Keeping courage in a gloomy potato market

Main conclusions of this analysis:

• Potato area EU-5 + Poland increases 1,5%.
• Potato acreage in North America shrinks 4%.
• Corona discount on futures market €3/100 kilos in July.
• Potato futures market ceiling €10-€15/100 kilos.
• Average harvest yields 36,2 million tons of potatoes in EU-5.

The sector was still in the middle of the corona crisis when the new season started. The wet autumn and mild winter caused some concerns for many growers with regard to getting the seed bed in order. Processors made frantic efforts to persuade growers to reduce their area after the collapse of the potato market. Then there were the special leg conditions. The choice was: wait for rain, or simply entrust the potters to the ground. Ultimately, both the early potatoes and the main crop were planted at an average time. Apart from corona, the dry starting position dominated the mood.

Area harvest 2020
About 90% of the agreements between buyers and growers had already been made before the lockdown. The incentive was to grow more potatoes. The demand for the end product was more than good, which the processing capacity in Europe anticipated. This set off a multi-year trend for expansion of the European potato area, especially in France.

After the outbreak of the coronavirus, frantic attempts were made by buyers to shrink potato cultivation. The aim was to shrink the area in Europe by approximately 10%. By mid-2020, the conclusion is that this mission has not been successful. The intended EU-5 area expansion has been reduced to a comparable area compared to last season. Including the area in Poland, the area is even expanding by approximately 1,5%. This is not very surprising. The seed potatoes had usually already been delivered and there are no alternative crops.

In the important chip potato growing areas of North America, significant measures have been taken to reduce the acreage. Larger growers, often well organized towards buyers, have cut their surface area. In both the US and Canada, the area for the 2020 harvest will shrink by more than 4%.
 

Field situation versus futures market
It was striking that despite the drought and moderate structure, the futures market did not want to go along with the sentiment among growers. The fears about the consequences of the coronavirus for the further price development of the season were apparently too great. The futures market harvest 2020 remained stuck around the €12 level for a long time with relatively little turnover. In other seasons, where drought was an issue early in the year, mood did arise. This is how the mood was set in the (in hindsight bad) 2011 and 2017 seasons. The futures market rose towards and even above the €20 level. There is therefore already a so-called 'corona discount' for the April 2020 futures market quotation from initially approximately €8 to €3 in July.

For the Potato Market and Arable Farming Pro subscribers Boerenbusiness.nl is known that when compiling the potato market analysis, the direction that the futures market chooses for settlement in April the following year is made in weeks 27 to 30. The statement is that if the futures market chooses a direction below €10 or above €15, which is often the top (in the case of €10) or the bottom (in the case of €15). The formula is: Area x crop growth x sales = price development.

Sales determine price
In the first half of the growing season, the components area and growth weigh heavily. In a later phase, sales of the end product will be partly added. For the 2020/2021 season, sales of fries, and in particular their recovery, will become an even more important factor than it already is. Over the past 10 years, sales of end products seemed to be able to grow indefinitely, at a few percent per year. In years with a bountiful harvest, processing capacity was the limiting factor. The 2017 harvest year is still fresh in our minds. In that year, the European harvest was too large compared to the processing capacity, which determined the price formation.

This year, an almost impossible challenge has been added: the loss of part of the sales of end products as a result of the corona crisis. The closure of the catering industry and the loss of food service services has hit processing particularly hard. At the low point (early April), sales were reduced to 15% of normal. Retail continued to operate reasonably well because consumers started hoarding. The fact is that relatively little French fry consumption takes place indoors worldwide. The 'deep fryer density' is greatest in Northwestern Europe compared to the rest of the world. The big question is how quickly demand for end products can recover to previous levels.

Yield in the EU-5
The 5-year average (2015-2019) of the EU-5 main harvest is 34,2 million tonnes, based on 42,3 tonnes per hectare. This also includes the significantly lower result from 2018. Last season that was 41,2 tons per hectare and in 2015 44,3 per hectare. With an average hectare yield this season, the EU-5 harvest amounts to 36,2 million tons. This is 2 million tons less than in the peak year of 2017, when an average of 46,4 tons per hectare was harvested. In a scenario with a plus of 5% on the average, the harvest will be 38 million tons. In a minus 5% scenario this is 34,4 million tonnes. Depending on the processing capacity - in 2019 this was 28 million tons - and demand for the end product, there are a number of possible scenarios. We assume that no second corona outbreak will occur.

Conclusions
Due to the limited decrease in area in the EU-5 and Poland and the current state of the crops, it is very important that the processing and marketing of the end product normalizes as quickly as possible. The development of the crops largely takes place in July and August. The last hurdle in terms of risk is the harvest. Pessimism is particularly high due to the consequences of corona. The futures market for the 2020 harvest has chosen a downward direction in weeks 27 and 28, as it now appears. If crop growth remains average to good and chip sales show too modest a recovery, so that accumulated stocks continue to get in the way, then the sector is looking at a pitch-black scenario for the remainder of the season.