A Matter of Pennies

Turning a Risky Gmable into an Actual Business Model

Published in the August 2013 Issue Published online: Aug 04, 2013 Jerry P. Wright, President CEO, United Potato Gro
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After suffering years of disastrous markets, a group of Idaho potato growers got together in 2004 to discuss their struggling industry. Apparent to them from the beginning was that the potato market's present course was leading them to bankruptcy. About to be lost were the efforts of generations to sacrifice, sweat and toil to establish and preserve their family's farm. What could be done to save what their parents and grandparents had fought so hard to build?

Easily identifiable were the two leading contributors to their dilemma: 1) Lack of coordination of supply with what the market needed; and 2) Lack of cooperation among growers when facing huge conglomerate buyers; like wolves chasing a herd of antelopes, growers could be picked out of the herd and savaged one by one. This was nothing new. In 1922, during the era of Congressional trust busting, the United States Congress recognized that huge corporations in the nation's largest cities were able to pick off defenseless growers one by one, and beat the price of farm goods down below cost. Keep in mind that most farm goods are highly perishable, if not prepared and consumed within a short time span.

To counter the untenable position that a grower inherits because of the perishable nature of his produce combined with his lack of bargaining power in the marketplace, Congress granted growers the right to "cartelize," the very word Justice Brennan used in his famous opinion regarding a group of poultry producers who had collaborated to organize a pricing strategy against ruthless corporate buyers.

Potato growers knew at once they needed to follow the poultry example, and they didn't go about it haphazardly. Knowing that potatoes competed with the housewife's choice among numerous carbohydrate selections, including rice and pasta, the growers recognized that the price of their potatoes must remain competitive but still cover their costs. What did this mean, exactly?

Using round numbers, in 2004 it cost a grower roughly 4 cents to produce a pound of potatoes. Markets were returning barely that amount to the grower, with some years returning less than 3 cents per pound-a 25 percent loss. On the other hand, if the market could be structured to return 5 or 6 cents per pound, growers would make ends meet.

From the housewife's perspective, how would a 1 or 2 cent per pound price increase affect her family's budget? In 2004, the retail price for one pound of potatoes averaged 39 cents per pound. Raising that price 2 cents per pound to 41 cents per pound would mean little to the housewife while drastically boosting the health of the family farm. So the decision was made to legally organize as growers under the Capper-Volstead Act so they could capture some portion of a mere 2 additional cents per pound out of the market and save the family farm.

Beyond the farm production cost for a pound of potatoes, many other added economic costs influence what the housewife finally pays at retail. These include packing, freight, storage, distribution, labor, insurance, energy, retail shelving and retail and wholesale profit margins, hence the leap from 4 cents per pound of grower costs to 39 cents per pound at the retail counter.

From that momentous day, led by skilled legal counsel, potato growers have preserved their family's life work and sought to turn a risky gamble into an actual business model. Best of all, the housewife has enjoyed an uninterrupted flow of inexpensive, healthy potatoes.

Come to think of it, I'm going to enjoy a potato for lunch. 

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