A number of potato processors are going on the farm this season with multi-year fixed price contracts, whereby growers can fix their price for 2 or 3 years. This means that deliveries can be made in the coming years at the price level of 2020. But, is that price representative for harvest year 2023? Boerenbusiness figured it out.
Multi-year agreements are not new, but some processors are making them more prominent this year. To create stability in the sector and to compensate for a short-term price drop. Farm Frites and Aviko Potato opt for a 2 or 3 year agreement in the form of a fixed price or 'rolling contract'. At McCain and Lamb Weston / Meijer (LWM), growers can also make a multi-year agreement, but it is not extensively discussed in the contract strategy.
At Farm Frites, growers receive a plus of €0,25 per 100 kg per harvest year. McCain also uses that strategy. Aviko uses the same contract price for the 2022 and 2023 harvest years as for 2020. LWM does not communicate prices externally.
Highest contract price, highest cost price
The contract prices charged in 2020 are the highest ever paid out by processors. The average price level for Fontane on week 17 was €15,14 per 100 kilos and €18,00 on week 26. That is 13,5% and 14% higher than the 7-year average. For Innovator, the price level in 2020 was 8% to 14% higher than average. On average €16,98 was paid in week 17 and €19,10 in week 26.
For 2021, Fontane's contract prices in week 17 are on average €0,48 lower. At week 26 this is €0,25 lower. At Innovator the price drop is €0,28 and €0,33. You can compensate for this small decrease with a multi-year contract. The price levels may be high - from a historical perspective - but this means little to the grower. They experience it differently. Especially because the cost price increases by about 3% every year and is therefore rising faster than the potato price.
Contract price increased 6,5% to 10%
Contract prices have increased integrally since 2015. Prices only fell in 2018 and 2021. At Fontane, prices have increased by an average of 5% over the last 6,5 years. The price increase for the Innovator variety is 10%.
Cost rose a third
Since 2009, the Dutch Arable Farming Union has been making a cost price calculation for consumption potatoes from the field and dry from the shed, delivery in April. The cost price has increased by more than 12% in 30 years for ex-country delivery (from €10,07 to €14,00). Dry from the shed, the increase is 35% (from €13,50 to €18,20). These prices have been calculated for an arable farm on clay soil. These are net cost prices, excluding margin for the grower.
If we assume a linear cost price increase, the ex-land cost price in 2022 will be €14,32. In 2023 that will be €14,64. A significant gap arises with the contract prices, with an average of €10,91. For April delivery, the cost price is €18,59 in 2022 and €18,98 in 2023. The average contract price in April is €16,06.
Bonuses and allowances
An average cost price is not anyone's cost price and is one of the reasons why potato processors do not cling to it too much. Only Aviko has a contract form in which the cost price is taken into account. This form was launched in 2019, but has not really taken off. Growers can accurately calculate for themselves what level their cost price is and what sales price is therefore worthwhile. Boerenbusiness reports the basic contract price as much as possible, without bonuses and surcharges. If you do this - and store your potatoes in, for example, mechanical cooling - the price will increasingly exceed €20 in June. The contract price level is then clearly higher.
Processors are only willing to participate in the rising cost price, but is an inflation correction not an option? In 2020 this amounted to 1,3%. Over the last 10 years, the average inflation adjustment was 1,6%. It is normal to apply an annual inflation adjustment to current contracts, salaries or other price agreements. Why not for potato contracts? After all, the prices of many inputs are partly supported by this.
Price gap
If we apply an inflation correction of 1,6%, this means that the contract price for Fontane in 2022 will be €9,44 (ex land), €14,89 (week 17) and €18,04 (week 26). For Innovator this is €11,08, €16,96 and €19,08. In 2023, the Fontane price will increase to a level of €9,59 to €18,32 and €11,25 to €19,38 for Innovator. This leaves a gap of several euros between the net cost price that NAV calculates, but it does give an indication of a solid price increase. Additionally, this takes the guesswork out of contract pricing before contracting begins.
This increase does not compensate for the annual increase in the contract price, but it does provide an initial impetus and a stable basis.