American potato processors are unable to reach proper agreements with growers in the country. While the first potatoes are already in the ground, both parties have not yet reached an agreement on the price level for the 2021 harvest.
Lamb Weston - the largest North American potato processor with a 42% market share - is unable to reach contract agreements with its growers in the important growing area of the 'Columbia Basin'. Growers are demanding a higher contract price for next season than the processor is willing to pay. Time is running out, because the first potatoes are now being planted.
The Columbia Basin is the potato growing region of the US. Located in the states of Washington and Oregon is an immense arable region where a combination of heavy irrigation and many hours of sunshine guarantee good yields. The average in the area is 67 tons per hectare. The potato area there is almost 73.000 hectares.
Plots under cultivation
Arable farmers have had a difficult year, but with a good harvest. The growing conditions were perfect, resulting in high yields. The corona pandemic also threw a spanner in the works here. Last spring, when the potatoes had already been planted, Lamb Weston started phasing out its contract positions. As a result, growers under-processed potato crops during the growing season.
The contract negotiations between Lamb Weston and the growers are of significant importance. They form an indicator for potato growers elsewhere in the country. Other processors, such as McCain and Heinz-Kraft, are waiting to see what the outcome will be before they make their own offer. In mid-February, arable farmers in the area started planting for the 2021 main harvest, which means that the contracts really have to be signed now.
Increased costs
There is less tension with the contracts for potato chips. Processors use the same prices and volumes here compared to a year earlier. The table potato market is shrinking in terms of both contracted volume and total volume. Prices are considerably lower in this market segment. All growers face increased production costs for fuel, fertilizer, crop protection products and labor. They demand a higher price, while chip processors in particular want to take less risk and pay lower amounts.
Canada has had a more difficult potato year. Drought and heat resulted in lower potato production, which is 4% below 2019. Seed potato production is also lower, partly due to an area that has shrunk by 2,3%. This in turn is disadvantageous for growers in the US, who are partly responsible for seed potatoes from Canada. Factories have placed more orders for chip varieties, but the question is whether all of this can be delivered.
Home market hit
All processors in North America have postponed putting together their contracts for as long as possible in order to gain the best possible picture of the potato market. A large degree of uncertainty is built into the market due to the coronavirus. Delivery services are working overtime in the country and American consumers are eating more potato products at home. However, the sector has reasonable fears that the home market will continue to be severely affected. About 110.000 restaurants in the country have already had to close their doors, which is affecting sales. It will take years for the catering sector to rebuild to pre-corona levels.
Another uncertainty is the presence of European fries in the US. Belgian and Dutch factories have managed to significantly expand their export position. In addition, they have (partly) taken over export markets where the US previously had a strong presence. This not only applies to fries, but also to potato flakes and granules, for example.
Less stock
The Columbia Basin may have had a good harvest, but a combination of less acreage and a smaller harvest in the US means a tighter supply. French fries stocks in cold stores were at the second lowest level ever in February. A decrease of almost 4% compared to last year. On the one hand, this is quite special because of the lower consumption in our own country. Another reason is that processors are carrying less inventory to reduce risks. Supply and demand for potatoes are reasonably balanced, so they can afford this.
The US export figures do not directly reflect this competitive struggle. In the second half of 2020, the country exported 17% fewer fries than in the same period a year earlier, but this loss was only 6% in December. The last 3 months of last year showed clear recovery. This is evident from figures from Potatoes USA.