The International Potato Industry

The international potato industry

The international potato industry JOSEPH F GUENTHNER

Cambridge England

Published by Woodhead Publishing Limited, Abington Hall, Abington Cambridge CB1 6AH, England www.woodhead-publishing.com First published 2001, Woodhead Publishing Ltd © 2001, Woodhead Publishing Ltd The author has asserted his moral rights Conditions of sale This book contains information obtained from authentic and highly regarded sources. Reprinted material is quoted with permission, and sources are indicated. Reasonable efforts have been made to publish reliable data and information, but the authors and the publisher cannot assume responsibility for the validity of all materials. Neither the author nor the publisher, nor anyone else associated with this publication, shall be liable for any loss, damage or liability directly or indirectly caused or alleged to be caused by this book. Neither this book nor any part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, microfilming and recording, or by any information storage or retrieval system, without permission in writing from the publisher. The consent of Woodhead Publishing Limited does not extend to copying for general distribution, for promotion, for creating new works, or for resale. Specific permission must be obtained in writing from Woodhead Publishing Limited for such copying. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation, without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. ISBN 1 85573 465 6 Typeset by Best-set Typesetter Ltd., Hong Kong Printed by TJ International Ltd, Cornwall, England

Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ix

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

xi

List of abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . .

xiii

Part I Introduction

1

2

History and background . . . . . . . . . . . . . . . . . . . .

3

A brief history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

Cultural aspects of potatoes . . . . . . . . . . . . . . . . . . . .

12

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

Potato properties, types and use . . . . . . . . . . . .

20

Nutritional attributes . . . . . . . . . . . . . . . . . . . . . . . . .

20

Culinary aspects of potatoes . . . . . . . . . . . . . . . . . . . .

22

Potato types and varieties . . . . . . . . . . . . . . . . . . . . . .

24

Fresh potatoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28

Processed potatoes . . . . . . . . . . . . . . . . . . . . . . . . . . .

29

v

CONTENTS

Fresh processed potatoes . . . . . . . . . . . . . . . . . . . . . .

31

Seed potatoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31

Livestock feed and other uses . . . . . . . . . . . . . . . . . . .

32

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33

Part II Economics of the global potato economy

3

4

5

Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37

Potato growth requirements . . . . . . . . . . . . . . . . . . . .

37

Production zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39

Production trends . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42

Production systems . . . . . . . . . . . . . . . . . . . . . . . . . . .

56

Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65

Factors that influence plantings . . . . . . . . . . . . . . . . . .

70

Potato yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

74

Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76

Demand theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76

Factors that influence demand for potato products . . .

79

Utilization trends by country . . . . . . . . . . . . . . . . . . . .

87

Consumption trends by type of final product . . . . . . .

98

Demand forecasting models . . . . . . . . . . . . . . . . . . . .

106

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

111

Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Price theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

113

Pricing mechanisms, institutions and information . . . .

126

Price changes through time . . . . . . . . . . . . . . . . . . . . .

135

Price forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

141

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

143

Part III

6

The trade

Fresh potato trade . . . . . . . . . . . . . . . . . . . . . . . . . 147 Fresh potato exports . . . . . . . . . . . . . . . . . . . . . . . . . . vi

148

CONTENTS

7

8

9

10

Fresh potato imports . . . . . . . . . . . . . . . . . . . . . . . . . .

152

Net trade for fresh potatoes . . . . . . . . . . . . . . . . . . . .

155

Fresh potato prices . . . . . . . . . . . . . . . . . . . . . . . . . . .

158

Fresh potato trade issues . . . . . . . . . . . . . . . . . . . . . . .

161

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

168

Frozen potato trade . . . . . . . . . . . . . . . . . . . . . . . 169 Frozen potato exports . . . . . . . . . . . . . . . . . . . . . . . . .

172

Frozen potato imports . . . . . . . . . . . . . . . . . . . . . . . .

176

Net trade for frozen potatoes . . . . . . . . . . . . . . . . . . .

179

Frozen potato trade prices . . . . . . . . . . . . . . . . . . . . .

181

Frozen potato trade issues . . . . . . . . . . . . . . . . . . . . .

184

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

189

Seed potato trade . . . . . . . . . . . . . . . . . . . . . . . . . 191 Seed potato exports . . . . . . . . . . . . . . . . . . . . . . . . . .

194

Seed potato imports . . . . . . . . . . . . . . . . . . . . . . . . . .

196

Seed potato net trade . . . . . . . . . . . . . . . . . . . . . . . . .

202

Seed potato prices . . . . . . . . . . . . . . . . . . . . . . . . . . . .

206

Seed potato trade issues . . . . . . . . . . . . . . . . . . . . . . .

209

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

213

Other potato trade . . . . . . . . . . . . . . . . . . . . . . . . 214 Potato snack trade . . . . . . . . . . . . . . . . . . . . . . . . . . .

214

Dehydrated potato trade . . . . . . . . . . . . . . . . . . . . . . .

220

Starch potato trade . . . . . . . . . . . . . . . . . . . . . . . . . . .

226

Miscellaneous potato trade . . . . . . . . . . . . . . . . . . . . .

229

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

232

The marketing chain . . . . . . . . . . . . . . . . . . . . . . . 233 Quick-service restaurants . . . . . . . . . . . . . . . . . . . . . .

234

Processors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

243

Retailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

251

Fresh packers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

253

Growers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

254

Potato futures markets . . . . . . . . . . . . . . . . . . . . . . . .

255

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

260

vii

CONTENTS

Part IV

11

12

Key issues for the future

Technology issues . . . . . . . . . . . . . . . . . . . . . . . . . . 263 GMO acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

264

Seed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

268

Plant property rights . . . . . . . . . . . . . . . . . . . . . . . . . .

269

Electronic technology . . . . . . . . . . . . . . . . . . . . . . . . .

272

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

273

Market issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 Greater China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

274

Trade agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .

278

Currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . .

280

Branding by variety . . . . . . . . . . . . . . . . . . . . . . . . . . .

281

International growers . . . . . . . . . . . . . . . . . . . . . . . . .

282

Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

283

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

285

Index

288

..........................................

viii

Foreword

I

t is with great pleasure that I write a Foreword to this book. J o s e p h Guenthner, whom I have known for several years, has a quite incredible knowledge of the potato industry and he is particularly gifted at disseminating this knowledge to the many audiences who have had the privilege of listening to his lectures. For those particularly, like myself, who have been immersed in the potato industry for many years, and even to those who have only been in this industry for a few years, I am quite certain this will be found a most interesting, stimulating and very readable book. We have always known the potato is a particularly versatile commodity. Well, we now have an equally versatile handbook to this most interesting of industries. I wish you very pleasant reading. Richard Harris President of UEITP (European Association of Potato Processing Industry)

ix

I

Preface

was thrilled when Neil Wenborn asked me if I would be interested in writing a book about the global potato industry. He explained that Woodhead Publishing had a series of books about the international trade of commodities ranging from aluminium to zinc. I was pleased to accept the challenge of writing the first book to deal with the fascinating topic of the international potato industry. I am grateful to the University of Idaho for granting me a sabbatical leave that gave me the time to write this book. The book is aimed at a wide audience. People who are involved in the business part of the potato marketing chain as growers, processors, shippers, retailers, marketers, advisers or fast-food providers should find items of interest in the book. Economists, students and those entering the industry for the first time may find that this book provides background information that can make them more familiar with the potato industry. This book also provides an opportunity for those people at the end of the marketing chain, the consumers, to learn more about one of the world’s most important foods. Part I introduces readers to the impact that potatoes have had on people and their culture. From its origins in the Inca society of xi

PREFACE

South America to its role in the Irish Potato Famine to its contribution to the settlement in remote islands, the potato has a long, rich history around the globe. Potato consumption, in its many forms, has influenced economic development, wars and the fast-food society. Part II describes the global potato industry in the economic terms of supply, demand and prices. Part III looks at the trade of potatoes around the world. Since the different potato products flow in separate channels, four chapters are devoted to trade by type of product. Another chapter deals with the marketing chain from field to consumer. Part IV deals with the future outlook for the global potato industry. One chapter discusses technology issues, the other explores market issues. Three generations of women inspired me to write this book. I am grateful that my mother, Carol Dawley Guenthner taught me to love to learn. I am deeply indebted to a potato farmer’s daughter, my wife Terri, for her support in writing this book. She and my three daughters,Amanda, Megan and Hayley, were patient with me when I devoted time and energy to the book. They understood my fascination with the potato industry because it is in their blood as well as mine. They are descendants of many generations of potato growers.

xii

Abbreviations

APEC APHIS BC BPC BRR CFIA CIPC CITT CME CPB CPI EFP EU FAO GATT GI GMO GNP GPS HDP HI

Asia Pacific Economic Cooperation Animal and Plant Health Inspection Service British Columbia British Potato Council bacterial ring rot Canadian Food Inspection Agency chlorpropham Canadian International Trade Tribunal Chicago Mercantile Exchange Colorado potato beetle consumer price index exchange of futures for physicals European Union Food & Agriculture Organization General Agreement on Tariffs and Trade glycemic index genetically modified organism gross national product global positioning system high demand and production Herfindahl Index xiii

ABBREVIATIONS

IFPRI International Food Policy Research Institute IGRI Idaho grower return index IMPACT International Model for Policy Analysis of Agricultural Commodities and Trade IPC Idaho Potato Commission ITC International Trade Commission KFC Kentucky Fried Chicken LIFFE London International Futures and Options Exchange MAFF Ministry of Agriculture, Fisheries and Food (UK) MH maleic hydrazide MI McDonald’s Index NAFTA North American Free Trade Agreement NAPI Navajo Agricultural Products Industry NPPB National Potato Promotion Board (US) NYCE New York Cotton Exchange NYME New York Mercantile Exchange P&G Procter & Gamble PCCF per capita consumption of potatoes for food in kg/year PEI Prince Edward Island PGI Potato Growers of Idaho PGW Potato Growers of Washington PLRV potato leafroll virus QSR quick-service restaurants RS resistant starch SPS Sanitary & Phytosanitary Measures TPS true potato seed UEITP European Association of Potato Processing Industry USDA US Department of Agriculture USTR US Trade Representative WANA West Asia and North Africa WTO World Trade Organization ZMP Zentrale Markt- und Preisberichtstelle

xiv

PA RT

I INTRODUCTION

CHAPTER

1 History and background

A brief history

T

he humble potato has long been a vital part of societies scattered around the world. When European conquerors raided South American cities, they found the natives eating an unimpressive, odd-looking vegetable. In their quest for gold and silver, they could not have imagined the impact that this potato would have in Europe, then North America, then the rest of the world. The history of the potato is intertwined with the lives of the people who influenced its development into an important international food. Major economic and political forces of the last four centuries were tempered by the potato’s attributes but also by its vulnerability to disease. This common vegetable literally shaped societies in South America, France, Ireland, North America, China, New Zealand, remote islands in the Southern Hemisphere and in many other parts of the world.

A gift from the Incas The potato was more than a food to the Incas of South America. They believed it had the power to heal ailments such as headaches, broken bones, skin disease and rheumatism. Incas had been growing and eating potatoes 3

THE INTERN ATION AL POTATO INDUSTRY

for two thousand years before the Europeans came to the New World. They domesticated the wild potatoes that grew naturally in the Andes mountains and began the development of a food that is now among the top staples worldwide. Wild potatoes are indigenous in South, Central and North America but the Incas were the only people to cultivate them in pre-Columbian times. Over the years the Incas planted and improved a wide variety of potatoes. They used the name papas for potatoes in general, but had other, colourful names to describe particular types. One with red flesh was called ‘weep blood for the Inca’. Another, tough type was known as the ‘knife breaker’. Others were called ‘human head’ and ‘red mother’.1 Potato colours seemed to span the rainbow – ranging from white and yellow to blue, red, brown and black. To say that the potato was important to the Incas is an understatement. It was their lifeblood. Although they sometimes ate fish, deer and fowl, their diet was mostly vegetarian, consisting of potatoes, beans and maize. They grew several crops in the lowlands, but mostly potatoes in the highlands where the people lived at altitudes not suitable for maize. The Incas built sophisticated terraces and irrigation systems for their potato crops and made their homes on rocks where potatoes could not grow. The Incas were not only the first potato growers but also the first potato processors. They developed a method to freeze-dry the tubers into chuño, a product that could be stored from year to year and was even used as currency. The chuño process was to drive water out of the potatoes using human power and the elements. At harvest the Incan workers spread out the potatoes to freeze during the cold nights in the mountains. During the day men, women and children stomped on the potatoes with their bare feet to squeeze out the moisture. After four or five days of this, the Incas had their chuño, a freeze-dried food that was easy to store and transport. Food production, processing and storing systems based on the potato enabled the Incan society to flourish. Food efficiency enabled many of the citizens to become involved in other pursuits such as engineering, art, law, astronomy and science. The potato helped build the Incas into the largest society in the Americas. When the Spanish invaders came, the Inca empire consisted of ten million people spread over 2000 miles along the Andes mountain range of the South American continent. Spanish conquistadors, although small in number, easily defeated the Incas and imposed colonial rule over them. How could a small force of invaders conquer such a large empire? Some say that the conquistadors strategically captured Incan food storehouses, which held chuño, to gain the upper hand. Ironically, the potato helped the Incas build their society, but it may have led to their demise because they depended so heavily on it. 4

HISTORY AND B ACKGROUND

Pedro de Cieza de Leon provided early written record of potatoes in 1553 when he described his Peruvian adventures of 1538. He told of potato production, the chuño process and how potatoes protected the Incas from famine. He also told of many Spanish citizens becoming wealthy by transporting chuño to the mines of Potosi.2 Spaniards destroyed the Inca civilization in their search for gold and silver. They shipped vast amounts of the precious metals back to the mother country, but they also left with something perhaps more important – the potato. According to one European observer in 1800, ‘. . . this useful root, for which we are indebted to America, . . . is more valuable than all the gold of Mexico, all the diamonds of Golconda or all the tea of China’.3

The potato in Europe The lifeblood of the Incas was at first merely a botanical curiosity in Europe. In time the potato became an important food crop in many parts of the continent. The potato in Europe is a story that involves myths, fear, deception, theft, exploitation and tragedy. There is no conclusive written evidence regarding how and when potatoes first came from the New World to Europe. Some scholars believe that the route was from North America to Europe via either Sir Francis Drake or Sir Walter Raleigh.4 Some writers acclaim Raleigh for the introduction of potatoes to the British Isles, but others suggest that he did not travel to the places at the times he supposedly transported potatoes. The legend regarding Drake, the first Englishman to circumnavigate the globe, is that he introduced potatoes from Virginia to England. Myth-refuters claim that Drake did indeed learn about potatoes at a 1577 stop in Chile during his first round-the-world trip, but did not return to England until 1580. On a later voyage, in 1586, Drake collected potatoes at Cartegena (in today’s Colombia), then stopped in Virginia on his way back to England. In the colony he picked up some discouraged English settlers and gave them transport back home. Many people assumed that since the passengers came from Virginia, the potatoes did as well. Potatoes arrived in Spain a bit earlier, but since the actual first event was not recorded there is not one specific name associated with it. Spain controlled trade from its American colonies, so the first potatoes may have arrived in some ship’s stores or among the personal belongings of a returning colonist or administrator. The earliest written record of a commercial European transaction involving potatoes was in 1573. The Hospital de la Sangre in Seville purchased potatoes in the fall, which suggests that they were grown domestically and not imported. For stocks to be built up to commercial levels from small amounts carried on ships, potatoes must have been planted in Spain several years before the hospital purchased them. 5

THE INTERN ATION AL POTATO INDUSTRY

Myths accelerated and slowed the acceptance of potatoes in Europe, but within 150 years of introduction potatoes became ubiquitous.The potato plant was, in various places and times, regarded as a botanical curiosity, a medicine, a narcotic, a poison, a livestock feed, a food for royalty, a salvation of peasants and a harbinger of famine. Herbalists and physicians who claimed that eating potatoes could cause indigestion, flatulence, rickets and syphilis slowed acceptance of potatoes as a food. A French provincial government, convinced that potatoes caused leprosy, banned potato production. Because of its phallic shape some people claimed the potato was an aphrodisiac. Religious leaders declared potatoes evil because the Bible made no reference to them. Other societal leaders made claims about potatoes that accelerated acceptance. Carolus Clusius, a French botanist, said that eating cooked potatoes was good for the health, made for large families and increased life span. One herbalist prescribed potato broth for diarrhoea, tuberculosis, impotence and barrenness. During the 1600s potatoes were a food for aristocrats on the European continent. Perhaps through scarcity and high prices, potatoes were viewed as a luxury good and not for the likes of peasants. Royalty, however, came to realize that potatoes could play an important role in feeding the masses. Kings in Prussia and Sweden commanded peasants to grow potatoes, in some cases providing free seed and soldiers to enforce their orders. French pharmacist Antoine Parmentier used psychological deception to get farmers to grow potatoes in the eighteenth century. He developed a taste for potatoes while a prisoner in Germany during the Seven Years War (1756–63). After returning to France he planted a potato field near Paris and stationed guards around the perimeter. He left it unguarded during the night. Neighbours, wondering what crop could be so valuable, began to pilfer Parmentier’s potatoes after dark to plant on their own land. Parmentier’s deception certainly played a part in the rapid spread of potatoes in France. The plant became so popular that potato blossoms worn in women’s hair became a new fashion in Paris after Marie Antoinette adorned herself with them. The potato had several advantages that contributed to its widespread acceptance as a food in Europe. Convenience was one important attribute, as it is in modern society. Potatoes competed quite favourably with other contemporary foods such as grains that required milling to make flour and ovens to make bread. Potatoes did not need to be processed and could be made ready for consumption simply by placing them in the embers of a fire. Potatoes were also found to be much more productive than grains, especially in the climates of northern and eastern Europe. On the same amount of land potatoes could feed five times as many people as could wheat. Vig6

HISTORY AND B ACKGROUND

orous seed was another plus for potatoes. Weather conditions that wiped out other crops would only set back potatoes temporarily as the seed tubers sent out new sprouts to emerge as potato plants. The potato’s ability to adapt to poor soils allowed for production of a third of a crop or half a crop under conditions that would completely destroy small grains. Another advantage is that potatoes could be stored in the ground where planted, reducing pilferage and preventing invading armies from easily destroying or confiscating food supplies. Enemies could burn wheat fields and steal livestock, while potatoes were out of sight in the soil. Since the potato provided food security and required no processing it became an important crop of the masses.

The Irish Potato Famine The first person to plant potatoes in Ireland is unknown. The earliest plantings probably came from potato tubers found on Spanish ships that ran aground after the defeat of the Spanish Armada in 1588. Unlike on the European continent, where it was an aristocratic food, in Ireland the potato quickly became the main food for peasants. There are several reasons why potatoes spread very rapidly in Ireland. One reason was the island’s mild climate, in which potatoes thrived, especially in southern Ireland. Irish growers produced surprisingly high yields, even in terms of potato production two centuries later. During the early 1800s Irish potato yields were over ten tons per hectare, which is about the average for all developing countries in 2000. Another reason was the structure of Irish society. Over several centuries the evolving political and economic situations created powerful forces that led Ireland, more than any other country, to be associated with one crop – potatoes. One early political force goes back to the twelfth century when Pope Adrian IV, the only English pope in the history of the Catholic Church, granted control of Ireland to English King Henry II. Four centuries later in a series of harsh measures Queen Elizabeth I brutally crushed Irish rebellion. A large portion of the Irish population was killed and the devastated food supply put many on the brink of starvation. Then potatoes came to Ireland. The convenience and nutritional value of the potato rescued Irish peasants by keeping away famine and disease. Political unrest continued during the seventeenth century; warfare created uncertainty in food supplies. The English army and rival Irish factions would confiscate or destroy cattle, standing crops and stored food supplies. Potato growers could survive the chaos by leaving the tubers in the soil and only harvesting them when needed. The mild climate prevented 7

THE INTERN ATION AL POTATO INDUSTRY

freezing in the ground, so potatoes were stored over winter in the soil where they grew. Any tubers left unharvested would sprout in the spring and grow into a new crop. During the eighteenth and nineteenth centuries the potato helped feed Ireland’s expanding population. Irish citizens depended very heavily, too heavily it turned out, on the potato as their main food. A fundamental part of Irish society, the land tenure system, contributed to this dependence. Much of the agricultural land was in the hands of English landlords. Many of them chose to be absentee landlords, preferring the comforts of Dublin or London to the poverty-stricken Irish countryside. The tenants produced grain and meat for their landlords, who exported the products for their income. Potatoes were typically not part of the tenancy agreement, so the Irish peasants grew them for family subsistence on the remaining poor soils. The Irish used their ingenuity to develop a yield-maximizing potato production system. They planted seed potatoes in raised beds of soil mixed with manure. One agricultural expert of the time estimated that 90% of Ireland’s manure was used in potato production. The tubers were covered with soil from the trenches between the strips of raised beds. Growers could leave some of the potatoes in the soil, which would allow them to sprout in the beds and produce a crop the following year. An entire family could be fed from one acre of potatoes. This potato production system, although quite efficient, became the main food source for more people than had ever before lived in Ireland. A 1780 report claimed that, on the average, Irish people ate three kilograms of potatoes per day. A continually increasing supply of nutritious, convenient potatoes fuelled remarkable growth in Ireland’s population, which increased from 1.5 million in 1790 to 9 million in 1845. About half made up the peasant class, but the health of the entire Irish economy depended on potatoes. From a few tubers found on a Spanish shipwreck Irish growers multiplied potato plantings into a production system that fed millions of people. Unfortunately, the Irish people depended not only on one crop for their subsistence, but also on a crop descended from a very narrow genetic base. Since potato production from seed tubers essentially makes each plant a clone of the mother plant, the potato crop became very vulnerable to disease. If one plant was susceptible to a disease, they all were. The devastating disease came in the mid-1800s. In 1845 Irish growers planted a two-million-acre potato crop, much of it cultivated by spade in plots of less than one acre. Emergence and growth of the crop was off to a fine start. The potato plants were green, vigorous and healthy. Until early July it looked to be one of Ireland’s best potato years.

8

HISTORY AND B ACKGROUND

Then the weather changed. Clouds and fog blocked the sun. The temperature dropped. Storms of wind and rain pelted the potato fields. The cold, damp weather continued. A fungus, Phytophthora infestans, thrived and reproduced rapidly under these conditions. Potato plants were ideal hosts for this microorganism that caused a terrible plant disease. First symptoms of the disease, later to be known as late blight, included brown spots spreading on the leaves of the potato plants. The gangrene spread, leaving nothing but black, withered stalks where healthy plants had flourished a few days earlier. Some early-maturing potato plants survived long enough to produce tubers, but the fungus could also cause harvested potatoes to rot quickly. The stench of decay permeated the countryside. The malady was horrifying in its rapid destruction. Families were shocked that they could go to bed with a healthy crop and wake up to blackened, stinking fields. Growers tried an assortment of treatments. They pulled the infected stalks to stop the spread. They lit fires to purify the air. They placed stones and turf over the potatoes to protect them. They sprinkled potato fields with holy water. In spite of their frantic efforts the destruction continued, with the fungus invading homes and barns, wiping out harvested potatoes. About half the 1845 crop was lost. Famine struck the Irish people the next winter. With a complete potato crop failure in 1846 starvation and death followed. Dry summer weather in 1847 provided a reprieve from late blight, but Irish potato plantings had dropped to 284,000 acres, one-eighth of the 1845 acreage, due partly to the fact that people ate their seed potatoes. Late blight struck again the following two years. The impact was devastatingly similar to that of the Black Death 500 years earlier. The peasants were without food and without money in a nearly cashless society, forcing them to sell their belongings to eat.They slept in rags and foraged for anything to eat. Typhus, cholera and other diseases ravaged the weakened people. In some towns there were not enough healthy people to bury the dead. Visitors entered homes to find nothing but corpses. One million Irish people died. Two million emigrated to other countries. Over the next half-century five and a half million people left Ireland.

From Europe to North America The Irish potato monoculture, together with late blight, created the famine that caused immigration to America. The flow of people across the Atlantic became a flood of 100,000 per year, with Irish immigrants soon making up 30% of the populations of Boston and New York. Money earned by the IrishAmericans was sent back home to pay for the departure of their relatives and friends.

9

THE INTERN ATION AL POTATO INDUSTRY

In spite of hardships endured by the recent immigrants, they beckoned those still living in Ireland with letters describing their new home as a land of plenty. Compared to famine, America provided a better opportunity but the lives of most Irish immigrants were very difficult. Penniless, uneducated and weakened by hunger and disease, the only employment available to them was low-paid temporary work unwanted by others. Many lived in squalid urban hovels. Three out of five of their children died before the age of five. After a long struggle against poverty and discrimination, the Irish became a successful ethnic group that influenced US culture and politics. The Irish lobby became very strong, influencing policy toward Britain and delaying American entry into both world wars. Currently about one-sixth of the US population is of Irish descent. Part of the legacy the Irish brought to America is that the potato has long been known in the US as the Irish potato. Some Irish people moved to America long before the Potato Famine. Irish immigrants brought potatoes from Europe to the North American continent in 1719 when they came to the British colony of Londonderry, New Hampshire. Potatoes made a circuitous route from South America to Europe to North America, but potato late blight travelled in the reverse direction. The disease first hit North America in 1842, spreading from Massachusetts to Novia Scotia along the Atlantic coast. Although not recorded in history, the terrible fungus probably hitched a ride east across the Atlantic in a diseased tuber, aboard one of the fast new steamships of the time. In spite of late blight, potato production expanded in America, spreading from New England to the Mid-Atlantic region. Thomas Jefferson, who learned to love potatoes during a visit to France, was a factor in this expansion. Jefferson grew potatoes on his farm, experimented with them and served them at the White House during his term as President of the United States. As the frontier pushed westward, American pioneers brought potatoes with them. During gold rushes, when some people abandoned their farms to search for gold, potatoes became quite valuable. One Montana farmer wrote about a long, bitterly cold trip to a mining community during which he built night-time bonfires next to his wagons to prevent his potatoes from freezing, then using blankets and snow to protect them during day-time transit. He was richly rewarded with gold dust for his potatoes when they arrived in good shape. He reported that there was even a market for frozen potatoes in the community. Christian missionaries, such as Henry Spaulding in 1830s Idaho, encouraged native Americans to plant potatoes in their efforts to get them to adopt the ways of white people. It is ironic that Europeans obtained potatoes from native South Americans, then used potatoes to try to convert native North Americans to the ways of Europeans. 10

HISTORY AND B ACKGROUND

Potatoes around the globe European colonial powers, often with the help of their churches, spread potatoes around the world. Potatoes came to China with missionaries from Britain and the Dutch East Indies (Indonesia) in the seventeenth century. Some parts of China first saw potatoes brought in by Portuguese and Spanish traders. Russian potato production spread over the border into northern China. During the same period Portuguese traders and British missionaries introduced potatoes into India. Although most potato varieties do better in a cooler climate, potato production expanded in the parts of India where tropical heat and monsoon rains were not problems. From India and from China potatoes spread to Tibet where by 1900 potatoes were an important part of the Tibetans’ favourite stew. Japan’s first potatoes came from Dutch traders around 1600. Although the Japanese did not like the potato’s taste, production spread for practical agronomic reasons. Following a series of floods and famines during the seventeenth century, Japanese growers expanded potato production in higher, cooler but less fertile areas. From Japan potatoes spread to Korea, where the crop became an important food and livestock feed in mountainous regions. Meanwhile Belgian missionaries introduced potatoes to Africa. The tubers in central Africa became known as the ‘white man’s yam’ or ‘European root’.5 Natives began growing potatoes to sell to Christian missionaries, but some considered them taboo and would not eat the tubers themselves. Their attitudes gradually changed and, of course, they ate potatoes during times of famine. The pattern of adoption from European colonists to indigenous peoples was repeated in many parts of the world. In the late eighteenth century the French explorer de Surville brought potatoes to New Zealand, where Maoris widely adopted them by 1840. Also in the late eighteenth century Europeans had introduced potatoes to Persia (Iran) in the Middle East. A half-century later Syrians began to grow potatoes, then a half-century after that Turks started to grow them. Potatoes have played an important role in feeding people who settled on small, isolated islands. Salaman studied the diets of people living on Tristan da Cunha, a 45-square mile South Atlantic island midway between the Cape of Good Hope and Rio de Janeiro. After failed attempts by the British and Dutch to colonize the island William Glass, his wife, two children and two other men were successful in the early 1800s. Later, six black slave women, a few shipwrecked sailors and members of the Repertto family from Italy joined the group. In spite of problems with late blight, rats and strong winds, potato crops did well and provided the major part of the diet of the people on Tristan da Cunha. They supplemented their potato diet with fish, eggs, milk and other 11

THE INTERN ATION AL POTATO INDUSTRY

foods purchased from ships that stopped infrequently at the island. A 1926 study revealed that the islanders were in remarkably good health, which was in part owing to their potato-rich diets. The good health of potato eaters has been confirmed on other islands. Potato production had expanded from South America to Europe to North America to the rest of the world in 400 years. With wheat, rice and maize, potatoes are now one of the top four crops in terms of world production. Many scientists see potatoes as the main solution to world hunger problems.The International Potato Centre in Peru was founded by the United Nations, the World Bank and other governments and foundations to develop new ways to prevent famine. The potato offers much to developing countries. It produces more calories and protein per acre than any grain crop. Although it thrives mostly in temperate climates, some varieties are well suited for warmer climates. A potato crop in hot climates can be harvested 40 to 90 days after planting, allowing growers to plant potatoes between slower-growing grain crops. The current trend is that potato production is expanding more rapidly in developing countries than in developed countries. The trend will probably persist for a long time as the potato continues its role as an important source of sustenance for a wide variety of people.

Cultural aspects of potatoes The potato is more than a plant or a crop or a food. It is an important component of the daily lives of people all over the world. In many societies the potato has been a catalyst for change in their culture. Webster’s Dictionary6 defines culture as ‘the ideas, customs, skills, arts, etc. of a people’. The potato’s productivity and adaptability have brought food security to many people, freeing up time and energy to develop their culture.

