38 million is missed by the potato sector

It was clear from the start that the fries potatoes that were still in stock would not be able to be sold to their intended final destination with the lockdown due to the coronavirus. Processors in particular were (and are) facing a major (financial) challenge to cope with the loss of demand for fries and to stay afloat financially. Growers seemed less impressed, because in recent years they have increasingly grown their potatoes under contract and thus hedged their financial risks. Free growers immediately feel the discipline of the market, because in no time the market collapsed like a plum pudding because there was no longer a demand for French fries potatoes.

Pain when processing
This ax has been used to chop more than once. For example in 2017, when prices also fell to levels of around €3 due to surpluses. In recent years, free growers have also been able to benefit from market shortages due to drought, causing prices to rise above €30. The pain therefore mainly lies with the processing industries that have contract potatoes, without sales of the end product.

The sector soon came to the government's table to provide financial compensation to those affected by the coronavirus. The calculations always assumed a surplus of more than 1 million tons of potatoes. This figure was arrived at by calculating 300.000 tons of processing per month until the end of the season (July 2020). It was assumed that a small amount of processing would remain and cold stores would be used for the storage of fries for which there was no sale at that time. The government indicated that it would allocate €50 million for this and thus alleviate some of the pain.

Primary sector
The problem was that governments cannot (and may not) provide support directly to companies/industries. However, support could be allocated to the primary sector. So the promised compensation had to be justified and paid out to the growers.

After lengthy negotiations and under a lot of pressure, the agreement was reached on May 8 redeeming message that a scheme has been set up for affected potato growers and that a fund of €50 million has been made available. This meant that almost 1 million tons of potatoes could be partially financially compensated. A number of rules have been drawn up to prevent fraud. The settlement is done by RVO (Netherlands Enterprise Agency). Important protective rules are that each grower receives a maximum of €6 per 100 kg up to a maximum of €150.000 per company.

Financial compensation
Shortly after the announcement of the scheme, a number of processors offered growers the opportunity to use financial compensation from the government through contract termination or a settlement agreement to collect €6. This also limited the damage suffered by processors by paying the compensation minus the contract price as a 'buyout'. In addition, a huge logistics operation was set up to move the surplus potatoes to alternative destinations such as flakes and animal feed.

However, this was against the sore leg of the free grower and their interest groups. Special, because most interest groups simply sat at the table and knew that the compensation scheme would be used in this way. Nevertheless, a number of parties felt deprived by the arrangement and felt that the compensation did not go to the right place.

On May 20 it was announced that the arrangement was not clear and that there were adjustments in the interpretation of the regulation were done by RVO. The path of dissolution by processors and the resulting support for contract potatoes was closed. RVO.nl provides clarity through questions, answers and calculation examples.

What are the consequences of the changed interpretation of the compensation scheme and how will the potato market, including growers, respond to this?

Two scenarios
Now that it is (partially) clear how the scheme should be interpreted, the processing industry is left empty-handed. They will have to pay for the financial damage themselves. Several scenarios are possible for this:

1. The processing industry still invokes force majeure and terminates the contract with the grower, leaving the financial damage to the grower.

This would be a draconian measure. A survey among lawyers makes it clear that this is not impossible. The various contracts and conditions refer to a force majeure clause. COVID-19 qualifies for this. Growers who think they are safe with a contract are left empty-handed and can only turn to the government for support and receive €6 + the proceeds when selling their potatoes, provided that this is below the level of compensation.

2. Processors will, as much as possible, process the potatoes they have under contract into an end product and thus extend the season until the end of August to get rid of the potatoes and thus limit their financial damage.

This could mean that the potatoes that have just been planted for the new season are no longer needed in the field. Even though it is, and may remain, dry, and the yields on land may be (very) low, there will be no room for the industry for a large part. The 2020/2021 season will then start at a very low price level.

The pot never runs out
Another consequence of the adjustment of the scheme is that the amount that the government has reserved for the compensation scheme (€50 million) will probably not be reached by a long shot. The estimate of a surplus of 1 million tons involved all potatoes in the Netherlands. Now we are only talking about free potatoes and potatoes for which the price has not yet been determined. Contract potatoes will therefore fall outside this scope. It is known that at least 80% of the potatoes in the Netherlands are contracted. So a maximum of 200.000 tons of potatoes would be eligible for the compensation scheme (200.000 tons x €6 = €12 million). €38 million will therefore never be used by the sector.

Arctic potatoes also appear to no longer be eligible for the scheme. The average pool in the Netherlands that uses a normal sales strategy will, even with a proceeds of €0 for the remainder, end up with a payout of more than €6 and is therefore not eligible for the scheme. The changed interpretation is therefore a missed opportunity for the potato sector, with the grower ultimately having to pay the bill this or next year.