Contract prices significantly higher, but is it enough?

14-02: The price overview has been adjusted after Agristo's price increase in their fixed price contracts.

03/02: This article has been updated after McCain's price increase in their fixed price contracts.

01-02: Aviko's prices have been updated after the announced increase. An explanatory paragraph has been added to the story.

The five large chip potato processors in the Netherlands (Agristo, Aviko Potato, Farm Frites, McCain and Lamb Weston/Meijer) have all increased their contracts for the 2022-2023 season. The price increases range on average from €2,42 to €3,17 per 100 kilos. That is a relatively large increase. After a year of stability (2020) and small reductions (2021), the fixed price is increasing considerably. It should be mentioned here that last year's reduction (average €0,20 to €0,50) is not included in these figures.

Does price increase match cost price?
That is not entirely unique. After the special 2018 growing year, the potato processors also increased their contract prices at the time. Then about €1,70 to €2,25 was added. The question is what growers will notice from the current price increases. After all, they are faced with a hefty cost increase for almost all inputs in their company. The magnitude of the cost increase varies from company to company. That makes it difficult for processors. The Producers' Organization for ware potatoes (POC) calculates with an increase of €1,50 for delivery ex-country and €2,10 for delivery in April. This excludes margin for the grower and for cultivation on clay.

We can conclude that the contract price increases more than offset the cost price increase. An increase of almost €3 for Fontane and Innovator on April is one euro more than what the POC is counting on. Yet that is not the whole story.

In recent years, skewed growth has arisen
The fixed contract price and the cost price of potato cultivation have grown apart in recent years. If the first is partly determined on the basis of the market, the second only looks at hard figures and estimates. Simply put, the contract price has grown too little in line with rising costs. A considerable amount of catching up is being made for next season, but whether this is enough, each grower has to judge for himself. For example, costs for irrigation are not included, while this is necessary for many companies.

There are two sides to the cost story. French fries producers are also facing sharp price increases. The sales may go very well, despite the worldwide corona problem, high costs also cut into the margins of companies here. The financial Numbers of Lamb Weston, for example, show 12% sales growth but almost 70% less profit. Everything from cardboard boxes and plastic bags to cooking oil and energy is significantly more expensive. In the current situation of shortages, it is also difficult for a factory to purchase competitively. That is why we also look closely at the purchase of raw material: the potatoes. Ultimately, it is the consumer who has to compensate for the price increase, and that is not always without a struggle. Especially because retail does not always accept increases. This is very noticeable in the chip world.

*This table is intended as an overview and NOT as a comparison between processors. The table lists the base price without premiums and surcharges. Agristo and Farm Frites are grading 35 millimeters upwards. Aviko, McCain and Lamb Weston/Meijer with 40 millimeters up. See below for further explanation.

Already €20 in April
What stands out in the contract price overview? Last year reported we that for the first time a price above €20 per tonne was offered for delivery at the end of June. Although including premium for mechanical cooling. This year, even on April delivery, Innovator is already seeing a price above €20 (Agristo).

Despite the high energy prices, the delivery period at Fontane at the end of June does not have the largest price increase. At Innovator, however, the focus is on this period. Even when delivering from land, prices have increased relatively much. Innovator is in high demand by all processors. Yields with this variety are sometimes disappointing, causing growers to turn to alternatives.

Contract price above market price
With the above price levels, the factories have clearly taken a stand. When you consider that the 5-year average potato price on the futures market is €16,20 (and the 10-year €15,65), the contracts are well above this. Even in a year with oversupply, the processors commit themselves to pay these amounts.

Agristo not in the lead everywhere
There has been a significant shuffle among the five factories in this overview. The Belgian Agristo, with a factory in Tilburg, is traditionally the list leader with the highest contract price. It must now relinquish or share this position with the competitor. Please note: Agristo pays this price for potatoes from 35 mm, whereas most competitors, except Farm Frites, charge 40 mm.

Aviko usually paid a relatively high contract price in the past. For this season, the processor decided to open the competition early with an integral raise of €2,50 for all varieties in all periods. Other processors have gone over this with sometimes a euro or more. Perhaps to trump the competition or because they simply need more potatoes. Almost all of them are expanding their production this year or in 2023. McCain is even building an entirely new factory. LWM also has those plans for next year.

Aviko's contract prices - which had already been set in October - no longer matched the cost price increase for the cultivation that is pictured in February. Reason for the company to price to be adjusted by €0,50 to €0,80 per 100 kilos.

Innovator at €22,30
Fontane comes in the three delivery periods (from country, week 17, week 26) with an increase of €2,75, €2,96 and €2,42 per 100 kilos. This brings the average contract price to €12,05, €17,62 and €20,17. At Innovator, those increases are €2,99, €2,93 and €3,17. The average contract prices are €13,90, €19,63, €21,95.

Quality premiums and bonuses are not included in this overview. This can cause the final potato price to deviate considerably. While the fixed price volume was reduced last season, this year it has been reduced to 40 to 50 tons. Sometimes there is a small bonus for that too. Due to the uncertain situation, most companies do not opt ​​for multi-year agreements. Those who have a current two- or three-year contract are sometimes compensated, sometimes not.

Conclusions
Processors are responding to the sharp rise in cost prices. Due to price imbalances, it is difficult to raise prices to a significantly higher level in one or two years. They also indicate that a high potato price is at the expense of their global competitiveness. It is clear that manufacturers also incur higher costs for all their inputs. After all, frying potato products requires a relatively large amount of energy. Factories need more potatoes by expanding the processing capacity, but are by no means always certain of expanding the acreage. Little growth or contraction is expected in the Netherlands. Expansion opportunities are mainly seen in France, but the signals are not positive there either. 2022-2023 will be a challenging and uncertain season for all parties in the chain.