Potatoes in art The Andean cultures of South America were the first to include potatoes in their art. Archaeologists have documented the potato motif in Peruvian preIncan pottery. Burial-site pottery depicted three common threads of potatoes, man and mutilation, which was associated with the practice of cannibalism. Scholars argue that the inclusion of potatoes as one of three themes indicates the importance of potatoes in that culture. Incan pottery often depicted large and twin potato tubers, which were regarded as fertility symbols. 12

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Perhaps the most profound example of the potato in European art is the work of the renowned Dutch painter Vincent van Gogh. Living among peasants at Neuen, Holland during the 1883–85 period, van Gogh gained insight into the lives of his subjects, realizing the important role of potatoes in their work, diet and culture. During his time at Neuen, van Gogh painted many pictures of Dutch peasants planting, tending and harvesting potatoes. His indoor paintings often dealt with women peeling potatoes. He created four still-life paintings devoted entirely to potatoes. In 1885 van Gogh produced his famous masterpiece ‘The Potato Eaters’. Salaman7 quotes a letter from van Gogh to his brother explaining how he felt about the picture: I have tried to make it clear how those people, eating their potatoes under the lamplight, have dug the earth with those very hands they put in the dish, and so it speaks of manual labour and how they have honestly earned their food.

Other examples of European art regarding potatoes include mundane utensils of food preparation. The Irish cauldron, used extensively by peasants for boiling potatoes, is one example. Cauldrons are pots consisting of three legs and two handles. The beauty of design and ornamentation of many of the cauldrons suggests the importance of potatoes in the everyday life of the Irish peasantry. Ireland was the source of another type of potato-related culinary art, but this one came from the middle and upper classes rather than the peasantry. During the eighteenth century, many Dublin residents of means imported mahogany furniture that could easily be damaged by hot surfaces. Traditionally in these households potatoes had been served hot in wooden bowls that were often trimmed with silver. In order to protect polished mahogany tables, people used dish rings to keep the bowls several inches above the table surface. Also known as ‘potato rings’, some of these silver dish rings are elaborately ornamented works of art that are on display in museums.

The role of potatoes in economic development The potato has played an important role in economic development in many places around the world. In developing countries the potato provides an abundant supply of cheap, nutritious food that can keep the masses fed and liberate labour for non-agricultural pursuits. In developed countries, the potato can play an important role in providing quick meals for a busy, affluent society. Walker8 describes Bennett’s model of transition from a potato economy to a potato-and-wheat economy, then to a wheat economy and finally to an 13

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advanced economy. As a developing country’s economy grows, consumers with increased income substitute bread for potatoes, but eventually as income continues to grow they reduce consumption of both staples. The model seems appropriate for Ireland and Eastern Europe but not for other regions, such as Asia, where rice is an important staple. Walker has revised Bennett’s model into a potato ‘feed–fresh–processed’ framework. He says that people in less-developed economies use a substantial amount of potatoes for livestock feed. As the economy grows, potato use shifts from livestock feed to human consumption of fresh potatoes. When a modern economy becomes completely developed, human consumption shifts from fresh potatoes to processed potatoes. Large numbers of citizens who eat fries and chips at fast-food restaurants suggest that a country fits into the ‘developed’ category. Potatoes can be more than simply an indicator of a stage of economic development or a measure of a society’s culture. History shows that when potatoes are introduced into some regions, they became catalysts, or primary driving forces, for economic development. The potato can become such an important part of a people’s culture that it not only drives the development of their own society, but also impacts on neighbouring societies. One example is the effect of European-introduced potatoes on the Maori society of New Zealand. According to Harris and Niha,9 Captain James Cook and other explorers brought potatoes to the Maoris between 1769 and 1773. Some Maori claim that their ancestors grew potatoes long before that, but there is no scientific evidence to support that claim. What is clear, though, is that potatoes became an important part of Maori society. The Maori found the European-introduced potatoes to be quite palatable, high-yielding and easy to grow at varied locations and altitudes. They soon saw the potato as superior to the kumara that had been a food staple in Maori society. Maori communities burned and cleared forests to build potato plantations. The potato became an important trade good both within and outside Maori society. The Maori soon began to market potatoes to ship captains for provisions and to European settlers. Maori sailing vessels were used to transport potatoes to population centres. The potato transformed Maori society from a culture of subsistence agriculture to a society of commercial agriculture and traders. The Maori developed efficient potato production and storage systems to provide ample supplies of the tubers to offer to European traders for iron goods. Since potato production required less time and effort than kumara production, the Maori had more time for non-food production endeavours. Some scholars suggest that the potato provided the Maori with food security that led to warfare. With less labour needed for food production Maori warriors could more easily go to war. Belich10 suggests that the ‘Musket wars’ 14

HISTORY AND B ACKGROUND

could have been called the ‘Potato wars’ because of the crop’s importance in warfare.

Potatoes in war Warfare places high demands on a society’s ability to produce, store and transport food. Since potatoes yield more calories per acre than any other crop, it is an important source of nutrition for soldiers and civilians in a nation at war.The potato has a food-security advantage of being stored underground in the fields, offering some protection against invading armies. When armies stay in place for a long period, however, the soldiers have time to get the potatoes. That happened in eighteenth-century Europe during the Kartoffel Krieg, or the Potato War. Also called the War of the Bavarian Succession, it occurred when Prussia’s Frederick the Great invaded Austria in 1778. The two armies met on the upper Elbe and faced each other to a stand-off. Being short of supplies the invading Prussian army confiscated food from Austrian citizens in the countryside. Since the upper Elbe was primarily a potato-growing region, the soldiers subsisted on a diet heavy in potatoes. Winter cold and the strength of the Austrian army eventually led Frederick to withdraw, but not before soldiers ate enough potatoes for the war to earn its name. Armies that intentionally camp in farming regions can consume the region’s resources, including its potato crops, but armies on the move have different food supply requirements. Fresh potatoes have two disadvantages in wartime supply lines. First, they are heavy and bulky, consisting of about 80% water. Second, potatoes have a short storage life. Before the advent of modern processing methods, the potato’s main role during times of war was to feed citizens at home rather than soldiers away at war. War-time governments usually develop programmes to enhance food production and security. This was especially important to the United Kingdom during World War I. Prior to the war the UK relied on imports for a large portion of its grain and meat consumption. Enemy submarines threatened the shipping lanes and put the country in danger of hunger. The Ministry of Agriculture was granted wide powers, including price controls, to increase food production. British farmers responded by producing an abundant supply of potatoes in 1917. Potato plantings in 1917 increased nearly 20% over the pre-war period. Profitable minimum prices fixed by the government encouraged the acreage increase and were a powerful economic incentive to manage the crop for high yields. The result was a large surplus of potatoes. At the guaranteed price growers produced a larger supply than the market demanded. 15

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The Ministry of Agriculture dealt with the surplus disposal problem by purchasing the excess potatoes. The United Kingdom situation was similar during World War II. The Ministry of Agriculture established programmes to encourage growers all over the country to produce potatoes. The government paid bonuses to growers who planted potatoes on marginal soils. Again, the growers responded to economic incentives by producing a potato surplus. Great Britain potato plantings doubled from 0.7 million acres in 1939 to 1.4 million acres in 1944. Yields increased about 7 tons per acre. The Ministry handled the surplus by diverting potatoes to livestock feed. The potatoes destined for feed were coloured to keep them from food market channels. The Ministry also established dehydrated potato factories to supply overseas soldiers with potato products. Meanwhile, North Americans also worked to solve the potato’s twin military problems of bulkiness and limited storage life. Idaho entrepreneur Jack Simplot built an onion dehydration factory in 1940 to supply military needs. During that same year Rodgers Brothers operated a small-scale factory to provide dehydrated potatoes to the US Quartermaster. Two years later Simplot built a successful large-scale factory to supply US soldiers with dehydrated potato products. The profitability of selling potato products to the war-time government led Simplot to develop frozen potato processing after the war ended. The frozen potato products tapped into a powerful consumer market driven by post-war prosperity in the United States.

The fast-food society Although the United States suffered serious casualties in World War II, its infrastructure was undamaged. Since battles were not fought on American soil, the war did not devastate its highways, factories and cities as it did in Europe and Asia. This allowed the US economy to steadily rebound from a war-time economy to peace-time prosperity. During the war many women stepped into positions that had been filled by males.The war-induced shortage of males in the workforce created opportunities for women, some of whom were reluctant to go back to pre-war customs. This led to a post-war increase in the number of women working outside the home. In subsequent decades females joined the away-fromhome workforce in ever-growing percentages. The increase in female workers and managers helped the US economy grow. Their efforts added to the gross national product of the country and increased individual family income. Families now had more money, but the person who traditionally prepared the meals, the mother, had less time for domestic chores. The increased income also led to less need for children to 16

HISTORY AND B ACKGROUND

earn an income and allowed them time and resources to pursue hobbies, sports, arts and other activities. The trend of more money and more activities but less free time created the fast-food society. People who work long hours but who have plenty of money for food and family recreation don’t want to spend much time in meal preparation and consumption. They want fast food. They are willing to pay for more service in their food products. Rather than taking time to prepare meals from scratch, they purchase foods that are partially or completely prepared. The fast-food society created a tremendous growth opportunity for the potato industry. The traditional American meal of hamburger and fries as well as the traditional British meal of fish and chips became icons of the fast-food industry. Restaurant entrepreneurs became adept at providing these meals rapidly for customers who were in a hurry. They could do it by purchasing fresh potatoes and making them into fries and chips, but some searched for more efficient methods to provide consistent, high-quality potato products for quick service. United States potato magnate Jack Simplot pioneered the development of a potato product for fast-food restaurants. His researcher Ray Dunlap experimented with different ways to turn raw potatoes into a frozen French fry product that restaurants could quickly fry in oil. He developed a system for peeling, cutting, blanching, pre-cooking and freezing potatoes that did not break down their cellular structure. Restaurants purchased the product, fried the potato strips in oil and served them to their fast-food customers. Dunlap’s frozen potato processing system was copied and improved in subsequent years, but the basic strategy of efficiently converting raw product into a frozen product for the restaurant trade remained unchanged. The rapid growth of fast-food firms, such as McDonald’s, created the opportunity for frozen potato processors to grow along with them. The driving force of the fast-food society is the trade-off between money and time. Economic development leads to higher incomes but less time for food preparation. This creates opportunities for the fast-food and frozen potato industries. First, however, must come the economic development. Following the pattern in the US, post-war economic recoveries created fastfood societies in numerous other countries. Many Third World countries, however, have not had the economic development needed for a fast-food culture.

The potato in developing countries A challenge for many developing countries is to feed a rapidly increasing population. People in some regions face not only hunger and malnutrition 17

THE INTERN ATION AL POTATO INDUSTRY

but also death by starvation. Government policy in developing countries has long focused on increasing grain production. According to the Food and Agriculture Organization (FAO) of the United Nations, wheat, maize and rice production grew at annual rates of 4.3%, 3.9% and 2.9%, respectively, in developing countries from the 1960s into the 1990s. In spite of the potato crop receiving less emphasis, developing country annual growth in potato production during the same period was 4.0%. Given some inherent advantages, potatoes are receiving increasing attention as a tool to solve world hunger problems. Dr John Niederhauser, who worked extensively in developing countries on potato production problems, lists the following as the potato’s advantages as a food crop:11 1 2 3 4 5 6 7 8 9 10

High yield potential Excellent nutrient source High proportion of edible biomass Ease of preparation for consumption Wide acceptance as a daily food Adaptable for intensive cultivation in small areas Wide variety of cultivars Extensive production technology Security of production under stress Short crop season.

The Neiderhauser list of potato disadvantages is: 1 2 3 4 5 6

Bulkiness (in harvesting, marketing, transport, storage) Perishability and post-harvest losses Storage Cool climate crop Seed problems Disease and pest control.

Niederhauser’s lists of advantages and disadvantages are relevant for both developed countries and developing countries. Concerning developing countries, Niederhauser says that disease control (especially potato late blight), seed production and scarce economic resources are the main factors limiting potato production. Although problems are serious in some developing countries, advantages more than offset disadvantages in most locations. Potatoes are becoming quite important in many developing countries. Potato production has been increasing more rapidly in the Third World than in the rest of the world. Significant potato production in Third World countries may even go uncounted by government sources because of the abundance of subsistence farmers who produce potatoes on small plots for their own consumption. 18

HISTORY AND B ACKGROUND

Declining price is one factor that encourages potato consumption in developing countries. In places where they had been considered expensive or even a luxury good, potatoes have become relatively cheap. Noting a decline in potato prices from 1950 to 1980 in Third World markets, Niederhauser pointed out that the potato/rice price ratio declined from 3.9 to 0.8 in Bangkok, Thailand and from 2.4 to 0.7 in Dhaka, Bangladesh. With demand increasing, price declines of those magnitudes must come from an abundance of potatoes produced at low costs. Government policy influences potato production and consumption in developing countries. In Peru, the birthplace of the potato, per capita consumption had declined from 100 kg in the early 1960s to 45 kg in the mid1980s. Scott et al.12 attribute the decline to subsidized cereal production, an overvalued currency that encouraged imports of cheap cereals, price controls and market regulations. The floundering economy also contributed to a record high potato/rice price ratio. A 1990s change in government policy toward more economic freedom led to economic recovery as well as an increase in potato consumption from 45 kg to 65 kg per capita.

References 1 M Meltzer, The Amazing Potato, New York, HarperCollins, 1992. 2 C Brown, ‘Origin and history of the potato’, 76th meeting of the Potato Association of America, Past, Present and Future Uses of Potatoes Symposium, Fredericton, Canada, University of Idaho, 1992. 3 W Burton, The Potato: A Survey of its History and of Factors Influencing its Yield, Nutritive Value, Quality and Storage, Wageningen, Holland, Veenman & Zonen, 1966, p 20. 4 R Salaman, The History and Social Influence of the Potato, Cambridge, University Press, 1949. 5 D Horton, Potatoes: Production, Marketing, and Programs for Developing Countries, London, Westview Press, 1987, p 12. 6 V Neufeldt and D Guralnik, Webster’s New World College Dictionary, New York, Macmillan, 1997. 7 Salaman, History and Social Influence of the Potato. 8 T Walker, P Schmiediche and R Hijmans, ‘World trends and patterns in the potato crop: An economic and geographic survey’, Potato Research, 1999 42 241–64. 9 G Harris and P Niha, Nga ¯ Riwai Ma ¯ori – Ma ¯ori potatoes, Lower Hutt, New Zealand, Open Polytechnic, 1999. 10 J Belich, Making Peoples, Auckland, Penguin Press, 1996. 11 J C Niederhauser, ‘The role of the potato in the conquest of hunger’, 76th meeting of the Potato Association of America, Past, Present and Future Uses of Potatoes Symposium, Fredericton, Canada, University of Idaho, 1992. 12 G Scott, M Rosegrant and C Ringler, Roots and Tubers for the 21st Century, Lima, Peru, International Potato Center, 2000. 19

CHAPTER

2 Potato properties, types and use

Nutritional attributes

T

he potato provides inexpensive calories, but perhaps more importantly, it also contains nutrients vital to good health. Potatoes are rich in ascorbic acid, a water-soluble vitamin, C6H8O6, also known as Vitamin C. A diet deficient in Vitamin C causes scurvy, a common affliction among people who go long periods without fresh produce. One small potato per day can provide all the Vitamin C needed to prevent scurvy. R H Dana1 wrote a vivid description of the plight of two scurvy victims on a ship travelling from California to Boston in the 1830s: The scurvy began to show itself on board. One man had it so badly as to be disabled and off duty, and the English lad, Ben, was in a dreadful state, and was daily growing worse. His legs swelled and pained him so that he could not walk; his flesh lost its elasticity, so that if it was pressed in, it would not return to its shape; and his gums swelled until he could not open his mouth. His breath, too, became very offensive; he lost all strength and spirit; could eat nothing; grew worse every day; and, in fact, unless something was done for him, would be dead in a week.

20

POTATO PROPERTIES , TYPES AND USE

Fortunately, fresh provisions were obtained from another ship. Potatoes soon restored the ailing sailors to good health and probably saved the life of the English lad. A small amount of potatoes quickly healed the sailors because potatoes have a high nutrient density; each potato calorie carries a large amount of essential nutrients. Although the potato is 80% water, it is a nutritional jewel box. One medium-sized potato provides half the daily adult requirement of Vitamin C. It also provides significant amounts of dietary fibre, protein, thiamin, niacin, calcium, iron, Vitamin B6, folic acid, phosphorus and magnesium. People in developing countries, who face the problem of insufficient calories, are well served by potatoes. High nutrient density means that moderate consumption of potatoes, even in calorie-deficient diets, can provide valuable health-enhancing nutrients. While too few calories is a concern in developing countries, people in developed countries worry about eating too many calories. In places where obesity, rather than hunger, is a concern, potatoes compare quite favourably with other foods. Table 2.1 shows that potatoes prepared in four different ways contain fewer calories than 15 other foods. With less physical activity many people in developed countries need the same nutrition as their

Table 2.1

Calorie comparison Serving size

Potatoes, boiled Potatoes, mashed with milk Potato, baked Potato salad with dressing Spaghetti, cooked Bread Biscuit Candy, chocolate Rice, cooked Sweet potato, baked Milk, whole Peanuts, roasted Pancakes Pizza Macaroni with cheese Ground beef Steak Cake, chocolate Milk shake

1

/2 cup /2 cup 1 medium 1 /2 cup 3 /4 cup 2 slices 1 1 oz bar 3 /4 cup 1 medium 8 oz 1 oz One 3–4≤ diameter 1 slice 1 /2 cup 3 oz 4≤ ¥ 2.5≤ ¥ 0.5≤ 2≤ ¥ 1≤ 12 oz 1

Source: Meltzer

21

Calories 45 70 90 99 115 120 130 150 150 155 165 170 180 180 240 245 330 420 520

THE INTERN ATION AL POTATO INDUSTRY

ancestors required, but from fewer calories. Here again, the potato’s high nutrient density is important. In the US potatoes had long been viewed as a fattening food. The first mission of the National Potato Promotion Board (NPPB), founded in the 1970s, was to dispel that notion and educate consumers about the nutritional benefits of potatoes. The industry won that battle but new diets that exclude potatoes continue to come into vogue. A fad diet at the beginning of the 2000s shuns carbohydrates for protein and fat. Advocates of high-protein, high-fat diets use the glycaemic index (GI) to identify foods that they claim are unhealthy. The GI compares foods on their ability to increase blood sugar. Foods with a high GI are linked to diabetes, heart disease and obesity. Potatoes have a moderately high GI. What may be more important than GI alone is the relationship between GI and resistant starch (RS). Some nutritionists say that a high RS may have more health benefits than low GI. Potato RS levels can be enhanced in several different ways. Cooking then cooling potatoes provides a rich source of RS. Frozen chips (fries in North America), twice-baked potatoes and left-over potato dishes are examples of high RS potato products. Another curious thing is that small tubers have higher amounts of RS. Maybe some day the enhanced health aspects of small potatoes will be a marketing hook. If more nutritionists recommend low GI foods the potato industry could respond by developing new potato products and promoting other health attributes of potatoes. One important health attribute is the potato’s high content of phytochemicals that reduce the risk of heart attacks, strokes, cancer and other chronic diseases. Diet fads will come and go, and nutrition research will point out pluses and minuses of all foods. The important thing is for the potato industry to have a finger on the pulse of consumer tastes and preferences. New attributes, such as low GI, high RS and enhanced phytochemicals, can be added to make the nutritional jewel box shine even more brightly in the eyes of consumers.

Culinary aspects of potatoes The nutritional benefits of a food may be ignored if consumers find it unpalatable. For people to eat potatoes during times of plenty the prepared dishes must be appetising. Although preferences vary between countries and through time there are a few standards for potato culinary quality. First, potato products must appeal to the senses, especially the sense of taste. The potato should send a pleasurable message from taste buds to brain. The potato’s aroma should please the sense of smell. The potato’s texture 22

POTATO PROPERTIES , TYPES AND USE

should appeal to the sense of touch. The visual presentation of a potato dish should be pleasing to the sense of sight. The remaining sense, hearing, may even be important to consumers who appreciate the sound of sizzling foods. Assuming flavour is a composite of both aroma and taste, what is it about potatoes that is appealing? Scientists say potato flavour is determined by reactions between amino acids, sugars and pectins during cooking. The difficulty is in trying to quantify or describe flavour preferences. Burton2 says that English consumers prefer maincrop potatoes with a ‘mild, but not insipid flavour’ to be served as a ‘neutral accompaniment to more strongly flavoured foods’ while early potatoes should have a ‘strong distinctive potato flavour’. Harris3 says new potatoes should have a ‘slightly sweet taste’. While fresh potatoes are often served with flavoured toppings, potato processors simply add flavoured ingredients, such as onion powder, to their processed products to get the flavours they want. Texture and flavour are interrelated. Consumer perceptions of texture influence their subjective evaluation of flavour. When a potato product is eaten, the flavour and mouth-feel are sensed at the same time. Different potato products have different preferred textures. Many consumers prefer baked potatoes with their dry, mealy texture. Others like a boiled potato with a moist or waxy texture. Potato snack foods are expected to be crisp while a popular standard for chips (fries in the US) is crisp on the outside and moist in the inside. Regarding the sense of sight, consumers prefer raw potatoes that are free from blemishes and defects such as cuts, bruises and diseases. Preferences for shape and colour vary, but darkening during storage and cooking are undesirable for varieties with light-coloured flesh. Consumers expect processed potato products to be uniform in colour, but North American consumers expect their unflavoured fries and potato snacks to be very light-coloured. Potato products are eaten in meals during the morning, mid-day and evening and as between-meal snacks. Where the potato fits on the plate for the evening meal has received attention from potato marketers. In many countries the evening meal is often seen as consisting of three segments: main course (usually meat), starch and vegetable. Although the potato has traditionally fitted into the starch category, many people consider it a vegetable. The versatility of the potato provides opportunities to design different potato products for different parts of the plate, including potatoes as part of the main course. Cooks fry, boil, steam, roast, hash and mash potatoes. They put them in soups and stews and make pancakes out of them. They top baked potatoes with foods ranging from sour cream to caviar. They use potato flour to bake breads, doughnuts and cakes. Some dairies use potato starch in ice cream. 23

THE INTERN ATION AL POTATO INDUSTRY

Certain potato dishes have become identified with particular regions or nations. Fried potato strips served at North American fast-food restaurants are known there as French fries. German potato salad is a popular, spicy dish even outside its country of origin. Italians use potatoes to make gnocchi. A flat potato cake, known as roesti, is a national dish of Switzerland. In the North American market, the Idaho potato industry has marketed its russet potatoes so well that some consumers, in spite of brand protection, refer to all baked potatoes as ‘Idaho potatoes’.

Potato types and varieties Potato markets in South America include hundreds of species and varieties, with a wide assortment of sizes, shapes, flavours and colours that have been cultivated for centuries. In North America there is one dominant variety, but growers also produce about a hundred other varieties. In Europe, hundreds of varieties have been developed in both the private sector of Western Europe and the public sector of Eastern Europe. The rest of the world relies mostly on potato varieties from these three continents. Why is there such a wide assortment of potato types and varieties? One reason is the tremendous genetic diversity of potatoes. In addition to the primary commercial potato species, Solanum tuberosum, there are six other cultivated species and an additional 200 wild species. By contrast the genetic resource base for maize consists of one cultivated species and no wild ones. Rice and wheat have eight species. Another reason for the large assortment of potato varieties has to do with the way growers plant potatoes. Although potato plants produce seeds, farmers usually plant potato tubers. Potato seeds yield plants with wide genetic variations, but potato tubers produce plants that are clones of the mother plant. This clonal reproduction, also known as vegetative propagation, is subject to small variations, or mutations, between generations. The mutated plants occur frequently, but are often not noticed because they usually differ in only a single trait. When differences are discovered, growers can control the potato’s evolution by either discarding or keeping the new types. Over the centuries, before scientific breeding programmes developed, growers selected the mutated plants that produced higher yields or better quality or were resistant to pests. By planting tubers from the superior plants and sharing with other growers, new potato varieties were developed. Russet Burbank, the most popular variety in North America, was developed this way. One selected mutation from the Burbank variety in 1873 eventually became the Russet Burbank variety. Even within a specific variety 24

POTATO PROPERTIES , TYPES AND USE

classification, seed producers market mutated selections as superior strains of that variety. For example, the Dark Red Norland is a mutation of Red Norland that produces a more vivid red-coloured skin. Following the Irish Potato Famine, many commercial plant breeders focused on developing blight-resistant potato varieties. Most potato varieties until that time had been developed in Europe, but choices were limited and the genetic base was narrow. From six European varieties in 1850, breeders in the US developed 350 new varieties over the next 60 years. Breeders sought new genetic material from South America, the original source of the potato plant. One important South American selection was the Rough Purple Chili, which the Reverend C E Goodrich introduced into breeding programmes in 1851. Hundreds of modern European and American varieties trace their lineage to Rough Purple Chili. Potato markets have long been classified according to colour and shape. In the UK in the 1730s, potatoes were put into five market categories: black potatoes; round reds; yellows; round whites and the white, flat, kidney potato.4 Two of the categories involved colour only, while the other three included shape as well as colour. Modern potato markets also describe potatoes by shape and colour. Most popular North American potato varieties have traditionally fitted into four classifications: round white, long white, round red and long russet. Round yellows are a recent addition that is relatively small but growing in importance. Blue and purple varieties show some promise, especially in upscale restaurants. Maturity, or time of harvest, is another type of potato classification. A traditional British classification consisted of four maturity types: first earlies harvested in June; second earlies harvested in July and August; early maincrop harvested in September and late maincrop harvested in October and November. In North America the time-of-harvest classifications have evolved from six to four categories based on the seasons. The summer crop is considered the first of the new crop year. It is followed by the fall crop, which is sold out of storage during the harvest of the winter and spring crops. As a result of modern storage technology, the fall crop storage season now overlaps with the summer crop as well. Although different varieties are often used for early crops, global trade and modern transport have changed perceptions regarding maturity and market timing. Canadian consumers can buy newly harvested red potatoes from Florida in January when Canadian fields are under snow. During the same month consumers in Scotland can buy new potatoes grown in Egypt. The maturity-type differences must now be something other than time of availability. Potato buyers in many parts of the world can purchase both early and maincrop potatoes all year round. The distinctions between earlies and maincrop potatoes have moved toward culinary differences. Varieties considered 25

THE INTERN ATION AL POTATO INDUSTRY

earlies typically have thinner skins and a higher moisture content than maincrop potatoes sold out of storage. Consumers who want to serve boiled potatoes or potato salad can choose early-variety potatoes, while those who want to prepare jacket potatoes (‘baked’ in North America) might purchase a late variety. Potato processors also choose between early and late potatoes. The earlies, or potatoes processed at harvest time, typically have less trim and peel loss than potatoes processed out of storage. Offsetting this advantage is the transport cost during the time of year when potatoes cannot be harvested near the processing facility. In North America an annual accounting of varieties planted is not conducted in the commercial potato market. Such accounting is, however, mandatory in the certified seed potato market. Using acres approved in seed certification programmes as a proxy for all plantings, we see differences between the top 10 varieties in 1982 and 1999 (Tables 2.2 and 2.3).The North American variety mix is rapidly changing. Only two of the top 10 varieties in 1982, Russet Burbank and Norland, remained in the top 10 less than two decades later. Kennebec, the second most popular variety in 1982 with 14% of the acreage, not only dropped out of the top 10, but fell to just 2% of plantings in 1999. The tables also show a trend toward wider distribution of varieties, with non-top 10 variety share increasing from 20% to 29%. In 1999, for the first time a yellow variety, Yukon Gold, entered the top 10. The dominant variety remained the Russet Burbank, with a market share that declined slightly from 30% to 28%. It is a dual-purpose variety, used in both fresh and processing market channels, but particularly well suited for the rapidly growing frozen processing segment. Potato breeders have been

Table 2.2 United States and Canada seed potato plantings, 1982 Percentage 1 2 3 4 5 6 7 8 9 10

Russet Burbank Kennebec Superior Katahdin Norchip Chieftain Norland Green Mountain Sebago Red Pontiac Other varieties

30 14 7 6 5 5 4 4 3 3 20

Source: National Potato Council, 1982 Yearbook F = fresh, P = processing

26

Use F, P F F, P F P F F F F F

POTATO PROPERTIES , TYPES AND USE Table 2.3 United States and Canada seed potato plantings, 1999 Percentage 1 2 3 4 5 6 7 8 9 10

Russet Burbank Russet Norkotah Shepody Atlantic Frito-Lay varieties Superior Norland Ranger Russet Yukon Gold Red Lasoda Other varieties

28 10 7 6 4 4 4 3 3 2 29

Use F, P F P P P F, P F P F F

Source: National Potato Council, 1999 Yearbook F = fresh, P = processing

Table 2.4

UK potato plantings by variety, 1989 Percentage

1 2 3 4 5 6 7 8 9 10

Maris Piper Record Estima Wilja Pentland Squire Cara Pentland Dell Desiree Romano Maris Bard Other varieties

13 12 9 8 8 7 7 4 4 3 26

Use P F, P F, P P P F F F, P F F

Source: British Potato Marketing Board F = fresh, P = processing

trying to develop better varieties for more than a century, but with limited success. A few varieties, including Shepody for processing and Norkotah for fresh, appear to be making inroads as Russet Burbank replacements. British growers have also shifted varieties (Tables 2.4 and 2.5). During the 10-year period from 1989 to 1999 Maris Piper remained the number one variety, increasing share from 13% to 21%. Only four of the rest of the 1989 top 10 – Estima, Cara, Pentland Dell and Desiree – remained in the top 10 a 27

THE INTERN ATION AL POTATO INDUSTRY Table 2.5

UK potato plantings by variety, 1999 Percentage

1 2 3 4 5 6 7 8 9 10

Maris Piper Estima Cara Saturna Nadine Pentland Dell Desiree Marfona Lady Rosetta Maris Peer Other varieties

21 10 6 5 4 4 4 4 3 2 36

Use P F, F, P F F, F, F P F

P P

P P

Source: British Potato Council F = fresh, P = processing

decade later. Plantings of the number two variety in 1989, Record, dropped from 12% of plantings to less than 1% in 1999. As in North America, variety plantings became more diversified, with the share of non-top 10 varieties increasing from 26% to 36%.

