Potato market looking good for 2007

If the last few years are any indication, the potato industry could be in for another good year in 2007. While the retail market is still decreasing and prices have gone through the typically seasonal fluctuations, there are growing opportunities and signs of life on an international level.

The potato industry is a global one, and there are a number of economic forces that are affecting the U.S. industry, making this year’s market complex, said Bruce Huffaker, president of the North American Potato Market News.

Depending on the layer you’re looking at you come up with radically different pictures,” he said.

One global trend creating a good environment for growers and marketers is a large international demand for U.S. potatoes. There is a short supply of potatoes in Europe, so many chip processors are importing potatoes from abroad. Potato production in Europe is down 13 percent from last year and down 25 percent from 2004.

“And that’s just the tip of the iceberg,” Huffaker said.

As much as 60 percent of Europe’s crop won’t be usable because of pests and disease.

If only U.S. production increases were accounted for, growers could expect a 10 percent to 12 percent drop in prices. But the international demand will pick up much of the slack, Huffaker said.

“The only thing that will hold us back from exporting more potatoes and potato products is the lack of supplies in North America,” he said.

The currency exchange rates are making U.S. potatoes a cost-effective alternative. U.S. consumers typically desire a strong dollar, but the current weak dollar is actually helping potato growers.

“It’s counterintuitive,” said Joe Guenthner, professor of agricultural economics at the University of Idaho. “Every time there is a change there are winners and losers.”

The U.S. dollar has traditionally been strong, but this year the value of the dollar has dropped. One U.S. dollar was equivalent to 0.75 euro, 0.50 British pounds and $1.15 Canadian. That means U.S. products cost less in other countries, and products imported to the U.S. cost more. The stronger Euro and British pound, and almost equivalent Canadian dollar, explain the increased demand for U.S. potatoes from Europe, United Kingdom and Canada.

“The strong currency is like a magnet that attracts goods,” Guenthner said.

Guenthner doesn’t expect the currency exchange rates to change dramatically in 2007, either. Exchange rates follow slow-moving trends, and 2006 is only the third year of a weakened U.S. dollar. The dollar was strong for the 10 years before that, Guenthner said.

Huffaker said growers are in a situation similar to the 1989-1990 growing season. He said the market through the 2007 season should be strong, but growers should still be cautious.

“For heaven’s sake, don’t expect it to continue,” he said.

Prices

As inputs into farming increase, it’s vitally important to the industry that prices stay at a profitable level. It appears that may happen in 2006 into 2007, said Mac Johnson, vice president of domestic marketing for the U.S. Potato Board.

In total, prices for chipping, processing and fresh market potatoes would most likely be up slightly for 2006, Johnson said. The potato board uses actual demand dollars and not USDA figures, so actual numbers won’t be available for a few months. Fresh market dollars were up, although poundage will most likely be off, Johnson said. Retail prices averaged about 42 cents a pound in 2006, slightly higher than last year but still short of four years ago, when retail prices hit 50 cents a pound. Potato prices are somewhat inelastic, so consumers will still continue to buy even when the price rises. Even at the “high” price of 50 cents a pound, potatoes are “still by far the best value in the store,” Johnson said.

In December, shipping point prices were slightly lower than the same time in 2005, although five- and 10-pound package prices increased about $1.00 each on average.

Chipping potatoes were stable in 2006, although prices were relatively flat. The process side should see growth, mainly through sandwich shops and quick service restaurants.

Acreage

Growers in the United States planted an estimated 990,500 acres of potatoes in 2006, according to the USDA National Agricultural Statistics Service. That’s a 2 percent increase over 2005, but still 5 percent below 2004. U.S. growers produced about 435 million cwt. in 2006, an increase over 2005 of less than 3 percent.

Canada, on the other hand, has seen a production increase of almost 15 percent. The harvested area in Canada increased by 1,800 acres, less than 1 percent, but yields hit an all-time high, the North American Potato Market News reported in November. Canadian yields rose to 287 cwt. per acre, surpassing the previous record of 272 cwt. set in 2004. The 2005 yield was 252 cwt.
But Huffaker said the Canadian yields are not as high as they appear. Many of the Canadian potatoes are out of position and have disease issues. The only province that will see an actual increase is Manitoba, which is recovering from a poor 2005 growing season.

