For the past several years, grower margins have consistently declined in Idaho to the point they are no longer sufficient to maintain a stable business environment for growers’ long-term financial future. For the four-year period including crop years 2014 through 2017, pricing has plummeted 7 percent (down 70 cents a cwt.)
Processors use the bargaining group to set an advertised price and then present growers with different options to leverage an even cheaper raw product price. Some growers have been offered multiple-year contracts at a discounted price. Others, a joint venture where profits are split between the producer and the buyer.
However, the majority of growers still sell their crop on an annual agreement where the grower takes all of the risks with more and more contract language that leaves the grower vulnerable to rejection and reduced pricing for the slightest quality variance.
The question needs to be asked whether these multi-year contracts make sense for the grower and the industry as a whole given the current demand for frozen potato products from a domestic and global perspective.
In my opinion, both of these “off contract” alternatives guarantee a raw product supply for the processors production needs and also provide them with significant leverage for flat or reduced pricing since a portion of their raw potato requirements are guaranteed from year to year. Some processors are more aggressive on both pricing and acreages than others.
Where do these multi-year purchasing programs leave the potato industry in Idaho and the Pacific Northwest? The answer is the current situation in Idaho and Washington, where the grower organizations have little or no leverage for their members to provide financial sustainability and sufficient profitability to invest in the future.
Looking at the financial data that is available, processors are currently enjoying record profitability and the motivation from stockholders and senior management is to continue this trend. Meanwhile, the grower base continues to diminish with larger operations taking over the supply chain even at the sacrifice of raw product quality.
The Quick Service Restaurant chains (QSRs) realize the effect of this dynamic with their French fry prices increasing based upon demand and a tight capacity situation resulting in uncertainty of potential supplies for the future. So, finished pricing moves higher while raw product concurrently moves lower. That is the recipe for windfall profit taking and this will continue as long as the industry’s demand is ahead of processing capacity, especially when you consider the global marketing programs. There is also the potential, with all of the new capacity being added in the Pacific Northwest, for excess processing capacity in the future and this would make it even more difficult for the grower to survive.
So, what can the grower community do to “right the ship” and secure their financial future? Sticking your head in the sand and waiting for a poor crop year to make a market is not a strategy. The industry could say no to the multi-year agreements that guarantee the processors a significant portion of their raw product supplies annually. Perhaps the larger growers could have the discipline to reduce acres to promote inclusivity with smaller growers to maintain the quality the industry needs. Or finally, there is the scenario whereby growers individually negotiate their own deal with the processors, similar to the chip industry. Perhaps not the most attractive set of alternatives, but that is the reality of our industry today.
It’s obvious that if Idaho had an increase in processing capacity, acreage would be in high demand and that would give the bargaining association more leverage. There has been some movement by both out-of-state processors and French fry customers to determine what can be done to offset the diminished profits in their arena. SIPCO has started a dialogue with both to determine if this is feasible in Idaho. The intent is to position the SIPCO group to be their primary raw suppliers. Due to the confidentiality of this dialogue, we can’t announce the companies that might participate with us in creating a more stable pricing program that will be sustainable in the future. The cost plus method of pricing has been discussed and this could be the solution to make sure both customers remain solvent in the industry.
This would be a big undertaking. However, our industry has thrived on innovation and resourcefulness. We do not begrudge the processors making a fair profit. However, SIPCO is committed to making sure the growers receive the same fairness as our valued end users in the French fry industry. As part of my new role as executive director of SIPCO, it is one of my primary goals to reach out to all of the contract potato growers in Idaho. It is my opinion that contract growers must come together if they are to claim their fair share of the $23 billion global market for frozen potato products. Growers’ opinions and comments are invited.
Chuck Stadick is executive director of the Southern Idaho Potato Cooperative, SIPCO.