Fresh potatoes Fresh potatoes, also known as ware potatoes or tablestock potatoes, have been a staple in Western diets for many years. A traditional evening meal consisted of ‘meat and potatoes’ eaten at home. With the increasing popularity of fast-food restaurants, the traditional meal seems to have shifted toward ‘hamburgers and fries’ and ‘fish and chips’ eaten away from home. This shift in preferences contributed toward a decline in fresh potato per capita consumption during the 1950s, 1960s and 1970s in North America and Western Europe. In North America the decline in fresh potato consumption has bottomed out and appears to be heading back up. One reason is that microwave ovens make it more convenient to prepare jacket (baked) potatoes. Another reason is that fresh vegetables in general are seen as healthy foods. Still another factor is that some fast-food restaurants include fresh potatoes among their menu choices. Fresh market potatoes in North America can be classified as russets, reds and whites, based on skin colour. Regardless of their classification potatoes 28

POTATO PROPERTIES , TYPES AND USE

sold in North America have been almost exclusively white fleshed. Yellowfleshed potatoes have been popular in Europe for many years and are successfully entering the North American market. South American consumers have eaten blue, purple and black potatoes for centuries. Although markets for these ‘exotic’potato types are small, they are expanding around the globe. The structure of the fresh potato market varies only slightly across North America. In general, Eastern potato growers are also shippers. In the West, growers and shippers are usually separate businesses. Western shippers compete with processors in the market for potatoes at the grower level. In the East, many growers operate their own fresh pack operations. Fresh potato sales are made in a variety of containers and grade specifications. Russet potatoes are usually packed in three general size categories: consumer packs, count cartons and institutional packs. Consumer packs consist mainly of 4–8 ounce (non-size A) potatoes packed in plastic, paper or mesh bags. The most valuable potatoes are the 8–14 ounce tubers that are packed in 50-pound cardboard boxes. These are called ‘count cartons’ and each carton has a number that tells how many tubers are in a box (60, 70, 80, 90, 100, 110, 120). Retail stores and restaurants buy count carton potatoes, which are typically used for baking. Institutional buyers such as government military bases like to buy 100-pound bags of large potatoes to minimize packaging, handling and peeling costs. Although some reds and whites are sold in the same three size categories as russets, it is more common to pack them in a wider range of sizes in one container. The russet consumer packs are usually the closest competitors for the reds and whites. Only the very largest and smallest are typically sold separately. In North America the large and small potatoes have traditionally brought the lowest prices, which is the reverse of the situation in Europe. Small red-skinned potatoes now sometimes top the market in North America, indicating a possible shift toward European size preferences. Some fresh potato production areas have mandatory inspection for fresh shipments. The rules, usually administered through government entities, require all fresh shipments of potatoes to meet grade standards. Strict quality control has been an important component in some regional advertising and promotion campaigns.

Processed potatoes Other than the centuries-old chuño processing in South America, much of the growth and development of the global potato processing industry is recent. Potatoes have, however, been processed in the US since 1831 when 29

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the first starch plant was established. Potato snack foods are also reported to have been first prepared during the mid-nineteenth century. Potato processing remained on a small commercial scale until World War II, when processors developed improved peeling and frying techniques. Growth in potato processing has been remarkable. Prior to 1960, US reports on potato utilization did not differentiate between snack foods and fresh consumption. By 1970 US processed utilization was nearly equal to that of fresh. Major processing uses of potatoes now are snacks, dehydration and freezing, which together account for about 98% of US potato processing. Canned, starch and flour processing make up the remaining 2%. Geographic dispersion of processing facilities varies according to product form. In North America frozen and dehydration factories are near supply sources in the Northeast, upper Midwest and Pacific Northwest. In contrast, factories for making potato snacks (also known as crisps in the UK and chips in the US) are in every region. Since potato snack products are fragile and their low density makes them expensive to transport, they are processed in heavily populated areas. Growers of potatoes for the snack food industry are also widely dispersed. Prior to drought and flood problems during the 1990s North Dakota was the largest US producer of raw product for potato crisps. Florida then replaced North Dakota as number one. Other major producing areas include Arizona, central California, Maine and Michigan but pockets of production are scattered across the continent. Processing markets are quite different from fresh potato markets. Frozen processor contracts with growers emphasize things that influence finished product quality. Specific gravity is of particular concern; processors pay premiums for high specific gravity and discount for low specific gravity. Other characteristics, such as tuber size and grade, also earn premiums. Contract provisions change in response to changes in technology and production practices. Processors use contracts to guarantee some portion of their raw product needs. Typically, processors contract for 50% or more of their expected requirements. The remainder of their needs is met by purchases on the open market. Contracts allow growers to concentrate on production practices that produce profitable yields and quality. Over time, contracts stabilize grower prices and to a lesser extent returns, which are also influenced by the vagaries of weather. Frozen processors make fries, hash browns and other products from the usable potatoes delivered to the plant. The dehydration industry in North America operates differently, purchasing most of its raw product as off-grade potatoes from fresh packers. Growers produce potatoes specifically for frozen and fresh markets but returns are usually too low to attract dehy-only growers. Future development of varieties designed specifically for dehydra30

POTATO PROPERTIES , TYPES AND USE

tion could change this situation. In Europe, where the government provides economic incentives to produce starch potatoes, growers plant highyielding varieties suitable only for that market. The processing industry is a growth market. While problems exist, processing benefits both producers and consumers. Grower returns from sales to processors have added some stability to an otherwise highly volatile market.

Fresh processed potatoes A chilled potato product developed in Europe is becoming increasingly important in global markets. The impact of government food safety regulations on British fish and chips businesses was a key catalyst of change. Faced with new, expensive health regulations fish and chips managers struggled with their traditional method of preparing chips from raw potatoes. The expense became prohibitive for many operations. Some clever entrepreneurs filled their need by peeling, cutting, packaging and marketing a ‘fresh processed’ product. The fish and chips businesses were thus able to purchase a less labour-intensive product that met food safety regulations. One advantage of chilled versus frozen potatoes is that refrigeration is generally cheaper than freezing. The convenience of fresh processed potatoes provides marketing opportunities in the retail food market as well. In developed countries consumers are choosing to buy more convenient foods. They increasingly buy prepared salad mixes and ready-to-cook packaged foods. Consumers have also become interested in potatoes that have been peeled and even cut into slices, wedges or other shapes they want. While this market has been growing in Europe since the early 1990s it arrived in North America nearly a decade later. Fresh processed potatoes may be regarded as a substitute for both fresh potatoes and processed potatoes. The net effect of the introduction of this important new potato product is that total demand for all potato products may expand. Fresh processed potatoes give consumers another quick-meal choice that should compete well with other starches and vegetables in the convenience food array.

Seed potatoes Seed potatoes are vital to the health of the potato industry. Since potatoes are propagated vegetatively, diseases of the mother plant are passed on to 31

THE INTERN ATION AL POTATO INDUSTRY

the next generation. Seed potato certification programmes were developed in the early 1900s to reduce seed-borne disease and maintain varietal purity. These programmes, often administered by government agencies, enforce rules about production practices and inspect seed plants and tubers to determine which lots meet seed certification standards. Potato growers who specialize in seed production are usually located in cold climates where winter weather destroys pathogens. Seed potato farms are often isolated from commercial potato farms that might be sources of disease. Seed growers who are located near processing facilities or have access to fresh packing have the flexibility to market their seed potatoes in other market channels. Seed potato markets usually offer the best returns, but seed growers stuck with unpopular varieties usually sell some in other market channels. New varieties must be increased by seed growers for several years before a sufficient quantity is available for commercial sales. The ultimate source of seed is usually the laboratory in the form of tissue culture. Public and private sources of disease-free potato stocks are available to seed potato growers. Plantlets grown from tissue culture produce small tubers, known as minitubers, that seed growers plant in either greenhouses or in fields. They produce several generations of seed to spread out the front-end costs of the laboratory production.

Livestock feed and other uses Potatoes have been used for livestock feed probably for as long as they have been used for human food. The general principle is that the best potatoes go into the food market and the rest into the feed market. The principle is breached during years when potatoes are in surplus. When the market is supplied with an overabundance of potatoes, food market prices may decline to the level where even high-quality potatoes are diverted to livestock feed. Raw potatoes are sometimes chopped before feeding to cattle to reduce problems with swallowing whole potatoes. Potato waste from processing is an important source of feed nutrients for cattle feeders. Some processors are able to sell the waste by-product which, without livestock feeders, would be a disposal liability rather than a marketable product. In this way the cattle industry in Western North America has helped support potato processors who might have located facilities in other regions. Low-value potatoes have also found their way into energy and alcoholic beverage markets. Potatoes are used as raw product for vodka producers. Some facilities have been constructed to turn potatoes into ethanol fuel. Some US states require that automobile fuels contain a certain amount of 32

POTATO PROPERTIES , TYPES AND USE

ethanol for two reasons. One is to reduce air pollution and the other reason is to indirectly support prices for farm commodities.

References 1

H Dana, Two Years Before the Mast, New York, Westvaco, 1992, pp 346–8, originally published in 1840. 2 W Burton, The Potato: A Survey of its History and of Factors Influencing its Yield, Nutritive Value, Quality and Storage, Wageningen, Holland, Veenman & Zonen, 1966, p 20. 3 P Harris, The Potato Crop, London, Chapman & Hall, 1992, p 539. 4 Burton, The Potato, p 27.

33

PA RT

II ECONOMICS OF THE GLOBAL POTATO ECONOMY

CHAPTER

3 Supply

T

he gift of the Incas has spread to many different types of farming regions around the world. Before discussing potato supply it is useful to know something about the people who produce potatoes. Like potatoes themselves, potato growers are quite a diverse lot. According to Harris:1 Some of the world’s largest and smallest, richest and poorest, most progressive and most backward farmers grow potatoes. Subsistence potato growers in isolated mountain areas in Rwanda and Bolivia are among the world’s poorest farmers. Commercial growers in northern Mexico and Brazil are among the richest. Market gardeners in parts of Guatemala and the Philippines are among the most intensive and productive. Uncounted households, both rural and urban, also grow potatoes, along with other vegetables, in home or garden kitchens.

Decisions made by these diverse potato growers determine the global supply of potatoes. This chapter discusses the results of grower decision-making within the biological, climate and economic forces that influence potato supplies around the world.

Potato growth requirements Potato growers can dictate some factors of production but others are beyond their control. Location of planting is one important factor over which 37

THE INTERN ATION AL POTATO INDUSTRY

growers have some influence each growing season. Those with mobility can choose to farm in regions that are favourable to potato production. Those who are not mobile should still select potato fields carefully. Since potato production is expensive, they should choose fields with suitable soil types that are free of risky weather patterns such as frost pockets. Soils suitable for potato production should be well drained, deep and friable. Soils with heavy clay content can be difficult for potato production owing to water runoff, air deprivation, tuber growth restrictions and harvest difficulty. Sandy soils, including those with low organic matter, are suitable for potato production if irrigation is available to keep the soil from becoming too dry. Both heavy and light soils can be improved by increasing organic matter, which keeps the soil loose, reduces compaction, improves water retention and enables proper root and tuber growth. Growers can plant cover crops, rotate potatoes with legume crops and apply manure to increase soil organic matter. Growers can also control variety selection, fertility, pest protection, soil moisture and the end of the growing season. Variety selection can help growers choose the type of potato most suited to their region. Fertility can be managed by rotating crops, testing soil nutrients, applying fertilizer and monitoring nutrient content in the potato plants by a practice known as petiole analysis. Pest protection may include selecting pest-resistant varieties, rotating crops, scouting for pests and applying pesticides. Growers who have irrigation systems or drainage systems can practise water management by monitoring soil moisture then adding or removing water as needed. Growers can also control the end of the growing season by deciding when to kill the top growth of the potato plants. Potato top growth, also known as vines or haulms, is usually killed in advance of harvest in order for tuber skins to toughen up, or ‘set’. This is quite important for potatoes going into long-term storage. Seed potato management is another important factor under grower control. Selecting high-quality seed potatoes that are free from seed-borne disease and variety mix can help prevent production problems. Seed potato size is also important. North American growers, many of whom plant cut seed, can control size by adjusting their seed cutters. European growers prefer whole seed potato tubers and can control seed size by purchasing a specified size range. A third area of seed potato control is plant spacing. Growers can adjust plant populations on the basis of varietal growth differences and market destination. Wider spacing generally produces larger tubers. Potato growth factors beyond grower control include air temperature, soil temperature, frost-free period, light intensity, humidity, wind and other weather patterns. Potatoes are considered a short-day, cool season crop but do well in a variety of climates. Some potato varieties have adapted to 38

SUPPLY

the longer days of the potato-producing regions in higher latitudes. The highest potato yields are obtained in high-latitude desert regions such as Washington state’s Columbia Basin, where daytime temperatures exceed 38°C (100°F) but cool substantially at night. Potato yield potential is a function of sunlight and respiration. Photosynthesis, which converts sunlight to plant tissue, is controlled by day length and light intensity. Sunny days are conducive to high potato yields. Yield is determined by the amount of photosynthate produced minus the amount used by the plant. The plant’s usage, also known as respiration, is reduced by cool night-time temperatures. Too-cool weather, such as freezing temperatures during the growing season, will kill potato top growth. Potato plants, however, have shown a remarkable ability to survive and produce a crop of tubers even after frost has blackened and apparently killed a field of potatoes. Potato fields that have suffered from early-season frosts may come back to life as the energy stored in seed tubers allows them to send up new sprouts that become new potato plants. Late-season frosts, however, usually put a premature end to the potato-growing season. Frosts that go deep into the soil can actually damage potato tubers and render them unfit for marketing.

Production zones Farmers successfully grow potatoes in a wide variety of locations, from the tropics to near the Arctic Circle. Growers in Sub-Saharan Africa and the northern Andes of South America produce potatoes along the equator. Others plant potatoes at high-latitude areas in Alaska, Scandinavia, New Zealand and Patagonia. Potato production is also spread from fields near the sea to terraced plots more than 4300 metres above sea level. Farmers in the Netherlands plant potatoes on reclaimed land that is actually below sea level, while growers in Nepal produce potatoes within sight of Mount Everest. Potato growers succeed in hot, tropical lowlands as well mountain valleys with bitterly cold winters. Given the diversity of potato production sites it is useful to consider four global production zones: (1) temperate; (2) highland; (3) lowland tropical and subtropical; (4) Mediterranean. Although many countries fit entirely into one category, some large countries such as China have land in all four zones.

Temperate zones Temperate zones are characterized by at least one month when the average temperature drops below 0°C. Day length is suitable for most varieties but 39

THE INTERN ATION AL POTATO INDUSTRY

growers face the risks of severe weather such as hail, frost and drought. Although many temperate-zone growers irrigate, others depend entirely on rainfall to produce their potato crops. Developed countries in northern Europe, North America and portions of South America’s Argentina and Chile fit into the temperate-zone category. Developing countries in northern Asia, including China, North Korea and South Korea, contain farmland considered to be in the temperate zone. Farther to the west, Iran and Turkey also fit into the category of temperate-zone developing countries. Although there is some technology spillover from developing to developed regions, temperate-zone production methods are very diverse. In developed countries, most potato producers plant in the spring and harvest in the fall. Cold weather allows for potato storage through the winter and spring and in some areas until the next potato crop is harvested. Rotation with grain and forage crops is typical. In some developing countries growers double crop and inter-plant. Where the climate permits, potatoes are planted immediately after rice or maize has been harvested, allowing for both a grain crop and a potato crop to be produced from the same field in the same year. Some growers mix potato plants in with orchards or other vegetable plantings. Temperate-zone growers use draft animals and tractors, livestock manure and chemical fertilizer, hand harvest and mechanical harvest depending on the availability of inputs and the economics of production in their areas.

Highland zones The highland zones, regardless of latitude, are the mountainous regions of the world. The Andes mountains of South America are where potatoes originated so that region remains a logical potato-producing region. Similar conditions exist in the Himalayas and other mountain ranges scatted across Asia, Africa, the Americas and Oceania, all of which have highland zones where potatoes are produced. Tropical highland zones have cool, but volatile temperatures that can make potato production inconsistent from year to year and even from field to field within a year. The local climate in highland areas changes with elevation. Individual growers may have fields with much different planting and harvest dates based on climate-induced length of growing season. In the lower elevations crop rotations and alternatives may include many other agronomic and horticultural crops. At higher elevation potatoes and barley, the hardiest grain, may be the only cropping choices. Highland growers use both manure and chemical fertilizer, but in remote areas some growers produce potatoes without fertilization and move to new fields as fertility declines. Early harvest of immature tubers is common to take advantage of seasonal price spikes. 40

SUPPLY

Some highland growers plant another crop of potatoes after an early harvest. Storage consists of both special-purpose storage buildings and storing in the ground until needed.

Lowland tropical and subtropical zones Average monthly temperatures are 10°C or higher in tropical and subtropical zones. The Indo-Gangetic Plain of Pakistan, India and Bangladesh is a region that fits into this category. Other tropical and subtropical potatoproducing areas include southern China, Cuba, Egypt, the coast of Peru and Vietnam. Until recently experts regarded the climate in tropical lowlands as too hostile for potato production. Since potatoes are not indigenous to tropical lowlands, potato-farming systems in these regions have not had much time to develop, as they have in temperate and highland zones. When potato production expanded in Europe and North America, the development of new potato varieties and technology favoured temperate zones. In the latter part of the twentieth century new techniques were developed specifically for tropical lowlands. As a result the Indo-Gangetic Plain has become one of the world’s three largest potato-producing regions. The potato production pattern in tropical lowlands is to plant seed potatoes at the beginning of the cool, winter season. Since this is the dry part of the year irrigation is required in most areas. For proper potato development it is important that night-time temperatures remain below 20°C for much of the growing season. In regions where this is the case, growers enjoy a more reliable weather pattern than in highland areas. Growers, even small growers with limited resources, generally achieve high yields in tropical lowlands. A combination of suitable winter climate, the potato’s short growing season, water availability, high yields and high prices have led to rapid expansion of potato production in some tropical lowland areas. As new varieties are developed specifically for lowland production, the growth will no doubt continue.

Mediterranean zones Mediterranean zones have dry summers, cool, humid winters and moderate temperatures, with the coldest month averaging between 0°C and 10°C. The European, Middle Eastern and African lands near the Mediterranean Sea, of course, are included in this category. Other countries with Mediterranean zones include Chile, New Zealand and the United States. Potato cropping practices in Mediterranean zones are a mix of those in temperate and lowland tropical zones. Much of the Mediterranean potato 41

THE INTERN ATION AL POTATO INDUSTRY

production is in developed countries. Mediterranean growers often double crop potatoes, planting both a spring crop and a fall crop in the same field. Global potato processing firms operate a few factories in Mediterranean zones, but perhaps more importantly, procure raw product from Mediterranean growers for their factories in temperate zones. Both the processing and fresh market channels rely on Mediterranean zone potato production for new potatoes in the winter and spring.

Production trends Global distribution Potato production is widely dispersed throughout the world. Walker et al.2 developed a map of global potato plantings during the mid-1990s (Fig. 3.1). The map gives a visual image of potato plantings during the latter part of the twentieth century. Although pockets of intensive potato growing are on all the continents, the heaviest concentrations are in Europe, China and India. The European potato-planting concentration is in Eastern Europe, especially in the countries that made up the former Soviet Union. The Asian plantings are heaviest in northeast India and central China. Other pockets of significant potato production include the Northwest United States, Northwest Europe and the Andes mountains of South America. Walker’s map provides a snapshot of world potato plantings during the mid-1990s, but potato production continually shifts. During the last quarter of the twentieth century the distribution of global potato plantings shifted from West to East (Fig. 3.2 and 3.3). During the 1974–76 period nearly twothirds of the global potato supply was produced in Europe, but 25 years later that share declined to about half of the global total. Production shares changed little in the other regions, but Asia’s share jumped from 17% to 31%. The pie charts suggest that potato production declines in Europe coincided with potato industry expansion in Asia. Since the Asian expansion is primarily in the developing countries of that region, potato production in general may be shifting away from developed countries. In a study on root and tuber crops in the twenty-first century Scott et al.3 confirmed that potatoes are becoming more important in developing countries. During the 1983–96 period potato production in developing countries grew at an annual rate of 4.1%, while production in developed countries actually declined 0.8% (Table 3.1). Continuation of this trend could eventually close the gap between production in developing and developed countries. Developing country production grew from 64.3 million metric tonnes in 1983 to 108.1 million metric tonnes in 1996. Developed country 42

3.1

Global potato production map (Potato Research, vol. 42, extra edition, 1999, pp 246–7).

SUPPLY

43

THE INTERN ATION AL POTATO INDUSTRY Oceania 1%

Africa 3% N & C America 9% S America 4%

Europe 52% Asia 31%

3.2 World potato production by region, 1995–97.

Oceania Africa 1% 2% N & C America 10% S America 5%

Asia 17% Europe 65%

3.3 World potato production by region, 1974–76.

production declined from 209.2 to 187.6 million metric tonnes during the same period. In percentage terms, the developing country share of global potato production increased from 24% to 37% in 13 years. Scott’s research not only confirms that potato production is shifting to developing countries, but also that much of the shift is toward Asian developing countries. Large increases in annual production growth in India (5.1%) and China (4.6%) support the regional production shifts observed in Fig. 3.2 and 3.3. The production increases are attributed only partially to area planted. In all regions except Sub-Saharan Africa actual production growth

44

SUPPLY Table 3.1 Annual growth rates in potato production and area planted, 1983–1996 actual and 1993–2020 forecasted

Country/region

Actual 1983–96 production (% per year)

Forecasted 1993–2020 production (% per year)

Actual 1983–96 area (% per year)

Forecasted 1993–2020 area (% per year)

4.6 -1.0 5.1 3.7 5.4 2.0 4.8 0.6 4.1 -0.8 0.6

1.5 1.1 3.1 2.9 2.1 1.7 2.0 3.0 2.0 0.3 1.0

3.0 -2.1 3.8 2.7 2.5 0.3 2.6 0.7 2.4 -1.4 -0.1

0.2 -0.4 1.2 0.9 0.6 0.4 0.6 1.2 0.5 -0.2 0.1

China Other East Asia India Other South Asia Southeast Asia Latin America WANA Sub-Saharan Africa Developing countries Developed countries World Source: Scott et al. WANA = West Asia and North Africa

outpaced plantings growth, indicating that yields are trending upward. For developing countries, overall annual production growth of 4.1% is nearly double the area growth of 2.4% per year. The Scott study also included a forecast for potato production and consumption for the 1993 to 2020 period. The ‘forecasted production’ column in Table 3.1 depicts the expected growth rate in world potato plantings. In Sub-Saharan Africa, developed countries and the world as a whole forecasted growth into 2020 is expected to exceed actual growth during the 1983–96 period. In all other regions production is expected to continue to grow, but at slower rates than in 1983–96. The gap between forecasted production growth and forecasted area growth in all regions shows that Scott expects yields to increase all over the globe. The global trends of potato production shifting from Europe to Asia and from developed countries to developing countries may be modified or clarified by analysing potato production in individual regions. Table 3.2 shows actual potato production for six global regions in 1967, 1977, 1987, 1997 and 2000. In all of the regions except Europe production has been steadily increasing. The figures for 2000 show that Europe’s share of production dropped to 46% and Asia’s share increased to 36%, indicating a continuation of the trend identified in Fig. 3.2 and 3.3 and in Table 3.1. The predictions that European production will continue to decline and production will increase in all other areas deserves further analysis. Discussions of the regional potato supply situation follow.

45

THE INTERN ATION AL POTATO INDUSTRY Table 3.2

World potato production by region, 1967–2000 1967

Africa Asia Europe N & C America Oceania South America World

2 184 12 254 142 772 16 549 904 7 754 308 281

1977 1987 1997 (000 metric tonnes) 4 377 60 922 114 535 19 394 990 9 321 292 938

7 028 58 761 108 420 21 929 1 304 10 500 283 849

9 275 89 972 154 346 26 794 1 592 13 429 295 407

2000

10 350 108 751 138 152 27 975 1 875 14 699 301 803

Source: FAO, United Nations

Africa Africa is a vast continent with diverse farming regions ranging from the European-influenced Mediterranean area in North Africa to subsistence farming in war-torn Sub-Saharan Africa to the productive commercial agriculture of South Africa. All four of the production zones discussed in the previous section are present in Africa. In recent decades potato production has been expanding across the entire continent. Table 3.3 shows growth patterns for the main potato-producing countries in Africa. Africa’s largest producer, Egypt, is in the north with Mediterranean ports that provide access to European markets. The Egyptian industry is a significant supplier of winter potatoes to European fresh produce and processing market channels. In spite of European Union tariffs, Egyptian growers with new potatoes successfully compete with European growers who sell fallharvested potatoes out of storage during the winter months. Although changes in trade policy could affect potato production in Egypt, the successful adaptation of European varieties and the presence of processors and traders who depend on Egyptian potatoes will probably maintain Egypt’s stature in the potato industry. In Sub-Saharan Africa, the countries in a band to the south of the Saharan desert, war and civil strife have limited potato production. For example, potato production in Cameroon grew to 172 000 metric tonnes in 1987, then fell dramatically to 35 000 metric tonnes in 1997. Following a similar pattern, potato production in Rwanda, where 90% of the population is farming, built up to 181 000 metric tonnes in 1987 then dropped to 96 000 metric tonnes in 1997. The drop is even more dramatic when one considers that Rwanda’s potato production peaked at 347 000 metric tonnes in 1992. In five years during the Rwandan civil war potato production fell 72%. In nearby Kenya potato production also declined 72%, from 730 000 to 205 000 metric tonnes, from 1987 to 1997. 46

SUPPLY Table 3.3 Potato production in African countries, 1967–2000

Algeria Burundi Cameroon Egypt Ethiopia Kenya Libya Madagascar Malawi Morocco Rwanda South Africa Tanzania Tunisia Uganda Other Africa Africa total

1967

1977 1987 1997 (000 metric tonnes)

204 95 10 278 152 195 10 100 3 205 107 520 35 79 23 168 2184

500 151 40 970 177 375 80 120 89 180 170 740 88 90 384 223 4377

905 47 172 1678 220 730 114 267 276 520 181 1022 220 188 188 300 7028

948 43 35 2743 360 205 130 280 380 1145 96 1619 240 280 360 411 9275

2000

950 24 49 1 900 340 360 209 293 1 800 1 070 175 1 680 255 330 478 437 10 350

Source: FAO, United Nations

Prior to the civil strife, potato plantings and productivity were increasing in the highland zone of Sub-Saharan Africa. In a 1980s study of potato production in the Central African countries of Burundi, Rwanda and Zaire, Scott4 found a great deal of potential for expansion. He cited an abundance of farm family labour, suitable climate in the highlands and a familiarity with the crop as reasons for untapped capacity for growth. Since Europeans introduced potatoes into Central Africa in the 1880s generations of farmers have been integrating potatoes into their cropping practices. If political stability returns to the region the potato industry may flourish. Potato production increases from 1997 to 2000 are an encouraging sign. Another encouraging sign in Sub-Saharan Africa is the potato-supply response of growers in the Zaire–Nile divide of Central and East Africa. Growers there helped feed refuges from the Rwanda civil war in the 1990s by intensifying their potato production with the planting of two crops per year and adopting new production methods. One source of improvement was a blight-resistant variety from Mexico – Cruza 148. The variety does not produce high-quality potatoes for the commercial markets in developed countries, but its high yields and disease resistance helped improve the nourishment of many refugees. As people became displaced, many of them brought seed tubers of Cruza 148 to plant near their refuge camps. 47

THE INTERN ATION AL POTATO INDUSTRY

Adoption of the new variety is an example of the power that investment in agricultural research can have on potato producers and consumers in developing countries. Walker5 mentions three other important points regarding potato production in Sub-Saharan Africa. First, the lifting of the embargo on South Africa opens the door for much-needed potato crop improvement technology to the region. South African expertise could be quite valuable to its neighbours. Secondly, dramatic increases in potato productivity could be achieved if inorganic fertilizers become available. Thirdly, unreliable government statistics may mask the true growth of the importance of potatoes in the region. Apparent potato industry expansion in some countries has not been documented by official government statistics. Another leading African potato-producing country, South Africa, is at the opposite end of the continent. Like Egyptian producers in the North, South African growers have adapted potato production and marketing techniques from the most developed potato production countries. International potato processing firms such as Frito-Lay have invested in South Africa because of the growers’ ability to efficiently, and consistently, produce high-quality raw product suitable for sophisticated global market channels.

