THE POTATO MARKET - BACK TO THE FUTURES
The potato market is on a roll, but pricing them is more difficult than ever
The market for deep frozen French fries and other potato products is booming and has been during the last 3 years. Despite a world in turmoil, price- conscious consumers have been enjoying their fries more than ever – outstripping the demand both in Europe and North America. A market that switches from supply-driven to demand-driven also has significant impact on pricing raw potatoes, which is something that ADM Investor Services B.V. specialises in.
Growing potatoes is a high-risk job for farmers. Hedging their (price) risks is therefore vital to cover the high production costs involved with this cash crop. Using the futures market has been the go-to solution for many European growers during the last 65 years. Over 25 years ago brokerage firm DCA Finance B.V. was set up by Dutchmen Edwin Burgers and Kees Maas. Both are born and bred between the numerous potato crops that dot the fertile soils around the company’s HQ in Lelystad. They met whilst physically trading potato futures contracts at the (then) Amsterdam-based market. When – in 2005 – this market moved to the European Energy Exchange AG (EEX) in Leipzig, Germany, this became the trading hub for large-scale growers, independent traders and processors.
FREE MARKET OR FIXED PRICES The North American potato industry traditionally relies on fixed contracts with growers to cover 90% of their supply needs. In North-Western Europe on the other hand, farmers preferred a free position, selling their produce as they saw fit. With
the professionalisation of the French fry industry in the EU-4 (The Netherlands, Belgium, France and Germany) growers switched to fixed-price contracts more and more. Throughout the growing season prices can be subject to significant fluctuations. Contracts – in theory – help to stabilise raw material prices for factories, but they also overshoot their target when it comes to market forces, removing the incentive for growers.
HARVEST 2023 Both the European and North American potato markets have seen extreme years with the Covid- pandemic, the impact of the war in Ukraine, numerous logistical challenges and impact from climate extremes. Almost every year since 2018 saw one or more weather-related issues that played havoc with potato crops on both sides of the Atlantic. For four years in a row, the US had a below-average harvest and declining cropping areas. 2023 however, turned out to be a paradigm shift. The US potato area increased with 9.5% and their total harvest bounced back to over 20 MMT. Meanwhile, in Europe an altogether different situation arose. The area in the EU-4 increased by only 1.4%. After a difficult start, a wet summer was set to deliver a plentiful harvest, but three months of torrential rains played havoc with farmers’ plans. This resulted in 650,000 MT of potatoes not being harvested and an estimated 1 MMT suffering from weather-related quality issues. Despite this, the total potato volume in the EU-4 increased by 5% y-o-y. That is however far from enough to satisfy the processors’ hunger.
Source: DCA Market Intelligence
Source: DCA Market Intelligence
9 | ADMISI - The Ghost In The Machine | Q1 Edition 2024
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