What if everything grows well?

After 2018, 2019 also turns out to be a special year. Drought leaves its traces and causes high costs: cultivation without irrigation is Russian roulette.

In the past, lower yields and high costs were offset by higher prices, a logical consequence of supply and demand. The DCA Group once conducted research into crop yield insurance, which is used by 80% of potato growers in North America. If the average return on your company over 5 years is not achieved, the insurance will compensate for the financial loss. There appeared to be no need for it among growers and the main argument was that the high price makes up for the low yield.

Supply and demand
It is interesting to cite this research now. The low yields are no longer automatically compensated: supply and demand no longer seem to make the market in potato land. Cultivation has evolved, with production based on surpluses. Buyers need stability and certainty, both in terms of yield and price. However, this is difficult in Europe due to the weather and the diversity of soil types, which means that yield fluctuations of 15% are no exception.

Stimulating cultivation by guaranteeing a price in advance that is higher than the cost price, and giving a better yield than grain, produces 10% to 20% more potatoes than necessary. In the event of a crop failure, this is just enough, unless the yield loss is greater than 15% and contract obligations are not met. The market changes from a demand to a supply market.

Getting things in order
The solution? Growers need to get their affairs in order. Firstly, by reducing dependence on customers; seed potatoes must be freely available, without delivery obligation. Second, less greed should be shown. Sometimes it's like a race to the bottom: the more hectares, the tougher. This while the cultivation optimization yields more returns. Controlling the acreage brings the market into balance through a so-called 'mandatory 1-to-5 construction plan'.

Third, a maximum of 40% of the average proceeds may be sold at a fixed price in advance. These steps do, however, require direction in the sector. Unfortunately, there is none and individual interest drives the market. The game remains difficult to play, or you have to believe that everything dries up once every 2 years due to global warming.

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This article is part of the potato analysis of 2019. Subscribers of Arable farming Pro en Potato market have recently received it. Would you also like to receive this magazine? then click here to become a subscriber and receive the magazine sent to you.

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Keith Maas

Kees Maas is director of the DCA Group. He has more than 25 years of experience in commodities trading, both on the stock exchanges and in the physical market. Maas is a specialist in price risk management and a much sought-after sparring partner for food companies for their sales and purchasing strategy.

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