Asia Asia is a large, sprawling region that some analysts divide into sub-regions. Table 3.4 depicts potato production in the broad region of Asia including the Middle Eastern countries. Although potato production is expanding in the Middle Eastern countries of Iran, Israel, Syria and Turkey, only Iran and Turkey are among the five largest producers in Asia. Of the countries listed in Table 3.4, 2000 potato production is down from 1967 only in Japan and South Korea. Rice is the main staple food in many Asian countries. Since potatoes are a substitute good for consumers and an alternative product for growers, increased potato production comes at the expense of rice.The ratio of potato price to rice price can be a driving force in Asian potato production and consumption. In countries where the government provides price support programmes for rice production and not for potato production the potato : rice price ratio becomes distorted. The Japanese government’s policy has long been in support of higher prices for its rice growers. The resulting low potato : rice price ratio encourages Japanese farmers to shift plantings from potatoes to rice. In spite of increasing demand for potatoes in Japan its potato production has decreased. The gap in demand is met with potato imports. In countries where government policy does not favour rice growers there is more incentive to expand potato production. 48

SUPPLY Table 3.4

Potato production in Asian countries, 1967–2000 1967

Afghanistan Bangladesh China India Indonesia Iran Iraq Israel Japan Korea, North Korea, South Lebanon Nepal Pakistan Saudi Arabia Syria Turkey Vietnam Other Asia Asia total

* * * 3 522 * 213 10 110 3 638 930 566 81 255 768 * 40 1 760 2 359 12 254

1977 1987 1997 (000 metric tonnes) 228 735 41 646 7 287 133 580 47 212 3 742 1 400 650 90 269 318 * 135 2 900 18 532 60 922

350 1 069 28 046 12 731 379 2 210 168 218 3 955 1 950 450 143 395 594 34 334 4 300 498 937 58 761

235 1 508 45 534 19 240 1 100 3 200 400 260 3 200 1 550 663 320 997 964 435 315 5 000 300 2 170 89 972

2000

235 1 702 58 039 22 500 827 3 450 150 333 3 400 1 963 562 270 1 182 1 868 331 450 5 315 371 5 803 108 751

Source: FAO, United Nations * = Insufficient data

Asian farmers in the highlands tend to grow more potatoes than do growers in the lower, and usually hotter, regions where rice is the dominant crop. Although the high- and mid-elevation areas are more conducive to potato production, potato growing in Asia’s tropical regions can actually be a complement to rice growing. Since the potato is a short-season crop, rice and potatoes may be planted on the same field in the same year. During the traditional winter fallow period for rice a crop of potatoes can be grown. An additional incentive is that winter-harvested potatoes usually sell for price premiums. China is the largest potato-producing country, not only in Asia, but also in the whole world. It has held the number one position since it replaced the Russian Federation in 1994. Although the United Nation’s Food and Agriculture Organization has reported China’s potato production since 1972, the accuracy of the numbers is dubious. Historical restrictions by the Chinese government on domestic vegetable trade, unusually large year-toyear changes in production numbers and inconsistencies between different data sources contribute to uncertainly of production, especially for historic 49

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data before the 1990s. In spite of data problems it seems clear that China holds the top spot as the world’s largest potato-producing country. According to FAO, Chinese farmers grew 15% of the world’s potato crop in the late 1990s. Scott’s potato forecasting model predicts that China will produce 63.4 million metric tonnes of potatoes in 2020, which is 17% of the predicted world total. Walker’s map (Fig. 3.1) shows that Chinese potato production is concentrated in a north–south band a bit to the right of the centre of the country, but well inland from the Pacific Coast where China is most heavily populated and consumer income is highest. The potato band is mostly highlands stretching from Burma/Myanmar in the south to the borders of Mongolia and Siberia in the north. China’s main rice production area is in the southeast, well outside the potato band. Efforts have been made to increase winter potato production in the rice fallow fields of the southeast to take advantage of higher seasonal prices as well as higher prices in a potato-deficit area. Most Chinese potato growers rely on traditional agricultural practices that use cheap labour, small fields, little or no mechanization and organic fertilizers such as human ‘nightsoil’. Although China has a large number of potato scientists for a developing country, many growers are reluctant to adopt modern potato production techniques and varieties. One global potato processor built a frozen potato processing facility in China in the 1990s but had difficulty obtaining a consistent supply of high-quality raw product. Ironically, the top potato-producing country in the world cannot meet domestic demand for frozen potatoes in its restaurant industry. The problem is not quantity; it is quality. Growers using traditional Chinese cultural practices have been unable to produce a consistent supply of potatoes that meet the quality standards required by global food service firms such as McDonald’s. The other large band of Asian potato production lies in a long east–west strip stretching from Bangladesh through northeast India along the border of Nepal and extending across the border into Pakistan. Potato production in all four countries is expanding. This entire area is considered to be a lowland tropical zone. Walker attributes the rapid expansion of potato production in the Indo-Gangetic Plain to ‘synergy between government and private sector investment’. Publicly funded irrigation projects and agricultural research coupled with private investments in such things as cold storage facilities have provided farmers with effective means to expand potato production. Turkey is another large potato-producing country in Asia. Although its pro-Western culture and proximity to Europe make it a potential candidate for membership in the European Union, many people consider Turkey a true Asian country. Potato production has steadily increased and is expected to 50

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continue to increase. Global potato processors such as Lamb-Weston have built factories in Turkey. The firms are contracting for potato production with native growers but have also assisted growers from other countries in setting up potato-growing operations in Turkey. The country is blessed with productive soils, a temperate climate and close market access to population centres in the Middle East and Mediterranean region.

Europe A dramatic political shift in the latter part of the twentieth century changed potato production patterns in Europe. Before the Iron Curtain came down the potato industries in Eastern Europe and Western Europe reflected the differences between communism and capitalism. In Eastern Europe collective farms, central planning and use of potatoes for livestock feed were major forces in the potato industry. Meanwhile in Western Europe rapid adoption of new technology, large commercial potato farms and development of a processed potato industry influenced the potato economy. Since the fall of communism the Eastern European potato industry has been evolving into one that looks more like that in Western Europe. The emphasis of potato production is shifting toward satisfying the needs of consumers rather than the needs of government planners. As a result the amount of potatoes grown for livestock feed is declining so much that total European potato production is also falling. Two striking examples of shrinking potato production in Eastern Europe are the Russian Federation and Poland, where in both countries the 2000 potato crop was less than half the size of the 1967 crop (Table 3.5). During the 10-year period from 1987 to 1997 potato production fell 18% in the Russian Federation and 43% in Poland. Although from much smaller bases, production declined rapidly in other formerly communist countries during that period – falling 33% in Czech Republic, 58% in Romania and 59% in Yugoslavia. In the three years following 1997 Poland increased potato production, perhaps in response to global potato-processing firms building factories there. Although its production numbers were not available for the entire 1967–2000 period (Table 3.5), Ukraine appears to be on a production rollercoaster since the fall of communism. During the 1995–97 period Ukrainian growers produced 14.7, 18.4, and 19.0 million metric tonnes, respectively. But then production declined to 13.0 million metric tonnes in 2000. This variation may reflect potato production on cotkas or small gardening plots. During difficult economic times marking the transition from a centrally planned economy to a market economy Ukrainians increasingly relied on their cotkas to feed themselves. Collective farm potato production on a 51

THE INTERN ATION AL POTATO INDUSTRY Table 3.5

Potato production in European countries, 1967–2000 1967

Austria Bel-Lux Bulgaria Czech Rep Denmark Finland France Germany, East Germany, West Germany, Total Greece Hungary Ireland Italy Netherlands Norway Poland Portugal Romania Russian Fed Spain Sweden Switzerland Ukraine United Kingdom Yugoslavia Other Europe Europe total

1977 1987 1997 (000 metric tonnes)

3 049 1 943 381 6 038 857 881 10 406 14 065 21 288 35 353 599 1 507 1 748 4 010 4 840 807 48 214 1 296 3 085 95 464 4 490 1 399 1 125

1 352 1 310 350 3 785 800 737 8 190 9 976 11 251 21 227 936 1 416 1 200 3 310 5 752 605 41 300 1 144 3 738 83 400 5 553 1 346 870

879 1 957 316 3 072 957 491 6 720 12 228 7 354 19 582 948 1 077 697 2 454 7 478 371 36 252 1 178 7 572 75 908 5 552 1 068 658

7 201 2 804 739 142 772

6 598 2 854 162 114 535

6 760 2 210 171 108 420

690 2 300 320 2 066 1 414 783 6 500 * * 12 438 1 050 1 049 700 2 032 8 081 400 20 776 1 300 3 206 62 513 3 420 1 240 700 19 000 7 154 904 2 457 154 346

2000

660 3 006 538 1 417 1 502 816 6 644 * * 11 568 900 1 200 559 2 076 8 200 398 22 270 1 250 3 650 45 037 3 100 1 210 583 13 000 6 957 810 801 138 152

Source: FAO, United Nations * = Insufficient data

massive scale is no longer done, but potatoes remain an important part of the Ukrainian diet thanks to their cotkas. Potatoes are so important to Ukrainians that they are known as ‘the second bread of Ukraine’. When commercial farms shift to other crops Ukrainians make sure they have enough potatoes to eat by growing them themselves. This phenomenon may also be occurring in other formerly communist countries, but official government statistics may be clouded by the difficulty of quantifying production in small plots. With a more unified Europe, potato production made another, perhaps more subtle, shift at the turn of the century. It is interesting to look at the shifts in European potato production in one decade, in particular the period 52

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from 1989, the year before the fall of the Berlin Wall, to 1999. Among the countries where potato production declined, Poland dropped 42%, Italy was down 15%, Germany down 33% and Spain fell 39%. The countries where production increased include the North Sea countries of Netherlands, where production was up 20%, France up 20%, Denmark up 20% and the United Kingdom up 14%. These numbers suggest that there has been a significant shift from east to west and from south to north. One possible reason is that growers in the North Sea region are better able to compete in modern, global markets. In addition to possible advantages in soil and climate, North Sea growers may possess the advantages of a willingness to specialize, new production/storage technology and proximity to processing facilities.

North and Central America The United States dominates potato production in North and Central America (Table 3.6). US 2000 production was more than five times the size Table 3.6 Potato production in North American, Central American, South American and Oceania countries, 1967–2000 1967

N & C America Canada Cuba Guatemala Mexico USA Other N & C America South America Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela Oceania Australia New Zealand

16 549 2 130 105 14 378 13 856 66 7 754 1 797 610 1 467 717 800 403 10 1 712 105 133 904 653 250

1977 1987 1997 (000 metric tonnes) 19 394 2 498 147 31 653 15 972 93 9 321 1 777 679 1 900 928 1 609 504 4 1 600 130 190 990 729 257

Source: FAO, United Nations

53

21 929 3 033 250 68 950 17 484 144 10 500 2 150 625 2 343 727 2 243 354 8 1 709 126 216 1 304 1 015 281

26 794 4 050 364 57 1 282 20 861 180 13 429 2 275 843 2 757 1 305 2 900 493 2 2 388 145 322 1 592 1 308 278

2000

27 975 4 204 206 58 1 592 21 700 215 14 699 3 450 882 2 588 995 2 705 543 2 3 072 110 352 1 875 1 372 500

THE INTERN ATION AL POTATO INDUSTRY

of production in Canada, the second largest producer. After several decades of slow, but steady, growth Canadian potato production grew more rapidly toward the end of the twentieth century. During the decade of the 1990s, Canadian potato production set new records in seven of the 10 years. Although other factors are involved, two important forces were currency exchange rates and the location of new North American potato-processing facilities. During the 1990s the US dollar strengthened significantly. Early in the decade the exchange rate was $1.15 Canadian for $1.00 US, then gradually moved to $1.60 Canadian for $1.00 US. The strong US dollar, along with the North American Free Trade Agreement (NAFTA), provided the Canadian potato industry with a powerful economic incentive to expand and sell in the US market. In response to this incentive several North American potato processors expanded their processing capacity in Canada by enlarging existing factories and building new factories. As in Europe during the latter part of the twentieth century, North American potato production shifted from east to west and from south to north. An analysis of the 1989 to 1999 period shows large shifts in North American potato production. The US states where production declined include Florida down 10%, Maine down 18% and California down 24%. Gainers were the Pacific Northwest states of Idaho up 35%, Oregon up 13% and Washington up 45% as well as Canada, where potato production increased 51%. The US shifts occurred because of improved storage technology and less production risk in the desert climates of the West. In the earlier part of the twentieth century North American potato production was concentrated near population centres. Modern transportation, new storage technology and potato processing changed the location economics of the potato industry. No longer is it economically efficient for a large number of producers, scattered near large cities, to be the potato suppliers. Growers became more specialized and potato production shifted toward the regions where higher yields could be produced. This gave a distinct advantage to areas such as the Columbia Basin in Washington, where potato yields are double the yields achieved by growers in many other states. One additional factor in the location of North American potato production is marketing. During the 1930s Idaho was a minor player in the North American potato market. In 1937 the Idaho State Legislature formed the Idaho Potato Commission (IPC). Through advertising, promotion and quality control the IPC changed consumer tastes and preferences. The Idaho potato soon earned a reputation as a superior product. Consumer willingness to pay a higher price for Idaho potatoes fostered an expansion of the industry in that state. Even in the latter part of the twentieth century the Idaho price premium remained strong, and Idaho’s production share con-

54

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tinues to grow. One-third of the 2000 US fall crop was grown in Idaho. Without the successful IPC marketing programmes Idaho’s share would not be as large.

South America and Oceania In the birthplace of the potato, South American production is scattered between many countries, without the domination of one or two countries as seen in other regions (Table 3.6). Production in 1997 for the top four countries – Argentina, Brazil, Colombia and Peru – was within a narrow band of 2.3 to 2.9 million metric tonnes, but in 2000 Argentina jumped ahead of the pack. Potato production in 2000 was higher than in 1967 in every country except Paraguay, with most countries showing a steady increase over 33 years. South American potato producers are perhaps the most diverse of any region. The advanced economies of Argentina and Chile foster the type of large, high-tech operations seen in North America and Western Europe. Global potato-processing firms have factories in both countries. Processed potato products from Argentina and Chile will not only satisfy domestic needs, they are being exported to other South American countries as well. With new trade arrangements, such as an expansion of NAFTA, South American processed potatoes could enter other international markets. At the other extreme is the South American subsistence farmer who grows potatoes only for family consumption rather than commercial markets. Growers in Bolivia and parts of Peru fit into the subsistence or semi-subsistence categories. In some South American countries, such as Brazil and Peru, both the subsistence and commercial growers co-exist. Oceania makes up the smallest of the world’s potato-producing regions. The advanced economies of Australia and New Zealand provide incentives for the development of modern potato industries. Several major food processors have established potato-processing operations in the region. Possible transport cost advantages may make this region a serious competitor in Asian processed potato markets. A discussion of potato-producing countries would not be complete without an overall list of the world’s largest producers. Table 3.7 shows the top 20. China was the largest potato-producing country in 2000, followed by Russia, India and Poland. Seven of the top 10 were in Europe, two in Asia and one in North America.

55

THE INTERN ATION AL POTATO INDUSTRY Table 3.7

Top 20 potato-producing countries, 2000

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

China Russian Fed India Poland USA Ukraine Germany Netherlands UK France Turkey Canada Romania Iran Argentina Japan Spain Peru Bel-Lux Colombia

Quantity (000 mt)

Percentage of total

58 039 45 037 22 500 22 270 21 700 13 037 11 568 8 200 6 957 6 644 5 315 4 204 3 650 3 450 3 450 3 400 3 100 3 072 3 006 2 705

19.2 14.9 7.5 7.4 7.2 4.3 3.8 2.7 2.3 2.2 1.8 1.4 1.2 1.1 1.1 1.1 1.0 1.0 1.0 0.9

Source: FAO, United Nations

Production systems Potatoes are produced by many different methods in diverse production regions around the globe. Consumer demand is the ultimate driver of potato production. A grower’s intended market influences production decisions regarding field selection, variety selection, cultural practices, harvest method and storage.

Seed potato production One important market for potato producers is other potato producers. Since potatoes are grown from tubers, about 10% of overall potato production is replanted. For other types of crops growers can simply save some of the harvest to use as seed for the next crop. It is much more difficult to do that with potatoes for two reasons. First, potato tubers are highly perishable. Unlike true seeds, potato tubers can only be saved for next year’s planting in expensive facilities where temperature and humidity can be controlled. 56

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Second, potatoes suffer from serious seed tuber-borne potato diseases. A few infected seed tubers can cause crop failure, especially with diseases that are also spread by equipment, insects, water and air currents. The need for healthy seed led to the development of seed potato improvement programmes, first in Europe in the late 1800s then in North America in the early 1900s. One founding principle of the programmes was to set up a system whereby seed potatoes could be ‘certified’ and approved for sale. At first the systems focused on varietal purity, but then the twin emphasis of disease purity emerged. At the time a serious potato production malady known as ‘running out’ was common. As new varieties were developed the yield of succeeding generations declined owing to seed-borne viruses. Seed certification programmes were designed to reduce the virus problem by establishing disease tolerances for seed potatoes. Seed potato certification is now in the hands of government agencies, universities or grower associations depending on the country and state. The certification agencies establish rules, set tolerances, inspect fields, detect disease and issue shipping certification. Unfortunately, some disease-causing pathogens go undetected because they remain latent, or express no symptoms. This led to limited generation regulations in most seed certification agencies. The probability of disease infection increases with each generation of seed potatoes because of the continual exposure to pathogens. To reduce this risk most agencies limit the number of generations that seed may be multiplied to five years, or up to nine years for some agencies. In the past growers or seed agencies would visually inspect seed potato fields and select the healthiest potato plants for the beginning of a new multiplication programme. New technology has replaced both the visual selection and early-generation multiplication methods. Tissue culture is the laboratory method used to provide disease-free potato stocks for seed multiplication. The technique involves growing plants under sterile conditions in artificial media. The procedure is as follows: 1 2 3 4 5 6 7

Cut a meristem, a small growing point the size of a flake of black pepper, from the stem of a potato plant. Put the meristem into a test tube with the nutrients required for it to grow into a small plantlet. Test the plantlet for the presence of disease-causing pathogens. Make nodal cuttings – consisting of a stem segment, a growing point and a leaf – from the plantlets that pass the disease tests. Place each nodal cutting into a medium that promotes root development and allows it to develop into a new plantlet. Plant the new plantlets in greenhouses or in outdoor fields. Harvest the tubers produced by the plantlets. Since they are small they are called minitubers. 57

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8

Plant the minitubers in fields for multiplication as certified seed potatoes.

One variation of this technique is to allow the plantlets produced in step 2 to grow and produce tubers, which are very small. Known as microtubers, these can be marketed as disease-free stock or planted in greenhouses for multiplication. With this new technology the management of seed potato operations has changed. Some growers have built laboratories and greenhouses to vertically integrate backwards in the seed potato marketing chain. Others rely on public or private entities to sell them the plantlets and minitubers that they require for beginning seed stocks. Although tissue culture technology has moved part of the seed potato production system indoors, conventional outdoor field production continues to play an important role in the multiplication of high-quality seed potatoes. The economic purpose of growing several field generations of seed potatoes is to spread tissue culture costs. During the 1990s US minituber prices for some varieties were $24 per pound ($53/kg). At a planting rate of 400 pounds per acre (2178 kg/ha), seed costs alone were $9600 per acre ($23 712/ha). With additional costs of $1500 per acre ($3705/ha), total production costs for the first generation of seed potatoes were $11 100 per acre ($27 417/ha). A typical yield for the first field generation from minitubers was about 200 hundredweight per acre (22 t/ha), giving a production cost of $55.50 per cwt (45.4 kg). Assuming planting rates of 30 cwt/acre and yields of 285 cwt/acre for subsequent generations, production costs for the first six generations of seed potatoes are $55.50, $11.11, $6.43, $5.94, $5.89 and $5.88 per cwt (45.4 kg), respectively. Under this scenario the cost structure flattens out at the fourth generation. Commercial growers can plant high-quality, earlier-generation seed potatoes, but at a higher cost. New technology that reduces tissue culture costs and increases seed potato yields would shorten the field generation timetable. Potato growers who want to grow for the seed market should be located in areas that reduce the risk of field contamination. Isolation from commercial potato fields is so important that some seed potato production areas are quarantined to prohibit planting of non-seed fields. Although seed potato growers generally use the same equipment and production practices as commercial growers, they must also utilize extra sanitation methods to reduce the risk of disease. Quality control is a major challenge for seed potato growers. Some diseases, such as bacterial ring rot (BRR), have a zero tolerance with seed certification agencies. If a seed grower has one plant infected with BRR, some agencies will prohibit the whole farm’s production from being certified. Seed potato growers face marketing challenges that differ from those in 58

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the commercial market. First, the seed growers’ target market is other potato growers. Since their customers are in a similar business and tend to be loyal to suppliers, many seed growers focus on establishing long-term relationships with successful commercial growers. Secondly, seed growers must make production and marketing plans several years in advance. Since they multiply seed stocks for several years before selling to commercial growers, they must try to determine what varieties will be in demand several years into the future. If they are wrong, they may be in an excess supply situation for a particular variety and be forced to sell either at low prices or in commercial markets. Although commercial potato market prices are usually lower than seed potato prices, that is not always the case. For seed growers who are close to processors or fresh packers, the additional market alternatives can reduce risk and improve profitability. Seed potatoes can be sold in other markets, but it is a one-way street. Potatoes grown for commercial purposes and not entered into a seed certification programme cannot officially be sold as seed potatoes. Some states and countries prohibit planting seed that is not certified, but enforcement is difficult, especially for growers who plant tubers produced on their own farms. A common practice among growers in some areas has been to plant ‘year-out’seed or ‘eliminators’.The first term describes potatoes a commercial grower harvests from a crop planted with certified seed. Saving a portion of that crop to plant next year is the practice of using ‘year-out’ seed. The second term describes the practice of sorting small potatoes from a commercial harvest to plant next year’s crop. Potato processors usually specify in their grower contracts that certified seed must be used, but buyers in fresh markets do not have such a policy. Commercial potato growers in North America usually plant seed potatoes that have been cut into pieces. An eight-ounce seed potato might be cut into four two-ounce pieces. The seed-cutting practice increases the risk of disease infection entering via the cut surfaces, but the trade-off is that seed potato costs per acre are reduced. European growers typically plant whole seed potatoes, which reduces the risk of disease. Growers in other parts of the world follow both the North American and European seed practices. Seed potatoes make up a large portion of potato production costs for most growers but are higher in areas far from seed potato production. In tropical lowlands high aphid populations, lack of winter-time pest kill and continual threats of viral and fungal diseases make it difficult to grow seed potatoes locally. This has generated interest in true potato seed (TPS). The risk of disease transmission is lower with TPS, and tonnes of seed potatoes that require careful temperature and humidity control can be replaced with a few kilograms of easy-to-store TPS. The problem is that TPS produces a genetically diverse crop that lacks the uniformity that many markets require. 59

THE INTERN ATION AL POTATO INDUSTRY

New technology that solves the uniformity problem could change the seed potato industry, especially in tropical lowlands.

Commercial potato production Commercial potato production is generally for human consumption. Although a large portion of potatoes produced in Eastern Europe were grown for livestock feed, human consumption has become more important since the fall of communism. In capitalist countries the primary market for commercial potato production is for human food, with potatoes going to livestock feed only when they fail to make the grade for food or during times of when large supplies depress prices. Commercial potatoes flow into two main food market channels: fresh and processing. Within the processing channel are several distinct sub-channels including frozen, dehydrated and snack food processing. Growers should think about marketing before planting a crop of potatoes. Variety selection may determine what market channels are open to them. Some varieties do well in fresh markets, while others are best suited for a particular type of processing. Growers with processor contracts may have the variety selection determined for them. A few varieties may be used in both fresh and processing markets. After selecting varieties some critical steps in commercial potato production include: seed potato procurement, seed bed preparation, planting, fertilizing, irrigating, pest scouting, controlling pests, harvesting, storing and marketing. Seed potatoes can be purchased from individual seed potato growers or from brokers. Some processors procure seed potatoes for their contract growers and deduct the costs from their payments. Many seed growers and commercial growers prefer developing long-term relationships with each other. Seed bed preparation consists of a variety of soil tillage methods. Some growers plough in the fall, some in the spring and some not at all. For proper soil aeration deep tillage of the soil, if not by plough then by disc or ripper, is recommended for potato production. To reduce damage during mechanical harvest, stones are either removed from the field or placed in furrows away from the potato plants. Working the soil when wet can cause soil compaction problems, creating clods that can bruise potato tubers. Clodbreaking tillage is often used to prepare seed beds. If bed-shaping equipment is not used at planting, a later ‘hilling’ operation is done to form potato beds that cover shallow tubers and facilitate harvesting. Potato growers in developed countries use mechanical potato planters that efficiently and evenly place seed in rows. The size of planters has increased from two-row to four-row to six-row to eight-row planters. In the late-1990s the 12-row planter made its debut in the United States. Some 60

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planters are equipped to place fertilizer and systemic insecticides near the seed. In developing countries the entire planting operation may be done with draught animals and human labour. Furrows are opened with implements pulled by horses or oxen, and seed potatoes are placed by hand before the furrows are covered. Growers usually fertilize at planting, and some apply additional fertilizer during the growing season. In developed countries, chemical fertilizers are common. In developing countries manure is often used. In China and other places, human waste, or ‘nightsoil’, is used as a fertilizer. Irrigation is done as needed during the growing season, but in very dry regions fields are irrigated before planting in order to facilitate soil preparation. Pest scouting and pest control methods vary but are a critical factor in producing a potato crop that has the yield and quality to be profitable.

Potato harvest methods Potato top growth is usually killed before harvest. The tops, known as potato haulm in the UK and potato vines in the US, are killed for several reasons. The first reason is to stop growth. Potato tubers can be too large for some markets, such as the seed potato market. Another reason to stop growth is for pest control. If the top growth is dead, potato diseases can no longer enter the tubers via the tops. In cases of serious disease outbreaks potatoes are killed prematurely to save the crop. Another reason to kill top growth is to hasten skin set, the natural process that thickens the tuber’s protective outer layer. In developed countries growers use a variety of methods to kill top growth. One method is chemical dessicants that are sprayed onto the foliage. Another method is mechanical devices that either pull out or chop the haulms. Some growers use a combination of mechanical rollers to weaken the haulms then follow with a chemical dessicant whose effectiveness is enhanced by the rolling. When energy prices are low some growers use petroleum burners to kill the tops with flames. Growers in some temperate zones rely on frost to kill potato tops. Potato harvest involves the separation of 20 to 40 tonnes of potatoes from 500 to 1500 tonnes of soil per hectare. Regardless of harvest method the goal is to separate tubers from roots and soil. The most primitive method used long ago by the Incas and still used by subsistence farmers is for some sort of spade to dig and lift the potatoes to the soil surface. Mechanical harvesting consists of the following steps: digging the bed; sieving the soil; separating tubers from plants; and transferring to a vehicle. Modern potato harvesters perform all of those steps as they move down the rows of potatoes. Recent mechanical harvest improvements emphasize 61

THE INTERN ATION AL POTATO INDUSTRY

speed of harvest. To minimize turning-around time, many growers use potato harvest methods that pick up four, six or even 12 rows at one pass. Some growers use a two-stage harvesting method with smaller harvest machines, called windrowers, to dig rows of potatoes not to place in a vehicle, but to place in the rows that the main harvester will pick up. This allows a tworow harvester to pick up four rows, two of which are dug and two of which were placed on the beds by the windrower. It also allows a four-row harvester to dig only four rows, yet pick up the potatoes from eight other rows placed in its harvest beds by two four-row windrowers. One advantage of hand harvest methods is that people can handle potatoes more gently than can machines. Bruising is an ongoing concern for mechanical harvesting, especially when tuber temperatures are below 10°C. Careful adjustment and operation of potato harvesting and handling equipment is critical during cold harvest weather. Growers are advised to avoid early morning harvest and wait until temperatures warm in order to minimize bruising. Careful handling is required in transport and handling at the market or storage as well.

Storage systems Where storage is an option, growers must make important storage-related decisions that affect the profitability of their potato crops. Whether or not to store, how to store and how long to store are the main issues. Even after the tops are killed, potato tubers are still living organisms. The crop’s condition coming out of storage cannot be better than it was going into storage. The goal is to minimize losses, not eliminate them. Storage losses consist of weight loss and quality loss. Weight loss is a natural occurrence for the living, breathing potato tubers. Some water weight is lost through evaporation and some carbohydrate weight is lost through respiration. The end result is that growers have less tonnage of potatoes to sell coming out of storage than they had at harvest. Even under optimal storage conditions weight loss for potatoes stored for crisp processing can reach 10% for eight months of storage (Fig. 3.4). The other storage loss category – quality loss – can range from zero to one hundred percent when a disease problem such as late blight gets out of control. For the example in Fig. 3.4 quality loss begins at 1% in the third month of storage then increases to 5% by the eighth month. The three critical variables that affect storage loss are: (1) the condition of the potato; (2) the storage environment; and (3) the length of storage. Growers have some control over all three variables. The condition of potatoes going into storage is influenced by the production practices the grower

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SUPPLY % 16 Quality loss 14

Weight loss

12 10 8 6 4 2 0 Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

3.4 Potato storage loss ( J Gibson, personal communication).

used, such as pest control, haulm kill and bruise prevention during harvest. Problems caused by factors beyond grower control, such as excess rainfall or severe frost, can lead growers to sell at harvest rather than take on the increased risks of storage losses. Temperature control and humidity control are the main functions of a storage facility. The crudest form of storage is to leave the potatoes in the soil where they grew. If the climate during field storage provides adequate soil moisture and soil temperatures that are neither too hot nor too cold, storage weight and quality losses may be low. Storages in some regions consist of pits or trenches into which the harvested potatoes are placed, then covered with soil, straw or some built structure. Potato storage facilities in the temperate zones of developed countries are above-ground, insulated buildings made of concrete, metal and wood. The design of these modern storage buildings includes ducts for air movement to control temperature and humidity within the piles of potatoes. Some facilities include electronic sensing and control devices to automatically keep an optimal storage environment. In modern facilities potato storage consists of three periods. First is the curing period during which potato bruises and wounds are healed in a

63

THE INTERN ATION AL POTATO INDUSTRY

temperature range of 10°C to 15°C. During a process called suberization potato tubers form a corky layer of cells over a cut or wounded area to prevent entry of harmful organisms that could cause rot. The curing period also allows the tuber skin to further mature and thicken. Second is the holding period during which the temperature is held in a range from 4.4°C to 10°C depending on the market channel. Potatoes stored for fresh and seed use are held at the low end of the range, those stored for frozen processing are held in the middle of the range and those held for potato snack processing are stored at the high end. The third stage is the warming phase before removal from storage. Since potatoes bruise more easily at low temperatures, potatoes in low holding temperatures are warmed before handling for removal. In arid climates moisture is added to the air to reduce evaporative weight loss in the potato tubers. Where potatoes are stored into hot months, refrigeration is added to some facilities. One potentially serious type of quality loss during storage is sprouting, which some varieties tend to do several months after harvest. As a control method growers can apply chemical sprout suppressants. During the growing season maleic hydrazide (MH) can be applied to the foliage. Potato plants move MH to the tubers where it carries over and prevents sprouting. An alternative is to use a chemical during the storage season if the potatoes are to be stored longer than two or three months. Growers can apply chlorpropham (CIPC) through the ventilation system. For long-season storage of more than six months additional CIPC applications are usually done. Of course, sprout inhibitors should not be used for seed potatoes. Since some global potato buyers, including Japanese customers, are becoming reluctant to purchase processed potato products that have traces of CIPC, potato scientists are investigating alternative sprout-control methods. Potatoes can also be stored successfully outside the temperate zones in some regions. In highland zones potato growers use in-field storage as well as in-home storage. They also use general farm buildings, especially for seed potato storage. A few highland growers have invested in special-purpose potato storage buildings. Growers in the Mediterranean zones who can harvest potatoes during the fall, winter and spring have less need for storage than do growers in other zones. Lowland tropical growers face the challenge of hot-weather storage. Since they grow their potato crops during the winter, stored potatoes must survive hot summer temperatures. On-farm storage usually consists of holding potatoes in dark, well-ventilated buildings or even under shade trees. Egyptian growers have built permanent mud huts for potato storage. The effective storage season for most lowland growers is two or three months, but refrigerated storages are being built by agribusinesses in India and Bangladesh. The extended storage season has helped expand the potato industry in the Indo-Gangetic Plain. 64

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Costs Growing costs Potato production is an expensive enterprise when compared to the costs of growing grain and forage crops. An example of estimated potato production costs for a temperate climate zone in a developed country is given in Table 3.8. The Idaho potato production costs are split into two categories: variable and fixed. Also known as operating costs, the variable cost category includes the direct costs of producing a crop. Fixed costs are incurred regardless of the level of production. In developed temperate zones such as Idaho fixed costs represent a large portion of total potato production costs. Since Idaho growers use expensive equipment the ownership costs – depreciation, interest, taxes and insurance – for machinery and tractors make up a large portion, 14%, of total production costs. Unlike grain drills and combines that can be shared between wheat, barley, maize and other grain crops, potato equipment is only used for potatoes. When one considers both the fixed and variable costs of equipment it is seen that mechanization expenses make up 28% of total production costs. Obviously potato production in Idaho is very capitalintensive. The same is true for most other temperate-zone potato regions in developed countries. Table 3.8

Estimated potato production costs per acre, eastern Idaho, 1999

Variable costs Seed Fertilizer Pesticides Equipment Labour Other Total variable costs Fixed costs Equipment Land Other fixed costs Total fixed costs Total costs

Cost ($/acre)

Cost ($/cwt)

Cost (£/tonne)

Percentage of total

176 130 134 175 126 102 843

0.54 0.40 0.41 0.54 0.39 0.31 2.59

7.24 5.34 5.50 7.18 5.16 4.18 34.60

14 10 10 14 10 8 66

181 220 33 434 1277

0.56 0.68 0.10 1.33 3.93

7.43 9.03 1.34 17.79 52.39

14 17 3 34

Source: University of Idaho Equipment variable costs include fuel, lubrication, maintenance, repair and custom work. Other variable costs include crop insurance, promotion tax, water assessment and interest on operating capital. The assumed currency exchange rate is $1.50 per £1.00.

