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By Dale Lathim, Potato Growers of Washington
There has been a lot of talk and emotion surrounding the ever-escalating cost of production for the 2022 crop and the contract price. As this has been happening, there have been some misunderstandings and misinformation about Potato Growers of Washington (PGW), our focus and the profitability of potato contracts. For those who directly asked about some of these issues, we thank you, as it is always good to have checks and balances in place. By walking many growers through this process in one-on-one conversations and at the well-attended all-grower meeting we had, we hope many of you are feeling better about things going forward.
For those of you who have not heard the explanations and for those who may want additional perspective, I will try to address once again several of the concerns that have been expressed.
To make it very clear, we use weighted averages for all the Columbia Basin potato contracts we negotiate. All quality attributes such as size, specific gravity, color, etc. are done on a weighted average basis by potato variety and delivery type. For instance, we calculate size to be used in the Russet Burbank grower storage contract valuation by weighing only the volume of Russet Burbank potatoes that exceed 6 ounces in weight over the past five crop years delivered on grower storage contracts. The same is done for each attribute, variety and delivery type.
Here’s an example to demonstrate weighted average. If 10 growers grow 500 acres of potatoes with a yield of 30 tons/acre and one grower grows 5,000 acres of potatoes with a 42 ton/acre yield, the straight average yield would be 31.09 tons/acre. But on a weighted average basis, the average would be 36 tons/acre or the total production from all 10,000 acres divided by the number of acres, not the number of growers.
Weighted average is the most equitable way to look at any aspect of a potato contract and is the method that has been used for at least the last 50 years in the Columbia Basin. We do this on profitability, as well. We want the weighted average profit margin to be as close as possible to our targets of 15 percent for out-of-field deliveries and 25 percent on grower storage. We fully recognize that there will always be growers who are above and those who are below the weighted average. But there will always be half of the volume above and below, not necessarily half of the operations above and half below due to their differences in size.
Why so many have an issue with using weighted average for yields is very surprising to me. Since we use the same methodology for calculating quality attributes, why is there not as big an uproar over not everyone hitting the specific gravity number or the size profile we use in our contract valuation sheets? There are just as many operations that are either above or below those numbers as there are on yield, yet growers adjust those in their minds when they compare the contracts just like they should with the yields.
The push to divide the north basin into a separate bargaining region was done because the yields in the north are not as high as they are in the south. This is true and most likely will always be true. But yield is only one factor in determining the economic return on a potato contract. Quality can often be more valuable than yield, and individual cost of production is the third leg on the profitability stool.
Historically, the north basin storage potatoes have been higher quality than those in the south basin. That difference has become much less than in the past, but there is still a gap. On average, storage contracts in the north basin will pay in the neighborhood of $5-6/ton more than the same variety and delivery date in the south, while the overall average yield in the south for storage potatoes is about 5-6 tons/acre more than it is in the north. The added revenue from the higher quality makes up for some of the lesser yield, but the rest is made up in the third factor for profitability, the cost of production.
Cost of production is significantly higher in the south basin. In talking with growers, processors and financial institutions, growers will typically spend $600-$800/acre more to grow, harvest, handle and store potatoes in the south basin than they do in the north. The higher costs come in to play with the longer growing season and additional pests which require more crop protectant applications. Larger yields mean more harvest, handling and hauling costs. And the most significant difference is the cost to get the water to the field. In the north basin, water costs are about $30-$60 per acre foot of water and power, while in the south, where they use more water, it is closer to $120/acre foot.
In our information gathering, we learned that while yields are lower in the north, the north also has the advantages of lower costs of production and higher quality. In the end, the return for each dollar invested to grow the potato crop returns a higher percentage in the north on the weighted average production of Russet Burbank storage potatoes, which is the highest volume contract type. Other varieties were closer to being equal. But the bottom line was that due to the lower cost and higher quality, all contracts were in line with our projections of hitting our targets for profit margin.
We fully understand there are several operations in the north basin that either don’t get the higher quality and/or don’t have the lower costs, resulting in profit margins well below our weighted average. But as a group, we must continue to focus on the weighted averages while each individual operation must focus on addressing the two legs of the profitability stool they can control: the quality they produce and the cost it takes to grow the potatoes.
Again, we appreciate the challenge brought forth to help us be certain that the direction we are going is the right one.
