The potatoes are barely out of the ground when the discussion and thinking about next season have already started. There are major challenges for both grower and processor. For the grower to make the right choice and for the buyer to present a cost-effective contract.
Last season, processors made a big step in increasing contract prices. In the current market this already seems outdated. The five major potato processors in the Netherlands left them contract prices increase by €2,42 to €3,17 per 100 kilos, depending on the variety and delivery period. In 2020, contract prices fell slightly in some cases, due to the consequences of the corona pandemic. In retrospect, this was an incorrect assessment by the processors, which they are often reminded of. This price reduction ultimately reversed the trend in the growth of the area.
incentive
After years of growth in the consumption potato area - mainly in France - this trend reversed in 2020. Growers were no longer willing to take so much risk for a low return. The area decreased for the first time. This had to be corrected in 2021 and growers encouraged to grow more potatoes. After all, investments in processing capacity had continued and the major processors were ready in 2021 to process a record quantity of potatoes and ultimately export a record quantity of fries, after corona no longer limited sales.
The outbreak of war in Ukraine made matters uncertain, but the start of the war at the end of February was just too late for many growers to anticipate this. As a result, the area grew in 2022 and the processors significantly increased their contract prices. Some processors even increased their contract prices during the contracting period. Something that has never happened before in the past. The main approach was to continue to stimulate the cultivation of potatoes and thus maintain an advantage over crops such as grain and onions.
Due to the timing of the contracting, most factories managed to obtain their desired volume of potatoes and to fix them at a fixed price. In theory, this meant that the processing capacity could be used sufficiently profitably.
Supply and demand
The fact that the growing season was subsequently very poor and the lowest yield in fifteen years was achieved within the EU-27 does not seem to really affect the market. Processors use the availability of contract potatoes and are defensive in the sale of fries. As a result, supply and demand are well matched, despite the low volume of potatoes. However, other markets have now drifted considerably and the cost of potato cultivation is escalating again.
Record prices
Fertilizer and diesel prices are currently at record levels. Moreover, diesel is even in danger of becoming scarce. The energy - required for storage - shows a fivefold increase in price levels compared to last year. An inflation of 17% also causes other potato cultivation costs to explode. This makes potato cultivation almost unaffordable.
A leading English market agency calculated last week that - at current potato cultivation costs - contract prices will have to increase by 40% next season. The NEPG has also used the calculator and calculates that cultivation (including storage) for next season will be €6 per 100 kilos higher in costs than in the previous season. This creates a very complicated situation for both the grower and processor.
Contract price up to €26
The cost price calculations, as made by these organizations, result in contract prices ranging between €16 and €18 ex-land. For storage potatoes at week 17, this price level is around €23 to €26 euros from storage. These are higher prices than the current futures market shows for this season.
The alternatives are widely available. Grain remains an attractive crop with low input and little labor. Moreover, it is very good for the soil and biodiversity. Today you can already sell next year's wheat behind the combine for prices around €300. Onion cultivation also continues to provide good returns. Moreover, there is good market functioning here.
Does the processor want to take a risk?
The question is whether processors are prepared to enter into such high fixed price contracts, or whether they will transfer the price risks back to the growers. After all; Purchasing potatoes at high prices does not always provide the opportunity to immediately resell the processed product for the same high prices. In addition, there is enormous uncertainty in the sale of fries due to the availability of gas, packaging material, frying oil and other supplies. Their availability and price levels vary widely.
In addition, the world is heading for a huge economic recession, in which the catering and events sector will probably also suffer significant blows to their turnover. The consumer can only spend his money once. If most of that is spent on gas and electricity, there will be little budget left for eating out. With these uncertainties in mind, the question is which potato processor wants to pre-determine 90% of his potato needs in January and February without having certainty about sales. The current daily market shows that even when there is scarcity, the price of potatoes does not exceed €25.
Calculator
It will be a complicated puzzle for both the grower and the processor, where the survival of potato cultivation may well enter a crucial phase. This could affect Europe, as the leader in the world chip market. For the grower, the calculator remains the most important machine in the machine park. The appetite for risk is an important consideration in what will be built next year.