Economic Impacts of the 2002 Farm Bill on Peanut Farms in Six States

Farm Business Management Update, April/May 2003

By Jim Pease

The Virginia Peanut Growers' Association funded a study conducted by Jim Pease (VT), Mike Roberts (VCE), Fred Shokes (Tidewater AREC), and Gary Bullen (NCSU) to analyze the financial performance of peanut farm models representing high-quality management in the leading peanut production county of Virginia, North Carolina, Georgia, Alabama, Florida, and Texas. The specific objectives were to analyze financial performance of peanut farms with and without the changes made by the 2002 Farm Bill in peanut policy and to help Virginia peanut farmers as they make difficult adjustment decisions.

Representative farm models were developed through on-site interviews with producers and other experts in the studied counties. All production and overhead costs were estimated, as well as all government payments, family living expenses, off-farm income, and taxes. Profitability, liquidity, and other financial indicators were estimated using the University of Minnesota budgeting programs collectively called FINPACK. Financial performance was estimated with and without the provisions of the 2002 Farm Bill (Farm Security and Rural Investment Act - FSRI) for both the farm business as well as the farm family. Farm cropland acres of these representative farms range from 800 acres (Alabama) to 2,128 acres (Texas). Peanut acres range from 170 acres (North Carolina) to 554 acres (Texas). Peanut yields per acre under dryland production are 3,000 pounds (Virginia), 2,900 pounds (North Carolina), 2,200 pounds (Georgia), 2,700 pounds (Alabama), and 2,900 pounds (Florida). Irrigated yields per acre are 3,800 pounds (Georgia), 4,000 pounds (Florida), and 3,800 pounds (Texas). Every farm except Alabama produces more acres of cotton than peanuts, and other minor crops were produced on farms in Virginia, North Carolina, Alabama, Florida, and Texas. In addition, the Alabama and Florida farms have beef cow enterprises. Under the 1995 Farm Bill (FAIR), most peanut farms owned between 20 and 30 percent of the quota peanuts produced, but the Texas farm did not rent quota. Farms produced additionals in amounts between 7 percent (Virginia) and 80 percent (Texas) of total production. All farms are well integrated into the commodity programs for other crops, the payments from which form a very important part of farm business income. All farms are solvent, with debt/asset ratios ranging from 26 percent (North Carolina and Texas) to 36 percent (Alabama). Assets held range from approximately $850 thousand (Alabama) to nearly $1.7 million (Texas). Liabilities range from approximately $271 thousand (North Carolina) to over $488 thousand (Georgia). Each farm family earns some income from off-farm employment, ranging from $10 thousand (Texas) to $30 thousand (Alabama and Florida). Family living expenses ranges from $35 thousand (Alabama) to $50 thousand (Texas). Table 1 presents selected results of the FINPACK simulation under the FAIR provisions.

Table 1. FAIR : Peanut Farm Financial Status and Performance

	Virginia	North Carolina	Georgia	Alabama	Florida	Texas
Gross Farm Income	$526,147	$601,582	$663,363	$559,047	$579,572	$867,474
Peanut Income	$175,560	$132,617	$262,970	$289,440	$266,220	$364,726
Cotton Income	$202,500	$360,000	$325,230	$136,500	$232,500	$342,867
Other Crop Income	$109,748	$53,510	$29,273	$88,566	$36,625	$69,867
Commodity Program Payments	$38,339	$55,455	$45,890	$44,541	$44,227	$90,014
Total Cash Expenses	$470,812	$534,964	$569,326	$522,576	$502,677	$708,708
Net Cash Farm Income	$55,535	$66,618	$94,037	$36,470	$76,895	$158,766
Net Farm Income	$16,510	$31,686	$39,489	-$7,060	$34,712	$95,610
Family Net Cash	-$45,179	-$16,823	-$8,178	-$32,520	-$19,094	-$2,591
Commodity Payments as % of Net Cash Farm Income	69%	83%	49%	122%	58%	57%

Table 2 presents a different scenario representing financial performance under provisions of the FSRI and assuming that peanut market price is equal to the loan rate ($355/ton).

