The Strategic Choice of Peanut Production
Part 1 of 4
by Sidnee Hill
TSA did not look kindly on my trying to pack 5 lbs of roasted peanuts in my carry on. The irony of the airlines wanting to take my peanuts, rather than giving some to me, was not lost on me. Those peanuts were not just any peanuts, they were grade A roasted Virginias. So of course I gave TSA a fight to keep my salty snack, one must always recognize value and quality.
Finding Value in a Cyclical Industry
Creating and capturing value is at the center of business strategy. Being adept at recognizing and capitalizing on value to be gained is more challenging (and important) when the industry is mature, commodity based, or has a buy/seller power dynamic. Food and agriculture, embodying the trifecta of these hallmarks, is no exception. But have no doubt, even with the recent downturn in primary commodity prices there is still value to be found in agricultural investments!
One way is by carefully considering investing in more strategic crops. Corn, soybean, wheat and cotton undoubtedly dominate the majority of acres cultivated in the United States (238 million acres in 2023 to be exact). The sheer volume of these crops explains that when corn has a bad year, most in agriculture seem to feel it! Most, but not all. Each crop is still a market unto themselves and diversifying into a wider array of crops can help a portfolio better mitigate the risk of agriculture’s price cyclicality.
Over the past year we have, and looking forward we will, take an objective look at several such crops and discuss if they could be strategically incorporated to build a stronger, more risk adverse investment portfolio. Our first in this series was a deep dive into Hazelnuts. Over the next few weeks we will be analyzing a different type of nut. My TSA seized specialty: Peanuts.
The Strategic Choice of Peanuts
There are four types of peanuts grown within the United States; Virginia, Runner, Spanish, and Valencia. Two of these varieties, Runner and Virginia, can be seen more as commodity crops, whereas Spanish and Valencia meet a more specialty market and are grown with far less acres. Each crop is geographically localized and specialized for specific uses. Wise investors in agriculture would be keen to understand these differences and how strategically choosing a variety, or combination of types, can bring increased value and reduced risk. Below is a quick synopsis of the types and what insight the data can give us on each.
Runner Peanuts
Runner peanuts are the most widely grown and used peanut in the United States, accounting for 80% of all peanuts grown. Their disease resistance and highest average per/acre yields make them a favorite for commercial peanut production.
They have medium-sized, uniform kernels preferred by processors for peanut butter production. This is an incredibly important designation among our different types. In 2023, 1.3 billion pounds of runner peanuts were used for butter, accounting for 57% of that season’s total US peanut production used for food. The market penetration of this good is prolific, with at least one jar of peanut butter in the pantries of 94% of consumers, signaling a stable level of demand for Runner Peanuts.
Due to its need for well-drained soils and warm climates, this variety is limited to the most southern states of Texas, Oklahoma, Alabama, Georgia, and Florida. This is a highly concentrated area of peanut production and as such will have more receiving stations and peanut processing facilities than other peanut producing states.
Just like all commodity crops, the supply and value received for the runner peanut crop is variable and dictated by many external forces. Success in this variety becomes a game of averages over a longer period. Who ultimately wins will be those producers able to consistently achieve higher than average per acre yields and lowest per acre production costs.
Virginia Peanuts
Virginia peanuts are those quintessential peanuts that you imagine eating at those summertime baseball games, or if you’re really lucky, on an airplane. With bright, clean, uniform hulls, large kernels and uniquely characteristic “crunch”, Virginias are widely considered the king of snacking. While all types have their own grading standards and regulations, Virginia peanut grading standards place more emphasis on visual attributes and size of kernel. The consumer appeal toward this larger size and hull brightness allows Virginias to capture, on average, $0.03 more per lb. at the farm level compared to Runner peanuts.
Virginia peanuts are much more limited in where they can be grown, being found primarily in its namesake state of Virginia and neighboring North Carolina. Because of their larger size and emphasis on visual quality, these peanuts tend to need more specialized shelling technology. While you cannot use a Runner specific shelling facility for the larger Virginia peanut, a Virginia shelling plant can be used for the other smaller types, adding a dynamic opportunity for those operations.
Spanish Peanuts & Valencia Peanuts
It is my personal opinion that there is not a candy bar worth eating unless there is a peanut in it. Which is where a majority of the Spanish peanuts are used. While the general markets for Spanish and Valencia peanuts are smaller, both types bring the highest price/pound in return. Valencias, with their bright red skins, are mostly grown in New Mexico and used for specialty uses such as natural peanut butters, Christmas candy, and for boiled peanuts. Very few Valencia peanuts are grown on a regular basis in the United States, which means that data on this market is sparce. Spanish peanuts, with the greatest shelf life and higher oil content, are used for our favorite candy treats and peanut oil. Together, both types only account for about 3% of the total US production.
Fertile Peanut Ground
Closely related to which variety you choose, and easily as important, is where you choose to invest in peanut production. Georgia undeniably dominates the scene in terms of peanut acreage planted and total production in pounds.
However, closer inspection shows that in yield per acre performance, Arkansas touts the most robust output. Looking at a 10-year yield average, to help normalize against adverse weather events in any particular year; Arkansas boasts a yield of 5,125 lbs/ac compared to Georgia’s 4,230 lbs/ac The Virginia peanut producing states of North Carolina and Virginia are also neck-to-neck with Georgia’s production with 4,287.27 lbs/ac and 4,047.27 lbs/ac respectively.
Strategic Thinking
Which peanut variety one chooses to invest in depends on which strategy you wish to employ. Do you go for commodity volume or value? Higher quality, but with lower yields? Or a niche market with the greatest expected returns?
Regardless of your strategic choice, investors in agricultural properties would be wise to turn their attention to peanuts. As prices for corn and soybeans weaken, peanuts provide a good way to diversify portfolios and mitigate risk. Over the next three weeks we will dive deeply into peanuts to understand the drivers of supply, demand, and lay to rest the misconceptions surrounding the USDA peanut program.
*Peanut data provided by USDA ERS: Oil Crops Data last updated on March 25, 2024; Price data from USDA:NASS Survey Data 2010-2023