European potato market dancing on a volcano

French fries processors in Northwest Europe are shouting in unison that they have increased or are going to increase production. For example, Farm Frites aims to produce approximately 2025 million tons of chips by 1, encouraging potato growers to grow more potatoes. This animation is reinforced by the development in the European market of competing crops that have been yielding low for some time, such as sugar beet and wheat.

Since 2015, the European acreage for consumption potatoes has grown by a few percent per year, with the market threatening to implode at the slightest or slightest favorable growth conditions. Harvest year 2017 was a perfect example of this. The European potato harvest in that year was above average, so that the market price went through the hooves already during the growing season (€10 and lower). In years when nature brings disaster, the average market price can remain above the $15 level. Think of the 2016 harvest year, when part of the potatoes in the southeast of the Netherlands drowned.

The same was true in the 2018 harvest, when drought resulted in a minimal average hectare yield in most of Europe. In some cultivation areas (such as Zeeland) the harvest was so disappointing that, often in combination with the contract obligations, this resulted in a minimum balance per hectare.

Nature finger in the pie
The conclusion is that nature has a large finger in the pie with regard to the development of the market price. Basically, in Europe (certainly in the last 10 years) enough potatoes are always grown to satisfy the raw material hunger of the processors. A large part of the potatoes is fixed in advance at an agreed price. The bit that is not contracted is settled at the daily price level. In the event that the hectare yield is above average, as in the 2017 harvest year, the co-delivery kilos are settled at an extremely poor market price.

In the 2018 harvest year, in many cases the average hectare yield was so disappointing that there was nothing extra to pay. In short: in a year of surpluses we are grateful with a contract, and in a year with shortages, recording potatoes could have been a little less. 

Contract price plus level
The most satisfied is the 'market' with a price development between €15 and €20; perhaps a scenario for the coming months. A contract price plus level, a market that everyone can be satisfied with. However, look over the fence to next season. After a satisfied harvest year (2019), it is a regularity in the market that the European acreage is further expanded before 2020. If nature does not bring disaster, then plenty of potatoes are available.

In other words: a price-technical disaster year (such as 2014 and 2017) is looming. In that sense, the potato market is dancing on a volcano, whereby seasons with shortages, but especially with surpluses, can lead to extreme situations. As a knowledgeable potato grower, a contract for harvest year 2020, preferably a hectare contract, in the current constellation is recommended. 

Sip on a drink
In principle, a French fries maker could reduce its fixed-price contract position. After all, with a good potato harvest, the latter will have the opportunity to buy raw materials below the contract price. In lean years in terms of prices, and that has happened quite often in the last 10 years (such as in 2008, 2009, 2011, 2014, 2015, 2017), this can make a difference to the average purchase price; assuming a larger area in the EU-5 and an average potato harvest.

Anyway: time will tell us what will happen next harvest year. To corrupt a football cliché: the potato stays round, and you never know which way it will roll.

Edwin Burgers

Edwin Burgers is director of DCA Group, which focuses on market consultancy and risk management for agricultural entrepreneurs and agribusiness. He can also be seen regularly in the market update on the potato market.

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