By Bruce Huffaker, Publisher, North American Potato Market News
napmn.com
Growers generally base their potato acreage on perceived demand for their product, though that may be altered to some extent by relative prices for competing crops. Despite efforts to right-size crops, the open market for potatoes can be extremely volatile. The biggest single disruptive factor in the market is year-to-year changes in average potato yields. Second on the list of disruptive market factors is unfounded expectations for demand.
This year, a few other factors could prove to be disruptive forces in the potato market. Processors are planning to ramp up production at several new facilities. If that process doesn’t go smoothly, they could have more potatoes under contract than they need. While global potato supplies always influence North American markets, European crop development could be extremely critical this year.
Deviations From Trend Yield
U.S. potato yields have been in a relentless upward trend since World War II. During the last 20 years, the national average yield has increased 3.9 cwt per acre per year, on average. However, there are several things to understand about trend yields. First, ideal growing conditions are not necessary to produce trend yields, only average growing conditions. Second, trend yields are a large-scale phenomenon, not applicable to individual growing operations. Yields for individual operations increase as farming practices change. Those yield changes are often abrupt and rather dramatic. Trends are smoothed out because individual growers adopt new farming practices at different times. Experience shows that when yields in a particular growing area reach new heights, they usually don’t fall back.
Deviations from trend yields are a driving force for potato prices. When yields exceed the trend, prices for open potatoes tend to fall below the cost of production, while below-trend yields result in stronger prices. Open market price movement deviates exponentially with the magnitude of yield deviations from the trend. Market price research shows that potato yields are as good of a predictor of potato prices as the volume of sales.
Several factors drive deviations from the trend yield. They include the timing of planting, summer temperatures, cloud and/or smoke cover, disease issues, first frost dates, harvest conditions and demands by buyers to sacrifice yields to supply immediate raw product needs. During the past 20 years, deviations from the national average trend have ranged between -11.9 cwt and +15.4 cwt. As farming practices have improved, deviations from trend appear to have narrowed. Between 1999 and 2008, the average deviation from the trend was 7.3 cwt per acre. During the most recent 10 years, the average deviation dropped to 4.4 cwt per acre.
Several factors could influence this year’s yield deviation. Planting and crop development got off to a slow start in most of the fall potato growing areas. As we go to press, planting is not yet complete in several growing areas. Late emergence could limit yields. In some growing areas, surplus water is another concern. Other factors to watch as the season unfolds include summer heat, rainfall events, first frost dates and fall harvest conditions.
When evaluating growing conditions, observers have a tendency to set the expected yield at the trend, with expectations that any deviation from ideal growing conditions will push yields below the trend. That is a fallacy. Growing conditions only need to be “average” to make a trend yield. That would include some adverse weather events. Ideal growing conditions often lead to yields that exceed the trend by a large margin. Other factors can lead to surprisingly strong yields. For example, shifting acreage from low-yielding areas to higher yielding areas boosts average yields.
Unfounded Expectations for Demand
Unfounded expectations for demand can have a major impact on potato supplies and prices. The chip potato industry provides a prime example. When supplies of storage raw product are tight, buyers ramp up new-crop production in Florida, Texas and throughout the early spring growing areas. In such circumstances, they often overestimate their needs and underestimate the yield potential of the early fields. The extra supply pushes back harvest dates for later fields and ultimately results in potatoes backing up in storage. That happened with the 2017 crop. The same scenario may occur this year if summer growing conditions do not intervene.
Idaho table potato growers also may be dealing with unrealistic expectations about demand for their product. They have been marketing a record volume of potatoes from their 2018 crop without pushing grower returns much below the cost of production. Planting for the 2019 crop may have been based on expectations that they could continue to move potatoes at that pace during the coming year without serious price repercussions. Such expectations fail to recognize that the market for the 2018 crop was facilitated by small crops in several other growing areas, which losses are unlikely to be repeated in 2019.
Raw Product Overages
North American processors have opened two new large French fry lines in the last 12 months and are scheduled to open two additional lines between now and next winter. They have contracted for potatoes to run those lines through the coming year. However, if they run into problems ramping up production on those lines, that could back up raw-product supplies and push some of the contract potatoes into the fresh market. While two of the lines are located in Canada, that may not insulate the U.S. market from the impact of raw product overages.
Global Potato Supply
Global potato supplies can impact the U.S. market. About 15 percent of the U.S. potato crop is exported, either as fresh potatoes or as processed products. European crop losses in 2018 tightened global potato supplies. European growers have increased planting this year. If growing conditions return to normal, Europe could have a large potato crop. However, parts of Europe’s main potato growing area remain dry, while Poland is dealing with flooding. World potato markets will be focused on European growing conditions this summer and could be subject to extreme volatility. That could spill into the U.S. market.
Huffaker’s Highlights:
- Year-to-year changes in potato yields are the strongest driver of open potato prices. When yields exceed the trend, prices tend to be depressed. Below-trend yields drive strong prices.
- Ideal growing conditions are not needed for potato yields to match the trend, only average conditions. Ideal conditions can result in yields coming in well above the trend.
- Unrealistic expectations for potato usage requirements can destabilize markets. This year, they could lead to overproduction of chip potatoes, as well as overproduction of table potatoes in Idaho.
- Fryers may have contracted for more raw product than they need if they run into problems ramping up production on new processing lines.
- Potato markets are likely to be extremely sensitive to European growing conditions this summer.