United Potato Growers of America has been working for the past two years to educate growers about the economic forces that determine whether or not they make a profit. They’ve developed a communications strategy that disseminates the numbers and are localized to growers in each region. United has developed a database that can “mine” information from a range of data, from seed to the consumption of French fries, that will make sense to processing growers. This new technology would especially help processing growers when they go into negotiations with buyers, said Buzz Shahan, chief operating officer for United Potato Growers of America.

“We can put up numbers to match the finest corporations in the world,” he said. “We provide a common data language.”

United will continue to teach the science of supply and demand, and the consequences of not managing supply on a national level, Shahan said. For every 1 percent over supply, price declines by about 6 percent. When growers are operating on a profit margin of 20 percent at best, oversupply of just a few percent can slice into profits.

“Marketing won’t be an issue so much in the future if we as growers in the U.S. would get production in line or a little behind demand,” said Cory Myers from M&G Farms in Center, Colo. “That will solve the biggest problems in the marketing arena.”

United’s tools and their communication with growers are meaningful to the industry because it means farmers don’t have to operate in a vacuum. They will be familiar with the national and international forces that are affecting price and demand.

“The formation of United Potato Growers Of America and the associated states,” Myers said. “Colorado is a member, and has members within United Fresh Potato Growers of Colorado that are leading the industry into the next 5 to 50 years. Without this type of organization the future of the potato industry will be very dismal. I as a young returning grower to the family farm along with all other potato growers must realize that without a profit in the potato industry, there will be no industry… It will become a ticking time bomb to the last man standing. Why would anyone want to see their livelihoods jeopardized at that type of ideology?”

As United looks at the numbers for 2007, it appears that production will need to be scaled back further to match the supply with demand.

“We know that we have to back up between 2 and 4 percent,” Shahan said.

But that depends on growers cutting back on production in the face of a profitable year.

“The fact that we’ve had two profitable years in a row in a time of decreasing demand is promising, but I’m not convinced we are smart enough to continue down this line of keeping supply in line with demand,” said Andy Diercks, Coloma Farms, Coloma, Wis.

“We have the tools in place with United and have seen evidence of the success but we are stubborn individual business owners and we may seriously destroy this market next year through greed and distrust. “

Consumer Interest

“Supply management is half of the picture,” Guenthner said. “Demand development is the second half.”

Despite some signs that consumers are leaving low-carb diets in the past, the consumer market for potatoes is still shrinking. It’s estimated that the consumer retail market for fresh potatoes is decreasing by about 2 percent a year. Households are becoming smaller, preparation time for meals is getting shorter and consumers are eating out more. There are also demographic changes, such as the influx of Hispanic populations across the country.

“We have to make sure the industry responds to those changes,” Johnson said. “The question is, how do we make sure they keep potatoes in their diets?”

The potato board is trying to answer that question by encouraging growers and packers to consider their consumers. Smaller packs, dual-language packages and higher-quality packages are approaches that potato marketers can use to increase demand in retail stores.

“I think our biggest issues in Wisconsin are the same as any other area this year,” Diercks said. “The main issue for me is decreasing domestic consumption of potatoes, especially fresh. I think the processing side of the industry is balancing increased exports against a stagnant or decreasing domestic market but on the fresh side we aren’t adjusting very quickly to what the U.S. consumer wants. We have relied too long on people buying large bags (10 pounds and larger) of cheap potatoes and then throwing the extras away. Those buyers are disappearing and our new customers don’t want to waste their food and they also don’t feel like they have as much time to prepare meals so their buying mentality has changed. We have been slow as an industry to adjust, both in our offerings and in the volume of potatoes that we supply.”

USPB is also working to educate consumers about the healthful benefits of potatoes. The group has developed a comprehensive plan for schools that are looking for healthier foods, and USPB is working with dieticians to spread the word about healthy potatoes without looking like an industry advocate.

“It’s immensely more credible than when it comes from us,” said Linda McCashion, vice president of public relations for USPB.

McCashion said she was encouraged by the interest in potatoes from the foodservice industry. Sandwich and casual chains have been increasing their use of potato products and USPB recently conducted a “Potato 101” of sorts for chefs.
As growers make decisions on seed, acreage and chemicals for the 2007 growing season that is rapidly approaching, they will hopefully do so in an economic climate that is positive for their industry. Pest management, resistance issues and the international climate will be variables that could affect individual farmers and in turn influence the overall profitability of the U.S. industry.”