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Crisis in Southeast Virginia Agriculture

Farm Business Management Update, August/September 2003

By Jim Pease and Mike Roberts

Peanut production has been the foundation of the southeastern Virginia regional farm economy since colonial days. Virginia peanuts are grown in nine mostly rural southeastern counties and one independent city (Suffolk). Virginia-type peanuts are a recognized type of peanut mostly used in-shell or shelled as premium snack or 'ballpark' peanuts, and have traditionally constituted 5-7% of national production. A quota program based on acres or pounds of quota for a specific farm has been in place since 1937, with above-world-market prices guaranteed by USDA on peanuts produced under quota. In Virginia, approximately 80 percent of quota peanuts produced are rented from nonfarming landlords, many of whom are heirs living out of state or widows of peanut farmers. Agricultural land in peanut counties has been able to withstand urbanization pressures in the past several decades because of the profitability of peanut production.

The 2002 Farm Bill brought an unanticipated collapse of the southeastern Virginia farm economy by ending the quota program in mid-planting season 2002. Peanuts that were planted with the expectation of earning $610/ton could be sold only at the loan rate of $355/ton (production costs are in the range of $450-$500/ton). Peanut growers received compensation through fixed loan support rates (well below the cost of production), and the direct payment and counter-cyclical payment programs also put in place for other commodities such as corn and wheat. In 2002, the loss in peanut farm sales due to the new provisions was $36.9 million, only partially compensated by $12.7 million in commodity program payments. Quota holders received buy-out compensation for their lost quota with a payment of approximately $52.7 million, equivalent in present value terms to approximately 15 years of quota rent. As can be expected, the value of peanut quota had been capitalized into land values and rents on farms holding quota, so Virginia producers had already been in a cost-price squeeze before the 2002 Farm Bill. Other field crops that could be grown in place of peanuts, such as cotton, corn, wheat, or soybeans, do not offer a profitable alternative under current or expected market conditions. The impacts of the dramatic change in the operating environment are apparent in planted acreage trends. Virginia peanut acreage fell from 75,000 acres in 2001 to 56,000 acres in 2002, and USDA projects plantings of 35,000 acres in 2003. We conclude on the basis of a phone survey of 70 farmers that only 15,000 to 20,000 acres of peanuts will be planted in 2003.

Lenders are unwilling to extend credit for the 2003 crop until 2002 operating loans are repaid or refinanced with other collateral. Realizing that registering profits from the peanut enterprise was highly uncertain and that collateral in the form of peanut quota had vanished, lenders have required many farm businesses to seek comprehensive financial analysis as a precondition of new operating loan applications. Farm business financial planning by the regional Extension farm economist has increased 20-fold in 2003. In more than one-half the cases analyzed, the farm business could not pay back 2002 crop operating loans, much less return a profit on the 2003 crop without using commodity program payments. Due to the extreme workload at local FSA offices, program payments have been delayed. In more than one-third of the cases analyzed, the farm business has no unencumbered collateral to back loan refinancing. Many farmers are considering equipment, land, or other asset sales as the only alternative to avoid bankruptcy or to save a portion of the farm. One in six of the farmers assisted will eventually be forced to declare bankruptcy, representing approximately 3,766 acres of owned and 9,598 acres of rented cropland.

Vendors supplying chemical, seed, fertilizer, and equipment inputs to farmers have inventories only one-third of last year's level. With the uncertainty surrounding peanut planting intentions, peanut shellers and processors find that forecasting production and purchases is difficult. A significant danger is that vendors, shellers, and processors will move their operations out of Virginia, further damaging the southeast Virginia economy.

From the perspective of landowners, the new peanut program has decreased the rental and resale value of their land for agricultural use. From the perspective of growers, the program has dropped them abruptly into national and international competition for the first time and presented them with a financial crisis. The farm enterprise that consistently returned profits to the farm has been eliminated. Many farmers and non-farming landowners are petitioning local tax assessors to reassess their land and are considering housing developments as an alternative land use to agricultural production. Bankers find themselves holding collateral (land based on quota values) and earning expectations (guaranteed quota prices) that are suddenly unrealistic and uncertain. Equipment and input dealers find themselves selling Virginia used equipment to farmers in other states as many farmers liquidate. Peanut shellers with their corporate offices in Virginia and North Carolina are concerned that peanut production acreages will not be sufficient to justify leaving processing facilities in the region. Local governments, facing a barrage of calls from farmers demanding lowered tax assessments for their farmland, are wondering how the local budget can be funded with decreased property taxes.

The core issue is one of market competitiveness, but the major implication for the region is associated with land use. Urbanization may be the only land use alternative for many counties in the region, and the rural peanut counties could soon resemble Chesapeake, Virginia Beach, or Hampton Roads. Some key questions that need to be addressed are Under what conditions will peanut shellers continue Virginia operations? What is the long term economic outlook for Virginia-type peanuts and for Virginia peanut farmers? What are economic consequences of reduced peanut acreage for agricultural and non-agricultural businesses, including farmers, input and output industries? What are the fiscal, economic, and social impacts on local governments and communities? What are the land use and urbanization implications? What can/should be done and by whom?

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