65

THE INTERN ATION AL POTATO INDUSTRY Table 3.9 Distribution of expenditures on selected inputs for potato production in various area Zone & region Highland zone Benquet, Philippines Ruhengeri, Rwanda Sabana de Bogota, Colombia Lowland zone Cañete, Peru Dhaka, Bangladesh Punjab, India Temperate zone Idaho South Korea United Kingdom

Seed

Labour

Fertilizers

Pesticides

Equipment

55% 38% 24%

16% 62% 34%

17% 0% 22%

10% 0% 14%

2% 0% 6%

38% 37% 45%

20% 27% 27%

17% 20% 18%

11% 15% 6%

14% 1% 4%

19% 32% 28%

13% 38% 23%

14% 3% 9%

15% 26% 11%

39% 1% 29%

Sources: Horton; Claydon; University of Idaho

Costs of production vary between growers and production areas and even between fields on the same farm. In international markets currency exchange rates also affect relative costs of production. It is useful, however, to look at the relative distribution of costs in producing areas scattered around the globe. Horton6 and Claydon7 show how growers in different locations rely on different types of production inputs to produce potatoes (Table 3.9). Rwandan growers relied only on seed potatoes and labour; they use no fertilizer, pesticides or machinery. Seed potato expenditures are highest for growers in regions where seed potatoes are not produced. Since it is difficult for growers in the lowland regions of Cañete, Peru and Punjab, India to produce seed potatoes in their hot, tropical climates they must import them from other regions. Seed expenses are also high for growers in some highland regions such as Benquet, Philippines where suitable nearby seed production sites are very limited and imported seed potatoes are expensive. Even in the temperate-zone areas where seed potato production is common, seed costs exceed one-fifth of the total direct input costs. Labour costs range from a low in highly mechanized Idaho of 17% to a high of 62% in Rwanda. For Rwandan farmers whose families can provide the needed labour, their only out-of-pocket expenses may be for seed potatoes. Family labour can reduce direct labour expenses in other regions as well, but the opportunity to reduce total costs is less where growers depend more heavily on mechanization. Fertilizer costs range from a low of zero in Rwanda to a high of 22% in Colombia, both of which are in highland production zones. The Colombian growers use manure and chemical fertilizers, both of which they apply heavily. The Rwandan growers did not have access to chemical fertilizers. 66

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European processing potato production costs and returns

Category Returns Yield (t/ha) Price (£/t) Total revenue Variable costs (£/ha) Seed Fertilizer Pesticides Other Total variable costs Fixed costs (£/ha) Rent Machinery Contractors Labour Irrigation Levies Other Total fixed costs Total costs (£/ha) Net margin (£/ha) Net margin (£/t)

UK

Netherlands

France

45 102 4590

50 59 2950

43 72 3096

556 197 359 46 1159

504 70 278 17 869

367 138 206 53 764

261 399 96 358 151 41 69 1376 2535 2055 46

340 226 148 70 17 17 52 871 1740 1210 24

121 418 44 286 143 11 77 1100 1864 1232 29

Source: Fearne,Wye College £1 = 3.3 NFL, 9.9 FF

In general, fertilizer expense appears to represent a larger portion of the total in the highland production areas, while pesticide expenses are larger in temperate zones. In heavily mechanized Idaho and the United Kingdom equipment expenses make up 39% and 29% of the direct expenses, respectively. A study conducted by Dr Andrew Fearne of Wye College in London analysed costs and returns for processing potato growers in the UK, Netherlands and France. Based on surveys of 173 growers Fearne compiled the averages in Table 3.10. The study indicates that costs are higher in the UK, but higher prices give British growers a larger net margin.

Storage costs Except for potatoes sold off the field grower costs do not end at harvest. Some growers mistakenly consider potatoes in storage like ‘money in the bank’, which is a mistake for two reasons: storage risks and storage costs. 67

THE INTERN ATION AL POTATO INDUSTRY Table 3.11

Estimated potato storage costs

Category

Cost (£)

Potatoes (3000 tonnes ¥ 75) Facility ownership Operating expense Interest (1%/mo ¥ potato value) Shrink (6%) Total costs Cost per tonne

225 000 24 000 18 000 13 500 13 500 294 000 92

Potato storage should be managed like any business enterprise; it should be viewed as a profit centre. An example of potato storage costs is in Table 3.11. The potatoes themselves should be considered an expense and are indeed the largest expense. If the crop were not placed in storage it could have been sold at harvest. The off-the-field price multiplied by the volume of potatoes in storage determines the value of this expense category. In our example we estimate a 3000ton storage filled with potatoes worth £75 per tonne at harvest, giving a potato cost of £225 000. Growers who hire storage can allocate that expense as a storage cost, but those who own their facilities also incur the ownership costs of depreciation, repairs, taxes and insurance. In our example we assume storage ownership cost of £8 per tonne. The next item, operating expense, includes estimated costs for electricity, labour and sprout suppressants. Interest is estimated at 1% of potato value per month. Shrinkage, the loss of potato weight and quality, is estimated at 6% for the six months of storage. The 3000 tonnes of potatoes going into storage is estimated to shrink to 2820 after six months in storage. The bottom line in Table 3.11 is that the break-even price for potatoes placed in storage for six months is £92 per tonne. The storage enterprise will only be profitable if the market price rises from the £75 per tonne at harvest to at least £92 per tonne six months later. Following similar analysis growers can estimate storage costs for each month to help them decide when to sell. On the revenue side is the price offered by buyers or a futures market if one is available. Processor contracts offer storage incentives, but the open market for fresh potatoes is a volatile roller-coaster that offers opportunities and risks.

Packing costs Some growers also pack potatoes for the fresh market. Those who do not pack their own potatoes can enter the fresh market by either selling to a 68

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United States fresh potato packing costs and returns 1985 ($/cwt)

1990 ($/cwt)

1995 ($/cwt)

Average ($/cwt)

12.87

17.64

11.67

14.06

Raw product cost

8.83

13.63

7.54

10.00

Containers Depreciation Inspection Labour Maintenance Overhead Supplies Utilities Total packing costs Total costs Profit

1.27 0.05 0.06 1.67 0.25 0.39 0.13 0.06 3.88 12.71 0.16

1.72 0.12 0.06 1.31 0.24 0.37 0.01 0.03 3.86 17.49 0.15

1.65 0.17 0.07 1.16 0.15 0.73 0.01 0.03 3.97 11.51 0.16

1.55 0.11 0.06 1.38 0.21 0.50 0.05 0.04 3.90 13.90 0.16

Percentage of revenue Revenue

Average price

Costs 71 Packing costs 11 1 0 10 2 4 0 0 28 99 1

Source: Reeve

packing business or contracting with a firm to pack and sell their potatoes for a fee. A University of Idaho study by Reeve8 analysed packing costs and returns for a large multi-state packer, as shown in Table 3.12. The profit margins were quite thin (1%) and nearly identical in each of the years, even in 1990 when potato prices were comparatively high. Profits during the years not placed in the table were also within the $0.13 to $0.16 per cwt (45.4 kg) range, suggesting that this firm keeps a stable profit margin in spite of volatile potato prices. This means that growers do not shift price risk on to the packers, or at least not this packer. The largest packing cost is for raw product, which is 71% of revenue on average. Containers form the second largest cost, making up an average of 11%, slightly higher than the labour figure of 10%. The trend in labour costs is downward, moving from $1.67 to $1.16, a decline of $0.51 per cwt (45.4 kg) in a decade, despite an upward trend in wage rates. This packer made a series of investments in labour-saving equipment that increased packing volume. During the same decade, depreciation expenses increased from $0.05 to $0.17 per cwt. In spite of operating more expensive and more sophisticated equipment, maintenance expenses declined from $0.25 to $0.15 per cwt. The investment in high-volume, labour-saving equipment 69

THE INTERN ATION AL POTATO INDUSTRY

added $0.12 to depreciation costs that were more than offset by labour savings of $0.51 and maintenance savings of $0.10 per cwt (45.4 kg).

Factors that influence plantings Growers consider several things when they decide what crops to plant. They look at the availability of land, labour and other inputs as well as cropping history and desired rotations. They also respond to economic signals. Perhaps the most important of the economic signals is the price of potatoes. Given the time between the decision to produce and the actual harvest of potatoes there is a lagged response to prices. Human nature is such that high potato prices during the time when growers are deciding what to plant will give them incentive to increase plantings. Even though they know that the price for the next crop may be different from the price for last year’s crop current price levels can make growers pessimistic or optimistic. Changes in prices can also cause people to enter or leave the potato business, with high prices often tempting people who never before grew potatoes. Potato growers who farm in countries where potato futures contracts are available may lock in prices before they plant, as discussed in Chapter 5. Those who don’t use potato futures may be influenced in their planting decisions by prices on the futures exchanges. More discussion on potato futures follows in Chapter 10. Of course, potato price is but one factor that influences plantings. Other factors, known as supply shifters, that can affect the supply of agricultural goods include input prices, profitability of alternatives, technology, prices of joint products, risk, government programmes, and weather and pests. Joint products are important for products such as wool and mutton, but are not relevant for potatoes. The other factors are discussed below.

Input prices Potato production input expenses are seen in Tables 3.8, 3.9 and 3.10. Economic theory tells us that changes in any of the major expenses could affect potato plantings. Equipment costs make up the largest cost category, with variable and fixed costs comprising 28% of Idaho total production costs. Statistical analysis, however, has shown an insignificant relationship between equipment costs and US potato plantings. One reason may be that once growers make an investment in potato production equipment they tend to plant potatoes regardless of changes in prices of fuel or the market for new and used potato equipment. Seed potato price is sometimes thought to be 70

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an important factor in potato plantings and probably is in production regions where seed potatoes represent a large portion of total production costs. For potato plantings in the US, however, no significant statistical relationship has been established for seed prices or for any other input.

Profitability of alternatives Although most farmers like to practise crop rotation, the relative profitability of the alternative crops can cause them to break rotation. Even if they stick to rotation on land they own, they might have flexibility to adjust plantings on leased land. In most potato-producing regions grain crops and forage crops are grown in rotation with potatoes. In some regions a wide variety of agronomic and horticultural crops are possible alternatives. Increased profitability of alternative crops, via higher prices or lower costs, can cause potato growers to reduce potato plantings. When profitability of alternatives declines, the economic signal is to increase potato plantings. The price of alternative crops is a statistically significant variable in United States potato plantings forecasting models.

Technology Although new technology is usually thought of in terms of its impact on yields, it can also have a positive impact on potato plantings. The introduction of a new, disease-resistant variety particularly well suited for a certain potato-producing region could well cause plantings there to increase. Improved irrigation is another type of technology that could increase potato plantings. Yet another is new planting equipment that can decrease the time and cost of planting potatoes. For people who are interested in forecasting potato plantings, the impact of new technology may be difficult to quantify.

Risk Potato growers face two types of risk: production risk and price risk. Changes in either type of risk can influence potato plantings. Converting dryland farms to irrigation is one example. The growers who no longer face the risk of drought, because they now can irrigate, are likely to increase plantings because of reduced risk. The presence of potato disease is another example. Prior to the 1990s potato late blight did not exist in some Western US states. After late blight appeared, the increased production risk put downward 71

THE INTERN ATION AL POTATO INDUSTRY

pressure on potato plantings. Reducing the risk of low prices can cause potato plantings to increase. Better availability of processor contracts, futures contracts or crop insurance can reduce price risk and increase plantings.

Government programmes Government programmes can distort markets and economic signals to growers. Programmes that provide price floors reduce risk and encourage plantings of the supported crops. Even in countries, such as the United States, where potato price supports have not been provided, programmes for alternative crops can influence potato plantings. If total risk of a farming operation is reduced, the grower may be inclined to increase plantings of a potentially high-value crop like potatoes. Some government programmes restrict the amount of plantings or the amount of a commodity that can be marketed. Other government programmes provide incentives or penalties for use of certain inputs. Still others fund irrigation projects, research and trade. Any programme that distorts market signals between consumers and producers can influence plantings.

Weather and pests Unusual weather or pest pressure can cause sudden shifts in the supply of potatoes. The weather situation doesn’t even need to be during the growing season to influence the available supply of potatoes. For example, when severe weather shuts down trucking or rail transport in potato-producing regions the market supply temporarily shrinks. Outbreaks of insects or other pests or the change in availability of pesticides can also influence potato plantings. If a government agency bans the use of a pesticide that is an important input in a potato-producing region, growers there are probably going to reduce potato plantings.

Forecasting potato plantings 9

The author built a potato plantings forecasting model for 17 different potatoproducing regions in the United States. He found the following variables, all lagged one year, to be statistically significant in at least one region: previous potato plantings; potato price; monthly range of potato prices; and alternate crop prices including barley, maize, hay, sugar beet, wheat, sunflowers and vegetables. The lagged potato plantings variable captures the influence of a concept called ‘asset fixity’. That is when an investment in specialized equipment 72

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becomes a fixed factor of production. Since US potato production requires expensive, single-purpose equipment such as planters, harvesters and storage facilities, grower investment in that equipment becomes fixed. They are not likely to sell and buy potato equipment from one crop to the next, and the equipment is not useful for producing other crops. Therefore, the forecasting model includes a lagged plantings variable to capture the influence of asset fixity. The monthly price range variable is a measure of price risk. A large price range indicates more market volatility and more risk to the growers. The plantings-forecasting model was simple but accurate for some potato regions. The model explained at least 92% of the variation in potato plantings in six of the 17 regions. Potato market analysts employ similar models for their market newsletters or agribusinesses.

Potato yields People in the potato industry are also interested in forecasting potato yields, which may be more difficult than forecasting plantings. Although growers respond to the same economic forces when they make yield-influencing decisions, there are other factors that are difficult to quantify. Plantings models predict human behaviour, while yield models predict weather. Both are challenging. MacKerron10 wrote the seminal book on the topic of potato yield forecasting. He split 11 European countries into 64 similar production regions and investigated methods to forecast potato yields in each. The purpose of MacKerron’s work was to provide a framework of analysis for European Community agricultural policy. Others have followed up on MacKerron’s work to provide proprietary forecasts for their company’s personal business interests. A more simple type of analysis is to look at yield trends. Figure 3.5 shows the movement in potato yields in five geographic regions. Yields in Africa, Asia and South America are seen to be well below those of the other regions. The yields in all regions are progressing upward through time. Analysis of US potato yields suggests that the upward trend in yields may be accelerating in that part of the world. Figure 3.6 shows that during the 1990s the yield trend is steeper, actually increasing at the rate of 7 cwt (45.4 kg) per year, as compared to 4 cwt (45.4 kg) per year during the 1949–89 period. Scott predicts that world potato yields will increase 0.9% per year during the 1993–2020 period. His forecast for developing countries is for yields to increase 1.5% per year, while developed country yields are expected to go up 0.5% per year. Yield forecasts for the developing regions range from 1.3% per year in Latin America to 2.0% per year in Other Asia. 73

THE INTERN ATION AL POTATO INDUSTRY 40

Africa N & C America S America Asia Europe

Metric tons per hectare

35 30 25 20 15 10 5 0 1967

1972

1977

1982

1987

1992

1997

3.5 Potato yields in world regions, 1967–2000.

400 Yield

350

Trend 1 100 lbs/acre

Trend 2 300

250

200

96 19

92

88

19

84

19

19

80

72

76

19

19

19

68

60

64

19

19

19

52

56 19

19

YE

AR

150

3.6 Trends in United States potato yields.

References 1 2

P Harris, The Potato Crop, London, Chapman & Hall, 1992. T Walker, P Schmiediche, and R Hijmans, ‘World trends and patterns in the potato crop: An economic and geographic survey’, Potato Research, 1999 42 241–64. 3 G Scott, M Rosegrant, and C Ringler, Roots and Tubers for the 21st Century, Lima, Peru, International Potato Center, 2000. 74

SUPPLY 4 G Scott, Potatoes in Central Africa: A Study of Burundi, Rwanda and Zaire, Lima, Peru, International Potato Center, 1988. 5 T Walker et al., ‘World trends and patterns’. 6 D Horton, Potatoes: Production, Marketing, and Programs for Developing Countries, London, Westview Press, 1987. 7 K Claydon, The Economics of Potato Production in the United Kingdom, University of Nottingham, 1995. 8 D Reeve, ‘The farm – retail price spread for Idaho fresh russet potatoes: a case study’, MS thesis, Moscow, Idaho, University of Idaho, 1996. 9 J Guenthner, ‘Acreage response: an econometric analysis of the United States potato industry’, PhD dissertation, Pullman, Washington, Washington State University, 1987. 10 D MacKerron, Agrometeorological Aspects of Forecasting Yields of Potato within the EC, Brussels, Commission of the European Communities, 1992.

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CHAPTER

4 Demand

Demand theory

T

he consumer is queen. The people who make everyday purchasing decisions in supermarkets, restaurants and farmer’s markets drive the entire food production and marketing chain. Although potatoes are also used for livestock feed the primary purpose for growing potatoes is to feed human beings. Potatoes must meet one or more of three human needs for people to purchase and consume them. Principles of demand At the very basic level people eat potatoes for the same reason they eat other foods – to survive. In some subsistence agricultural areas, the challenge is indeed to keep the family fed. That may involve producing or acquiring food staples such as rice, wheat, maize or potatoes, depending on the location. A second level of need is to eat to provide fuel or energy for work, recreation and other human endeavours. The more energy that is required, the more calories people need to eat. At this second level people look for variety and consume foods beyond the staples. Fruits, vegetables, livestock products and processed foods are choices for some people at the second level of demand. 76

DEMAND

People at the third level of need consume food for pleasure. With the income to open a wide variety of choices, third-level consumers are concerned about food flavour, texture and appearance. Not merely interested in calories for survival or energy for work they are willing to pay for services included in their food products. They choose to pay higher prices for foods that have been washed, peeled, sliced, canned, frozen, cooked, served or even delivered to their homes. Regardless of the level of human need, most consumers try to maximize their personal satisfaction with their food purchases. Economists use the term ‘utility’ to describe consumer satisfaction. One important economic principle is that of diminishing marginal utility. As a consumer eats additional potatoes, or apples, or any product, the satisfaction gained from the last one is less than it was for the previous one. Someone may enjoy the first serving of potatoes quite a bit, but the second serving of the day is less satisfying. By the third or fourth or fifth potato serving the consumer may get no additional satisfaction and may crave some other food. Another important economic principle is the inelasticity of the human stomach. In developed countries, whose consumers are at the third level of human need, total per capita food consumption is about 1500 pounds (680 kg) per years, consisting of 3500 calories per day.1 They are not hungry and, on the average, are not likely to eat much more. In fact, many are satiated. Their stomachs are full and inelastic. If one food, say potatoes, becomes more attractive they will give up something else, perhaps rice, to consume more potatoes. Many things can influence individual consumer demand for food products. Prices of the different products are, of course, important in consumer decision-making. Consumer income is another factor. In general demand for staples goes down as a consumer’s income goes up and moves them from first-level to second-level to third-level human needs. Demand for some other foods such as processed products increases as income goes up. The inelasticity of the human stomach dictates that changes in income lead people to change the mix of food they consume. A simple model of demand would be that a consumer’s consumption of potatoes depends on (1) potato price (2) consumer income and (3) price of potato substitutes. If we knew the values of all three variables we could predict the quantity of potatoes a consumer would buy. If we had aggregate data for all consumers in a city or a country, we could forecast total demand. Demand is not the same as consumption. The per capita consumption figures estimated by government agencies are calculated by dividing total supply by population. Price is not part of the calculation. Potato industry people are sometimes confused when a large crop follows a small crop and per capita potato consumption increases. This does not mean that demand for potatoes increased. The larger crop most likely sold at lower prices and 77

THE INTERN ATION AL POTATO INDUSTRY

demand may not have changed, or it could have even decreased. The influence of changes in consumer income and prices of substitutes are not included in per capita consumption figures.

Elasticity of demand An economic concept that is often mentioned in discussions about potato markets is elasticity of demand. A potato industry mantra is that prices are volatile because the demand for potatoes is inelastic. The statement is true but may be confusing economic jargon to some. Elasticity is a measure of change. A change that is of particular interest to growers is a change in price. The most powerful force that changes potato prices is the supply of potatoes. Growers know that a larger supply drives prices down and a smaller supply boosts prices. The key question is by how much. Elasticity of demand quantifies supply–price relationships. It specifies the change in quantity sold for a change in price. Elasticity is a measure without units such as kilograms or tonnes or dollars or pounds; it can be explained in terms of percentages. Elasticity of demand is the percentage change in quantity divided by the percentage change in price. For example, consider an estimated elasticity of demand of -0.2 for fresh potatoes. This means that for each 1% change in price, the quantity sold will change by 0.2% in the opposite direction. A 5% increase in price would cause quantity to decline by 1%. That seems like a large price change for a small change in quantity. The reason is that consumers are not very sensitive to changes in potato price. They tend to purchase about the same amount of potatoes regardless of price. When potatoes are scarce, prices must be marked up a large amount for the supply to be rationed to consumers who are willing to pay. When the supply is large, consumers are willing to buy more only at much lower prices. Before moving on, notice two things about the potato elasticity of demand estimate of -0.2. First, the sign is negative. One expects an inverse relationship between quantity and price. As price increases, quantity will decrease and vice versa. The second thing to notice is that its value is between 0 and -1, which fits into the ‘inelastic’ category. For inelastic goods, the percent change in quantity is smaller than the percent change in price. A figure that is outside that range, such as -2.0, would fit into the elastic category, which is for those goods whose percent change in quantity is larger than the percentage change in price. The elasticity of demand concept is more relevant to retailers than it is to growers. Retailers would like to know how many potatoes to stock if they change the price. Growers would like to know the potato-supply impact on their price. The concept of price flexibility is more useful to growers. Price 78

DEMAND

flexibility is the percentage change in price for each 1% change in supply. For fresh potatoes a US rule of thumb figure is a price flexibility of -5. This means that for each 1% change in supply the potato price will change five percent in the opposite direction. A 5% supply reduction would be expected to cause a 25% increase in price. Both flexibility and elasticity measure the supply–price relationship. One can be estimated by calculating the inverse of the other (this is not precise for all goods). The inverse of a -0.2 price elasticity gives a price flexibility of -5 (1/-0.2 = -5). The relevant concept in both measures is a single number that can predict change. The same concept can be applied to other economic variables. For example, income elasticity is the percent change in potato quantity sold for each 1% change in consumer income. Cross-price elasticity is the change in potato quantity sold for each 1% change in the price of a substitute such as rice.

Factors that influence demand for potato products Potato demand consists of two parts. The first part is the price of potatoes. The second part is demand shifters, named to describe the situation where the basic quantity–price relationship shifts to a new level. The four main demand shifters – consumer income, other goods and services, tastes and preferences, and population – are examined below, following a discussion of price.

Price When the price of potatoes changes, the proper economics terminology is to say that the ‘quantity demanded’ also changes. A change in demand (shift) is different from a change in quantity demanded. Figure 4.1 shows the relationship. Imagine that the graph shows the demand relationship for a monthly period for one particular family. A potato price increase from £0.40 per kg to £0.60 per kg causes the consumer to decrease quantity demanded from 10 kg to 9 kg per month. This is a movement along the lower demand line from point A to point B. For the 50% increase in price the quantity demanded increased 10%. This depicts an inelastic demand relationship of -0.2. The price–quantity relationship varies according to geographic location, time period, marketing chain level and type of product. For the US retail market a study by the author and others2 estimated price elasticity for fresh potatoes at -0.14. This is in the highly inelastic range, with a 1% change in 79

THE INTERN ATION AL POTATO INDUSTRY Price (£/kg) 1.60 1.40 1.20 1.00 C

0.80 0.60 B

0.40

A

0.20 0.00 6

7

8

9 10 Kg/month

11

12

4.1 Potato demand for an example family.

quantity causing only a 0.14% change in price in the opposite direction. The price flexibility, or inverse of the elasticity, provides a measure more meaningful to producers. An elasticity of -0.14 corresponds with a flexibility of about -7.0. This means that for each 1% supply increase the retail price increases seven percent. A one percent decrease causes a seven percent price drop. Other researchers have estimated US fresh potato elasticities of demand in the range of -0.14 to -0.40. We also estimated elasticities of demand for three types of processed potato products in the retail market. The estimated elasticities for frozen, dehydrated and potato crisps were -0.55, -0.77 and -0.67, respectively. These are all in the inelastic range, but are not nearly as inelastic as the demand for fresh potatoes. For the processed potato products consumers are much more sensitive to prices. Since fresh potatoes are a substitute, when processed potato prices change, consumers adjust their fresh potato purchases. The influence of price on the quantity of potatoes demanded at awayfrom-home meals is more difficult to estimate. In many restaurants potatoes are included as parts of meals sold for a fixed price, without a specific charge for the potato portion. In fast-food restaurants potato products like McDonald’s fries are sold as separate menu items, but there are difficulties there as well. Many quick-service restaurants have gone to ‘meal deal’ pricing with a sandwich (burger), fries or crisps and beverage sold for a set price. In other away-from-home markets such as schools, military bases and hospitals there may be no direct pricing for potato products. In these cases where consumers don’t see a potato price the institutions providing the meals do. Institutional buyers must compete in the wholesale potato market alongside other buyers. At both the wholesale and farm levels, potato prices remain clearly expressed. In developing countries Horton3 reports that potato demand becomes 80

DEMAND

more elastic as the potato industry grows. Potato supply increases cause sharp price drops, but if the production is sustained, consumers respond by developing preferences for potatoes. In the very short run, such as a few weeks, consumers do not switch food preferences. If there are several consecutive crops of abundant supplies and low prices consumers come to appreciate the inexpensive food. Prices then move upward. Horton also points out that potato demand is more elastic in poor countries than in rich countries. Since poor people spend a higher portion of their income on food, they are more responsive to price changes.Whereas a high-income consumer in a developed country may buy the potatoes she wants without even looking at price, the low-income consumer in a developing country may be very price-conscious and carefully adjust all purchases based on relative prices. Another important principle is that more substitutes mean more elastic demand. For example, the demand elasticity for apples, a product for which many other fruits are substitutes, is higher than that for onions, a food with few close substitutes. The closest substitute for a food product is usually another grade or form of the same food. Therefore the demand for mediumsized, red-skinned fresh potatoes is more elastic than is the demand for all potatoes.

Demand shifters Point A on the lower demand line in Fig. 4.1 is only a temporary relationship between quantity and price. When quantity changes, price responds as depicted in moves along the line. When other things affecting consumer behaviour change the demand line shifts to a new level. The line can shift in or out, but Fig. 4.1 shows an outward shift to a higher level of demand. Any one of the four demand shifters can cause such a shift. For example, increases in consumer income, potato advertising and population could all shift out the demand for potatoes. When demand increases, or shifts out, the same amount of potatoes can be sold for a higher price, a larger amount of potatoes can be sold at the same price, or both the quantity of potatoes and the price of potatoes can increase. The move from the lower to upper line in Fig. 4.1 shows the latter. At point C, with 10.5 kg at £0.70, both the quantity and price are higher than at points A or B. Of course, demand shifters can cause the movement to go the other way as well.

