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30–238 PDF 2006

S. HRG. 109–622

TO REVIEW THE IMPLEMENTATION OF THE

PEANUT PROVISIONS OF THE FARM SECURITY

AND RURAL INVESTMENT ACT OF 2002

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 

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

SAXBY CHAMBLISS, Georgia, Chairman 

RICHARD G. LUGAR, Indiana 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

PAT ROBERTS, Kansas 

JAMES M. TALENT, Missouri 

CRAIG THOMAS, Wyoming 

RICK SANTORUM, Pennsylvania 

NORM COLEMAN, Minnesota 

MICHEAL D. CRAPO, Idaho 

CHARLES E. GRASSLEY, Iowa 

TOM HARKIN, Iowa 

PATRICK J. LEAHY, Vermont 

KENT CONRAD, North Dakota 

MAX BAUCUS, Montana 

BLANCHE L. LINCOLN, Arkansas 

DEBBIE A. STABENOW, Michigan 

E. BENJAMIN NELSON, Nebraska 

MARK DAYTON, Minnesota 

KEN SALAZAR, Colorado

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) 

(III)

C O N T E N T S 

Page

HEARING(S):

To Review the Implementation of the Peanut Provisions of the Farm Security 

and Rural Investment Act of 2002 ...................................................................... 01

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

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

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

(1)

TO REVIEW THE IMPLEMENTATION OF THE

PEANUT PROVISIONS OF THE FARM SECURITY AND RURAL INVESTMENT ACT OF 2002

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. 

2

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. 

3

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 

4

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. 

5

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. 

6

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, 

7

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, 

8

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. 

9

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 

10

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 

11

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 marketprice 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 onfarm 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 

12

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 

13

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, 

14

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 

15

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. 

16

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 proVerDate 0ct 09 2002 15:17 Oct 20, 2006 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\30238.TXT TOSHD PsN: LAVERN
17

gram, 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 

18

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. 

19

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. 

20

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-thanVerDate 0ct 09 2002 15:17 Oct 20, 2006 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\30238.TXT TOSHD PsN: LAVERN
21

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. 

22

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. 

23

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 peaVerDate 0ct 09 2002 15:17 Oct 20, 2006 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 C:\DOCS\30238.TXT TOSHD PsN: LAVERN
24

nuts, 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 

25

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 unVerDate 0ct 09 2002 15:17 Oct 20, 2006 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 C:\DOCS\30238.TXT TOSHD PsN: LAVERN
26

doubtedly 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? 

27

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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