One Big Pile of Potatoes

What is your world view?

Published in the March 2013 Issue Published online: Mar 22, 2013 Jerry P. Wright, President CEO, United Potato Gro
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We had an excellent Potato Business Summit in Las Vegas this last January. Over 300 growers, shippers, frozen and dehy processors and industry executives attended the half-day event to gain a focused insight into the ever-changing foreign and domestic potato market. Several key factors impacting the industry emerged as critical points that merit reporting:

1) There is clear, continued, decreasing demand for domestic frozen-processed, dehydrated and fresh potatoes. This is well-documented by USDA and AC Nielsen tracking data. While increasing exports have lately offset decreasing domestic usage of frozen-processed and dehydrated potatoes, fresh potatoes do not enjoy that same boost. Fresh-potato volume continues to decrease at about 1.1 percent annually, equal to one million cwt each year, or the production of about 2,500 acres. One factor in the fresh-potato volume decline is the consumer's move to smaller packages: 10-pound consumer bags are being replaced by 5-pound and 3-pound consumer bags at an alarming rate.

2) Further USPB research into WHY the steady decline in retail potato consumption reveals that about 2/3rds of the loss is likely due to "reduced in-home potato usage," while about a third of the impact appears due to "switching to other side dishes"-most frequently a pasta dish. That means getting consumers to buy more isn't the answer-getting them to eat more potatoes more often, is!

3) Directly colliding with this broad decline in domestic demand is the annual increasing potato trend-line production rate. Each year, the average potato grower produces 500 pounds (cwt) of potatoes per acre more than he produced the previous year on the same acre. This "yield creep" phenomenon known as the trend-line yield increase is predictable with almost 95 percent dependability.

That means that the likelihood of yields increasing by 500 pounds per acre per year is absolutely going to happen. Depend on it. With no acreage correction, that's a lot of extra potatoes coming into already-declining and oversupplied domestic fresh, frozen and dehy markets.

4) Attempts to balance this annual increasing production/supply with the annual declining demand in all sectors (expect for export frozen and dehy) has created its own related set of challenging business circumstances:

a) The Fresh Potato Packing Industry today has, depending upon the production area, between 40-60 percent excess packing capacity. That overhead burden increasingly influences production decisions rather than the realities of declining domestic demand. Price is almost always the causality.

b) Dehydrators face uncertain and diminishing supplies of process-grade potatoes. Their response has been to over contract.

c) Growers producing within each sector often plan and produce independent of the other sectors. This information vacuum often leads to speculative planting and individual grower strategies that justify selling excess potatoes into any other sector.

When a potato grower sees the two lines-increasing yields and decreasing price-positive demand-on the same sheet of paper, it becomes obvious that, should that grower not adjust production accordingly, he becomes a contributor to a drop in market price. When enough growers fail to recognize and act on this paradigm, each then contributes to a major disaster like the one now underway. And this is not opinion. This is fact.

Why does any of this matter anyway? Balanced supplies within each sector mean stable and profitable markets, less diversion of potatoes from one sector into another, more stable raw production contracts within each producing sector and, most importantly, a stable domestic and export pricing environment.

Never has this industry needed to be more connected. It is one big pile of potatoes. The prosperity of each and every grower and each producing sector of this industry, fresh, process and dehydration, depends on an improved understanding of each sector's connectedness and influence on the other.

Now back to what one's world view has to do with all of this: Steve Jobs years ago made the following observation: "Corporate America [i.e., the U.S. potato industry] has a need that is so huge and can save them so much money, or make them so much money, or cost them so much money if they miss it, that they are going to fuel the information revolution."

The beautiful thing about change today is that information technology allows one to be absolutely current with change. As a potato grower, your prosperity today depends on knowing all aspects of changing markets. It means determining just what your share of a profitable potato market might be, and growing exactly and only that amount. Seeking and following reliable market information can make growing potatoes profitable every year. Does accepting your share of responsibility for managing the overall potato market fit into your world view?