Seeking balance in life and potato markets

By Larry Alsum
President/CEO Alsum Farms and Produce
Member of United Potato Growers of Wisconsin

Most of the struggles we face in life carryover from work to our personal challenges. As I think about the upcoming potato crop transition from the 2009 to the 2010 crop, I keep coming back to my personal struggles with weight. I have always enjoyed eating and often find myself wanting to eat too much. During one point in my life, I let my weight creep up to 300 pounds. I knew it was not healthy, and I knew I had to make changes. So what are the similarities between my struggles with weight and the potato crop transition that we face every year?

I think the potato industry hit its “300 pound mark” about a dozen years ago. The birth of United Potato Growers of America five years ago was one of the resulting changes needed for creating market balance.

Let's first look at the problem of achieving balance. Managing weight is relatively simple, yet very hard to do. Calories in must equal calories burned up or you will gain weight. If you are out of balance, you have two choices, adjust the calories you are consuming or adjust the calories you are burning. Likewise, the potato industry is faced with the same challenge every year, potatoes produced must equal potatoes consumed or the market is out of balance.

When I hit the 300 pound mark at age 39, I made up my mind that I was going to change. I will admit it was a challenge, and it still is a daily struggle for me, but it had to be done if I wanted to live a healthy life. The primary factors that helped me to achieve my 100-pound weight loss and maintain it are the same principles needed to achieve potato market balance.

I believe if we apply the following concepts to our industry, the crop transition for 2010 will be successful:
1. Be purpose driven. We need to know why we exist and what our goals are. We need good information in order to make good decisions.
2. Have a plan and a strategy. Know your customers. Know what they need and want. Know how to add value to your relationships.
3. Bring balance into your plan. Cutting supply only is not the solution. We also need to increase demand. We need to create new products, new uses and new ideas.
4. Communicate with your customers, your suppliers, and, under the umbrella of United, with each other.
5. Plan ahead, but always remain flexible. As growers, we need to know our market windows and opportunities. If things change, we need to know what our options are. Be willing to change. Be willing to try new ideas.
6. Never give up. Our own mindset can do more to harm us than any other factor. We can move markets and create opportunities if we keep a positive outlook.

Best wishes to all potato growers and to achieving balance in life and potato markets.

Is someone renting market share with your equity?

By Lee Frankel
President/CEO United Potato Growers of America

Close communication and a shared philosophy are critical elements in the relationship between a grower and his or her sales organization. If your sales organization spent most of the year being both long and short on product and not much time balanced, it is a good indication that communication needs to be improved.

Sales organizations tend to be 50 cents below the market, at the market or about 50 cents above the market price at any given time. The common element for a group to be below the market is whether the sales desk has more potatoes than necessary to serve their core customers. If the sales team has potatoes beyond what they need to service their core customer base, they must battle other sales groups for the same “price-first” marginal customer who will switch suppliers at a moment’s notice. 

Why was it so important to not be under the market this year? Marginal customers are marginal customers for a reason. They are more likely to demand an additional discount upon arrival for quality claims and are generally slower to pay. Ultimately, sales to most of these customers meant that your sales organization and packing shed sent a bill to you, the grower, for having supplied the potatoes for this transaction.

Growers that communicated with their sales organization to see if there were any sales on consignment, any claims from customers and any build-up of inventories on the sales floor could avoid creating extra pressure for the sales organizations by instructing the shed to cull out all marginal and or excess potatoes. 

As prices dropped to levels well below break-even levels for growers, movement of fresh market potatoes increased. By springtime, many individual sales organizations could clearly see that they would not have enough potatoes from within their core grower group to last for their typical marketing season. These sales organizations ultimately had to purchase potatoes from other packers and growers to meet their true core customer needs.

Did your sales organization resist raising prices and intentionally use your grower equity to maintain market share even though they ultimately needed to source potatoes from other growers? Or did you not communicate the true condition of your storage potatoes in a timely manner to allow them to increase your returns? Did you communicate with your sales and packing organizations to let them know that the return to the farming operation is even more critical for long-term sustainability than this year’s market share battle?

As you review your liquidation reports, which are also known as pack-outs, from this past season and consider who will be packing and marketing your crop for the coming season, carefully analyze if you truly have the communications in place with your sales and packing organizations to maximize your return.

