PORTALES, N.M.—Recessions usually mean big business for peanut producers as shoppers flock to low-cost, high-protein foods like peanut butter.

But a highly publicized salmonella outbreak early this year linked to the Peanut Corporation of America (PCA), combined with a 2008 bumper crop, has left peanut producers and businesses alike in a less than favorable position.

"For a while there, one bad apple had spoiled consumer confidence, and the timing couldn't have been worse," said Jimmie Shearer, CEO of Portales-based Sunland, Inc., which produces high-end peanut butter varieties. "Our industry, from the producers to the processors, will see a big hit this year."

And while the salmonella outbreak jarred the industry—nationwide sales of peanut butter dropped nearly 13% in February alone—the oversupply of peanuts from the previous year has created the most uncertainty among producers.

"It's true, contracts for new peanuts are few and far between," acknowledged Shelly Nutt of the Texas Peanut Producers Board. "First we had the bumper crop, and then we had the salmonella outbreak. Peanut acreage has been cut in Texas by as much as 60 percent."

The USDA initially estimated 2009 reductions in peanut acreage to be between 20-30 percent nationwide, but low contract prices and high input costs have resulted in higher acreage cuts.

Both Shearer and Nutt agree they have little control over last year's supply, but they hope the demand will start to even out.

"Peanut sales are back up, which is a good sign for the industry. It means that consumer confidence has been restored," said Nutt.

Sheared added, "We've never had a batch of peanuts test positive for salmonella in the 20 years we've been in operation," noting, that unlike those of PCA, Sunland's long-standing safety standards exceed the rigorous government requirements.

With economists predicting that 2009 would be a tough year for peanuts—even before the salmonella scare—producers had braced for the cuts. Few, however, knew how bad the cuts would be, and for many, the risk in planting peanuts this year was too high.

"We all knew the industry was going to take a hit, but the question was always how big?" Nutt said. "The lower contract prices, the increased production costs, the insurance—we just can't afford it."

The Price of Safety

Given this year's dire forecast in the peanut industry, producers are making efforts to cut costs, but they can all agree on one thing: Do not sacrifice safety.

"Our philosophy is to pay for extra safety measures now so we are not paying in lost sales later," Shearer said. "I'd say the vast majority of people in the peanut industry have a similar approach."

Sunland's products are made from the Valencia peanut, native to west Texas and eastern New Mexico. From the time the seed is planted to its transformation on retail shelves, the peanuts go through three independent third party inspections not to mention Sunland's own internal inspections. They are checked for their quality, grade and presence of any harmful or foreign materials in the product.

The first two inspections are mandatory federal/state inspections, and the last is a voluntary third party inspection that Sunland pays for out of its own pocket. As Shearer explains, the voluntary inspection is simply another precautionary step to ensure Sunland's products are safe.

For most companies, these inspections are just the beginning. In Sunland's case, it pays to have analysts monitor each inspection report. It pays to conduct regular environmental tests in the factory to check for the presence of harmful bacteria. And, it pays to thoroughly and regularly clean areas where bacteria could form to make sure no problems materialize.

PCA, however, did not operate under similar high standards. "Their negligence is not indicative of how our industry works; consumers need to know that effective systems are in place insuring the safety of the foods on their grocery shelves," he said.

Jimbo Grissom, a peanut grower from Seminole, TX, would agree.

"Farming is an incredibly expensive profession, especially given the strict regulations and practices we adhere to in the United States," he said. "Our returns aren't great in a normal year, but a combination of things like this just kills us. It's especially difficult here because of the high input costs and low yields we've had in the past year."

It is estimated that the PCA debacle will cost peanut producers $1 billion in lost sales and production.

"The only bright spot is that consumers are coming back," said Grissom. "We all have operating loans to repay with interest each year, and when you're selling at a loss you can't keep a farm afloat for too long."