Free to Choose

Published in the February 2014 Issue Published online: Feb 20, 2014 Jerry P. Wright
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A great advantage to living in America is being free to choose. Why is freedom of choice so highly prized? Because, while one can control one’s choice, one cannot control the outcome. Clearly, then, one cannot put too much research, thought, and effort into one’s choice.

What if, in choosing your farm’s 2014 crop mix, you had to fill out a form that contained this question: Regarding making a profit on your 2014 potato crop, which outcome would you prefer? Please circle 1, 2, or 3:

1) “Yes, I’d like to make a profit,” or;

2) “No, I need a bigger tax deduction,” or;

3) “I really don’t care.”

What would be your choice? Which one did you circle last year? Would it surprise you to learn that you actually did pick one last year, know it or not, like it or not?

Remember when Ronald Reagan told Muammar Gaddafi, “You can run but you can’t hide,” just before bombing Gaddafi’s home? While the supply/demand/price equation is not the bad guy, it is always there, making its influence felt. You can run from it; you can pretend it’s not there; but you can’t hide from it. It will always track you down and either draw upon—or make a deposit into—your bank account. And, believe it or not, you and your companion growers choose which it will be. How is that, exactly?

In the fresh-potato market, there is a supply point above which the market will not return cost of production. This is termed a market glut. In the process market, as long as processors are over-supplied—“glutted”—what incentive do they have to increase potato production with a higher price? None. As long as growers willingly over-supply processors’ needs, why motivate growers with a higher contract price? Logically, you then must ask: How many potatoes should growers produce to maximize grower return while not undersupplying either market?

The supply/demand/price equation readily answers this question in both cases: In the fresh-potato market, total price-positive supply approaches 94 million cwt. While the market will accept a glut above 94 million, the over-supply exerts a predictable effect. Sales organizations and retailers may address the glut by incentivizing consumers with discounted price. But in the end, the discount inevitably is passed back to the grower. Every entity between the retailer and the grower naturally maintains its margins. Growers always pay for oversupply. Processors contract the volume they expect will fulfill their sales projections. Like the retailer, they’ll accept some over-supply and put it into dehydrated or frozen storage. But increasing storage volume increases expense. To offset the increased expense, processors cannot pay contract price and remain competitive on the extra volume. Any excess volume accepted above the contract price would only serve to keep the over-supply mentality alive by making the grower feel he is special.

In both cases the supply/demand/price equation comes fully into play. You can run from it, but you can’t hide. So what’s the conclusion: Find out from your processor exactly what volume he expects from your operation and do not exceed it. Find out from United Potato Growers of American the exact volume your area needs to send to the fresh market, get together with your fellow United member growers, and do not exceed that volume.