Q and A interview with Dr. Richard Sexton, UC, Davis

National farmers cooperative expert, Dr. Richard Sexton, professor, Department of Agricultural and Resource Economics, University of California, Davis, spoke to potato growers who attended the Fourth Annual North American Potato Grower Summit, February 9, 2010. Following is a question and answer interview with Dr. Sexton conducted by United staff following his presentation.

Q-1 In your remarks at the Summit, you said, “United has achieved a remarkable degree of success in its short life. United now faces challenges due to its success.” What did you mean by that statement?
A. I was referring specifically to the large share of North American potato growers who have chosen to join United and the success of the cooperative in increasing grower returns over the past two years. By managing the flow of product to the market, United has helped achieve an increase in the U.S. grower return index from $6.94 in 2006-07 to $8.41 in 2007-08 and then $10.85 in 2008-09.

Q-2 You spoke of supply management and key economic aspects of the potato industry saying that supply management in one region will benefit all regions and that expansion of production in one region will harm all regions. Tell us more about that situation.
A. It means that the different potato growing regions are all linked together economically in one broad U.S. or North American market. Economists would say that the different growing regions are “integrated” into the same market or that the “law of one price” applies across regions. This law does not say that the prices in different regions will be the same, only that the prices will move together. I did some basic statistical tests to verify this point. This means that supply changes in one region will affect prices not only in that region but all others as well.

Q-3 What do you mean when you say short-run returns can be increased through supply management?
A. Most agricultural commodities have a demand that is price inelastic, which means that a given percent change in production will cause an opposite and greater percent change in price. This status almost certainly applies to potatoes for the fresh market. Therefore, less supply means greater grower revenues, and lower costs due to producing fewer potatoes. Both the revenue and cost side effects of supply management contribute to higher grower returns.

Q-5 What warning signs associated with supply management should United consider?
A. Successful supply-management programs run into two types of problems: Free riders and new entrants. Free riders are the ones who don’t participate in the supply-management program but reap the benefits nonetheless. It is disheartening for growers who are participating to see outsiders benefit disproportionately because they are not cutting back on production. If returns from potato production come to consistently exceed returns from alternative crops in potato-growing regions, more potatoes will be grown, which will have a detrimental impact on price.

United's Confidentiality Agreement explained

Flex potatoes kill process markets too

North American process potato contracts have been vastly reduced in recent months, but that doesn’t mean process potato growers should plant extra acreage expecting a market and a profitable price for their non-contracted process potatoes.

This week, United Potato Growers of America national office staff conducted a question and answer interview with Dale Lathim, President, Potato Marketing Association of North America, a trade association representing process potato growers, to learn more about the process potato situation.

Q: Now that many process potato contracts have been vastly reduced, process growers are making decisions right now of what to do with the land that they had originally intended to plant with process potatoes. Should process growers plant above and beyond their existing contract?
A: Anytime process growers plant above and beyond their contracted acres or yield beyond their volume cap, they are growing flex potatoes. Flex potatoes represent a risky venture that can negatively impact the fresh potato market when the flex potatoes land there. History shows that in 9 out of 10 years flex potatoes do not even provide a contract price. In a declining market, flex potatoes will end up costing all growers as it will lower the fresh market price.

Q: Why should a process grower care about fresh market prices?
A: Fresh prices have a direct relationship to contracted process potato prices. A careful review of data clearly indicates that when fresh prices are significantly less than current contract prices, we can expect a drop the next year in contracted potato prices. For your own business success, you should care about fresh prices and avoid flooding the fresh market with flex potatoes. By supporting fresh growers in this way, you are really supporting yourself in the long run.

Q: The media continue to report that the economy is improving. Do you think the processors got it wrong when they reduced process contracts and assumed consumer demand would be low?
A: A process grower should never try to out-guess the processors and their extensive data and research. Historically, processors always predict consumption correctly. Processors expect a mild recovery of the economy and that expectation is built in to today’s contracts. For your own success, don’t get over enthused when the media reports a better economy and assume that that creates a hidden opportunity for process potatoes.

Bottom line, growers don’t know more than processors when it comes to consumer demand.

To learn more about process potato prices and its relationship to fresh market prices, contact Dale Lathim at dale@pgw.net or 509-488-6688.

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