Farmer Emmett Joiner looks at a field of peanuts waiting to be harvested on his 340-acre (1.38 square km) cotton and peanut farm in Garfield, Georgia October 27, 2015. REUTERS/Brian Snyder

By Chris Prentice

NEW YORK (Reuters) - A mountain of peanuts is piling up in the U.S. south, threatening to hand American taxpayers a near $2-billion bailout bill over the next three years, and leaving the government with a big chunk of the crop on its books.

Peanut growers in states including Georgia and Alabama boosted sowing acreage by a fifth this spring and now are wrapping up harvesting their 3.1-million-ton crop, the second-largest ever, even as prices plumb seven-year lows.

There is a debate over why it is happening and how long the supplies and costs will build. Farmers and peanut groups blame the glut on poorer market conditions for alternative crops, such as cotton and corn, and improving yields as a result of crop rotation and new varieties.

Some experts say it is the unintended consequence of recent changes in farm policies that create incentives for farmers to keep adding to excess supply.

One way or another, U.S. farmers look set to keep producing more peanuts than Americans can consume, leaving taxpayers on the hook.

First, the U.S. Department of Agriculture (USDA) is paying farmers most of the difference between the "reference price" of $535 per ton (26.75 cents per lb) and market prices, now below $400 per ton. A Nov. 18 report to Congress estimates such payments this year for peanuts exceed those for corn and soybeans by more than $100 per acre. (Graphic:http://link.reuters.com/fyw95w)

Secondly, government loan guarantees mean once prices fall below levels used to value their crops as collateral, farmers have an incentive to default on the loans and hand over the peanuts to the USDA rather than sell them to make the payments.





PEANUTS FOR FLORIDA





"It's a predicament," said Tyron Spearman, executive director of the National Peanut Buying Points Association, a group commissioned by peanut shellers. "Is it a concern to us? Yes. We certainly hate any increase in cost but that's the way the program was designed."

Through forfeitures, the USDA amassed 145,000 tons of peanuts from last year's crop, its largest stockpile in at least nine years, according to data compiled by Reuters.

That stockpile is enough to satisfy the average annual consumption of over 20 million Americans - more than the population of Florida - and puts the administration in a bind.

Storing the peanuts in shellers' and growers' warehouses comes at a cost. Selling them could depress the market further and in turn would add to the price subsidy bill.

Payments to peanut farmers could total between $960 million and $1.9 billion through fiscal 2018, according to estimates from the Congressional Budget Office (CBO) and USDA projections cited in the Congressional Research Service report.

The higher costs come as the 2014 Farm Bill set high peanut reference prices relative to historic averages and cut support for production of cotton, an alternative crop, encouraging growers to dedicate more acres to peanuts, the report and experts said.

The government spends far more on big cash crops such as corn, wheat and soybeans, with support for corn alone expected to cost $3.6 billion this year, according to CBO estimates. Yet relative to crops size and value, peanut crops are costlier, with payments worth more than a third of the crop's value.

Experts say the spike in spending highlights the risk of distortions to other markets, but overall spending caps and the fact that reference prices for other crops are closer to market levels than those set for peanuts act as mitigating factors.

As peanut carryover inventories are forecast to hit a record of 1.4 million tons by end-July 2016 and as loans begin to come due next summer, farmers are expected to fork over more peanuts to the USDA.

The legume has a special place in American history, diet and popular culture - the peanut butter and jelly sandwich is as iconic as an apple pie and former president Jimmy Carter is the world's most famous peanut farmer - but there is just not enough appetite for the troves filling the warehouses.

The abundance of cheap peanuts is a boon for the handful of companies that shell peanuts bought from growers, including Archer Daniels Midland Co's ADM.N Golden Peanut Co and peanut-butter makers such as J.M. Smucker Co, the maker of Jif, and Hormel Foods, which makes Skippy.

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