buys the same peanuts that
are in a warehouse associated with that buyer. There is a lot
of cross--a lot of people buying different peanuts stored in
different places. But the buyers are the same, yes.
Chairman Chambliss. The storage and handling fee is an
issue that we have talked a lot about here today, particularly
Mr. Gaibler gave a reference to it significantly in his
testimony and says that he thinks maybe the elimination of that
for the 2006-2007 crop as currently contemplated by the farm
bill is the direction to go. If that does happen, let us talk
about, from a practical standpoint, what will happen. Today,
the storage and handling fee is paid under the program and it
is paid basically to the buyer. Would that be a fair statement?
Mr. Plowden. It is paid to the warehouse operator, Mr.
Chairman. To the degree that the buyer operates the warehouse,
that would be the same. To the degree that the warehouse is
operated by an independent entity, then that independent entity
ends up with it one way or another. The payment may, in fact,
go to the buyer of the peanuts and then they settle in some
fashion with the independent warehouse operator.
Chairman Chambliss. And if that payment is not made under
the program in the next 2 years, what is going to happen to the
price that the buyer is willing to pay for peanuts to the
farmer?
Mr. Plowden. Mr. Chairman, storage and handling are real
costs. This is not some fuzzy ghost cost out there. It is a
real cost, a significant portion of which goes to Federal
inspectors to inspect the peanuts. The grading system in
peanuts is costly, so there are significant real costs with
handling. There are significant real costs with storage. These
warehouses are expensive, as you know. So somebody has got to
pay those costs.
It would seem to me, just from Economics 101, that if we
are in a surplus market, that it is going to be more likely
that the seller of the peanuts, in this case the farmer, is
going to have to incur some of those costs. The warehouse
operator is not going to store them for free, not going to pay
the inspectors out of their own pocket. So if we have got a
growing market for peanuts that are in a surplus situation and
we are not expanding our export markets, then I think the
economic situation would say that the grower is going to incur
those costs.
Now, if that produces a situation that the grower finds
uneconomical, then I suppose the grower will stop producing
peanuts, which may at some time in the future create a shorter
market, in which case goodness knows who will pay that.
Shellers may pay it. Manufacturers may pay it. It is very
difficult to predict. But the consequences of that would be one
of those supply situations that we had before.
I don't want to wear out my time, Mr. Chairman, but I don't
want to give an incomplete answer, either. What we don't want
to see is a supply situation that lurches from shortages to
surpluses. One of the things that is so helpful in our gaining
consumption in this country, and Mr. Rasor is more qualified to
talk about it than I am, but is some assurance of supply so we
are not going to lurch from these shortages to surpluses that
we have sometimes incurred in the past.
I say that, yes, if we are in a surplus market, probably
the pressure is going to be on the farmer to pay some of that.
But we don't want to get the farmer down to an uneconomical
situation so that the supply is in danger.
Chairman Chambliss. Dr. Fletcher, you heard Mr. Gaibler
talk about a recommendation coming out of the Department to
reduce the storage time from, or the loan time from 9 months to
6 months. What effect do you think that would have on the
market if that were to be the case?
Mr. Fletcher. Basically, I don't think that is going to
really have a major impact on the market. I think it is just
the way the crop is put in, that they will just adjust to it
and just the seam within where the forfeitures, if they come,
will come at an earlier time. I don't see, you know, it may
help some of the warehousemen where they have to, like in the
old program if you clean out the warehouse and be ready so they
can move that crop out of there so they can be ready for the
new one. But I don't see it is going to add a lot of economic,
you know, in terms of budget savings, because basically the
average loan on some of our surveys has been about five or 6
months anyway for peanuts, or the average length of time from
the surveys we have done, you know, the Peanut Center has. So I
don't see a lot of impact.
Chairman Chambliss. Mr. Plowden, any comments from your
segment of the industry on that?
Mr. Plowden. I would simply add that cleaning out the
warehouses may be more theoretical than actual. What we have
seen is when peanuts are forfeited, the CCC does not
necessarily move quickly to sell them. The peanuts that were
sold in March were undoubtedly forfeited many, many months ago.
So moving the deadline to June 30 or wherever it might be
simply means that the peanuts are no longer owned by the farmer
if they forfeited. They are owned by the CCC. The CCC requires
a contract with every warehouse operator that gives them the
right to keep the peanuts there for a very long time. So it may
clean out and it may not. History has not been particularly
favorable that they will move out expeditiously.
Chairman Chambliss. And the CCC, I assume, has got to make
those storage payments in the interim?
Mr. Plowden. That is correct.
Chairman Chambliss. Mr. Rasor, do you see a reduction from
9 months to 6 months having any impact on the manufacturing
side?
Mr. Rasor. No. I struggle with the problem still seems to
be the fact that the peanuts are sitting in the loan, sitting
there too long, and I think that the repayment rate issue, and
I think the sooner you can move those peanuts out and recapture
our foreign market, the better off the whole industry is going
to be. So I think if you can get that repayment rate realistic
early enough in the year and get the peanuts back in the export
market.
Chairman Chambliss. But from the manufacturers' standpoint,
supply and demand is going to dictate when you buy peanuts and
how much you buy----
Mr. Rasor. That is correct.
Chairman Chambliss [continuing]. Irrespective of the time
for the loan.
Mr. Rasor. That is correct.
Chairman Chambliss. Dr. Fletcher, in your written
statement, you stated that the peanut consumption in the U.S.
has risen by 16.5 percent since 2002. Do you think that is
strictly a result of the lower domestic prices or the other
influencing factors, and do you see any trends?
Mr. Fletcher. Yes. The price had a significant impact,
which helped make the products competitive and helped the
manufacturers be competitive with their products. Also, what it
did was it freed up where there was more research and
development going on by the manufacturers and other sectors of
new peanut products. We have had many new peanut products out
there for the consumer to consume.
Also, at the same time, there has been a lot more research
that has been done that has been coming out about the benefits,
the health benefits of peanuts. We have had the National Peanut
Board with the generic promotion that has put a lot of effort
about getting peanuts back on the mind of the consumers. But
basically, if it is not out there in the minds of consumers,
they are not going to consume the product. But price was
considered the key significant aspect that has helped turn this
thing around, plus the other aspects of the program that opened
it up so we could compete.
Chairman Chambliss. Mr. Rasor, you mentioned that, in your
opinion, the storage and handling issue is a critical issue and
it should be continued. From a manufacturer's perspective, is
there any level of confidence in purchasing peanuts, any
greater level of confidence in purchasing peanuts that have
been stored in a warehouse versus peanuts that have been stored
on the farm?
Mr. Rasor. Definitely, yes. I don't think it is realistic
to even think that you could have on-farm storage of a
perishable commodity like peanuts.
Chairman Chambliss. I am inclined to agree with you.
Gentlemen, I may have some more written questions that I
want to submit to you. Unfortunately, we have got a vote on and
I have got about 2 minutes left to get over there. So at this
time, I think we are going to conclude the hearing.
Let me say to each of you that, again, I appreciate your
willingness to come up and take your time and give us your
opinions about how we can improve the program once again as we
move into the 2007 farm bill. We do have some challenges here
and you guys are on the ground every day with this, as are
Armond and Jimbo, and we want to continue to dialog with you
and make sure that we continue to do the right things relative
to the peanut program.
So I thank you for being here, and at this time, this
hearing will be concluded.
[Whereupon, at 11:15 a.m., the committee was adjourned.]
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