Fries war lets grower be the winner

In the past fifteen years I have never seen the potato market change so quickly as in the past three months. The market for French fries appears to be turning from a supply-driven market to a demand-driven market. What does that mean?

In recent decades, the Dutch potato market has been dominated by the four major processors. Processors could determine what happened in a supply-driven market. With many fixed price contracts they got the market and the growers under control. The large amount of fixed price contracts ensured that European processors were able to grow rapidly in their French fries sales. Potato prices were the lowest in the world - for example 20% lower than in the United States - and caused a huge boom in the processing industry in the Netherlands and Belgium in particular.

French fries could be sold all over the world at competitive prices and the earning margins were above average, given the profitability of the processors. Striking was the unanimity of the processors. The processors hardly differed from each other in the outcome of the new contract prices. Except for a point (35 or 40 on) or a comma (€0,10 more for safekeeping) the contracts were almost equal, which is nice if you don't discuss this with each other beforehand. Dutch (and Belgian) growers had no rebuttal or negotiating position to make a difference in the contracting period. This is it and that's what you have to do with it (after Master Visser) seemed to be the credo. There was often grumbling, but the growers eventually signed. Partly due to the lack of alternatives in cultivation, but also in the diversity of potato growers.

Fear a striking outcome
DCA, in collaboration with Boerenbusiness has spent several years researching the motivations of growers to sign contracts, which at the time were often barely above cost. There was one striking and often mentioned reason: fear. More than 50% of potato growers sign a fixed price contract out of fear. Fear of extremely low prices, fear of not losing their potatoes or fear of not having seed potatoes. A striking outcome, because entrepreneurship should not be based on fear, but on opportunities. We regularly made calculations, which showed that the financial yield of growing potatoes for 10 years without a contract is about €2 per 100 kilos higher than growing with a contract. And yet 80% of the growers sign a fixed price contract. The fear of a bad year is apparently so deep that they are willing to miss the chance of a higher return.

I know better than anyone that with an arable farm a bad year always has a lot of impact on liquidity and that it often takes three years to recover. So the caution is understandable, especially since many other arable crops often do not provide the extra return to absorb a year of €2 for your potatoes. Still, there is an incredible opportunity for many potato growers right now. After fifteen years, the potato market seems to be turning from a supply-driven market to a demand-driven market. What does that mean?

Processing capacity expanded in corona time
For years, processors had ample access to potatoes. They always grew more than they needed. This kept them in control of purchasing. Many fixed price contracts meant that processors could often ignore the free market for long periods of time. As a result, the market became smaller and smaller and many traders also dropped out. All this entered based on the mathematical formula: processing capacity -/- quantity of potatoes (is yield) x demand for chips = supply.

This mathematical formula seems to work out differently today. Processors have also continued to build on their factories and processing capacity in times of corona. In the past two years alone, 750.000 tons of potato processing have been added. Something that makes the difference today. The result of the formula now looks like: processing capacity -/- quantity of potatoes x demand for chips = demand. There has simply been a tipping point, in which there is more processing capacity and demand for chips than potatoes are grown in the EU4 (the Netherlands, Belgium, Germany and France). This effect was reinforced last year by the shrinkage of the acreage by 6% and an increasingly difficult yield due to too intensive cultivation and increasing weather extremes.

Growth of acreage in EU4 does not seem to work
In fact, the area needs to grow by 12 to 15 % for the coming year to meet the demand for potatoes in the EU4. Something that doesn't seem to work. Where should those potatoes be grown? The Netherlands seems to have no space, quite a lot of growers have dropped out and the availability of land is a major problem now (and especially in the future). Should the growth of the acreage then come from Belgium? This doesn't seem to be happening there either. The new CAP law means that many landowners prefer to keep the land in their own name and sow wheat or maize. Then only hope remains in France, the new potato paradise for processors in Europe. There is still land and there are opportunities. The high grain price also seems to throw a spanner in the works there. Moreover, a number of growers in France have already dropped out due to the high costs, high risks, high investments and relatively low entrepreneurial remuneration.

So that creates opportunities for current potato growers. I've never seen processors compete on contract prices. They tumble over each other to raise prices. Increasing contract prices in the meantime used to be a mortal sin. This was the price and you had to deal with it. Two processors in the Netherlands have already raised their prices in the meantime. Something that indicates that the unanimity between the processors seems to be gone and that war is being waged for the fries. A super opportunity for growers. Finally back in the driver's seat, decide for yourself what your conditions are, decide for yourself whether or not you sign. 

Downside risk smaller than ever
These opportunities are there. Be smart, for example collect ten farmers together and jointly offer a large volume to three different factories and a trader. You'll be surprised what can happen then. But above all, forget the fear of the past ten years. Due to the change, there is now a demand market which will ensure that the dips in the market will no longer be so great and the peaks may be higher. We call this the downside risk in stock market terms. This seems smaller than ever and therefore the upside potential is much greater. So despite the sharply higher prices, think again whether fixed price contracts can take away your fear or increase your chances.

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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