PAA: Potato prices as affected by the yearly potato quantity produced 

Potato prices received by growers are largely determined by the quantity of potatoes produced each year. Potato growers make individual decisions on the potato area to be planted at the beginning of the potato production season. Potato prices that growers receive during the following marketing season are affected by the total potato quantity produced by all growers in the industry.

Simple economics of price-quantity relationship 

A simple economic model, which economists refer to as inverse demand, explains the relationship between product price received by producers and product quantity produced. Applied to the potato industry, this economic model suggests: (a) the potato quantity produced (harvested) by the industry at the end of the production season determines potato price received by growers during the following marketing season, and (b) the potato quantity and price are negatively related.

Depending on the year, the potato industry may experience one of two types of market scenarios. They differ due to whether the potato quantity produced by the industry increases or decreases in the current year, as compared to the previous year. The change in the potato quantity affects how potato prices change in response. The first type of market scenario is that an increase in the potato quantity produced would decrease potato price received by growers. The second type of market scenario is that a decrease in the potato quantity produced would increase potato price received by growers.

The yearly potato prices and potato production summarized in the table illustrate that changes in the potato quantity produced and potato price in the U.S. potato industry are consistent with the economic model.

Comparing 2012 to 2011 is an example of the first type of market scenario. The total potato quantity produced by the industry increased from approximately 430 million cwt in 2011 to almost 465 million cwt in 2012. The yearly average potato price received by growers decreased from $9.41 per cwt in 2011 to $8.63 per cwt in 2012.

Comparing 2013 to 2012 is an example of the second type of market scenario. The total potato quantity produced by the industry decreased from almost 465 million cwt in 2012 to 434.65 million cwt in 2013. The yearly average potato price received by growers increased from $8.63 per cwt in 2012 to $9.75 per cwt in 2013.

A recent study quantified the relationship between potato price and potato quantity in the U.S. potato industry during the period of 2011-2016. The analysis suggests that on average, during the analyzed period of time, a decrease in potato production by 38.5 million cwt increased potato price by $1 per cwt. This result can also be interpreted in an alternative way: an increase in potato production by 38.5 million cwt decreased potato price by $1 per cwt.

You can find the analysis in: American Journal of Potato Research, October 2017, Volume 94, Issue 5, pp 567-571, Recent price developments in the United States potato industry by Bolotova.

Potato production and decision-making 

Potato growers make individual decisions on the potato area to be planted at the beginning of each production season. These individual decisions, which are made practically simultaneously by all growers, affect the total potato quantity produced by the industry at the end of the production season. To be more precise, the total potato quantity produced is affected by the potato area harvested at the end of the production season and potato yield per acre. The potato area harvested was typically in the range of 98 percent to 99 percent of the potato area planted for the most recent years. Each potato grower decides on the potato area to plant each production season and can adjust this decision on a yearly basis.

In terms of decision-making, the situation is different with potato yield per acre, which potato growers typically cannot control. Potato growers do have certain expectations about potato yield per acre based on the potato varieties they plant and potato yields achieved in previous years. Once potatoes have been planted, potato yield is subject to various risks, including disease outbreaks and weather conditions, which potato growers cannot control. In addition, due to improvements in potato genetics and potato production management practices, a steady trend of the potato yield to increase over time is observed.

Potato production, price and receipts 

Whether we think about the receipts of an individual potato grower or the industry (in which case economists refer to receipts as the industry revenue), the potato price in dollars per cwt multiplied by the potato quantity sold is the dollar amount received from selling potatoes. Given that potato price and quantity are negatively related, how would this price-quantity relationship affect the potato industry revenue and receipts of individual potato growers? Economists use price flexibility to figure out the answer to this question in the case of each industry. Price flexibilities differ across industries, and even in the case of the same industry, price flexibility may differ across years and across different uses (marketing channels) of the same product.

Price flexibility may be interpreted in two ways: price flexibility indicates (a) a percentage increase in price, which follows a one percent decrease in quantity, or (b) a percentage decrease in price, which follows a one percent increase in quantity. The price flexibility estimated for the U.S. potato industry using potato price and production for the period of 2011-2016 is -1.28. You can find the analysis in the article published in American Journal of Potato Research referenced earlier.

The magnitude of the potato price flexibility is greater than one in absolute value, which means that a percentage change in price is greater than the percentage change in production. For example, if the potato quantity produced decreases by 1 percent, then the potato price increases by more than 1 percent. This means that the potato industry revenue is higher in a market scenario with a smaller potato quantity produced and a higher potato price, as compared to a market scenario with a larger potato quantity produced and a lower potato price.

Using potato prices and production reported for 2012 and 2013 in the table, we can calculate the value of potato production, which we can think of as the potato industry revenue in our simple analysis. The first example is the year 2012: a larger potato quantity produced and a lower potato price. The second example is the year 2013: a smaller potato quantity produced and a higher potato price. The calculated value of production is $4,013 million for 2012, and it is $4,238 million for 2013. The potato industry revenue and therefore the receipts of potato growers are higher during the year with a smaller total potato quantity produced.

Yuliya V. Bolotova is assistant professor of agribusiness within the Department of Agricultural Sciences at Clemson University, who teaches and conducts research in the area of agricultural marketing and price analysis

The Potato Association of America mission statement: The PAA and its allied associations must strongly support the private sector through Extension, research and commercialization efforts aimed at enhancing the role of the potato as the premier food source for the 21st century.



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