Background Potatoes
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This summer the potato futures market looked deserted, just when growing conditions were extremely exciting. The rollercoaster ride of the 2023 growing season has not yet ended at the beginning of December. In the meantime, the futures market is once again showing its value with the return of more and more participants. Yet the recovery can be called precarious. Pieter Post of DCA Finance explains why as a potato grower it is good to think about the market instrument and the impact if the instrument is no longer there, especially now, towards the 2024 harvest year.
During the previous interview At the end of September the free potato price was in free fall with the prospect of a very large harvest in the EU-4. The situation is now very different. What is the mood in the market now?
"Since then, a landslide has virtually occurred. It was taken into account that we would have to deal with a later than average harvest season, due to the late spring. What was not and could not be taken into account were the conditions under which the potato harvest was affected. Potatoes still have to be harvested and two questions arise. The first is: when can they be harvested? And the second: what is the usability of the product to be harvested? This harvest year is characterized by a high cost figure, making balances possible come under pressure. However, the headache for the grower is not over when all the potatoes have been harvested. There are considerable concerns about the shelf life of the recently stored potatoes in particular."
This autumn it became clear that existing and new participants in the futures market could contact ADM on relaxed financial terms, no starting amount of €100.000 is required. Have entrepreneurs taken advantage of this?
"Yes, certainly. We certainly have no complaints about the interest! But there is a gaping gap between showing interest and then taking action. On the one hand, this can be explained by the fact that growers are still busy with agricultural work. On the other hand, it requires opening an account quite some time. As DCA, we are responsible for a large part of this, but without input from the account applicant we cannot do anything. The time between applying and actually opening the account can take several weeks. The application itself is not too bad, although you do have to sit down for it."
There are a few things to consider when opening a futures market account. Does that go smoothly or not?
"Anyone who has dealt with a bank in recent years knows that the requirements have been tightened. That is for opening a futures market account not different. Gone are the days when you could open an account in three days. Quite a few things are asked, but it is not the case that it cannot be done. We have had accounts opened for companies with a complex organizational structure. The flexibility will largely depend on the applicant's response to the questions asked. Just like with that company with the blue envelopes, the same applies here: we can't make it more fun, but we can make it easier."
Daily turnover on the futures market has increased slightly again this autumn. Does the forward quotation now do justice to the potato market again?
"The potato futures market is the only reference for growers, traders and processors when it comes to the pricing of fries-suitable potatoes for long-term delivery. Concerns about the size of the harvest, the progress of the harvest and the usability of the harvest have increased. the futures market translates into roughly a premium of €10 on physical prices. That may be a lot, but seriously calculate the cultivation costs and you will see that the €10 has been erased in no time. In any case, the current futures market level shows that there is There is a difference between an expected harvest estimate on paper and in practice. This shows the instrument's value."
The price of the April contract is still well above the €30 level. Can potato growers benefit from this?
"Certainly, but then you have to have things arranged, i.e. the futures market account. Another factor is that there is some reluctance among many growers. This is mainly due to the quality that is stored. The potato market has a price-based undertone, despite the long off-season season and the accelerated supply of lots that can no longer be stored. Normally this is a reason for a less solid basis for price formation, but the market does not feel that way now. Whether the potato market can climb to higher price levels remains to be seen. question. That's why you have to think carefully about prices that represent a three."
Contracting for the 2024 harvest year will start early next year. Is it smart for a grower to involve the futures market in covering risks for the new season?
"Different risk profiles apply to every grower. Anyone who, in addition to cultivation, also wants to have an input into the price to be achieved would be well advised to open a futures market account. It costs nothing to open. Costs are only incurred when actual trading takes place. The instrument must suits you. This also applies to contract cultivation."
What do you mean by that, with a contract you have a guaranteed price, right?
"At first glance it is a reassuring way of covering risks, but that is the question. Suppose you have not harvested the kilos that were contracted this year. Then a contract feels different from the warm bath you thought you were in. A healthy mix of 50/50 between part fixed - in the form of a contract - and part free, will benefit the potato market as a whole. Then there will be a serious market and price formation where it is today. is being increasingly phased out. When it comes to the free cultivation of potatoes, the futures market is an indispensable element, which also applies if it concerns a pool. It is important that the futures market is retained as an instrument for the potato market. Imagine that this instrument disappears. Then it will be a serious challenge for the sector to create a price reference for the longer term. Few realize this. Without a futures market, managing risk becomes a difficult matter for all stakeholders, and this season has once again demonstrated that there are risks. once proven!"
Niels van der Boom
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