Despite the ongoing corona measures, French fries production continues to run remarkably well. Last January, more potatoes were processed in the Netherlands than in January 2020, before all corona measures came into effect in the western world. Sentiment has been gloomy for a long time. Until December, the general tendency was that the potato prices would be nothing this year. After the turn of the year, the mood seems to have changed and prices have risen. How does this reconcile with the stories of the manufacturing industry running on limited capacity?
There is a lot of talk about factories that now partly bake chips to be sent to the cold store as stock. However, several insiders have doubts about this. The potatoes are relatively cheap at the moment, so from that point of view it seems logical. However, stocks of frozen French fries increased considerably at the beginning of the corona crisis. Capacity of the cold stores is not unlimited. As demand increases, storage prices also increase.
With the uncertainty about the further course of the corona crisis in mind, it is risky for producers to maintain very large inventory positions. The vast majority of fries are therefore sold. But which parties are currently buyers?
Not all catering establishments are closed
The catering industry in Europe is largely closed. This means that an important sales market has disappeared. Various parties report that imports and exports within Europe are down 15 to 20% compared to a year earlier.
The disappearance of events, festivals and sports competitions with an audience plays a major role. This is where a lot of fries are normally consumed. If you watch a football match in front of the TV, you are less likely to eat a bag of chips than if you are in the stadium. There is a shift towards frozen chips sold at retail. It is difficult to determine exactly how large this shift is.
Delivering the new normal
It is also not the case that all catering establishments are closed. For example, if we look at McDonald's quarterly figures for 2020, we see a clear dip in turnover to $3,76 billion in the second quarter of 2020. A year earlier, this was still $5,34 billion. Sales recovered in the third and fourth quarters, reaching $5,31 billion and $5,42 billion respectively. In 2019, revenue was $5,35 billion in the third quarter and $5,43 billion in the fourth quarter. These figures refer to the company's worldwide turnover.
We cannot translate McDonald's figures one-to-one to other restaurants. It is quite conceivable that other fast food chains, snack bars and restaurants have also successfully switched to takeaway and delivery. A product like fries is suitable for pickup and delivery. Producers are responding to this with, for example, coated fries that stay fresh longer. After all, the need among consumers has remained. Demand has decreased, but this is not the biggest contraction.
Export recovers
Countries in Asia and Oceania took very strict measures to prevent the spread of the corona virus shortly after the outbreak. As a result, public life in affected areas has come to a virtual standstill for months. The policy has worked out well. The virus is largely under control there and public life has resumed. Consider, for example, the Australian Open last week, where an audience was present again.
This recovery is also reflected in chip exports. Several insiders report that exports to these regions are now growing again and are again above the level before the corona outbreak. The relatively low prices provide an additional incentive.
Distorted picture
Sector-wide, a global annual growth of the French fries market of several percent was predicted until March 2020. Manufacturers have responded to this and increased their capacity by approximately 30% in recent years. This expansion creates a distorted picture when different years are compared. If a manufacturer reports that it is operating at 80% of capacity, this means in absolute numbers that production is at the level of a few years ago. Chip factories are currently operating at the level of the 5-year average.
The NEPG figures from last autumn show that the area in Northwest Europe has grown by 5% over the past 7,7 years. This growth is smaller than the expansion of production capacity. This means that even without corona there is overcapacity in processing.
We saw a clear dip in the demand for fries in the second quarter. The demand for fries subsequently picked up relatively quickly. The growth in the chip market that was predicted has not materialized. But it is certainly not the case that fries are no longer eaten. Add to this the fact that part of the harvest was given a different destination at the beginning of this season, and the image of the chip market suddenly looks very different.