By Bruce Huffaker, Publisher, North American Potato Market News
Reports from Europe are comparing the 2018 potato supply situation to conditions during the 1976-77 marketing season. Though estimates vary, it is clear that 2018 potato production in Europe’s major exporting countries is at least 15 to 20 percent below the 2017 crop. Production in other European countries also is down from 2017 levels, but probably not as much. This year’s crop loss appears to be the largest percentage decline since 1975. (The reason that Europe looks to the 1976 downturn is that it was a 13.7 percent decline following a 22.9 percent decline in 1975.) Though this year’s European downturn is the most severe in more than 40 years, there are numerous differences between now and then. Some of those differences will tend to mute the global market response to this year’s supply shortage, while other factors will have a tendency to magnify it.
2018 Versus 1976
This year’s European crop losses are severe, but there are several factors that make the current situation much different than what occurred with the 1976 crop. Perhaps most important is that 1976 was the second year of a two-year downturn in production, while the 2018 downturn followed a record crop in 2017. Carryover from the 2017 crop is mitigating this year’s crop losses. Processors in the Netherlands and Belgium were able to continue running plants at record rates through at least October. Much of that was due to supplies of old-crop potatoes that would have been discarded were it not for the shortfall in 2018 production.
Not all of the differences between 1976 and 2018 will mitigate the market response to this year’s shortfall. Global potato markets are much different now. In 1976, European producers were focused on self-sufficiency. In recent years, the European industry has become the world’s largest supplier of processed potato products including French fries and potato flakes. As a result, this year’s shortfall is likely to have a much larger direct impact on global potato supplies and pricing than was the case for the 1976 crop.
EU-28 countries exported 3.9 billion pounds of frozen potato products and 381 million pounds of potato flakes to countries outside of the EU during the year ending Sept. 30, 2018. Frozen product exports have grown at a 13.5 percent per year annual rate for the last five years. The growth in potato flake sales was “only” 9.6 percent per year. Three EU countries, the Netherlands, Belgium and Germany, are responsible for the bulk of the EU exports. All three experienced major crop losses this year. Quality factors have reduced their available supplies even more. The Netherlands and Belgium rely on imports to feed their processing industry. Most of those imports come from France and Germany. The French crop is in better condition than crops elsewhere in the EU, but that country’s production is reported to be down 10.6 percent from last year.
In 1976, North America was dealing with a record crop. Exporters shipped substantial quantities of bulk potatoes to Europe, to take advantage of price differentials, with varying degrees of success. Experienced exporters succeeded, but there was a steep and sometimes painful learning curve for parties that were getting into the export business for the first time. Bulk fresh potato shipments are a thing of the past. While increased sales of containerized fresh potatoes are possible, North America does not have a surplus of potatoes from the 2018 potato crop. Although USDA reported the largest potato crop since 2012 in its November Crop Production report, that number appears to be inflated. In addition, quality and storability issues will reduce usable potato supplies throughout the upper Midwest and in eastern growing areas. Canadian growers were unable to harvest at least 13,000 acres of potatoes before winter weather set in, which has reduced that country’s potato supplies to their lowest level since 1994.
Market Impact
Capacity constraints and raw product shortages will limit North America’s ability to fill the supply gap left by the European potato shortage. Nevertheless, European losses will impact North American and global potato markets in several ways. First, North American processors will need to replace much of the product that U.S. importers purchased from Europe during the last 12 months. That included 56 million pounds of potato flakes and 141 million pounds of French fries. In addition, processors will be called on to cover the supply gap left by the European crop shortfall, as well as the growth in global demand for potato products. Dehydrators are in a much better position to cover those needs than fryers, but it is doubtful that they will be able to fill the developing supply gap. The result is likely to be a bidding war for finished product. Long-term relationships and the ability to pay are likely to determine which customers are able to cover their needs, and which will either end up on allocation or be cut off from supplies.
When will the supply shortfall manifest itself in North American markets? Domestic issues continue to dominate the raw-product market for fry-quality potatoes. Buyers are paying premiums for western potatoes that can be moved to fry plants in the Midwest and in Canada. Pacific Northwest fry plants are running at capacity. They will be able to run primarily on contract potatoes throughout the season. It is difficult to judge how much of any finished-product price increases will be passed on to growers. Dehydrators are paying extra for distressed potatoes, as they seek to cover new orders for potato flakes.
It may take some time for the crunch in the potato flake market to develop. There is a 12 million pound gap between reported EU potato flake exports to the U.S. and U.S. reported imports for the year ending Sept. 30. That suggests that there was a large block of product on the water at the end of September. Europe may have been able to maintain export volumes through the end of December. They were using up marginal raw product at a rapid rate to salvage as much of the crop as possible. Therefore, the supply crunch is likely to worsen through the next six months, and may continue through most of 2019, even if Europe’s production returns to normal in 2019.
The long-term consequences of this year’s European crop shortfall are likely to be long lasting. Europe has long had a reputation for having more volatile potato production than North America. North American product has been preferred for both quality and reliability. However, that started to change as Europe beefed up production and managed to hold exports stable during production downturns in 2012 and 2015. The 2014-15 West Coast Longshoremen’s labor dispute gave North American processors a black eye on the reliability front. North American French fry exports have stagnated since then, as long-term customers have sought to diversify their supply chain. In addition, North American fryers have been slow to ramp up capacity, making it difficult to compete against Europe’s rapid growth. New capacity is coming online, with more in the pipeline. This year’s European crop shortfall will encourage customers to maintain or redevelop long-term relationships with North American suppliers, though increases in exports may have to wait until next year.
Early new-crop production will be critical for both Europe and North America. Buyers are ramping up early contract volume to help offset this year’s shortfalls. History shows that production in the year following a crop disaster usually exceeds industry needs. However, there are exceptions. In Europe, the biggest exception was 1976. For the U.S., we would go back to 1989. The industry will be watching closely to see whether potato crops rebound in 2019. If they don’t, 2019 truly could resemble 1976.
Huffaker’s Highlights:
- Europe’s 2018 potato crop decline is the steepest since 1975.
- A substantial portion of U.S. imports of European French fries and potato flakes will dry up in the coming months.
- Global trade in potato products is likely to decline. North American processors will not be able to replace the European crop shortfall.
- The industry can expect permanent changes in potato product trading patterns as a result of this year’s crop losses.
- A rebound in potato production, both in Europe and in the U.S., will be critical for stabilizing potato markets. Another crop failure in 2019 could bring back the turmoil of 1976.
