By Dale Lathim, Potato Growers of Washington
Recently I was in New York City meeting with representatives of the major investment organizations. We were discussing the outlook of the French fry market and the potato industry that supplies it. Since ConAgra Foods completed the spin-off of Lamb Weston into a standalone stock, the subsequent SEC filings and mandatory financial disclosures have shined the spotlight on not only theses companies, but our entire industry.
Many of the potential investors that I have met with have done some of the most detailed analysis of our industry that I have ever seen. The results of this analysis support my belief that our industry is headed in the right direction and should enjoy continued growth and amazing profitability for the next decade.
A key indicator to me is that the world demand for frozen potato products continues to grow at a remarkable pace. So much so that North American processors are running most of their plants at, or in some cases more than, what was believed to be the capacity of the plant and we are still losing our share of the world market, which is growing faster than we can add new capacity.
That global growth should continue as McDonald’s China has announced that it plans to open 2,000 new outlets over the next five years. That is more than one new store every day for the next five years! Domestically, we are also seeing more restaurants adding frozen potato products to their menu, with Taco Bell now serving them in its more than 1,000 U.S. stores. Also consider the continued popularity and expansion of all-day breakfast options, which has greatly exceeded anyone’s estimates for the demand of cut and formed potato products. With all this in mind, it is very easy to see that the announced additional expansions of processing plants in the Pacific Northwest are needed just to try and keep pace with the growing demand.
With any product, tight supply constraints like those that exist today in the frozen potato processing industry lead to higher prices. In other talks that I have had with restaurant buying teams, they report that they are being asked to pay as much as 20 percent more for frozen potato products this year. Regardless of whether they are being asked to pay 1 percent more this year or 20 percent more, each chain is saying the ask is bigger than it has ever been, and there is very little, if any, room for negotiating on that price.
One of the investment analysts that I met with in New York had done some excellent math trying to determine where the money from an order of French fries ultimately ends up. He priced a large order of fries at one of the major QSR chains in his area, and it computed to $5.10 per pound of fries. Using very conservative recovery rates and median pricing, he calculated that the restaurant captured $4.45 per pound, the processor $0.50 per pound, and the grower received the remaining $0.15 per pound.
What this indicates to me is that the industry is very profitable, especially at the top rungs of our supply chain and that there is plenty of profit to be shared so that each level can and should be getting more profitable each year.
When I met years ago with a very major QSR chain and asked for help in getting additional money passed along to growers, the response was very clear and concise. It was not up to the restaurant to be responsible for the profit levels of anyone below it on the supply chain, it was up to each level to step up and get what it needs. Obviously, the processors have done that as Lamb Weston’s now public financial reports show amazing profitability.
We at PGW have been making it our number one priority this year to restore your profitability to sustainable levels. As I have stated many times before, we can only do that with your support. Please make the effort to attend our harvest wrap-up meetings and support the actions that your board of directors believes will help us the most with not only this year’s negotiations but future negotiations, as well.
