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The highly connected economics of the U.S. potato industry

Published in the January 2016 Issue Published online: Jan 30, 2016 Jerry Wright, UPGA President/CEO
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U.S. on-farm potato pricing is generally led by four production areas: Idaho, the Columbia Basin, the Red River Valley/Wisconsin region, and the Midwest/Southwest region.

Idaho

While Idaho’s sheer crop size places it at the head of the production pack, its particular economic paradigm of sector overlap significantly affects local price and, to some degree, national price in all sectors: fresh, frozen/process and dehydrated potatoes.

What is sector overlap, and how does it affect the potato market? Idaho’s sector overlap evolved over time, driven by the effects of perpetual overproduction. As overproduction leads to highly competitive markets, a grower in one of Idaho’s market sectors now retains the option of shifting potatoes to another sector where the return might be higher. Beginning with growers in the frozen/process sector, their production overlaps the fresh sector and the dehydration sector. In reverse, grower production in the fresh sector overlaps the frozen process sector and the dehydration sector. The seed sector overlaps the fresh sector and the dehydration sector. The intended consequence of this fluidity is to mitigate risk by shifting potatoes from a lower-priced sector to a higher-priced one; its unintended consequence is that these “shifting” or “flex” potatoes have in fact governed price, keeping grower returns at, near and often just below production cost. The shifting oversupply has effectively prevented any sectors from maximizing returns.

While Idaho’s sector overlap stabilizes Idaho’s grower returns at close to break-even, it also affects price in competing regions. For example, as long as sector overlap keeps Idaho’s grower returns at or near production cost, regions that happen to be closer to the nation’s main population centers capture whole dollars per hundredweight in freight differentials. Consider that Colorado’s San Luis Valley is at least $2 per hundredweight in freight cost closer than Idaho to population centers in the Midwest, Texas, parts of the Southeast and Mexico. Wisconsin’s market proximity allows it to capture at least $4 per hundredweight in lower freight costs to certain Midwestern and Eastern markets.

But all is not so bleak for Idaho: Idaho’s brand investment—built largely upon the Russet Burbank’s unique qualities—shifts Idaho’s emphasis from regional competition to brand competition, and no region has yet been able to dislodge the mighty Idaho brand from restaurant and institutional trade, where it remains firmly grounded.

Returning to the discussion of freight differentials: There occasionally arises some effort on a buyer’s part to demand this differential as a price concession. This is a dangerously short-sighted view, because doing so would force Idaho out of a market that the other regions could not satisfy alone, and would result long-term in shortages and resultant higher prices overall. Economic paradigms like the one described above are underpinned by long established economic principles that superbly balance the potato market’s supply/demand/price equation. To haphazardly change this healthy market structure for a moment’s profit would be to upset a dependable and efficient supply chain.

Columbia Basin

Lately, as the U.S.-Canadian monetary exchange rate has intensified, exporting from Canada to the U.S. has become increasingly more attractive, whether the product is fresh or frozen. However, after taking into account variances in yield, quality, seasonality and freight, contract price in all other North American frozen/process-producing regions still must line up behind the Columbia Basin. This happens not only because of the Columbia Basin’s unmatched yield and quality but also because of its geographic nearness to shipping ports.

For the last decade, growth in potato processing has occurred not due to increased domestic usage, but rather due to a growing export market; frozen potatoes now account for over 50 percent of total U.S. potato exports. Whether by truck into Mexico or Canada, or by container-boat to the Pacific Rim, Columbia Basin exports now account for nearly one-fifth of total U.S. potato production.

Red River Valley/Wisconsin

From October through mid-February—considering northwestern Washington’s Skagit Valley’s niche as a stand-alone market for colored potatoes—the Red River Valley’s and Wisconsin’s red potato production sets the price for red potatoes. While Idaho, Colorado and Texas contribute meaningful red potato volumes during those winter months, since they ship mostly contracted volumes, they do not set market price. Colorado, including the San Luis Valley and the state’s northeastern area, play heavily in yellow potato production; hence, they generally set yellow potato price.

As red and yellow potato production have been increasing yearly by about 1 million hundredweight, the russet market has been contracting by about that same amount. Along with red and yellow production expansion, organic and specialty potato markets have been gaining market share as well. Petite potatoes—potatoes smaller than 1½ inches in diameter—packaged as a single variety or in a medley of colors, are now seen alongside the once-dominant fingerling potato. Whether grown in Wisconsin or not, Wisconsin shippers have been key players in this expansion.

From Florida’s crop, which begins in mid-February, and continuing up the Atlantic seaboard through spring and summer, Eastern acreage has been shifting to volumes that include greater portions of reds and yellows and fewer white potatoes. This same shift is happening in California’s Kern County.

 

Midwest/Southwest Region

Among all regions undergoing significant production shifts, none matches what has happened in this region. Going from about 1 million hundredweight of annual potato production to almost 5 million hundredweight in just a few years has caused tremendous market pressure and re-evaluations in not only proximal regions, but in areas as far away as Idaho. A volume that large—popping up where little or none existed before and occupying a yearlong time span—with an equally large freight advantage portends that production adjustments be made almost everywhere.

Other Regions

Of one thing, potato growers can be sure: The potato industry is in a constant state of flux. Just ask a potato grower from Kern County, Calif. At its peak, Kern County grew over 59,000 acres of potatoes, sending them to market generally from April through June. But as potato storages and storage technology improved in the Northwest and allowed growers there to ship year-round, by necessity Kern County growers have dropped their acreage by over 70 percent to a varietal mix of red, yellow, white and petite production. Similar pressures have reduced acreage in the Klamath Basin, Arizona, New Mexico and parts of the Southeast.

Growers’ decisions have the potential to affect the potato market across the country, as well as on individual farms. No one grower or region operates in a vacuum, something the potato industry should keep in mind.