Farm Press – Editorial Staff
By Paul L. Hollis

The impact of the nationwide peanut butter recall has been far reaching and could ultimately cost America’s peanut producers up to $1 billion in lost production and sales, said Don Koehler, executive director of the Georgia Peanut Commission, testifying before Congress last month.

“Farmers, as small businesses have felt the real economic impact of this recall,” said Koehler. “Because farmers do business with other small businesses who supply them their inputs, the ripple will not likely stop at the farmer.”

Koehler testified before a subcommittee of the U.S. House Committee on Small Business on March 11, telling members that the devastation caused by the recall goes far beyond Peanut Corporation of America (PCA), where the salmonella outbreak originated that resulted in the recall.

PCA, which recently filed for bankruptcy, supplied peanut butter for industrial use in products like cakes and ice creams. Companies have recalled more than 2,100 products containing PCA’s peanut paste, marking one of the largest recalls in U.S. history. The Center for Disease Control reports that more than 600 people in 46 states were sickened in the outbreak, and that it also may have caused nine deaths.

Koehler, also speaking on behalf of the Southern Peanut Farmers Federation, said PCA, a Lynchburg, Va., company with plants in Texas and Georgia, had a culture of being a “bad actor” in the peanut industry.

“PCA was a supplier of peanut butter to the food service industry, but also a supplier of peanut ingredients to numerous food manufacturers and in that respect had a broad reach for a relatively small processor,” said Koehler. “This has by some standards become the largest food recall in American history.”

When the recall was announced, the National Center for Peanut Competitiveness (NCPC), located within the University of Georgia’s College of Agriculture, was asked to help determine the impact of the recall on farmers, he said.

“I have also spent a great deal of time discussing the recall and its impact on the market with people in the industry in whom I have a great deal of confidence,” he said. “The Commission has held public meetings with producers in the peanut belt counties this year. I have used these resources in preparing this portion of my testimony.

“Frankly, we are dealing with a situation of historic proportions, and the full impact will not be known until some point in the future. Rebuilding in the peanut industry cannot fully begin until the outbreak is over and the recall is complete.”

The 2008 peanut crop, said Koehler, was a record crop and the industry was faced with managing a significant carry-over. “The fact USDA has been slow reacting to the current market conditions in setting the weekly posted price of peanuts has complicated this issue greatly. Peanut sales are non-existent at any price for farmers who have not contracted peanuts and yet USDA has not reduced the posted price.”

After the recall began, he continued, sales of peanut products tumbled. “Scan data would indicate sales of jarred peanut butter were off by 24 percent in January. However, that number may be skewed because of deep discounts on peanut butter in January 2008. One major brand was still building back market share after its own smaller recall a year earlier. Still, general agreement is that peanut butter consumption is off as much as 20 percent. Peanut butter processing accounts for about 70 percent of the Southeast peanut market. Salted nuts are off about 8 percent and peanut butter cracker sales have tanked.”

Due to this uncertainty and non-existent sales at the sheller level, no contracts were being offered to farmers, he said.

“This is a critical issue because farmers in many cases need a contract or at least some indication of the market to achieve financing and make planting decisions. These decisions should have been made no later than February because a major option for farmers to consider if they don’t plant peanuts is corn. Corn in the peanut belt of Georgia is planted in March while peanuts are planted in May. This has made planning very difficult for farmers who grow peanuts.”

In two locations in Georgia, he explained, groups of farmers have invested in and built modern shelling facilities. At least one of these facilities received funding from the state and federal governments to encourage the farmers to seek added value for their product.

“These small businesses have fewer than 50 employees. The current situation may hurt them disproportionately because they are small compared to the two major peanut shellers. Peanut buying points, which serve as the transfer point from the farmer to the peanut shellers, are paid on volume handled. Reduced volume significantly impacts their efficiency and income. Most of these are independently owned small businesses in our rural communities. Please note these rural communities are not seeing large economic growth. Adding value to local products and creating local jobs is critical for their economies.”

The NCPC, using their Representative Farm Model, looked at the situation being faced by farmers due to the recall, said Koehler.

“The market has collapsed so the best-case scenario seems to be the loan rate of $355 per ton.

With the present projections for only variable costs, excluding land rent, farmers would need irrigated yields of almost 4,700 pounds per acre and non-irrigated yields of over 3,500 pounds to achieve just a zero cash flow. Typically, the mean yield on the farms in the Southeast would be just under 3,800 pounds per acre for irrigated acres and about 2,800 pounds for non-irrigated production.”

Currently, the University of Georgia Extension Service peanut production budgets for the year 2009 project potential yields at 3,700 pounds per acre for irrigated production and 2,700 pounds per acre for non-irrigated yields.

“You can see there is little to no likelihood of farmers’ cash flowing under today’s situation,” said Koehler. “Another way to view this, the NCPC took a five-year Olympic average of the U.S. peanut production that would total slightly over 2.1 million tons of peanuts. They then used USDA’s posted price for peanuts and came up with an average price of $408.37 per ton. Determining the difference of that price and the loan rate and including other factors such as option payments, the total loss numbers ranged from $114 million to a high of $121 million.”

Peanut growers, he said, say they anticipate a reduction of acres this year of at least a third. But the NCPC Representative Farms would indicate a reduction of 40 to 60 percent is possible.

“This means a loss of $225 to $450 million dollars in farm gate value due to reduced production. Using the NCPC conservative economic multiplier of two, we could see total economic losses of a billion dollars due to this recall.”

In discussing what can be done to help the peanut industry, Koehler said the formula that USDA uses to set the national posted price for peanuts – the price used to allow peanuts to move freely into the domestic and export market from the government loan – is a “farce.”

“The industry and government researchers have demonstrated time and again that the price USDA posts for peanut markets is too high. This has harmed our export efforts. This price was published this past week at $449,” he said on March 11. “No peanuts are being traded at this level. Doesn’t the USDA read the newspaper or watch television?’

Congress, said Koehler, should ask USDA to review the formula and report back in a firm time period as to how the formula can be made to be more realistic.

“Peanut butter has been a staple for U.S. and international feeding programs. Our various programs are administered by the USDA. Where has USDA been in this process? Our market is in trouble, yet we have not seen public statements from the Department about the nutritious value of peanuts, what products are safe to use, etc. Now is the time for USDA to heighten their use of our products in domestic and international feeding programs. We need their help more than ever before.”

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