The corona news has terrified the potato futures market. The fear is still there after the events of March last year, when the potato market collapsed from one moment to the next. But the world has changed a lot in a year and a half. Can the decline in the futures market this week be justified?
It is often said that 'markets do not like uncertainty'. This has once again become clear in the potato futures market in recent days. There is a lot of speculation about what measures the cabinet will come up with tonight (November 12). That gets on the nerves of some people and the thought 'things won't go wrong again' suddenly arises.
An arable farmer has few options to protect himself in that regard. Some see quickly cashing in for (physically) free product as a form of risk management, but if too many farmers do that, prices will fall. This is somewhat noticeable on the onion market, but is even more visible on the potato futures market. On Monday, November 8, the stock market opened at €20,20 and yesterday the futures market closed at €17,40.
Long term
If we look beyond the issues of the day, not much has fundamentally changed. The chip factories are running at full speed and there are no reports that they are scaling down or that sales are stalling. The Dutch potato harvest is estimated at approximately 3,5 million, which has not increased or decreased and due to the high processing pace at the beginning (of the late-starting) season, a serious batch of potatoes has already been removed from the market.
Viewed from the other side, a mild lockdown is in the air. The chance that all restaurants, drive-throughs, home delivery services, etc. will close does not seem very high. And even if the measures are tightened during the winter, this does not necessarily mean that demand will disappear completely. If the catering industry has proven anything recently, it is that the sector has somehow managed to serve customers in creative ways.
little trade
Something else is striking this season on the futures market: the turnover of the number of contracts is significantly lower than in previous years. The number of contracts in the period from weeks 18 to 44 is 6.716 contracts. That's about a third of what you would expect around this period.
It is difficult to pinpoint one cause for the lower turnover, but a few trends can be identified. In short, there are three parties that make a market: buyers on one side, sellers on the other and speculators in between. Not much has changed on the sellers' side (farmers and traders with potatoes in stock). According to insiders, they have not suddenly offered many fewer contracts. But someone still has to be willing to act as a buyer. That seems to be where the problem lies.
The processors in particular seem to be taking a calmer approach to trading on the futures market. It is mainly the speculator who managed to trade the futures market to levels of €20 and higher, but the same speculator also appeared to be the first to reset the futures market in anticipation of possible restrictions. Lack of support from multiple buying parties caused a major loss on the futures market this week.
How does the physical market react?
What is remarkable is that physical potato prices are not dropping. Does this indicate the confidence of the grower who invests high and thinks that the price will be achieved or are the buyers trying to keep the price at a stable level that is still acceptable to them? It will probably be a combination of both. It remains to be seen how the physical market will react next week. If it does not shrink, confidence in the futures market could soon be restored.