By Bruce Huffaker, Publisher, North American Potato Market News
U.S. potato growers will plant more potatoes in 2018 than they did in 2017. Several factors make an increase virtually inevitable. Processors will need more potatoes next year, both to make up for a shortfall in 2017 production and to supply new French fry production capacity. Strong prices for russet table potatoes also will encourage an expansion in the table potato sector. There is little doubt that the industry can use more potatoes than growers produced in 2017. The challenge will be to limit the 2018 acreage increase to the volume needed to meet industry needs without pushing open-market prices below sustainable profitability levels.
Processors made several misjudgments as they contracted for 2017-crop raw product needs. Fryers underestimated demand for their finished product. Dehydrators became convinced that they would be able to purchase a larger share of their raw product needs either as washed processing potatoes or as low-grade field-run potatoes at low open-market prices. Both fryers and dehydrators expected growers to convert a portion of their lost contract volume to open potatoes because of low prices for competing crops. That did not happen.
In addition, less than ideal growing conditions across much of North America reduced potato yields below expectations. Processors must deal with yield risk every year. However, this year’s losses were compounded by the decisions to cut back on 2017 contract volumes. The danger now is that processors will overreact to the current situation and contract more than they need in 2018.
Increased Needs
Fryers will need more potatoes in 2018. The first need will be for early potatoes to offset a portion of the 2017-crop shortfall. In addition, potatoes will be needed for the industry’s new processing capacity. Lamb Weston’s 300-million-pound line in Richland, Washington, came on line this fall. However, the company’s plan was to use much of that capacity during the 2017-18 processing season to allow downtime for refurbishing other plants that had been running beyond their design capacity. Observers expect all of the company’s plants to be running at capacity next year. In addition, McCain Foods is scheduled to complete a new 400-million-pound production line at its Burley, Idaho, plant next August or September. There is some question as to how quickly the company will gear up production on that line, but when it reaches capacity, it will require approximately 15,000 acres of additional potatoes.
Dehydrators face additional challenges for production planning. Off-grade potatoes from other industry sectors are their cheapest source of raw material. Those supplies are dependent upon the volume of potatoes shipped through fresh-market channels, as well as on the quality of the potato crop. As Idaho’s table potato industry has shifted away from Russet Burbanks to Russet Norkotahs, the availability of off-grade potatoes has declined. Idaho dehydrators have made up for the shortfall with field-run contracts. However, in years when production exceeds the needs of other industry sectors, dehydrators are able to purchase open potatoes at steep discounts to contract prices. The 2017 contract volume reductions were driven by a combination of low open-market prices for the 2016 crop, an unstable customer base and shifting ownership relationships for processing capacity. If this year’s reduced production squeezes the dehydrators’ profit margins, they can be expected to increase contract volumes for the 2018 crop. In the past, dehydrators have had a strong propensity to overreact to the previous year’s supply conditions.
2018 Production Planning
Table potato growers face special challenges as they plan their 2018 production. Markets often react negatively to acreage increases, months before the potatoes actually are harvested, as growers attempt to move storage potatoes quickly to make room for the larger crop that is coming. When reports of large acreage increases in the Columbia Basin and Idaho surface this year, growers need to remember that a substantial portion of those increases will be needed to feed the processing industry.
Growers will be tempted to increase table potato acreage to fill supply gaps in that sector. If they want to hold returns at a sustainable level, relative to costs, they need to exercise caution with their expansion plans. This year’s table potato supply shortfall was created by two factors that are unlikely to be repeated in 2018: 1) adverse growing conditions in key table potato growing areas, including the Pacific Northwest and Wisconsin, reduced table potato yields in those areas below trend levels; and, 2) the shortfall in processing potato supplies pulled some potatoes away from the table market for use by fryers and dehydrators. Yields tend to bounce back following a downturn such as we experienced in 2017, much like what happened in the Red River Valley after that region’s 2016 crop failure.
In addition, processors rarely repeat the same error in production planning two years in a row. A surplus of processing potatoes would create challenges for the table potato market. While processors may use some of the extra potatoes to replenish finished-product inventories, and/or to extend the processing season, they frequently find ways to divert a portion of their surplus to the table potato market. Fryers usually are obligated to purchase contract overages at contract prices within certain limits. However, if production exceeds those limits and the processors have enough raw product, the remaining potatoes are available to the open market. In addition, any potatoes that are rejected for quality issues can be diverted to other market channels.
Growers need to plan 2018 planting to minimize the risk of excess supply. Process growers need to make sure that they have contracts for the volume of potatoes that they plan to produce. If their 2017 yield was abnormally low, it should be discounted in the planning process (the tendency is to overemphasize that loss to make sure that production doesn’t fall short of contract obligations two years in a row). Table potato growers need to make sure that they have a strong relationship with the packing shed that will run their product. Growers for each shed should make sure that, as a group, they only produce enough potatoes to cover that shed’s known demand. It would be better to fall slightly short of that volume than to be long, as there is a strong possibility that supplies could spill over from the processing sector.