Consumer income Changes in consumer income can shift the demand for potatoes in or out, depending on geographical location and type of product. Horton found 81

THE INTERN ATION AL POTATO INDUSTRY Table 4.1

Income elasticities for fresh potatoes

Developed market economies North America Oceania Europe USSR and Eastern Europe Developing market economies Latin America Near East Africa Far East China & other Asian centrally planned economies

-0.21 -0.19 -0.10 -0.19 -0.33 +0.19 +0.12 +0.11 +0.51 +0.16 +0.30

Source: Horton

income elasticities for fresh potatoes to be negative in developed countries but positive in developing countries (Table 4.1). His figures indicate that a one percent increase in income in Africa would increase the quantity of potatoes purchased by 0.51%, but a 1% increase in European income would decrease potato purchases by 0.19%. The seeming contradiction is cleared up when one considers the low-income status of most consumers in developing countries. The lower the family’s income the larger the proportion of money that is spent on food. More money will result in more food purchases. A poor family is more likely than a rich family to buy more potatoes when income goes up. This points out the importance of income distribution on potato demand. Within a country, an increase in income for poor families will result in a higher demand for fresh potatoes than will an increase in rich-family income. With negative income elasticities, an increase in rich consumer income with no corresponding increase in poor consumer income could actually decrease the total demand for fresh potatoes. High-income consumers may also prefer to eat potatoes, but in a different form. With more money to spend on food they are likely to choose processed potatoes rather than fresh potatoes. As income increases people tend to purchase more service in their foods. The service may include some type of processing for retail products or food preparation at a restaurant. Hinton4 found that in the United Kingdom the income elasticity of demand was -0.40 for fresh potatoes and +0.25 for processed potatoes. We found similar results in the United States, so this is probably a common relationship in developed countries. In the jargon of economists, goods with negative income elasticities, such as fresh potatoes in developed countries, are called ‘inferior goods’. Goods with positive elasticities are known as ‘normal’ goods. 82

DEMAND

Prices of other goods Consumers with limited income compare prices when they shop for food. Consumers who are concerned about the high price for a particular good might buy a substitute instead. Prices of similar goods help determine demand for a product. When the price of a potato substitute increases, it increases or shifts out the demand for potatoes, as in Fig. 4.1. Of course, decreases in substitute prices will cause potato demand to decrease. What are some close substitutes for potatoes? It varies among countries, but researchers have found strong substitute relationships between rice and potatoes in Asia and maize and potatoes in Mexico and other Latin American countries. In some developed countries there is little evidence of strong substitute relationships for potatoes with any other food. In those countries other potato products appear to be the closest substitute for a potato product. For example, fresh potatoes are substitutes for dehydrated and frozen potato products. Complements are another type of good that can influence demand for potatoes. In developed countries consumers often eat potatoes with some other food, especially meat or seafood. The quick-service restaurant fare of hamburger and fries and fish and chips closely ties the potato market with the beef and fish markets. The relationship between potato demand and the price of complements is an inverse one. Complement price decreases cause an increase in potato demand. Theoretically, prices of many or even all other goods and services influence the demand for a product. For this reason many analysts use a consumer price index (CPI) to deflate all prices. By dividing prices by the CPI they remove the influence of inflation or deflation. During times of price stability this is less important than during times when price levels are changing rapidly.

Tastes and preferences Consumers change their minds about foods. Individuals who become more concerned about nutrient content, for example, will change the array of foods they prefer. If many consumers become like-minded, the aggregate market changes and demand shifts. Many things can change consumer attitudes about particular foods. The news media, for one, influences opinion. Press coverage of the mad cow disease in Europe is one example that decreased demand for a food – beef. News from medical organizations that fresh fruits and vegetables enhance human health is an example of a media story that increased demand for fresh produce. Commercial interests want to change consumer perceptions about their products. They use three methods to do this: publicity, advertising and pro83

THE INTERN ATION AL POTATO INDUSTRY

motion. Publicity consists of reaching the masses through the media at no expense to the product providers. Press releases about new products or some interesting anecdote can influence news outlets to write stories that have a positive influence on the demand for a product. Advertising also uses the news media but in a paid format. Companies hire marketing specialists to create persuasive advertisements for which they buy exposure in newspapers, magazines, television, radio and outdoor billboards. Promotion is another form of paid effort that involves such things as industry trade shows, in-store demonstrations and discount coupons to encourage customers to purchase the product. National organizations such as the US Potato Board, the British Potato Council and the Cyprus Potato Marketing Board are nationwide organizations that were formed to expand the demand for potatoes. Provincial or state organizations, such as the Idaho Potato Commission, were also formed for the same purpose. In addition to advertising, promotion and public relations some of these groups are also involved in research, education, market intelligence and quality control. Their fundamental purpose, however, is to increase potato demand. For some this effort goes beyond domestic markets and into global markets. Changing lifestyles influence consumer tastes and preferences. In developed countries where women work outside the home, consumers prefer food products with more service built into them. For these families the emphasis on convenient foods leads them to purchase more processed potatoes than fresh potatoes. Although food products with additional service attributes are more expensive there are two reasons that consumers prefer such goods. First, they can afford them. Second, they have less time for meal preparation. New product development can also influence consumer tastes and preferences. The advent of frozen chips for the quick-service restaurant industry provided a consistent-quality potato product that helped fuel the growth of the away-from-home market. New snack food products with flavouring, such as Walker’s prawn cocktail potato crisps, or shapes, such as United Biscuit’s Hula Hoops, changed tastes and preferences for many consumers in the United Kingdom. Some potato products are particularly attractive to youngsters, whose tastes and preferences may be more easily influenced. Others may be more attractive to people with different ethnic backgrounds or some other demographic distinction.

Population The number of people living in a market area is an important demand shifter. Total world population grew 1.4% in 1999. If nothing else changed we would 84

DEMAND

expect world demand to have grown at the same rate. Population growth rates vary around the globe, but in general growth is more rapid in developing countries. Among the countries that grew more rapidly than average were Afghanistan 5.9%, Cambodia 3.1%, Gambia 3.6%, Jordan 3.6%, Nicaragua 3.0%, Saudi Arabia 3.4%, Uganda 3.1% and Yemen 3.8%. China and India, the two countries with the largest populations, grew at rates of 1.0% and 1.8%, respectively. Developed country growth rates include Australia 1.1%, Canada 1.2%, France 0.4%, Germany 0.3%, Japan 0.2%, Netherlands 0.6%, United Kingdom 0.3% and USA 1.0%. The type of people who make up the population can also influence demand. Table 4.2 shows potato consumption in the United States for different population groups based on differences in region, urban vs rural, race/ethnicity, income, age and gender. The numbers in the table are market shares divided by population shares. Numbers greater than 100 indicate that consumption is higher than average for those population groups. The numbers for the Midwest region of the US show an above-average consumption for five of the six potato products. The Midwest is the only region that is above average for fresh potatoes. This may be partially explained by the fact that the predominant ancestry of the Midwesterners is Northern and Eastern Europe. The tastes and preferences of immigrants from England, Ireland, Germany and other countries where people ate lots of potatoes carried over into their descendants more than a century later. Regarding demographics, rural residents eat more of all types of potatoes (except dehydrated) than do urban residents. A striking difference is for fresh potatoes. Suburban residents eat only 10% of the average, while rural citizens are 24% above average. This contrasts to dehydrated potatoes and frozen fries where there is little difference between urban, suburban and rural people. Racial and ethnic figures show that Hispanics consume less than average for all types of potato products. This seems surprising since the birthplace of the potato is in Latin America, but many of the Hispanic immigrants into the US came from Mexico, a country where potato consumption is low and maize consumption is high. The ‘other’ category includes Asian people who also consume less than average for all potato products. For them the potato substitute is rice. Like Americans with European ancestry, those with Hispanic and Asian ancestry seem to carry ancestral potato preferences for at least several generations. Subsequent generations of immigrants seem to lose their language and cultural customs before they lose their forebears’ food preferences. The age and gender data also point out some differences between population groups. In general, males eat more potato products than females. Males in the 12–19 year old group eat more than double the average frozen fry 85

THE INTERN ATION AL POTATO INDUSTRY Table 4.2 Relative per capita consumption of United States potato products: market shares divided by population shares

Fresh

Chips

Dehydrated

Frozen french fries

Other frozen potatoes

Canned

Percentage Census region Northeast Midwest South West

91 118 99 90

101 125 97 77

83 145 101 66

71 108 120 86

68 93 105 127

105 101 107 84

MSA status Metropolitan Suburban Rural

85 10 124

98 94 117

102 100 96

98 98 107

103 87 125

95 67 183

Race/ethnic origin White, non-Hispanic Black, non-Hispanic Hispanic Others

110 64 90 69

101 133 68 64

107 100 65 65

97 131 89 95

106 94 85 59

99 33 77 363

Household income as a percentage of poverty 0–130% 131–350% 351% and above

87 107 98

96 101 101

113 97 96

99 101 99

99 126 72

85 98 110

117 44 59 110 132 153

126 62 127 178 147 39

109 67 76 154 116 96

127 65 111 213 144 36

128 81 216 169 131 53

123 32 62 94 141 185

84 40 50 70 90 114

75 69 112 114 80 20

91 62 91 96 103 64

75 60 107 152 73 21

73 77 142 76 72 39

78 57 54 53 77 114

Gender and age Male All 2–5 6–11 12–19 20–59 60 and older Female All 2–5 6–11 12–19 20–59 60 and older

Source: United States, Department of Agriculture, Agricultural Research Service, Continuing Survey of Food Intake by Individuals,Washington, DC, 1994–96, two-day data

consumption. People 60 and older prefer fresh potatoes (153% males, 114% females) to frozen fries (36% males, 21% females). An as yet unanswered question is whether the young people who prefer frozen fries to fresh will continue those preferences when they move into the older age groups. 86

DEMAND

Utilization trends by country Global distribution Europe is the top potato-using region for both food and feed use. Although European potato use for food grew during the 1961–98 period (Fig. 4.2), European use for livestock feed dropped by half during the same period (Fig. 4.3). Per capita potato use for food expanded in all regions, with the largest increase occurring in Oceania. South America had the smallest increase. Potato consumption for feed declined in all regions except Africa and Asia. Per capita use for both food and feed declined in developed countries, but increased in developing countries (Fig. 4.4, Fig. 4.5). China was the leading potato-consuming country in 1998 (Table 4.3). Ten of the top 20 potato-consuming countries are in Europe, five in Asia, three in South America and two in North America. The top three countries – China, the Russian Federation and Poland – made up 40% of total world

80.0

70.0 1961 1998

60.0

Kg/yr

50.0

40.0

30.0

20. 0

10.0

0.0 Africa

Asia

Europe

N & C America

Oceania

4.2 Potato per capita consumption for food by region, 1961 and 1998 (FAO, United Nations). 87

S America

THE INTERN ATION AL POTATO INDUSTRY

consumption. An interesting observation is that all three built up potato consumption during periods when their economies were centrally planned. Although the Russian Federation and Poland have moved toward free market economies, their citizen’s potato preferences were built under communism and may be slow to change. The consumption trend in many developed countries is downward (Table 4.4). From 1961 to 1998 potato use per capita declined in every Western European country except the United Kingdom, which increased 13% from 97.8 kg to 110.1 kg, and Portugal, which increased 45% from 87.6 to 127.4 kg. Potato use in some countries dropped dramatically. One example is Italy, where potato utilization in 1998 was only 41% of what it was in 1961, putting it in last place among the European countries listed in the table. In Germany and France potato use dropped by nearly half during the 37-year period. Europe’s decline in potato use is, of course, directly related to a decline in potato plantings. Horton suggests that changes in the hog (pig) industry contributed to a decline in the amount of potatoes grown for feed. Small hog-potato farms that were common in Europe, including Western Europe,

45.0 40.0 35.0

1961 1998

Kg/yr

30.0 25.0 20.0 15.0 10.0 5.0 0.0 Africa

Asia

Europe

N & C America

Oceania

4.3 Potato per capita consumption for feed by region, 1961 and 1998 (FAO, United Nations). 88

S America

DEMAND Kg/year 700

600

500 1961 1998

400

300

200

100

0 World

Developed

Developing

4.4 Potato per capita consumption for food, developed and developing countries, 1961 and 1998 (FAO, United Nations).

have given way to large, specialized hog production facilities. The small farmer had the labour available to grow, harvest, transport, boil and feed potatoes to hogs, but the modern operations prefer less labour-intensive rations of barley and soybeans. The trend is less clear in Eastern Europe. Potato use declined in Poland and Hungary, but increased in Romania. Incomplete data masks what happened in Belarus and Ukraine, but 1998 potato use in those two countries was the highest in Europe. Usage in the other developed countries was mixed, with increases in Australia, New Zealand, South Africa and USA and declines in Canada and Japan. South Africa showed the sharpest change, more than doubling potato use. The potato use trend is upward in most developing countries (Table 4.5). The largest potato user, China, doubled its use from 1961 to 1998. The countries of the Indo-Gangetic Plain – Bangladesh, India and Pakistan – doubled, tripled and quadrupled their potato use, respectively. Among the 89

THE INTERN ATION AL POTATO INDUSTRY Kg/yr 30.0

25.0

20.0

1961 1998

15.0

10.0

5.0

0.0 World

Developed

Developing

4.5 Potato per capita consumption for feed, developed and developing countries, 1961 and 1998 (FAO, United Nations).

Asian developing countries North Korea is the exception to the upward trend, showing a 1998 potato use of 27% of the 1961 figure. North Korea’s communist government was reluctant to share agricultural information during the 1990s but people outside the country were well aware that many of the country’s citizens were starving. The largest per capita potato-using country in Asia was Turkey at 66.9 kg. Included at the other extreme of less than 10 kg are the tropical countries of Indonesia and Vietnam. A general observation is that developing countries in the hot tropics are at the low end of the potato use range, while those with temperate and highland production zones are at the upper end. All the African countries showed increased potato use. Malawi’s ninefold increase to well over 100 kg is remarkable, but makes one question the accuracy of the figures. The Latin American developing countries show quite a contrast. At the low extreme is Bolivia, where potato use dropped to less than half the 1961 total. At the high end is Colombia, where use more than 90

DEMAND Table 4.3

Top 20 potato-consuming countries, 1998 Quantity (000 mt)

Percentage of total

China Russian Federation Poland USA India

61 364 33 318 25 808 21 679 17 624

20 11 9 7 6

6 7 8 9 10

Ukraine Germany UK Belarus France

15 409 10 999 8 065 7 236 6 019

5 4 3 2 2

11 12 13 14 15

Turkey Spain Japan Netherlands Iran

5 298 4 634 3 751 3 681 3 362

2 2 1 1 1

16 17 18 19 20

Romania Argentina Canada Brazil Peru

3 351 3 242 3 203 2 934 2 647

1 1 1 1 1

1 2 3 4 5

Source: FAO, United Nations

doubled. Latin American per capita use in 1998 varied over a wide range, from 12.6 kg in Mexico to 76.6 kg in Argentina. The potato use figures in Tables 4.3, 4.4 and 4.5 were not for human consumption only. They include potatoes used for livestock feed, human food, seed and other uses. Figure 4.6 shows world utilization by all categories in 1998. The non-food uses of feed, seed, waste and other make up 37% of all uses. A more detailed look at potato usage by category for the regions of the world is provided in the following sections.

Africa Only a handful of African countries use potatoes for livestock feed (Table 4.6). The only developed country in the region, South Africa, feeds the highest (10%) portion of its potatoes to livestock. Five of the countries use 100% of their potatoes for human food. Those at the low end of the food use range include Burundi at 52% and Cameroon at 58%. The next column, seed 91

THE INTERN ATION AL POTATO INDUSTRY Table 4.4 Potato use per capita in developed countries, 1961 and 1998

Western Europe Belgium-Lux Denmark France Germany Ireland Italy Netherlands Portugal Spain United Kingdom Eastern Europe Belarus Hungary Poland Romania Ukraine Former USSR Others Australia Canada Japan New Zealand South Africa USA

1961

1998

1998 as percentage of 1961

133.3 121.6 115.2 139.0 139.1 95.2 97.8 87.6 125.2 97.8

102.5 75.3 67.1 76.7 129.8 39.0 80.7 127.4 87.1 110.1

77 62 58 55 93 41 83 145 70 113

na 95.2 222.8 69.4 na 132.8

168.5 67.3 134.3 79.7 137.7 123.4

na 71 60 115 na 93

36.0 67.0 27.8 61.6 11.5 48.0

62.7 56.1 24.1 79.3 28.8 64.0

174 84 87 129 250 133

Source: FAO, United Nations Use is in kg per year

usage, shows that those two countries use large portions of their potatoes for seed, with Burundi at 43% and Cameroon at 33%. Wastage ranges from 0% in several countries to 15% in Malawi, 17% in Congo and 20% in Uganda. The ‘other’ category, which includes alcohol production and industrial uses, was zero in all but Mauritius, South Africa and Zimbabwe. The lowest African potato consumption for food, at 1 kg per year, was in Angola, Burundi, Cameroon and Congo. These countries fit into a band of sub-Saharan Africa that is hot tropical lowland where potato production is difficult. Countries in which the people consume more than 20 kg per year include Algeria, Libya, Malawi, Morocco, South Africa and Tunisia. Four of the five high-consuming countries are in a tier along the Mediterranean Sea. At 17 kg/year, Egypt, the other African country on the Mediterranean, is only 92

DEMAND Table 4.5 Potato use per capita in developing countries, 1961 and 1968

1961

1998

1998 as percentage of 1961

4.8 12.6 4.0 0.5 9.4 21.5 16.9 1.7 7.6 38.1 1.0

10.0 26.4 12.8 4.1 43.4 5.7 32.7 7.4 20.2 66.9 4.2

208 210 320 820 462 27 193 435 266 176 420

31.4 7.7 8.6 12.2 6.3 13.4

33.4 21.3 12.2 113.4 32.3 22.7

106 277 142 930 513 169

81.1 93.3 8.6 64.1 20.6 16.2 47.3 6.2 80.0

76.6 39.8 14.4 48.7 44.7 27.6 30.0 12.6 66.8

94 43 167 76 217 170 63 203 84

Asia Bangladesh China India Indonesia Iran Korea, North Nepal Pakistan Syria Turkey Vietnam Africa Algeria Egypt Madagascar Malawi Morocco Rwanda C & S America Argentina Bolivia Brazil Chile Colombia Cuba Ecuador Mexico Peru Source: FAO, United Nations Use is in kg per year

slightly behind the other four. These five countries fit into the Mediterranean potato production zone described in the previous chapter.

Asia China, the world’s largest potato user, fed 22% of its potatoes to livestock in 1998 (Table 4.7). Azerbaijan, Cyprus, Georgia, Iraq, Kyrgyzstan and North 93

THE INTERN ATION AL POTATO INDUSTRY Feed 16%

Seed 11%

Processing 5%

Fresh 58%

Waste 8% Other 2%

4.6 World potato utilization, 1998 (FAO, United Nations).

Korea also used more than 10% of their potatoes for feed. Many others, including Turkey, one of the top total potato users, fed no potatoes to livestock. Food use in Asian countries ranged from 52% in Cyprus to 100% in Brunei Darsm and Maldives. Armenia, Cyprus and Kazakhstan are the top countries for seed usage, with each using more than 20% for that purpose. Given the challenges of storing large potato crops in a hot tropical climate, wastage was highest in India at 18%. Significant uses in the ‘other’ category were in Lebanon, Malaysia, Philippines and United Arab Emirates. The lowest per capita potato consumption for food, at under 5 kg/yr, was in Burma/Myanmar, Indonesia, North Korea, Laos, Philippines, Thailand and Vietnam. These countries, except for North Korea, lie mostly in the tropical production zone. The highest consumption, at more than 40 kg/year, was in Armenia, Georgia, Israel, Kyrgyzstan, Lebanon and Turkey. Four of the six high-consuming countries border the Mediterranean Sea. In both Africa and Asia the highest potato-consuming countries are in the Mediterranean region. This propensity to eat potatoes extends around to European side of the Mediterranean as well.

Europe Four of the seven European countries that have a Mediterranean coast – Spain, France, Greece and Malta – had per capita potato consumption of at least 48 kg per year in 1998 (Table 4.8). The heaviest potato consumption for food is in three Western European countries: Ireland, Portugal and the United Kingdom, all at over 100 kg per year. Although several Eastern European countries had higher total potato use per capita (Table 4.4), when non94

DEMAND Table 4.6

Potato utilization in African countries, 1998

Africa Algeria Angola Botswana Burundi Cameroon Cape Verde Congo, Rep Djibouti Egypt Eritrea Ethiopia Gambia Kenya Lesotho Libya Madagascar Malawi Mauritania Mauritius Morocco Mozambique Rwanda Senegal Seychelles South Africa Swaziland Tanzania Tunisia Uganda Zimbabwe

Feed (%)

Food (%)

Seed (%)

Waste (%)

Other (%)

PCCF

2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 3 0 0 3 0 0 0 0 10 0 0 0 0 0

77 83 75 96 52 58 100 83 100 78 86 83 100 70 100 80 65 74 89 75 78 89 83 91 100 75 82 78 83 67 83

10 6 14 0 43 33 0 0 0 11 9 12 0 20 0 14 17 8 0 7 9 7 13 0 0 5 12 12 7 13 7

10 10 11 4 4 9 0 17 0 11 5 5 0 10 0 5 12 15 11 7 10 4 4 9 0 5 6 10 10 20 3

1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 11 0 0 0 0 0 5 0 0 0 0 7

8 28 1 13 1 1 18 1 3 17 9 4 2 6 4 25 8 84 3 14 25 4 19 2 12 21 12 5 25 8 2

Source: FAO, United Nations PCCF = per capita consumption of potatoes for food in kg/year

food uses are considered consumers in the British Isles and Portugal seem to be the champion potato eaters. In some European countries, a large portion of the potato crop was fed to livestock in 1998. In the Western European countries of Belgium, Luxembourg and Switzerland at least one-third of their potatoes is used for livestock feed. The same holds for the Eastern European countries of Belarus, Lithuania and Poland. Although feed use may be declining in Europe, it is still quite important in some countries. There is a marked difference in seed use between Western Europe and Eastern Europe. The portion of the 95

THE INTERN ATION AL POTATO INDUSTRY Table 4.7

Potato utilization in Asian countries, 1998

Asia Afghanistan Armenia Azerbaijan Bangladesh Brunei Darsm Burma/Myanmar China Cyprus Georgia India Indonesia Iran Iraq Israel Japan Jordan Kazakhstan Korea D P Rp Korea Rep Kuwait Kyrgyzstan Laos Lebanon Malaysia Maldives Mongolia Nepal Pakistan Philippines Saudi Arabia Sri Lanka Syria Tajikistan Thailand Turkey Turkmenistan Untd Arab Em Uzbekistan Vietnam Yemen

Feed (%)

Food (%)

Seed (%)

Waste (%)

Other (%)

PCCF

13 1 3 18 0 0 0 22 10 11 0 4 0 10 3 0 0 5 20 8 0 26 0 0 3 0 6 0 0 0 0 0 4 0 0 0 0 0 0 0 0

72 90 72 74 80 100 84 68 52 76 71 85 85 69 90 89 79 67 70 84 98 60 79 76 84 100 75 77 82 78 79 87 78 91 99 81 94 85 87 85 89

7 6 23 6 10 0 6 4 23 12 12 5 5 12 1 4 5 24 0 3 2 11 12 5 0 0 9 10 8 3 12 4 6 6 1 8 3 0 9 10 8

8 3 2 2 10 0 10 5 7 2 17 4 10 10 0 6 11 4 10 6 0 3 9 5 0 0 10 13 11 3 9 10 13 3 1 10 3 5 4 5 3

1 0 0 0 1 0 0 1 8 0 0 1 0 0 6 0 5 0 0 0 0 0 0 14 14 0 0 0 0 16 0 0 0 0 0 0 0 10 0 0 0

13 9 62 24 8 6 4 18 22 44 9 4 37 9 43 22 11 37 4 8 30 56 4 47 5 8 18 25 6 1 13 6 16 18 3 54 7 22 26 4 9

Source: FAO, United Nations PCCF = per capita consumption of potatoes for food in kg/year Cyprus is reported in the region assigned by the source

96

DEMAND Table 4.8

Potato utilization in European countries, 1998 Feed (%)

Food (%)

Seed (%)

Waste (%)

Other (%)

PCCF

Western Europe Austria Bel-Lux Denmark Finland France Germany Greece Iceland Ireland Italy Malta Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom

4 35 16 1 6 14 8 0 9 4 0 22 10 5 9 5 33 7

74 50 69 37 72 61 71 95 79 85 79 63 77 84 75 54 34 80

1 3 7 8 6 6 11 5 8 6 5 11 10 7 5 7 3 6

2 6 7 0 10 11 8 0 3 2 5 4 3 2 5 0 7 0

20 7 0 54 6 8 2 0 1 4 10 0 0 2 7 34 23 6

44 51 52 25 48 47 50 58 102 33 64 51 61 106 65 35 14 103

Eastern Europe Albania Belarus Bosnia Herzg Bulgaria Croatia Czech Rep Estonia Hungary Latvia Lithuania Macedonia Moldova Rep Poland Romania Russian Fed Slovakia Slovenia Ukraine Yugoslavia

10 51 7 24 5 15 32 13 17 34 15 5 46 13 15 2 26 23 28

58 25 81 51 76 60 38 66 44 28 58 64 22 55 58 85 60 45 39

22 23 8 15 14 14 27 8 33 31 15 27 12 31 23 13 8 30 23

11 1 5 10 5 11 3 4 2 6 12 3 17 1 4 0 7 1 10

0 0 0 0 0 0 0 8 3 1 0 0 3 1 0 0 0 0 0

18 42 69 16 86 49 34 45 61 37 31 41 29 43 72 58 34 63 14

All Europe

23

52

16

6

3

48

Source: FAO, United Nations PCCF = per capita consumption of potatoes for food in kg/year

97

THE INTERN ATION AL POTATO INDUSTRY

potatoes used for seed in Western Europe is in the 0% to 11% range, while seed use in Eastern Europe goes from 8% to 33%. Lower yields for the amount of seed planted and less successful seed certification programmes may be factors in the high seed use in Eastern Europe. In countries where much of the potato production is on small plots, growers may not be able to afford high-quality certified seed potatoes and instead replant their own potatoes. Waste appears marginally higher in Eastern Europe, but ‘other’ use is higher in Western Europe.

North America, South America and Oceania Livestock feed is an important use for potatoes in several South American countries, including Colombia, Ecuador and Uruguay, but is less important in North America and Oceania (Table 4.9). Seed use and waste are highest in Latin America. Per capita food consumption is lowest in the Central American countries, with nine countries at less than 10 kg per year. The highest consumption of potatoes for food is in Canada, USA, Argentina, Australia and New Zealand, with consumers in each country eating at least 50 kg per year. Those five countries are the most economically developed countries in their regions. The growth of the processed potato industry is a factor in the high potato consumption rates among their consumers.

Consumption trends by type of final product Processed vs fresh consumption In developed countries processed potatoes have been a growth industry. Potato consumption in the UK and the United States illustrates this trend (Fig. 4.7). Although consumers in Great Britain consume more than twice as many fresh potatoes, British and American citizens eat about the same amount of processed potatoes. British per capita consumption of processed potatoes increased by 26% from 36 kg to 45.5 kg per year during the 1989–99 period. United States processed potato consumption increased by 30% from 33.1 kg to 43 kg per year. In both countries the annual growth rate was nearly one kg per person each year. US fresh potato consumption was stable at around 22 kg per person per year while British fresh potato consumption declined from 71.5 kg to 57.8 kg per year, a loss of nearly 20%. In developing countries most potatoes are consumed in the fresh form. On the African continent, South Africa has a potato processing industry, but the United Nations Food and Agriculture Organization (FAO) statistics show 98

DEMAND Table 4.9

Potato utilization in American and Oceania countries, 1998

N & C America Antigua Barb Bahamas Barbados Belize Bermuda Canada Costa Rica Cuba Dominican Rp El Salvador Grenada Guatemala Haiti Honduras Jamaica Mexico Neth Antilles Nicaragua Panama St Lucia Trinidad Tob USA South America Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Suriname Uruguay Venezuela Oceania Australia Fiji Islands Fr Polynesia New Caledonia New Zealand

Feed (%)

Food (%)

Seed (%)

Waste (%)

Other (%)

PCCF

1 0 0 0 0 0 0 4 2 0 0 0 0 0 0 0 0 0 0 0 0 0 1

77 100 80 100 100 100 89 80 83 79 90 100 81 82 36 87 80 88 85 77 100 93 81

6 0 0 0 0 0 9 4 5 11 10 0 12 9 21 4 4 0 2 12 0 0 6

10 0 0 0 0 0 0 9 10 11 0 0 7 9 21 9 9 13 12 8 0 7 7

6 0 20 0 0 0 1 3 0 0 0 0 0 0 21 0 8 0 0 4 0 0 5

35 8 10 34 10 35 50 18 23 1 1 8 3 1 0 7 10 27 6 6 15 28 52

3 0 8 0 6 10 11 0 0 0 9 0

76 85 64 81 78 71 69 100 64 100 71 86

9 3 20 11 10 7 16 0 15 0 7 6

11 11 8 8 5 12 5 0 21 0 9 5

1 1 0 0 1 1 0 0 0 0 3 3

24 65 25 12 38 32 21 1 43 15 27 12

3 4 0 0 0 3

84 84 100 100 100 84

10 10 0 0 0 11

2 2 0 0 0 2

0 0 0 0 0 0

44 53 19 22 32 67

Source: FAO, United Nations PCCF = per capita consumption of potatoes for food in kg/year

99

THE INTERN ATION AL POTATO INDUSTRY 75.0

65.0

UK fresh 55.0

UK processed US fresh

Kg/yr

US processed 45.0

35.0

25.0

15.0 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99

4.7 Fresh and processed potato consumption in United Kingdom and the United States (BPC; NPC).

no potato processing in any other African country. FAO statistics depict small potato processing usage scattered around Asia and Latin America. The very low consumption of processed potatoes in developing countries is a function of price, income, facilities and lifestyle. Since processed potatoes are more expensive than fresh potatoes, low-income people in developing countries are not likely to buy them. Cooling equipment required to hold and transport frozen potato products is lacking in many developing countries. Another difference is the lack of the fast-food lifestyle that drives away-fromhome potato consumption in developing countries.

At-home vs away-from-home consumption The number of meals eaten away from home is increasing in many developed countries. Potato products are a popular part of these away-from-home meals. In the UK 44% of potato consumption occurred outside the home in 100

DEMAND Table 4.10

Consumption distribution for UK potatoes, 1998/99

Home Away from home

Raw

Crisps

Dehydrated & canned

Frozen or chilled

Total

61% 39%

84% 16%

16% 84%

41% 59%

56% 44%

Source: British Potato Council

Table 4.11

Consumption distribution for United States potatoes, 1994–96 Other frozen potatoes

Canned

Fresh

Chips

Dehydrated

Frozen fries

Home

79%

79%

89%

12%

53%

80%

Away from home Fast food Restaurant School Other

21% 6% 12% 1% 2%

21% 7% 1% 3% 9%

11% 4% 1% 2% 2%

88% 67% 13% 6% 2%

48% 23% 9% 12% 3%

20% 5% 15% 0% 1%

Source: CSFII, 1994–96, two-day data

1998/99 (Table 4.10). Frozen and chilled potato consumption away from home was much higher at 59%. A large share of this was most likely at fish and chips shops, pubs and restaurants. The UK potato crisp market was mainly an at-home market, with consumers buying 84% of their crisps to eat in their homes. Raw or fresh potato consumption was also popular in British homes, with a 61% share. For dehydrated and canned potatoes 84% of the consumption was away from home. The United States pattern is similar for all potato products except dehydrated and canned potatoes for which at least 80% are consumed at home (Table 4.11). The frozen fry market is 88% away from home, with most of that, 67%, going through fast-food restaurants and another 13% going through ‘other’ restaurants. Only 12% of frozen fries are consumed in US homes, the smallest at-home share for any potato product in the UK or the United States. The ‘other frozen’ potato category is almost evenly split between at-home and away-from-home markets, suggesting that fries are perceived as a very different product from hash browns, potato rounds and other frozen products. The smallest share for away-from-home consumption is dehydrated potato products in the US at 11%. One major fast-food chain in the US, 101

THE INTERN ATION AL POTATO INDUSTRY

Kentucky Fried Chicken (KFC), serves a dehydrated potato product but most other fast-food chains stick with frozen fries. The snack food market for US chips is similar to the Great Britain market for crisps, with a large majority of the product consumed at home. The ‘other’ category for US chips includes sales through vending machines. At a 79% consumption rate the fresh market is much more heavily an at-home market in the US than in Great Britain, which suggests that British restaurants prepare a larger share of meals with fresh potatoes.

