The trends of steadily increasing yields and shrinking demand will lead some U.S. farmers to leave the volatile fresh potato market for the security of processed contracts, while others will have to reduce their fresh acreage, according to a new Rabobank report.
The report notes fresh prices have been mostly high — about double their usual levels — during the past five years, and extreme volatility has heightened both the risks and rewards of growing fresh potatoes. Furthermore, erratic weather, high prices of rotation crops and the ease of returning acres back to fresh production should continue the volatility.
“We see fresh acreage decreasing at least at the rate of yield increases,” said Sterling Liddell, senior analyst with Rabobank’s Food & Agribusiness Research and Advisory Group. “You don’t need as many acres to supply demand if demand is flat.”
In the medium-term, the report emphasizes the growth of quick-serve restaurants in foreign markets, such as Vietnam and Thailand, will create export opportunities for processed spuds. Fresh consumption, however, is down by 10 pounds per capita from its peak demand in 2000, Liddell said.
“We do see some positive outlook there as we go forward. There has been some change in perception, and we’ve seen some flattening in the decrease in demand,” Liddell said. “We also see variety development making strides to address the specific qualities of the potato.”
To survive poor times, the report concludes fresh growers will have to be especially well capitalized.
“It’s really important for producers to evaluate their ability to access capital in a down year. Due to the volatility associated with the fresh potato market, a current ratio of about 1.25 to 1 is a minimum guideline, meaning for every dollar of short-term debt, you have a dollar and a quarter of liquid assets,” advised Nathan Thomsen, regional vice president of Rabo AgriFinance in Twin Falls, Idaho.
In general, Liddell said Rabobank has noticed an increase in growers’ liquid capital and a trend toward debt reduction.
Liddell predicts many fresh growers will cope by “pursuing avenues that allow them to control some of their own destiny,” such as becoming the low-cost producers of specific niche varieties. He also anticipates existing fresh growers will diversify by expanding acreage into other growing regions, where land costs may be lower and weather conditions are different.
Liddell described the fresh potato market as “an important sector, and not a lot of attention is paid to it.” He explained Rabobank’s research — its first such analysis of fresh potatoes — took 18 months to complete and utilized a model it also uses to study other crops.
“Compiling data was difficult because there is not a lot of data readily available in the potato industry,” Liddell said.
Seth Pemsler, vice president of retail-international with the Idaho Potato Commission, is more optimistic than the report’s authors about the fresh demand outlook, pointing to the work by potato groups to bolster sales and research showing purchases of different spud varieties don’t necessarily come at the expense of traditional Russet purchases.
Pemsler noted fresh growers may not have the option to switch to processed contracts, as the report predicts, unless processors wish to buy more acres.