Table 2. FSRI : Peanut Farm Financial Status and Performance

	Virginia	North Carolina	Georgia	Alabama	Florida	Texas
Gross Farm Income	$526,625	$609,133	$657,445	$509,641	$564,294	$929,720
Peanut Income	$116,820	$87,261	$171,124	$191,160	$180,540	$279,465
Cotton Income	$202,500	$360,000	$325,230	$136,500	$232,500	$342,867
Other Crop Income	$109,748	$53,510	$29,273	$88,566	$36,625	$69,867
Commodity Program Payments	$97,557	$108,362	$131,818	$93,415	$114,629	$237,521
Total Cash Expenses	$438,274	$514,186	$515,847	$452,940	$451,196	$691,354
Net Cash Farm Income	$88,350	$94,947	$141,598	$56,701	$113,098	$238,366
Net Farm Income	$49,525	$60,015	$87,050	$13,171	$70,915	$175,210
Family Net Cash	-$25,405	-$632	$19,313	-$17,509	$443	$45,699
Commodity Payments as % of Net Cash Farm Income	110%	114%	93%	165%	101%	100%

¹ Does not include any potential assessments against the 2002 quota price because of prior year's overproduction.
² Family net cash equals net cash farm income plus off-farm income minus debt payments minus living expenses minus taxes.
³ Does not include quota buyout payments.

All representative peanut farms are unambiguously better off financially under FSRI provisions, even while facing the lowest effective peanut price. The Texas farm is clearly the strongest and most prosperous, and its production cost efficiencies make it a formidable competitor for any U.S. producer. To a lesser degree, the same can be said for the Georgia farm. Even without considering the peanut quota buyout, the Georgia farm has improved net cash farm income and net farm income, and its net cash position may permit expansion if desired. The Florida farm and (less so) the North Carolina farm are maintaining a relatively secure financial position with FSRI, but the unanswered question is whether these farms can obtain sufficient capital for reinvestment or expansion. The Virginia farm nets only marginally less net cash income than the North Carolina farm. But higher debt, higher depreciation expenses, and lower commodity program payments cause the Virginia farm to be in a poorer financial situation than any except the Alabama farm. The Alabama farm is still in serious financial difficulty with FSRI. Relative cost of production, inefficiencies, high debt, and low yields put this farm at financial risk. These results imply continuing financial difficulties for many peanut farms in Virginia, North Carolina, Alabama, and Florida.

With the FSRI provisions (Table 10), the Virginia farm grosses $526,625, up approximately $500 from the FAIR result. Peanut income has declined by nearly $59,000, and peanuts bring in only 58 percent of cotton income. Commodity program payments have risen by over $59,000, slightly exceeding the peanut market income that was lost with FSRI, and thus leaving the income picture virtually unchanged. Commodity program payments have risen from 7 percent to 19 percent of gross farm income, and payments are equal to 110 percent of net cash farm income. In other words, the farm business has lost money in the market under these conditions, and government payment income is subsidizing market income. Cash expenses have declined by approximately $32,500, and the farm's net cash income increases by nearly $33,000 to $88,350. Cash expenses as a percent of cash income fall to 83 percent from 90 percent with FSRI conditions, and operating expenses now equal only 74 percent of gross income. The farm family does improve its net cash position after principal and interest, living expenses, and taxes, but the net position is still very negative (-$25,405). Even subsidization of the farm business with an annual $13,500 in peanut quota buyout over the next five years will not solve the financial problems of the Virginia farm. However, the farm business is in a better annual family net cash situation than with FAIR. After accounting for depreciation expenses, the Virginia farm has net farm income of $49,525, earns a positive rate of return (1 percent) on owner equity. With these sources of income and these expenses, the Virginia farm is better off than with FAIR, but still is not financially stable.

The Virginia farm has 100 fewer crop acres than the North Carolina farm, but earns net cash farm income of only $6,597 less with FSRI. However, its depreciation expenses are 11 percent more than those of North Carolina, and its principal and interest payments are 19 percent higher. This farm may have taken on too much debt for machinery purchases. Current yields and costs of production do not generate sufficient farm profits, and the farm family is unable to meet its cash debt, living expense, and tax obligations, even with the addition of peanut quota buyout payments. This conclusion holds even if yields are improved by 10 percent at no additional cost, and quota buyout payments are also included. Higher prices have very little effect on net farm income and family net cash position of the Virginia farm because of the counter-cyclical payment program. However, net farm income is improved if cotton replaces all peanut acreage, and family net cash losses are reduced significantly if peanut quota buyout is included in family income. If irrigated peanut production is not available to this farm, then ways must be sought to reduce the machinery complement and associated debt, improve yields at no extra cost, or expand farm size to plant more cotton and garner higher commodity payments.

Results of this study imply that the following are keys for profitable peanut farm businesses with new Farm Bill provisions:

1. Irrigated peanut yields of greater than 3,800 pounds per acre, or dryland yields greater than 3,200-3,300 pounds per acre;
2. Control of program acreage and all associated commodity payments;
3. Reduced input costs (especially chemical costs), possibly through longer peanut rotations; and
4. Careful selection and judicious financing of the least cost machinery complement necessary to complete peanut production and harvesting operations.

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