Fresh Fresh potato consumption is expanding in developing countries, but is stagnant or declining in developed countries. The consumer preference for convenience is putting a cap on fresh potato demand in high-income regions where many females work outside the home. Counteracting that trend are several factors that could stop the decline or even increase the quantity demanded for fresh potatoes. First is the microwave oven. This kitchen appliance reduces meal preparation time and indeed makes fresh potatoes more convenient. In consumer surveys regarding microwave oven use, cooking fresh potatoes is at or near the top. Second is the enhanced perception of fresh fruits and vegetables as healthy foods. Medical research results that show potatoes can reduce the risks of cancer and heart disease can help shape consumer tastes and preferences. A third factor is fast-food restaurants. Some chains such as Wendy’s have featured fresh baked potatoes. Other have tried and dropped fresh potato products. Since the trend is for consumers in developed countries to eat more meals away from home, an increase in the number of fast food-restaurants that serve fresh potatoes would certainly boost demand. In many developing countries fresh potato demand is increasing on the merits of a cheap, nutritious food. Continued growth is tied to the relative prices between fresh potatoes and substitute foods. If potato production technology improvements continue, lower costs to the grower and correspondingly lower prices to the consumer could boost demand.

Frozen Processed potato production varies by country according to domestic and export market demand. Table 4.12 shows that frozen and chilled potato production is similar at about 60% of the total in the UK, the United States and South Africa. In the Netherlands 90% of the processed production is in the frozen/chilled category, but a very large share of that is exported. An 102

DEMAND Table 4.12

Processed potato production by category in selected countries United Kingdom

United States

South Africa

Netherlands

5% 28% 6% 60%

2% 18% 20% 60%

3% 43% 0% 54%

1% 3% 6% 90%

Canned/Other Crisps (chips) Dehydrated Frozen & chilled

Sources: British Potato Council; US Potato Council; South Africa Potatoes; NIVAA

Kg/year 30.0

25.0

Frozen Snacks Dehydrated

20.0

15.0

10.0

5.0

4 199 5 199 6 199 7 199 8

199

199 3

198 9 199 0 199 1 199 2

5

4

6 198 7 198 8

198

198

198

1 198 2 198 3

198

198

0

0.0

4.8 United States processed potato consumption, 1978–98 (NPC).

increasingly international market for frozen fries is connected to the fast-food industry. Potato processors who hitched their wagons to the fast-food industry have enjoyed rapid growth during the 1980s and 1990s. Figure 4.8 shows how frozen potato consumption grew in the United States during the 1980s and 1990s. 103

THE INTERN ATION AL POTATO INDUSTRY

As fast-food meals become more popular, even in developing countries, demand for frozen fries will continue to grow. When frozen processors bump against their production capacity limits they must decide where they will expand. Options are the temperate-zone countries, where most of the frozen potato production is now done, or new areas, where demand is expanding. The key will be a consistent supply of high-quality raw product. Developing countries with a large potato production base are importing frozen fries for their fast-food industries, not because domestic potatoes are scarce, but because the domestic industry has not met the high quality standards for finished product. Developing countries in the hot lowland tropics are not likely to be able to compete in the frozen potato industry, which requires yearround supplies of raw product.

Chilled Chilled potatoes, a relatively new player in the potato market, require refrigeration instead of freezers. The industry got a boost in the United Kingdom when fish and chips shops found it increasingly difficult to comply with food safety regulations regarding the preparation of raw potatoes. Rather than face the high costs of compliance and the risk of not getting it right many proprietors searched for suppliers who would sell them washed, peeled and cut potatoes. Entrepreneurs met the need and a new type of potato-processing industry emerged. Chilled potato processors now supply the restaurant trade as well as the retail trade with attractively packaged, refrigerated potato products that reduce meal preparation time. Chilled potato products have been widely available in Western Europe since the early 1990s. Acceptance in the rest of the world has been slower. Efforts to market chilled potato products in North America did not begin in earnest until the late 1990s. Given North Americans’ acceptance of peeled carrots, salad mixes and other partially prepared produce, it is likely that chilled potato products will also become accepted.

Dehydrated Of the four countries in Table 4.12 the dehydrated potato industry is most important in the United States. The US dehydrated potato industry is tied closely to two other market channels – fresh potatoes and potato crisps. In the Pacific Northwest states of Idaho, Oregon and Washington, the largest potato-producing region in North America, the most popular potato variety is Russet Burbank. This variety produces a large share of undersized and misshapen potatoes that are unfit for the fresh market. Even the best potato pro-

104

DEMAND

ducers may see half their Russet Burbank crop not meet fresh standards. A dehydrated potato industry sprang up to handle those off-grade Russet Burbanks. With an abundant supply of high-quality raw product the dehydrators built successful businesses. They marketed dehydrated potato products that were packaged and aimed mostly at retail customers. During the mid-1990s nearly 90% of the dehydrated product flowed into the at-home market (Table 4.11). Beginning in the 1990s another opportunity appeared for the dehydrated potato industry. Some snack food manufacturers introduced potato snack foods that were made via an extrusion process with dehydrated potatoes rather than raw potatoes. General Mills with its Pringle’s and Frito-Lay with its Baked Lays led the charge. The increased demand for dehydrated potatoes improved the profitability of dehydrated potato processors and the growers who sold them raw product. Per capita consumption of dehydrated potato products increased in the US from 4.5 kg in 1980 to 8.2 kg in 1998 (Fig. 4.8). The global market also grew. International demand for these snack foods led to export of dehydrated potatoes destined for European extrudedsnack factories in the late 1990s.

Snack foods Potato use for snack foods in the US has been stagnant at about 7 to 8 kg per year (Fig. 4.8). The potato crisp industry in the UK is expanding, with crisping use increasing 22% during the 1990s. Future demand around the globe depends primarily on three demand shifters – income, prices of other goods, and tastes and preferences. Since potato snacks are priced higher than fresh potatoes, growth in the low-income developing countries will continue to be limited. Economic growth that boosts consumer income in developed countries will improve demand for potato snack foods. Prices of other snack foods influence demand for potato snack foods. Products that use corn as the main raw product are close substitutes. Tastes and preferences may have put a damper on potato snack foods in some regions. Medical experts warn consumers that diets with excess fat can be detrimental to human health. Since traditional potato snack foods were fried in oil, many consumers chose to reduce consumption on health concerns. New products that use less oil, less harmful oil or no oil at all (baked products) have been developed to provide snack foods that are perceived to be healthier. Potato snack food firms have also used a new fat substitute, olestra, in the manufacture of a healthy-image snack. During the late 1990s US sales of olestra-based snack foods were disappointing, even though they commanded higher prices at retail.

105

THE INTERN ATION AL POTATO INDUSTRY

Seed potatoes Demand for seed potatoes is derived from the consumer demand for potato products. Consumer tastes and preferences influence the varieties that commercial potato growers plant. The challenge for seed growers is to plan ahead and produce the varieties that will be popular several years into the future. Current seed production systems require several years of field production to multiply primary seed stocks. New technology may reduce the number of field generations needed. This creates an opportunity for seed growers to shorten their planning horizon, but reduces the total need for seed potato plantings. New developments that would make true potato seed (TPS) a viable option could in the future replace the current seed tuber system.

Other In none of the countries does the ‘canned/other’ category make up more than 5% of the processing share (Table 4.12). Use of potatoes by other food processors for soups, stews and other processed meals makes up a small part of this sector. Use of potatoes for livestock feed will probably continue to decline, but during years of large potato supplies and low prices, feed rates will go up. One stable part of the feed market is potato waste from potato processors. In western North America cattle feedlots depend on potato processing facilities for a steady supply of a potato-based feed component. Use of potatoes for alcohol for both beverages and fuel will continue to be small markets.

Demand forecasting models Several researchers have published studies about forecasting future potato demand. Private forecasting models are used for proprietary purposes and the results are not published.Two of the academic studies are discussed here.

United States In the late 1980s the Idaho Potato Commission (IPC), curious about future growth opportunities for the Idaho potato industry, funded a research project at the University of Idaho to forecast demand. The result was a study which predicted 1995 potato markets, seven years into the future.5 The 106

DEMAND Table 4.13

Factors affecting the demand for United States potato products

Factor Own-price, substitutes Price – fresh potatoes Price – dehydrated Price – potato snacks Price – frozen potatoes Complement Price – hamburger Consumer income Tastes & preferences Females in labour force Microwave ovens Meals away from home Advertising – frozen Advertising – dehydrated Advertising – potato snacks Western restaurants in Japan Yen exchange rate

Fresh Potatoes

Dehy Retail

Dehy FS

-

+ -

+

Potato Snacks

Frozen Retail

Frozen FS

+

+

Frozen Japan

+

-

+

+ +

+

+

-

-

-

+

+

+

+ -

+ +

+ + +

+

+ + + +

FS = food service market + indicates that as the factor increases demand increases - indicates that as the factor increases demand decreases

project consisted of three parts: (1) build an econometric model to determine the main forces that affect US potato demand, (2) forecast US potato demand and (3) estimate Idaho’s share of the forecasted potato demand. The econometric model included demand for seven potato markets: fresh, dehydrated-retail, dehydrated-food service (FS), chips (snacks), frozenretail, frozen-food service and frozen exports to Japan. Table 4.13 provides a summary of the model in terms of direction of impact, but not actual coefficients. The model includes the four demand shifters from economic theory (see pages 99–109). Although population does not appear in the list of explanatory factors, all quantities and consumer income were converted to per capita figures. The first group of factors includes prices for four potato products. The first column, representing the demand for fresh potatoes, has a negative sign in the fresh potato price row. This means that the mathematical model depicts a negative relationship between price and quantity, as expected. The blanks in the fresh potato column for the other three potato prices mean that the impact of substitute potato products had a statistically insignificant impact on fresh potato demand. In the next column, dehydrated retail potatoes, there is the expected negative sign for own-price and a positive sign for fresh potato price. This means that the price of fresh potatoes does have a statistically significant impact on dehydrated potato demand. As fresh 107

THE INTERN ATION AL POTATO INDUSTRY

potato price increases, demand for retail dehydrated potatoes also rises. The positive signs in the fresh potato price row show that fresh potatoes are statistically significant substitutes for dehydrated-retail, dehydrated-food service, frozen-retail and frozen-food service. The only other substitute relationship is that frozen potatoes are a significant substitute for dehydrated food service potatoes. Own prices for dehydrated and frozen potatoes in the food service markets were excluded. Discussion with industry experts revealed that non-price factors were quite important, which the model verified. As we have seen, many restaurants use ‘meal deal’ pricing with a set price for a complete meal, so the consumer price for frozen-food service potatoes cannot be clearly determined. The same is true for dehydrated-food service potatoes that are served in schools, hospitals, nursing homes, prisons and military bases where clientele are not charged a direct price for potato products. A hamburger and fries is a common meal in the United States and in fast-food restaurants around the world. Foods that are frequently eaten together are considered complements. When the price of one increases consumers tend to buy less of both products. In this model the hamburger was found to be a statistically significant substitute for frozen potatoes in the retail, food service and Japanese export markets. The positive sign for hamburger price in those three columns indicates that as hamburger price increases, demand for these three potato products decreases. The next seven explanatory variables fit in the demand shifter category of consumer tastes and preferences. The first, females in the labour force, is a variable intended to capture changes in preferences for convenient foods. The negative sign in the fresh potato column says that more females working outside the home will decrease demand. The positive signs in frozen retail and frozen food service shows that working women prefer frozen potato products. The microwave oven variable is the percentage of US homes that own a microwave oven. This variable is also related to convenience. As more consumers own microwaves the demand for fresh and dehydrated retail potatoes increases. These products are well suited for this cooking method. The demand for frozen-retail and frozen-food service declined with increased microwave ownership, probably because the frozen potato industry did not have products that performed well under microwave cooking. The mealsaway-from-home variable was also related to the consumer preference for convenience and had a positive influence on fresh, snacks and frozen-food service demand. The three advertising variables had positive impacts on the products they promoted and one, frozen-potato advertising, took away demand from potato snacks. The number of Western restaurants had a positive, significant impact on

108

DEMAND Table 4.14

Actual and forecasted potato demand for the US and Idaho 1988 Actual

1995 Forecast

1995 Actual

US quantity sold (million cwt) US price ($/cwt)

309 6.02

365 6.02

409 6.32

Idaho quantity sold (million cwt) Idaho price ($/cwt)

92 5.40

120 5.40

122 5.40

the demand for US frozen potatoes in Japan. Since many of these restaurants serve burgers and fries, Japanese consumers have developed a preference for US frozen potato products. The last variable in Table 4.13, the yen : dollar exchange rate, relates to own-price rather than a demand shifter. When the value of the yen changes in relation to the dollar, the Japanese price of US frozen potato products also changes. Actual values of the explanatory variables for the 1970–88 period were used to develop the mathematical equations in the forecasting model. In order to complete the 1995 forecast, future values of the explanatory variables were forecast. Some forecasts were obtained from government sources, some from private sources and some were estimated with linear trends and logistic functions. Results of the forecast are in Table 4.14. The forecast was for US potato quantity sold to increase by 18% between 1988 to 1995 if potato prices were at the same level. Actual US potato demand increased more than that, with both quantity sold and price rising. The quantity sold actually increased 32% and went for a 5% higher price. Although the econometric model forecast an 18% growth in demand in seven years, it underestimated the rapid growth of the demand for US potatoes. The model was very accurate for the Idaho portion of the forecast, predicting a 30% growth in quantity sold compared to the actual increase of 32%, with no change in price.

World market Researchers G Scott, M Rosegrant and C Ringer at the International Potato Center in Peru developed a model to forecast world demand for four root and tuber crops – cassava, potato, sweet potato and yam.6 In order to better understand the role of roots and tubers in the early twenty-first century the research team analysed trends and factors that influence the supply and demand for these commodities. Included in the project were forecasts for potato demand in the year 2020.

109

THE INTERN ATION AL POTATO INDUSTRY Table 4.15

Projected growth rates in world potato use, 1993–2020

China Other East Asia India Other South Asia Southeast Asia Latin America WANA Sub-Saharan Africa Developing Developed World

Baseline food (%)

HDP food (%)

Baseline feed (%)

HDP feed (%)

Baseline total (%)

HDP total (%)

2.2 1.3 3.1 3.0 2.3 1.7 2.0 3.1 2.3 0.4 1.2

2.8 1.3 3.8 2.9 2.4 1.7 2.3 3.2 2.8 0.3 1.4

0.3 1.2 na na 2.6 1.6 1.6 1.8 0.4 0.2 0.3

2.7 1.3 na na 2.4 1.6 1.6 1.8 2.7 0.2 1.0

1.5 1.3 3.1 3.0 2.3 1.7 2.0 3.1 2.0 0.3 1.0

2.8 1.3 3.8 2.9 2.6 1.7 2.3 3.1 2.8 0.3 1.3

Source: Scott et al. na = not applicable WANA is West Asia and North Africa HDP is the high demand and production growth scenario

The Scott team worked with the International Food Policy Research Institute (IFPRI), an organization that makes global projections of food supply and demand. The foundation of the projections is the International Model for Policy Analysis of Agricultural Commodities and Trade (IMPACT). The mathematical model consists of supply, demand and trade equations for 37 countries or groups of countries and 18 commodities, including potatoes. The commodity demand equations account for prices, consumer income, population growth, livestock production, feed prices and feeding efficiency. The model’s main driving forces for estimating demand were growth rates in population and consumer income. For the largest potato-consuming country, China, the researchers assumed an annual population growth rate of 0.7% and an annual income growth rate of 5.6% for the 1993–2020 period. The assumptions for the second-largest potato country, India, were 1.3% and 5.1% for population and income growth, respectively. The researchers made two forecasts for 2020, one called a baseline forecast and the other a high demand and production (HDP) growth scenario. Since previous efforts to forecast potato demand in developing countries had underestimated actual demand, the HDP scenario was developed. Problems with underestimating include wrongly applying income elasticities from developed countries to developing countries. In the HDP scenario income elasticities for food use of potatoes were increased. Results of the Scott forecasts are in Table 4.15 and Table 4.16. The projected annual growth rates in Table 4.15 show total world use increasing 110

DEMAND Table 4.16 Projected world potato consumption per capita, 1993–2020

China Other East Asia India Other South Asia Southeast Asia Latin America WANA Sub-Saharan Africa Developing Developed World

1993 (kg/yr)

Baseline 2020 (kg/yr)

HDP 2020 (kg/yr)

14 18 13 9 3 22 28 3 13 75 27

20 21 21 11 3 24 28 3 16 77 27

23 21 25 11 3 24 31 3 18 76 28

Source: Scott et al. WANA is West Asia and North Africa HDP is the high demand and production growth scenario

at a rate of 1% per year in the baseline scenario and 1.3% in the HDP scenario. The projected growth is only 0.3% in developed countries under both scenarios, much lower than the 2.0% and 2.8% in developing countries. The most rapid growth rates are projected for India and sub-Saharan Africa. To get a perspective of the size of the potato demand in different regions, Table 4.16 shows the projections in terms of per capita use. Although the developed country category has the lowest growth rate, it has the largest per capita use by a large margin. Under the HDP scenario the developed countries per capita use is more than double the next largest user and at least triple the use of all other regions. Although potato demand has been expanding and is projected to continue to expand all over the globe, the main potato eaters will continue to be the people living in developed countries.

References 1

United States, Department of Agriculture, Food Consumption, Prices and Expenditures, 1970–98, Washington, DC, 2000. 2 J Guenthner, A Levi, and B-H Lin, ‘Factors that affect the demand for potato products in the United States’, American Potato Journal, 1991 68:9 569–79. 3 D Horton, Potatoes: Production, Marketing, and Programs for Developing Countries, London, Westview Press, 1987. 111

THE INTERN ATION AL POTATO INDUSTRY 4 5 6

L Hinton, Potatoes in Surplus, Occasional Papers no. 37, Cambridge University, Department of Land Economy, 1987. J Guenthner, A Levi, and B-H Lin, Forecasting the Demand for Idaho Potatoes, AES Bull. No. 734, Moscow, Idaho, University of Idaho, 1992. G Scott, M Rosegrant, and C Ringler, Roots and Tubers for the 21st Century, Lima, Peru, International Potato Center, 2000.

112

CHAPTER

5 Prices

P

otato supply and demand are powerful driving forces, but several other factors also influence potato prices. This chapter deals with priceinfluencing factors not covered in the previous chapters, which dealt specifically with potato supply and potato demand.

Price theory Market structure Potato prices can vary between markets that have different types of market structure. The term ‘monopoly’ gives most people an image of a firm setting prices, while the term ‘competitive’ suggests that firms have little or no power to set prices. Economists use more than just those two categories of market classification, generally putting markets into four categories: competitive, oligopolistic, monopolistic and monopolistic competition.They also use four structural characteristics to classify markets: the number of buyers and sellers; the size of buyers and sellers; the amount of product differentiation; and the barriers to industry entry and exit. The various types of market structure as related to the potato industry are discussed below. 113

THE INTERN ATION AL POTATO INDUSTRY

Competitive markets The following characteristics define competitive markets: 1

sufficiently large numbers of buyers and sellers so that individuals cannot influence price; 2 products homogeneous to the degree that one producer’s product cannot be distinguished from another’s; 3 no market restrictions such as government control or collusion; 4 no barriers to entry. Since individuals cannot influence prices in competitive markets, the participants are known as ‘price takers’. As the term suggests, price takers simply take the price offered; they have no power to do anything else if they want to be in the market. In competitive markets there are no excess profits in the long run. Temporarily profitable prices attract new producers and expansion of existing producers, both of which put downward pressure on prices. When prices are at unprofitable levels some producers cut back or leave, which in turn pushes up prices. In competitive markets an individual potato grower who changes production has no impact on price. An expansion can change a grower’s cost structure, but not market structure or price. Collectively, if many growers expand during the same crop year it will, of course, affect prices. This points out the paradox of competitive markets. An individual acting out of selfinterest has no impact, but the aggregate actions of like-minded growers do change prices. A grower who expands to reduce per unit costs, or to simply increase revenue, has no price impact, but if other growers do the same the aggregate affect pushes down prices for everyone. Since small changes in potato supply can cause large changes in price, competitive markets provide growers with the risk of very low prices, but also the opportunity for very high prices.

Monopolies Monopolies are at the other end of the market classification spectrum. An absolute monopoly is a single firm with a product that is different from any others. Monopolistic markets also have barriers to entry. A monopoly sets high prices, which provide the firm with higher profits than are possible in competitive markets. Most governments have a mix of laws to regulate, promote and prohibit monopolies. Public utilities are examples of regulated monopolies, which operate with government regulation to provide citizens with consistent supplies and stable prices for such goods as telephone services. Patent law is an example where governments provide incentives for monopoly development. Patents are designed to protect the property rights 114

PRICES

of inventors and to give businesses incentives to invest in research and development. Patent laws typically allow a firm to operate as a monopoly for a fixed period, such as 17 years in the US, after which other firms may enter the market. Although patent laws protect monopolies, most countries also have laws to prohibit some other types of monopolies. Known as antitrust laws, this type of legislation is designed to prevent abusive market power, with the implicit principle that more competition is better. Two types of monopoly power relevant to the potato industry are local monopolies and producer monopolies. A local monopoly may exist in a geographic region where one firm can operate profitably, but two or more cannot. An example could be a potato processor in a small, isolated potatoproducing region where the high costs of transporting potatoes limits growers’ market alternatives. Although such a potato-processing monopoly controls price, there are limits. If the price is too favourable to the monopolist, excess profits might be an incentive for another firm to enter. Likewise, if grower profits are too slim, they may choose not to grow potatoes for the processor. Governments sometimes promote agricultural producer monopolies. Recognizing an imbalance of power in some agricultural markets, governments grant farmer exemptions to antitrust laws. Marketing orders, collective bargaining, co-operatives and marketing boards are some of the tools governments use to allow growers to collude and exercise monopoly power.

Oligopolies Oligopolies are markets in which there are a few large sellers and many buyers. Products may be homogeneous or differentiated. Barriers to entry do exist. Actions by individual firms in such markets can and do affect market prices. Price behaviour depends on the strategies of the firms. Assuming that the firms do not collude, they react to the decisions of the others. In some oligopoly markets a dominant firm sets prices and the others follow. Prices remain stable because firms that cut prices may cause a price war in which all firms lose revenue. Instead of price competition, oligopolistic firms use non-price competition such as advertising, promotion, coupons and rebates. In markets when there is collusion, such as the OPEC oil cartel, the challenge is to determine market shares for each firm. Oligopsonies are markets dominated by a few large buyers that purchase from many sellers. In some places potato processing is considered an oligopsonistic market where many growers sell to a few large processors. The market power of the processors pushes down grower potato prices to a level lower than what would prevail if the market were competitive. The amount of the price gap depends on the growers’ alternatives. In areas where 115

THE INTERN ATION AL POTATO INDUSTRY

growers can choose to sell in the seed market or fresh market, especially if they grow multi-purpose varieties, the oligopsony power is weakened. If the growers have many non-potato production alternatives such as growing grains, forages and horticultural crops they gain power but not as much as if they have alternative potato markets. Since potato growing requires expensive, single-purpose equipment, asset fixity can provide market power to the processors. Potato processors hold oligopsony power in their raw product market, but may face different situations in the final product markets. In the retail market channel there have been many buyers, but in the food service market there are fewer. For dehydrated potato products, potato snacks and retail frozen potatoes, the market is dominated by a few major potato processors that operate as oligopolists. In the food service frozen-fry market, which is dominated by several firms, including McDonald’s and Burger King, the market consists of a few large processors selling to a few large buyers. This situation has led to serious price competition and forward contracting. Since the number of buyers and sellers is similar and the product is homogeneous the price results may be close to the competition norm.

Monopolistic competition The fourth category of market structure is monopolistic competition. In this type of market a large number of sellers offer a differentiated product. Although each firm’s product has many substitutes, sellers differentiate on the basis of non-price competition. They try to use service, quality, reputation and other attributes to influence buyers to prefer their products. Firms have some control over pricing, but substitutes limit that power. Demand for a firm’s product is quite elastic. Small price changes can precipitate large changes in quantity sold. Prices in monopolistic competition are higher than in purely competitive markets, but lower than prices in monopolistic and oligopolistic markets. Seed potatoes are sold in monopolistic competition. The market involves many seed potato growers who differentiate their products. One important category of difference is variety. Although commercial growers may have flexibility regarding varieties planted they have preferences and some processor contracts specify a certain variety. Another point of differentiation is quality, as objectively measured by seed certification agencies. Disease readings in field inspections, laboratory tests and winter growth samples are provided to the public. A seed grower’s lot of potatoes that was completely disease-free in all readings is a higher-quality product than a lot that contains disease readings that barely meet certification tolerances. Seed potato markets also differentiate based on field generation. Since 116

PRICES Table 5.1

North American seed potato prices, 1998–99

Variety Norkotah Norland Ranger Russet Russet Burbank Shepody Superior

Low price

High price

Midpoint

$6.00 $8.00 $8.50 $5.75 $8.50 $6.75

$14.00 $12.00 $10.00 $8.75 $15.00 $9.00

$10.00 $10.00 $9.25 $7.25 $11.75 $7.88

Source: Fraser’s Potato Newsletter

generations closer to the parent seed from the laboratory are thought to be better, they get price premiums. Services such as timely delivery, sanitation procedures, tuber size sorting and optimal storage conditions can also help seed growers differentiate their product. Finally, the reputation of seed growers can bring price premiums or discounts depending on how buyers perceive them. The result of product differentiation in the seed potato market is that prices vary over a wide range. Table 5.1 shows seed potato prices for six popular varieties in North America reported by Fraser1 during the 1998–99 marketing season. There is a wide range of midpoint prices among the different varieties, ranging from $7.25 for Russet Burbank to $11.75 for Shepody. The same-variety price range was the widest for Norkotah, which had prices ranging from $6.00 to $14.00. For each variety the price varies depending on location, time of sale, generation and the reputation of the seed grower. The large size of the price range supports the notion that seed potatoes are sold in monopolistic competition conditions where producers, although many in number, can differentiate their product.

