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Potato Outlook 2009

Supply and demand. It’s the first law of economics in a free market system.

In times of surplus and material overproduction that flood the marketplace and exceed consumer demand, producers will be hard pressed to receive enough compensation or see enough of a return to cover the costs of production.

Whether you’re in the industrial or agriculture sector, urban or rural, both business models follow these two basic laws: supply and demand and cost of production and return on investment.

When talk turns to forecasting the 2009 agricultural season, “supply and demand” never strays far from the conversation.

Key Bank executive Jerold Myler, area executive for commercial and agriculture banking in Idaho, has seen recurring cycles in farming during his 23 years in banking. Myler said the cycles tend to run in two- to three-year patterns, sometimes four- to five-year patterns.

Myler, based in Pocatello, said commodity prices have been good and the majority of farmers have made a reasonable profit this year. But he thinks the good times may soon plateau.

“Like any commodity business, it’s cyclical,” Myler said, “so we are at or close to the top of what will probably be another cycle.”

Though grain prices have slipped recently, down to $213 per metric ton in October, and input costs of fuel and fertilizer increased dramatically during the course of the growing season, Myler said most farmers should still see a little bit of a profit this year.

For 2009 Myler expresses cautious optimism.

“There’s some really good operators out there, but they’re all subject to the laws of supply and demand,” he said. “If we can control production in the various crops, I think that they (farmers) can continue to generate reasonable profits.”

Myles credits United Potato Growers’ efforts to keep supply in line with demand with creating a more stable market for potato growers.

As does Farm Bureau of Idaho’s John Thompson. Thompson, public relations director, said current prices are looking good and attributes part of the reason to UPG.

“I think this new co-op, United Potato Growers, has a good handle on how to orderly ship the crop, and it should be a good market through the year,” Thompson said.

Thompson has heard rumors that some of the potato processing companies had pulled their contracts back and that farmers were reluctant to begin preparing their fields for next year’s crop without contracts in hand.

“From a farmer’s perspective I don’t see how they can move ahead with their fall work, fumigation and marking out, doing all that and not knowing. It’s just gotten to be too big of a gamble,” he said.

Thompson sees wheat prices coming down, with Australia bringing in their first wheat crop following three years of drought.

Klaren Koompin, a potato and grain farmer in American Falls, Idaho, believes that corn and wheat prices are going to rebound from their current prices.

“How much, I don’t know,” Koompin said. “But I believe they are going to increase 20 percent from where they are today.”

Koompin said world demand and the lack of a large surplus would keep wheat prices up.
“There’s so much money chasing all the commodity markets that the highs are way too high and the lows are way too low. At one time there were three times the bushels sold on the futures market that were being produced,” he said.

Koompin is optimistic that agriculture will survive the current turmoil in the financial markets, but it could take a year or two.

“We’ll come through okay,” he said. “Recessions have not really hurt agriculture. Ag’s healthy, and I think the rest of the U.S. economy will probably get healthy in the next one and a half or two years.”
Paul Patterson, a University of Idaho agricultural economist, based in Idaho Falls, said the best advice for farmers has always been to control their costs.

“There’s an old saying,” Patterson said, “that you can only manage what you measure, and growers need to have good records so they know specifically what their expenditures are. Not just in general but back to individual fields. They need to be very site specific in terms of managing their fields whether they’re growing potatoes or any other crop.”

Patterson also said that the current market crisis has strongly illustrated that the world economy still hinges on movements in the U.S. markets.

“There are a number of economists who are arguing that growth in China and India is self-sustaining, and it was going at such a rapid pace that whatever happened in the U.S. economy or to Europe, they would sustain that growth. What we’re finding out is that those economists were wrong,” he said.

Patterson also predicted that farmers would not enjoy the high grain prices that they have for the past two years for two reasons. One, because production of grain worldwide is up.

“If you look at the fundamentals of supply and demand, market prices are certainly reflecting the fact that there is a more abundant supply of grain,” Patterson said.

Reason number two is that the strength of the dollar has risen.

“It’s sort of ironic that the strength of the dollar is coming at a time when we look at our economy as being somewhat in shambles, but a lot of people run to the U.S. dollar in times of crisis, and that’s what has happened, and agriculture is going to be impacted negatively because of the strength of the dollar,” he said.

Patterson did point to one area that he sees improving for farmers: a drop in the double-digit increases in input costs of fertilizers and fuel.

“I’m looking at an overall increase on all inputs averaging somewhere under 5 percent,” he said. That doesn’t mean he predicts a rosy economic forecast for 2009.

“We’re at some very high levels of production costs for potatoes and other crops,” Patterson said. “The prices of some of those commodities are starting to move back down and starting to pass what was the break-even in terms of cost of production,” he said.

The problem lies in maintaining stability in crop prices, and Patterson applauds the recent successes of bargaining of Idaho in maintaining supply that meets demand and not overproducing.

“If they can sustain the success they’ve had over the last couple of years then the outlook should be fairly decent for fresh market growers as well as process growers for 2009,” he said, “but that’s not a given. Hopefully, potato growers recognize that their strength still comes in numbers.

Originally posted Thursday, Jan. 8, 2009

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