Processors get stable supply; growers control volatility
By JOHN O'CONNELL
POCATELLO, Idaho -- While other Idaho processors have spent top dollar shopping for open market potatoes during this crop year, H.J. Heinz Co. has had an ample supply available at the preseason contract price.
As for Heinz growers, they were able to plan ahead knowing long in advance how many acres they had under contract, and they had the peace of mind that they couldn't be stung by dramatic increases in input costs.
Heinz and the Southern Idaho Potato Cooperative are in the final month of a three-year contract designed to adjust for input cost fluctuations.
SIPCO Executive Director Dan Hargraves said the trial has worked well for both parties, and as they commence bargaining on a new agreement, he's optimistic they'll reach a similar multi-year deal.
"I think processors are understanding if they want a stable supply of potatoes, they've got to have adjustable (contracts)," Hargraves said. "We have had some preliminary discussions with another processor for the 2012 crop, and they are willing to look at incorporating some of those same features into their contract, which is good news. I think it's the direction the industry needs to go, without a doubt."
In some cases, Heinz has come out slightly ahead. In others, the growers have made out a bit better. The final price, however, has always been fairly close to the prevailing settlements locked in with other fryers, Hargraves said.
Here's the difference: While other farmers were waiting for annual contract negotiations to complete, Caldwell grower Mark Coombs knew exactly how many acres to fumigate last fall for Heinz spuds. And though a recent economic study estimates Idaho potato growers incurred a 15 to 16 percent increase in input costs, Coombs' contract will adjust accordingly.
"To me it's a more fair way to have a contract. As (input) prices change, that changes for the grower and the processor," Coombs said.
The Heinz contract started in 2009 in response to a 2008 growing season in which input costs jumped well above the 12.4 percent increase SIPCO negotiated.
Every input is now indexed and tracked. They use the nationally recognized source of fertilizer prices, Green Markets, and they keep tabs on weekly regional diesel fluctuations with the U.S. Energy Information Administration website. Profit margins are negotiated above the input increases.
"The model has worked flawlessly, I think, as far as capturing costs," Hargraves said.
Heinz officials declined to comment.
SIPCO President Doug Gross, who grows 35 percent of the spud crop for Heinz at his Wilder farm, said inputs have been volatile lately and are becoming increasingly difficult to predict six to eight months in advance, when other contracts are often locked in.
"What I like is we're not trying to beat each other's brains out each year trying to negotiate a price," Gross said.
"I think it's been a very good exercise for both the processor and the grower because it's made us get in touch with the true cost of growing potatoes."