Current fixed price system is due for replacement

I stepped down as chairman of Aviko Potato's Potato Growers Committee (ATC) last summer, after being part of this club for almost 20 years. It is a good moment to reflect on the changes that took place in the potato world during that period.

First of all, a major racial shift has occurred. Bintje was still a large free potato variety 20 years ago, but has now virtually disappeared (as a French fries variety). The variety has been supplanted by several licensed varieties (such as Innovator, Fontane, Agria, Markies and Victoria). With the emergence of these licensed varieties, the freedom of the potato grower has also been curtailed.

Free potatoes
The industry has taken over the seed potato supply and the grower has to deal with redelivery obligations of 40 tons per hectare (in which contract form then). The volume of fixed price contracts has increased. Most growers choose to supply the remainder above 40 tons, while you can simply trade this remainder freely. It is possible to guess what the influence of this will be on the functioning of the market.

However, the virtual disappearance of the buffering middlemen is added to this. The French fries industry now trades '1-to-1' with the grower. But, as the French fries industry has become a seed potato distributor, that comes with a responsibility. A grower who wants to grow freely should be able to purchase seed potatoes without an obligation to resupply. After all, the seed potato trading houses refer the grower to the industry.

All this is starting to look a bit like cartels; maybe a matter for the Netherlands Authority for Consumers & Markets (ACM)? However, ATR cultivation remains an excellent alternative.

Gambling is done in Las Vegas
In the past 20 years there has also been a shift in potato cultivation: from arable farmer to potato grower. The expansion of cultivation has mainly taken place in areas with many large growers. This gives a completely different risk profile. For example, if you grow 500 hectares with only potatoes, it would be irresponsible to do so without good price coverage (such as fixed price contracts).

Or as the American growers say: "If we want to gamble, we'll go to Las Vegas." The striking thing on the forum of Boerenbusiness is the constant bickering between free growers and contract growers. More understanding for each other and some nuance would be nice.

Conditioned cultivation
We have overshooted the proportion of fixed price contracts, which means that the market is not able to do its job properly. The problem with this is that the individual grower is hindered in his possibilities (by collective behaviour). The industries often point to the American system: everything at a fixed price. However, you cannot compare 100% conditioned cultivation in America with Europe.

You can see that in the yield differences (over the years). In America there is only a few tons, while in Europe it can be more than 10 tons. Due to weather extremes yield fluctuations only increase further. I understand the industry wants to secure raw material and price coverage; especially with regard to overseas sales.

Alternative contract
This year should be a 'wake-up call' for both the grower and the industry, because the current fixed price system is due for renewal. The price is now clearly controlled; after a year of bad prices, contract prices go down and vice versa. This does absolutely no justice to the cost price increase and the cultivation risk.

A better option is to steer by volume; for example with A and B contracts. What the industry like raw material wants and has to record, will have to be for a price in which part of the increased cultivation risk has been discounted. If the growers want to fix above that volume, they should be able to do so for a different price. The grower will have to use more alternative options.

This by showing more effort when trading the product, for example via the potato futures market. This allows market forces to be restored to some extent and an instrument such as the futures market can be preserved for the future. The futures market is essential for the survival of the various pools.

In short: the trade needs to spread out a bit. A bit of everything: not black and white, but with a bit of nuance.

Boerenbusiness

below Boerenbusiness opinions are posted from authors who, in principle, give their opinion once Boerenbusiness.nl or from people who prefer to remain anonymous. Name and place of residence are always known to the editors.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.