'Risk management is more than fixing potato prices'

The Nedato cooperative has had a special year in several respects. The potato market itself was unprecedentedly volatile with prices ranging from €10 to €60 per 100 kilos. It doesn't look like the market will calm down next year. At company level at Nedato, the spin-off of the table potato division with Agrico has been successfully completed.

A significant increase in the contract price for the 2023 harvest and prices for free potatoes that have found their way back up after a dip in October. Little reason for potato growers to complain?
"The potato processors have significantly increased the contracts for the 2023 growing year. Growers have not proven insensitive to this and have contracted more potatoes than in other years. The pool of free potatoes is therefore smaller. Because there are fewer free potatoes, the market is more sensitive to price fluctuations both up and down. In the meantime, cultivation costs have risen sharply. This increases the risk for growers."

"There has been a change in thinking among the potato processing industry. Until 2020, French fries sales were leading for the industry. We have almost forgotten it, but after the dramatic corona year for the 2021 harvest year, the French fries industry lowered contract prices with the expectation that the area would still increase. would be full. Growers thought differently, resulting in an area shrinkage of approximately 5% in Northwest Europe. Securing sufficient raw materials has since become much more important for the industry. The focus is not only on the sale of fries but also on the purchase of potatoes. This is reinforced by the expansion in processing capacity. The potatoes have to be there to keep the factory running and to have fries to sell. I think processors are struggling with the conflicting interests of purchasing and selling It is not without reason that they wait a long time before they come out with the new contract prices."

If processors and growers want to manage risks and seek certainty, will contracts become the norm and will we move to 'the American' model?
"I don't expect that. There is one very important difference between potato cultivation in North America and in Europe and that is the predictability of yields. In America, yields are much more stable with yields varying between a few percent more or less than average In the Netherlands, revenues vary by plus or minus 20% compared to average. You cannot therefore take into account almost 100% hedging in the sales positions of fries. 75% hedging on a fixed price will remain an absolute maximum for processors. The extra potatoes have to be priced and sold somehow."

"The question that must be asked is, how do we distribute the risk in the chain? Cultivation costs have increased and last season it became clear that the weather is also a significant risk with drought, precipitation and high phytophthora pressure. A risk premium of 15% on top of the cost price is therefore nothing strange. In America, the industry works with a cost price plus model. The basis for that cost price is formed by a limited group of large growers. In Northwestern Europe we have a much larger group of growers with cost prices that partly vary much more due to the large differences in yield. The value distribution in the chain must be improved. This starts with a cost-covering contract price, but also transparent and good market functioning for the free potatoes. This is, for example, in a futures market that, despite the fact that this year much fewer transactions is still a good indicator of developments on the market. Just look at the effect of the dry spring or wet autumn on the futures market. In addition, there are profits to be made with a reliable and transparent listing. This way, growers know what real prices are for free potatoes."

Growing potatoes freely, is that a better choice for the grower?
"It is not about better or worse, but about customization at grower level, about what risk you as a grower can and want to bear. Over a number of years, the average price of free potatoes is higher than that of contracts, which can also be seen in the table below. In the Nedato Flex System (NFS), the share of free potatoes is 75%. If liquidity is a bottleneck in your company or you want more security, you might be better off opting for a larger share of potatoes on contract. Then you know that. the direct input costs are largely covered. When the company has more financial scope, you can also take more risks. Risk management is about more than just fixing the price, also about variety choice, storage options and quality of potatoes."

"Nedato has the Nedato Flex System (NFS) in which growers can make a mix of four different price formation systems. Fixed contract price, pool without pre-sale, click contracts on the futures market and sales at daily price. Over the last five years, our growers have used this through the NFS can achieve a higher price on average than with 35 tons on contract and the co-delivered kilos paid at the PotatoNL."

That is a good result for the members, but growers and processors are increasingly finding each other better and various parties in the intermediary trade have disappeared in recent years. Does a cooperative like Nedato still have a right to exist?
"Ultimately, what matters is that we provide added value for both growers and processors. We do this for our growers with advice at all levels, bundled supply of potatoes and broad representation of interests. At the cultivation level, we have achieved great results through our collaboration with CZAV. very strong. But we also have a lot to offer our members in the field of potato marketing. For processors, our added value is that we can offer larger batches of potatoes that meet the same specifications at the right time. We know what "We know exactly which grower is in the shed and that is why we can switch quickly and provide the buyer with the potatoes he needs at that moment. A long-term, reliable relationship is therefore very important. Collaboration in the chain was and is becoming increasingly important."

"The fact that growers see that we add value is evident from the fact that we are still attracting new members. This is a diversity of growers, smaller growers who outsource the sale of their potatoes, but also the large growers who, for example, risk spreading, do not want to be dependent on two or three processors, but look for an additional buyer. The chance is small, but it will happen that a processor cannot meet its financial obligations to you as a grower. In Belgium, the futures market is still relatively unknown and attracts we invite new members who want to gain experience with this. In Germany we see that growers would like to make use of our cultivation guidance. I sometimes say that for a grower who is in a partnership with his wife or son/daughter, Nedato fulfills the role of an MT consultation. Suppose you want to build a new storage facility, we do not provide construction advice, but we do think along and can provide ideas based on the experiences of other members."

We have mainly talked about the market and prices, but there is more to the potato sector and agriculture in a broader sense. How do you see these developments?
"I think the potato area in the Netherlands and Belgium has reached its maximum and will shrink rather than grow. Consider, for example, the October 1 measure, the obligation of 1 in 3 rest crops on sand and loess and even more recently the NV areas. In addition that the hectare yields show a decrease rather than an increase. Some growers are therefore going from 1 in 3 potatoes to 1 in 4 or from 1 in 4 to 1 in 5 to extensify the cultivation plan. Chips, table potatoes, seed potatoes and starch are all to the market for that shrinking acreage of potatoes. If one increases the price sharply, this will be at the expense of the others. Due to higher chip potato prices, some seed potato growers have grown more chip potatoes or have even switched over completely. If the growing season is also disappointing like last season , then you run into shortages as we are now seeing with the availability of seed potatoes."

Different cultivation goals competing for the same hectares. Was that also the reason for transferring the table potato branch to a new cooperative?
"The table market has been showing a shrinking trend for years. A few years ago we were able to compensate for this by improving efficiency through a reorganization. To remain profitable, we knew that we had to attract extra volume for the sorting company. In a shrinking market This can only be achieved through collaboration or acquisition. By merging the table potato activities of Leo de Kock and Agrico, we have that volume. The pure table potato growers have switched to the PotatoNext cooperative. Some of the members who grow both table and AVI potatoes are became a member of both cooperatives. In particular, members who, for whatever reason, had difficulty achieving the maximum quality premiums in table cultivation, have completely switched to fries in recent years. Missing premiums has a major impact on returns in table cultivation. The interests of the table and chip growers are not the same. PotatoNext focuses on the table growers and Nedato can fully commit itself to the chip growers."

"The fact that Nedato only continues with the French fries potatoes does not mean that we have turned inward. Where possible we seek cooperation. If we have the same interest in an issue as the Vavi, LTO, NAV, why not work together? There will be considerable to the sector. Growers quickly think about legislation and regulations, but do not forget the sustainability programs. This starts with our customers' customers, the fast food chains and wholesale companies that impose sustainability requirements on the products they purchase and that continues to move forward. in the chain. Ultimately also to the grower. Successful introductions of sustainability at the grower depend on motivation and therefore reward for efforts. Then you come back to the value distribution in the chain. The current price of pre-fried fries is in every case, a good basis for fair redistribution within the potato chain."