Energy crisis: dark cloud over potato sector

A shutdown plan for the Dutch industry there is not yet. The Ministry of Climate and Energy is working on this under the leadership of Minister Rob Jetten. Such a priority plan is also being worked on in Belgium. The potato processing industry is taking into account that it may also receive less gas this winter. No statements are made about this in public, but insiders within the sector confirm that everything is being done to prevent it from happening.

Priority status
Andries Middag, secretary of the potato processing organization Vavi, would like to say a few words about the situation. "We don't expect the sector to shut down this winter, but the situation will not just blow over. Our members are now doing everything they can to avoid the traditional winter peak. Most factories already generate renewable energy, but that is not nearly enough to to meet the full need. The food industry is high on the priority list for gas supply. Unlike, for example, the greenhouse horticulture sector, we do not have our backs against the wall."

Great uncertainty keeps potato processors busy. The consequences are reflected in the potato market. The potato futures market is remarkably calm, which has everything to do with the lack of buyers following a risk-averse pattern. The mood in the physical market is also steady. In addition to the energy crisis, processors are also struggling with their total cost price. Deep-frying oil, packaging material, labor costs and more have also risen in price and the supply continues to be limited. Finally, there are fears that corona will strike again this winter and sales will decrease.

Converting French fries lines
Sufficient gas or not, potato processors do not wait for the situation. For example, Aviko Potato in Steenderen and Farm Frites in Oudenhoorn are known to (partly) convert their baking installations to use diesel instead of gas. Diesel is not cheap, but its availability is better. Both companies declined to comment on the details. It is possible that other Dutch French fries producers also undergo such a conversion procedure. In addition to long delivery times – of more than a year – the mandatory CO2 rights also play a role. If a factory decides to use diesel, it must buy rights to do so. The price is about €80 per tonne.

Where possible, factories use renewable energy. For example, Farm Frites has a fermentation installation at its location in Lommel for the production of green gas. "In the past, it was difficult for the potato industry to get started with fermentation from a subsidy-technical point of view," says Vavi secretary Middag. "With the current situation, we can hopefully make this a topic for discussion." He cannot say whether this step means that potato waste flows end up in the digester instead of being converted into animal feed. "That depends on the supply and demand situation. Perhaps manure is more interesting. An advantage is that factories can handle 'rawer' gas than other industries."

Factories that dry potatoes for flakes, granules or starch have an even greater energy requirement compared to French fries production. Steps are also being taken there. Avebe made known to work more with (sustainable) electricity and to make processes more efficient.

Waiting for support package
In the meantime, Germany has announced a large support package for industry and France has capped the energy price. Such measures have not yet been announced in the Netherlands, but Middag considers that there is a good chance. "Towards Prinsjesdag, more will undoubtedly be announced. The Netherlands is lagging behind in this area and it cannot stay that way." Neighboring Belgium, too, has not yet presented a shutdown plan and, like the Netherlands, is currently making an inventory. The country only gets 4% of its gas needs from Russia, making it relatively independent. Nevertheless, a possible European energy crisis does not leave the Belgians cold either. In addition to energy, Belgian fries producers face more challenges, Middag thinks. "In terms of sourcing (potato supply ed.), the Belgian industry has a bigger problem because of the lower production. In the Netherlands, factories have more potatoes." Not only because of the slightly better growing conditions, but also a higher hedging percentage through contracts.

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Since the end of August, the futures market price for gas has been falling again.

If there is a scarcity in the energy market, this will push up the gas price. This one is currently descending. This is also reflected in the cost price of the end product. The price of fries is at an all-time high and is likely to rise further. "There is room for further increases in the price", says Middag. "Normally, price increases are passed on afterwards, now processors have pre-sorted accordingly. This spring, research was conducted into the cost price and the consequences of the war in Ukraine on the cost price. In April and May we thought it would be okay, but the situation is completely changed. There is still room in the sales market, but the (price) risks are increasing."

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French fries prices in the EU4 and Poland are at a high altitude. The average price level was almost €1.000 per tonne this spring.

Inflation hits sales
The sky-high inflation will also influence the consumption pattern, according to producers. "Fries may be the cheapest product on your plate, but they are pre-eminently eaten outside the home," said an insider. People tend to eat out less, especially in financially difficult times. Sales of chips and other potato products are expected to decline. In view of the European potato production this season, the raw material supply can also inhibit production, balancing supply and demand.

The high product prices and energy costs also make French fries producers hesitant to build up stocks. French fries made from cheap potatoes did not allow manufacturers to keep stock in the cold store, as happened in the corona years. That is different now, which means that the work stock is poor. This makes it difficult to switch quickly during an upturn.

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Despite extreme drought, the potato futures market remains remarkably stable with prices between €27 and €28 per 100 kilos in April. That is equal to the physical prices.

Consequences for the grower
At the same time, it ensures that a conservative policy is also pursued when purchasing potatoes. "We buy the potatoes when we need them," is what it sounds like. This makes it possible that the current potato market will hardly show any improvement until the new year, or will even experience a decline. Especially when compelling farm supply arises because growers dread the high storage costs. It is now difficult to say to what extent the uncertain future will influence the contracts for next season. Processors would like to get started early, for an arable farmer opts for wheat this autumn, but what is the right price for next season? All factories agree that the contract price will increase, but no hard amounts have yet been mentioned.