Marketing margins As potatoes move from field to consumer, value is added by firms that store, transport, wash, sort, package and even cook the potatoes. Where ownership changes on the marketing chain different potato prices are established. For example, fresh potato prices change along the trail from grower to packer to wholesaler to retailer to consumer. The difference between two prices in a marketing chain is called a marketing margin. The margin from the farmer at the beginning of the marketing chain to the consumer at the other end of the chain receives much attention from those involved in agriculture. Fresh potato prices at the grower level have traditionally been determined under competitive conditions in most potato-producing regions. A 117

THE INTERN ATION AL POTATO INDUSTRY Table 5.2

July August September October November December January February March April May June Average

UK fresh potato marketing margins 1994/95 Grower price (p/kg)

1994/95 Consumer price (p/kg)

1994/95 Marketing margin (%)

1996/97 Grower price (p/kg)

1996/97 Consumer price (p/kg)

1996/97 Marketing margin (%)

15.7 12.0 10.9 10.1 13.2 14.6 18.6 22.2 24.0 25.7 25.4 26.1 18.2

42.8 37.6 35.8 34.3 33.5 36.2 37.4 43.5 48.1 53.4 58.3 63.7 43.7

63 68 70 71 61 60 50 49 50 52 56 59 59

8.9 7.7 6.3 6.2 5.3 5.8 6.2 6.2 7.1 7.2 7.4 na 6.8

37.6 34.8 30.6 25.3 24.1 23.7 24.8 25.9 27.3 30.5 35.3 34.5 29.5

76 78 79 75 78 76 75 76 74 76 79 na 77

Source: British Potato Council na = not available

large number of buyers and sellers and a homogeneous product make for competitive pricing; producers’ choices are limited to merely accepting or rejecting the current market price. At the other end of the retail marketing chain, fresh potatoes are sold in oligopolistic markets where restaurant managers and retailers set whatever prices they choose, with a careful eye on the competition. Table 5.2 shows marketing margins for fresh potatoes in the UK during two marketing years: 1994/95, which was a high-price year for growers, and 1996/97, which brought growers low prices. The comparative data suggests how fresh potato marketing margins behave. First, the grower and retail prices move together, with increases in grower prices corresponding to retail price increases in the same month or the following month. Another observation is that margins are higher in percentage terms during years when grower prices are low. For the high-priced 1994/95 crop marketing margins ranged from 49% in February to 71% in October and averaged 59% for the entire marketing season. Margins varied in a more narrow, but higher, range of 74% to 79% during the low-priced 1996/97 marketing season. Table 5.2 supports an economic hypothesis that fresh potato prices are ‘sticky downward’ in the retail market channel. The concept describes a situation where retail prices come down slowly. When supplier prices go down, retailers have an incentive to keep prices at about the same level and increase their profit margins. Both monthly and annual data in Table 5.2 118

PRICES Table 5.3

Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Average

United States fresh potato marketing margins Shipper price ($/cwt)

Retail price ($/cwt)

Marketing margin ($/cwt)

Marketing margin (%)

10.00 10.60 6.60 5.90 7.50 7.40 7.60 7.70 5.50 7.40 7.62

34.20 37.10 33.00 30.50 34.80 37.40 37.90 38.10 35.40 37.00 35.54

24.20 26.50 26.40 24.60 27.30 30.00 30.30 30.40 29.90 29.60 27.92

71 71 80 81 78 80 80 80 84 80 79

Source: National Potato Council

support that concept. The larger margins are clearly higher for the low-price year. During the high-priced year, 1994/95, the largest margin at 71% was during October when the grower price was at its lowest. From the previous month the grower price dropped 7% while the retail price dropped only 4%. The ‘sticky downward’ phenomenon is also apparent in marketing margin data for fresh retail potatoes in the United States (Table 5.3). A large drop in potato shipper average price from $10.60 in 1990 to $6.60 in 1991 corresponded to almost no change in the marketing margin as measured in dollars, $26.50 versus $26.40. For the 38% drop in shipper price, retailers reduced their prices only 11%, from $37.10 to $33.00, keeping their profit margins about the same in dollar terms. In percentage terms the marketing margin jumped from 71% to 80%. A similar scenario unfolded during the price drop from 1996 to 1997. From a longer-term perspective, the marketing margins in Table 5.3 seem to have reached a plateau of around $30.00 during the last five years, moving in a narrow range of $29.60 to $30.40. During the 1989–92 period the marketing margin seemed to be on a lower plateau around $25.00. A change in market structure toward fewer and larger retailers with more market power could be a reason that margins reached a higher plateau. Marketing margins are larger for processed potato products. One reason is that the potatoes go through more of a physical transformation when processed. Fresh potatoes are washed, sorted and packaged for the fresh market, but their structure and appearance remain unchanged. Processed potatoes undergo fundamental changes, with the final product of crisps, dehydrated potato flakes and frozen fries bearing little resemblance to the 119

THE INTERN ATION AL POTATO INDUSTRY Table 5.4 margins

United States potato snack marketing

Year

Retail price ($/lb)

Grower price ($/cwt)

Marketing margin (%)

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

2.86 2.96 2.97 2.90 2.88 2.97 3.00 3.06 3.13 3.16

5.06 4.75 4.58 4.50 5.06 4.66 4.66 4.77 4.86 4.68

93 94 94 94 93 94 94 94 94 94

Source: National Potato Council Grower prices are for all processed potatoes

raw product. Potatoes lose much of their water weight during processing. The conversion rates of raw product to final product are approximately 2 : 1 for frozen, 4 : 1 for potato snacks and 7 : 1 for dehydrated potato products. Marketing margins for United States potato snacks during the 1989–98 period are shown in Table 5.4. The margins are higher than the fresh potato margins shown in Tables 5.2 and 5.3. The value of the potato supplied by growers makes up only about 6% of the retail value of potato snack food products. Notice also that prices are relatively stable at both the grower level and retail level. Although there is a general upward trend in retail prices the $0.30 increase from 1989 to 1998 is an increase of only about 1% per year, less than the US rate of inflation, which ranged from 1.6% to 5.4% during that period. The grower price was also stable, varying within a range of $4.50 to $5.06. Since processors contract for a large part of their raw product needs, the processing potato price does not show the volatility that occurs in the fresh potato market. In the food service market where consumers pay for someone to prepare, cook and serve their food one would expect high marketing margins. During the year 2000 many US fast-food restaurants were buying frozen fries in 100-pound (45.4 kg) bags. They could get about 400 servings from each bag. A common price was $1.00 per serving, giving revenue of $400 per bag of frozen fries. The restaurants paid about $40 to get the 100-pound bag of fries into their stores. About $10 went for transport and distribution and the remaining $30 to the potato processor, who passed on $10 to the grower. One hundred pounds of frozen fries requires 200 pounds 120

PRICES Grower Processor 2.5% 5.0% Other 2.5%

Restaurant 90.0%

5.1 Marketing margins for frozen fries in food service.

of potatoes, which processors purchased from growers at a typical price of $5.00 per cwt. Of the $400 that consumers spent on fast-food fries the restaurant got $360, the processor $20, the distributor $10 and the growers $10. The grower share in this example is 2.5% (Fig. 5.1).

Location Potatoes are bulky, perishable and difficult to transport. The expense of moving potatoes means that potato prices vary between locations. According to Von Thunen’s Principle, farm product prices are lower in places far distant from the market and higher in the locations closest to market. The far locations also have the disadvantage of more price volatility. Since transport costs make up a higher percentage of the consumer price, small changes in consumer demand can cause large changes in grower prices. Potato prices can vary over a wide range at different locations within a country at any particular time. Table 5.5 shows potato prices for four locations in Germany during one week at the end of March 2000. The prices vary according to type of potato, with the ‘firm cooking varieties’ getting the higher prices. For both types of potatoes, the prices progress from a low in Hanover to higher prices, progressively, in North Rhine, Bavaria and Brandenburg. The Hanover region is in north central Germany, the North Rhine is on the western edge of Germany bordering the Netherlands, Bavaria is in southern Germany and Brandenburg is in eastern Germany. The price pattern exhibits a circular, counter-clockwise progression from north to west to south to east (Fig. 5.2). If potato transport costs were lower the large differences in prices would most likely be less. 121

THE INTERN ATION AL POTATO INDUSTRY Table 5.5

Potato prices in selected German markets, March 2000 Low (E/100 kg)

High (E/100 kg)

Midpoint (E/100 kg)

Firm cooking varieties Hanover North Rhine Bavaria Brandenburg

2.56 4.09 5.11 5.62

5.62 6.14 6.65 7.16

4.09 5.12 5.88 6.39

Predominately firm cooking varieties Hanover North Rhine Bavaria Brandenburg

2.56 3.58 3.58 4.60

3.07 5.11 5.62 6.90

2.82 4.35 4.60 5.75

Type/location

Source: ZMP

Hanover 4.09

Brandenburg 6.39

North Rhine 5.12

Bavaria 5.88

5.2 Potato prices in selected German markets, March 2000.

Location and transport economics are important factors in the location of processing facilities. Dehydrators want to minimize the cost of hauling raw product. Owing to the relatively low value of dehydration-grade potatoes, most dehydration factories are located quite close to fresh packing facilities. To minimize costs of transporting off-grade potatoes from fresh packer to dehydrator some facilities are located across the road from each other or even on the same site. The economic incentive is the same for frozen potato processors in that an objective is to minimize costs of transporting raw 122

PRICES

product. Frozen processors locate their facilities in large potato-producing regions where they can procure a year-round supply of raw product from local growers. Potato snack manufacturers use a very different approach, building their factories in or near big cities, some of which are far from major potatoproducing areas. Since potato snack foods have a low density they bump against a space constraint before reaching a weight constraint in transport. A lorry full to the brim with potato crisps would carry a light load. Transport costs per unit of weight can be quite expensive for snack foods. The incentive for potato snack firms is to minimize final product transport costs. As a result, they transport raw product great distances, especially during times of the year when local potatoes are unavailable or unacceptable. In North America Canadian snack-food factories are supplied with Florida potatoes during some periods of the year. In the same manner Egyptian potatoes have supplied potato crisp factories in the United Kingdom. In the potato snack industry grower prices also vary according to location. During the week of 7 December 2000, Fraser reports the following prices for open-market raw product going to potato snack processors: Michigan $7.00/cwt, Wisconsin $6.25/cwt and the Red River Valley of Minnesota and North Dakota $5.25/cwt. All three potato-producing states are in the same region, the Upper Midwest. The highest price is in Michigan, which is closest to large population centres. The lowest price is in the Red River Valley, a sparsely populated area far from major cities and potato-snack factories. Transport economics is not the only driving force that affects regional differences in potato prices. The market for fresh russet potatoes in the United States is a case in point. According to the Federal-State Market News Service, the following prices per cwt were reported for 70-count cartons of russet potatoes during the week of 7 December 2000: Wisconsin $12.50, Colorado $14.00, Idaho $18.00, Washington $15.00 and the Klamath Basin of California and Oregon $15.50 (Fig. 5.3). Of these five areas Wisconsin is the closest to the major population centres of the Eastern US, but its shippers got the lowest price. Idaho is the greatest distance from population centres, yet its shippers received the highest price. The reason is that the Idaho industry has successfully differentiated its potatoes. Consumers perceive the Idaho product to be superior and are willing to pay a price premium that more than offsets transport cost differentials.

Quality Grade standards are established for agricultural products, often with government assistance, to make marketing more efficient. Without adequate 123

THE INTERN ATION AL POTATO INDUSTRY Washington $15.00 Wisconsin $12.50

Idaho $18.00 CA/OR $15.50

Colorado $14.00

5.3 United States russet 70-count fresh potato prices, 7 December 2000.

grade standards buyers would have to rely on personal inspection to determine quality. Proper grade standards allow for trade by electronic communication rather than by a large number of buying agents who travel to producers for face-to-face buying. One of the challenges of developing or revising grading systems is to capture the quality attributes that are important to consumers. Size, shape, firmness and appearance are important fresh potato attributes. Although size and shape preferences vary among consumers and by the type of cooking method, consumers generally want potatoes that are free from unsightly blemishes such as cuts, bruises, diseases and rot. Fresh potato industries in many regions operate with grade standards that are clearly understood by buyers. Standards for US No. 1 size A require potatoes to be of similar varietal characteristics; firm; clean; well-shaped; free from freezing, blackheart, blight, wilt, rot and damage by other causes; and not less than 17/8 inches (47.8 mm) in diameter. Tolerances allow for a total of 8% of potatoes in any lot to fail to meet standards and still make grade. Tolerances for individual types of defects include 5% for external damage, 5% for internal defects, 3% for disease defects and 1% for frozen or rotten potatoes. Some of the main differences in fresh potato grade standards are in sizing. Consumers have shown preferences for potatoes that are sold in similar size ranges. Potato packs that include large and small potatoes together sell for lower prices than those sorted by size. In the North American russet potato market fresh potato sizing is split into two groups. The smaller potatoes in the 4 to 8-ounce (113 to 227 g) range go into non-size A 124

PRICES $35

$30

70-count 100-count 10 mesh

$25

$20

$15

$10

$5

$0 Sept.

Oct. Nov. 1998

Dec. Jan.

Feb.

Mar.

Apr. May 1999

Jun.

Jul.

Aug.

5.4 Idaho fresh potato prices, 1998–99.

bags, mostly in 5-pound (2.3 kg) or 10-pound (4.6 kg) packs. These potatoes do not meet US No.1 size A grade standards, but are sold to retailers as ‘consumer packs’ for at-home consumption. The larger and most valuable potatoes are in the 8–16 ounce (227–454 g) range. They go into 50-pound (22.7 kg) cardboard boxes, known as ‘count cartons’. Each carton has a number that specifies how many tubers are in a box. An 80-count carton would contain about 80 potatoes, with an average weight of 10 ounces (284 g). Count cartons are popular in the restaurant trade where sized portions are important. Since potatoes of different size grades are substitutes for each other, their prices generally move together. Prices for three grades of Idaho russets during the 1998–99 marketing season are given in Fig. 5.4. The ‘10 mesh’ grade is non-size A consumer pack potatoes in 10-pound (4.6 kg) mesh bags. Notice that the highest price level is for the 70-count cartons, which restaurants frequently serve baked in the skin. The lowest price is for the 10-mesh consumer packs. In between are the 100-counts, which in terms of size are close to the size border between cartons and consumer packs. Although the price level for all three packs moved upward together late in the season, prices moved in opposite directions early in the season. One possible explanation is that early harvested potatoes had a size profile skewed toward 125

THE INTERN ATION AL POTATO INDUSTRY

smaller potatoes. In September when the Idaho crop is not fully mature, the scarcity of larger potatoes pushes up their price. Since growing seasons differ and the overall size profile of a potato crop varies from year to year, the price gaps between different potato sizes varies. Fresh potato prices are usually reported in a daily range. The fresh shippers at the top of the range have reputations for providing superior products and service. Although grade standards dictate tolerances for fresh potato defects such as misshapen and bruised potatoes, all shipping areas do not require inspection. Fresh shippers who operate in markets with mandatory inspection can choose to sort potatoes to barely meet grade tolerances or to be well within them. Shippers who consistently pack potatoes that are much better than minimum standards develop reputations for high-quality potatoes and obtain prices at the top of the range. For example, the market news for 25 January 2001 showed the following prices for Idaho russet count-carton potatoes: 40s = $5.00–$7.00 50s = $5.00–$7.00 60s = $6.00–$7.00, occasional higher 70s = $7.00–$7.50, few $8.00 80s = $8.00, some $7.00–$7.50, occasional higher 90s = $8.00, some $7.00–$7.50, occasional higher 100s = $8.00, few higher & lower. During that day in the same state for the same grades of potatoes prices varied over a wide range. Differences in reputation and perhaps marketing skills of the shippers account for some of these price differences that occur during any day in fresh potato markets. Private branding by region is another form of quality identification. North American regions that have mandatory inspection, such as Idaho, Colorado, Oregon and Washington generally get higher prices than states that do not have mandatory inspection. In the United States the ‘Grown in Idaho’ trademark has brought fresh market premiums for decades. The premiums at the retail level have been large enough to more than offset transport price differences and put Idaho FOB prices for fresh potatoes at the top. This situation may be changing with the introduction of new varieties.

Pricing mechanisms, institutions and information Pricing mechanisms Farm prices are established in a variety of different ways even for the same commodity. Analysts generally put pricing mechanisms into five categories: 126

PRICES

individual negotiations, organized exchanges, formula pricing, collective bargaining, and administrative pricing. The potato industry applications of these price discovery methods are discussed below.

(1) Individual negotiations Markets for fresh fruits and vegetables generally fall into the category of individual negotiations. Each year millions of produce transactions around the world are done under this pricing mechanism. In competitive markets with large numbers of buyers and sellers negotiated prices vary, depending on location, perceived or real quality differences and the trading skills of the people in the market. Fresh potatoes at the farm level are frequently sold under individual negotiations. Fresh potato transactions between brokers, wholesalers, restaurants and retailers have also traditionally been done through this type of pricing mechanism. At the consumer level prices are not negotiated in most developed country market channels. The prices posted on a restaurant menu or a potato display in the produce section of a supermarket are not negotiable. In developing countries, with less complex marketing systems, consumers bargain with sellers who may be the growers themselves.

(2) Organized exchanges This category includes auctions and futures markets. Although grains, livestock, cotton, tobacco, flowers and other agricultural products are commonly sold through exchanges, most potatoes are priced by other mechanisms. Organized potato auctions have operated and continue to operate in places around the world but they are losing ground to other pricing mechanisms. Some countries, such as Taiwan, have conducted auctions for potato imports, with the winning bidders getting the right to ship a certain quantity of potatoes into the country. Potato futures markets, which are discussed in Chapter 10, exist in some countries but have gone defunct in others.

(3) Formula pricing Formula pricing has been used in developed countries to price many farm goods, especially livestock products. The mechanism links prices paid to sellers to some other price, which may be a published price reported by an unbiased third party. The two main parts of a formula pricing mechanism are the establishment of a base price and the quantification of the link to that price. An example in the potato industry could be to link a transaction at 127

THE INTERN ATION AL POTATO INDUSTRY Table 5.6

Fresh potato formula pricing example

Product 10 # mesh 40-count cartons 50-count cartons 60-count cartons 70-count cartons 80-count cartons 90-count cartons 100-count cartons 10 oz min No. 2 Processed grade Total Packer charge Net price

Price ($/cwt)

Share (%)

Value ($/cwt)

9.75 16.25 16.40 17.10 19.65 20.00 19.50 17.45 12.20 7.30 2.00

30 1 2 2 4 4 5 4 2 8 38

2.93 0.16 0.33 0.34 0.79 0.80 0.98 0.70 0.24 0.58 0.76 8.60 3.50 5.10

95% of the closing price for April futures on the Amsterdam potato futures market. Formula pricing is commonly used to calculate prices between growers and fresh packers in North America. Although the grower–packer pricing mechanism has traditionally been individual negotiations in many fresh potato regions, formula pricing is becoming more common. The traditional ‘scoop up’ pricing of a flat price for all potatoes coming off the harvester or out of storage puts much of the price risk on the packer. With a change to formula pricing the market risk is shifted to the grower. The way formula pricing works in the fresh industry is that growers are paid on the actual pack out of their potatoes. The pack out is the percentages of potatoes that fit into each grade sorted by the packing house. An example pack out is in Table 5.6. Prices the packer received for each product shipped are in the first column. The next column is the portion of the grower’s potatoes that went into each pack. Value per cwt of $8.60 is determined by summing the values that each pack contributes to the total. The packer deducts a $3.50 packing charge to arrive at a net price to the grower of $5.10 per cwt. Assuming the packer charge includes a profit margin, the market price risk is borne by the grower. The packer’s incentive is to increase volume, which may in aggregate worsen the net prices to growers because of increasing supplies. For this reason growers often complain about this formula pricing mechanism and express a preference for pricing by individual negotiation, which provided incentive for packers to obtain high prices for the packed products. Some potato-packing operations 128

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are co-operatives that do indeed have an incentive to seek the highest possible prices for its grower members.

(4) Collective bargaining When growers become dissatisfied with prices or terms of trade they often turn to collective bargaining to deal with buyers. Facing one or several buyers they attempt to gain market power by uniting to increase their collective size. Their efforts are similar to workers who unite to form a labour union. Some governments grant antitrust exemptions to both labour unions and farmer groups in an attempt to provide them with market power. Growers have responded by using a variety of tools including co-operatives, bargaining associations and marketing orders to push up prices. Although potato processors compete for some product on the open market, they contract for a large portion of their potatoes. In potatoproducing areas where growers are geographically close together and willing to do so, collective bargaining has become a common mechanism for establishing contract prices. In North America potato-snack food growers are scattered across the continent and have not been successful in establishing collective bargaining associations. Some production areas have attempted to bargain, but processors shifted supply sources to other regions and broke the grower efforts. Since potato-snack processors rely on transporting raw product long distances, they have the flexibility to move away from areas that try to bargain collectively. Growers have been more successful in collective bargaining with frozen potato processors. In the frozen industry processing facilities are located in major potato-producing regions because it is more economical to transport final product than raw product. Processors who are dissatisfied with their growers cannot easily shift supply sources to other areas, because of high transport costs. Another difference between snack processors and frozen potato processors in North America is that the latter include price adjustments for the quality of potatoes that growers deliver. Whereas snack processors set quality standards and reject potatoes that do not meet them, frozen processors provide growers with economic incentives to produce highquality potatoes. Using an old metaphor, one uses a stick and the other uses a carrot to motivate growers to deliver high-quality potatoes. An example Idaho frozen potato processor contract during the 1990s specifies a base price of $4.35 per cwt, with the following quality-based premiums and discounts: 1

Specific gravity. An incentive of $0.03 per cwt will be paid for each 0.001 above 1.078. A penalty of $0.03 per cwt will be deducted for each 0.001 below 1.078. 129

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2

US No. Ones (two-inch or four-ounce minimum size). An incentive of $0.01 per cwt will be paid for each percentage point above 60%. A penalty of $0.01 per cwt will be deducted for each percentage point below 60%. 3 Bruise-free. An incentive of $0.01 per cwt will be paid for each percentage point bruise-free exceeds 66%. A penalty of $0.01 per cwt will be deducted for each percentage point bruise-free is less than 66% down to 55% and $0.02 per cwt for each percentage point below 55%. 4 Size (over six ounces). An incentive of $0.03 per cwt will be paid for each percentage point the over 6 ounce percentage exceeds 50%, up to 70%, and $0.02 per cwt for each percentage point over 70%. A $0.03 per cwt penalty will be deducted for each percentage point below 50% down to 40%, then a $0.035 per cwt penalty will be deducted for each percentage point below 40%. 5 Dirt, rocks and foreign material. The price shall be increased $0.01 per cwt for each percentage point that dirt, rocks and foreign material tare is below 8% and shall be decreased $0.02 per cwt for each percentage point that dirt, rocks and foreign material tare exceeds 10% of the total weight delivered. The base price, incentives and penalties are all subject to negotiation each year during the bargaining process. Potato Growers of Washington (PGW) and Potato Growers of Idaho (PGI) are two grower organizations that have a history of bargaining for contracts with potato processors. Results have been mixed. Contract potato prices negotiated by PGI are given in Fig. 5.5. The 1990 figure is blank because bargaining was unsuccessful that year, marking the beginning of a loss of PGI bargaining power. During the rest of the 1990s PGI was involved in bargaining, but signing a contract with PGI was no longer critical to the potato processors. A significant number of non-PGI members would sign contracts with or without PGI approval. During the four decades of collective bargaining in Idaho, the contract price followed a pattern of three successive plateaus. The first plateau was in the $1.00 to $2.00 per cwt price range for 13 years. Prices remained constant for as long as three consecutive years. Then in 1974 the contract price jumped from $1.85 to $3.96, marking the beginning of a new 17-year plateau mostly in the $3.00 to $4.00 price range. The more than twofold price increase from 1973 to 1974 was a tribute to successful grower bargaining, but processor concerns about raw product procurement were also a factor. The next year processors negotiated the contract price down to $3.30, then down to $2.77 in 1977. The price then bounced back up into the $3.50 to $4.00 range and stayed there for 10 years. This decade of stability was fol130

PRICES $6.00

$5.00

$4.00

$3.00

$2.00

$1.00

19 61 19 63 19 65 19 67 19 69 19 71 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

$0.00

5.5 Idaho potato contract prices, 1961–2000.

lowed by the price impasse of 1990. Following that the price went to a new plateau in the range of $4.00 to $5.00. In the future changes in relative market power between processors and grower bargaining groups will determine future contract price patterns.

(5) Administrative pricing Administrative pricing requires one of two types of power – political power or market power – to set prices. Governments often use political power to set prices for agricultural commodities. In centrally planned economies the government fixes all the prices it chooses. In market economies the government often sets floor prices for agricultural goods at the farm level. Some impose ceiling prices to protect consumers from rising food costs. The other type of power needed for administrative pricing, market power, is available to monopolies and to a lesser degree oligopolies. In the potato industry growers do not have the power to administer prices. Snack food processors, especially in North America where the market is dominated by one firm, do have power to administer prices. Snack food growers sometimes complain that contract prices are administered at painfully low prices, but without effective bargaining associations they have 131

THE INTERN ATION AL POTATO INDUSTRY

little countervailing power. When the snack food processors need raw product for which they have not contracted, they must buy in the open, competitive market, sometimes at very high prices. During years when they paid $5.00 per cwt for contract potatoes, snack-food processors have paid open market prices as high as $20.00 per cwt when high-quality potatoes became scarce. Most potato processors buy some potatoes on the open market where they lack the power to influence prices in the same way they do with contract prices. At the consumer level in developed countries most potato sellers do indeed use administrative pricing. Large fast-food chains, such as McDonald’s, may decide in corporate headquarters what will be the price of fries in their restaurants around the globe. In supermarkets the produce manager may decide how to price fresh potatoes, and other managers may decide how to price dehydrated, snack and frozen potato products. The other four types of pricing mechanisms are not often used at retail markets in developed countries, but individual negotiations are common at the consumer level in developing countries.

Government intervention Since hungry people become unhappy with their governments, there is a long history of government control of food production and marketing. Although political methods vary, nearly every country has some type of involvement in agriculture that affects prices. Governments intervene in farm prices to support farm income, preserve rural communities, enhance food security, lessen price and income instability and reduce consumer costs. Of course, government policy can have simple goals but complex results and some governments impose contradictory programmes. Potato markets, like markets for other fresh fruits and vegetables, have been relatively free of government intervention. Even in communist countries a large portion of the potato crop was traditionally grown on private plots, where the growers were free to eat their own potatoes or sell them to others. Most governments impose more regulations on grain markets than on potato markets. Sometimes the government programmes for other agricultural commodities can be detrimental to the potato industry. In Peru, the potato’s birthplace, potato consumption dropped from 100 kg per person in the 1960s to around 45 kg in the mid-1980s, as a consequence of government policy. According to Scott et al.,2 two driving forces caused the decline in potato production and consumption in Peru. First, the prices of cereals, a potato substitute, were driven to low levels by domestic subsidies and overvalued exchange rates that encouraged cereal imports. Secondly, price controls, tight credit policy and anti-middleman marketing 132

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regulations crippled the potato production and marketing industries. An economic downturn and record high potato : rice price ratios decreased potato demand. In the 1990s an economic recovery and changes in government policies allowed potato production and consumption to rebound. In developing countries cheap food policies and trade restriction policies can cause harm to domestic potato industries. When urban and industrial political interests are successful in passing laws that impose farm price ceilings, potato production will fall because of the high costs and risks of growing potatoes. When governments erect trade barriers to protect domestic industries, local demand for foreign currency falls. The resulting currency overvaluation lowers the price of imported cereals. The reduced substitute price drives down the demand for potatoes. In developed countries the same policies are important, but other types of policies come into play as well. In the United Kingdom a decades-long programme of potato market controls came to an end in the 1990s. Under the previous potato marketing scheme production quotas were used to support potato prices. When supply control failed to bring the desired prices, other tools of market intervention were used with costs shared by growers and the government. The quotas were rights to plant potatoes. Since the programme was successful, the quotas took on a value. In order to acquire the right to grow potatoes growers would lease or buy quotas, which were bid up to very high levels. According to Hinton,3 potato production was much more profitable than the production of any other crop. One indicator of the profitability was the price of potato production quotas that exceeded £2000 per hectare in some highly productive farming regions such as the Fens of East Anglia. In North America government intervention has been at a lower level. Although the US government sometimes provides diversion programmes to take potatoes off the market during low-price years, potatoes have not been among the commodities traditionally targeted for price support programmes. Grain production has been heavily supported, an action that can have an indirect affect on potato prices. Since grains are grown in rotation with potatoes, reducing the price risk for grains can tend to increase potato plantings and drive down potato prices. Potato growers who face less risk for rotation crops could feel compelled to increase plantings of potatoes, a crop for which there is a possibility of high prices. Export assistance is a government programme that can enhance potato prices. Researchers such as Topolewski4 have found that the amount of government-funded foreign advertising can boost export demand for US potato products. Consumer groups have criticized US policy that allows such government-funded export programmes because they may increase domestic potato prices. The US potato industry has been concerned with trade restrictions on potatoes going into Mexico and Canada. The complaint regarding Canada 133

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has been about government subsidies giving the Canadian industry an unfair advantage in the US market. Canadians counter that the US government subsidizes their industry in other ways such as government irrigation projects that provide cheap irrigation water. The complaint regarding Mexico has been not about the US market, but about trade barriers against US potatoes going into Mexico. The North American Free Trade Agreement (NAFTA) has scheduled progressive expansion and eventual elimination of potato export quotas going into Mexico, allowing its industry time to adapt. Research and education is another area of government involvement in the potato industry. According to Araji et al.,5 government investment in potato research provides very high returns on investment to society in general and to the potato industry in particular. Although private research in the potato industry is increasing, both developed and developing countries continue to invest public funds in potato research.

Market information Competitive markets operate most efficiently when buyers and sellers have access to accurate information about production, stocks, demand and prices. Farm leaders convinced government policy makers in many countries that government intervention was needed to provide market information. The rationale is that buyers could afford to collect and analyse their own proprietary market information and growers could not. In order to improve the balance of power between growers and buyers, many governments are involved in agricultural market information. Most government market information programmes focus on collecting and compiling information. Government market news reporters interview growers and industry personnel as well as conduct in-field yield surveys. The accuracy of the market information depends on grower co-operation. In some countries compliance is mandatory, while in others it is voluntary. Some co-operators try to give incorrect information in an attempt to impact prices in their favour. Most government market information agencies use other sources and methods to prevent manipulation of the system. Private organizations are also involved in market information. Large potato buyers invest in their own information systems that they do not share with others. Some grower organizations also collect information that the government does not provide but that is helpful to its members. Since most government market information is in the form of data, market analysis is up to others. Private analysts fill this gap in the potato industry with their market newsletters. Government sources provide statistics that give information about historical and current quantities and prices, but may not provide analy-

134

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sis, interpretation or forecasts. Private analysts use government statistics as a foundation for building their market reports.

Price changes through time Volatility Potato prices are volatile because the demand for potatoes is inelastic. Small changes in production can cause large changes in prices. Figure 5.6 illustrates this concept for potatoes in the UK. Although there are many other factors that influence prices, in general when potato production goes one way potato prices go in the opposite direction. A few striking examples are worth noting in the graph. First is the steep drop in production in 1975. The price response was a jump from £25 to £104 pet tonne, more than a fourfold increase in price for a 34% decrease in production. Two years later the dramatic move was repeated but in the opposite direction, when prices dropped from £133 to £43 per tonne. Subsequent increases in production

ODD tonnes 7500

£/tonne 200 Production Price

180

7000 160 6500

140 120

6000

100 5500

80 60

5000

40 4500 20 4000

0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

5.6 UK potato production and prices, 1970–99. 135

THE INTERN ATION AL POTATO INDUSTRY

were met with substantial decreases in price in 1984, 1988, 1992 and 1996. Price jumps in 1983, 1994 and 1998 resulted from drops in production. The UK market was quite a roller-coaster, but that is not uncommon in potato markets. Of particular interest is that the UK market was under serious government regulation during the 1970s and 1980s when the roller-coaster effect was quite pronounced. The vagaries of weather and its influence on potato supplies would seem to complicate analysis of potato prices through time. Although potato prices are indeed difficult to predict, many analysts believe that historical patterns of price movement can help predict prices in the future.Three types of price movement through time – trends, cycles and seasonal variation – are discussed here.

Trends Perhaps the most apparent feature of the potato price line in Fig. 5.6 is the volatility. A second feature that is readily noticed is the upward trend. Placing a ruler on the low price points or the high price points shows the increasing trend of British potato prices during the 1970–98 period. Statistical analysis shows that the trend is an average increase of £2.83 per year. What causes trends in general and the upward trend for British potatoes in particular? It might be useful to remember the demand shifters and supply shifters. A trend in any of the four demand shifters – population, income, prices of other goods, and tastes and preferences – could cause such a trend. Although the population of the UK grew during this period, it grew at a very slow rate of well under 1% per year. The other three demand shifters could have separately or collectively caused the upward trend. Supply shifter patterns could also be involved. One likely candidate is the ‘prices of other goods’ demand shifter. The price pattern for US potatoes is used to illustrate the importance of the ‘other goods’factor. Figure 5.7 shows a half-century of US potato prices that are different from the British prices in Fig. 5.6 by one important factor – they have been deflated by the consumer price index. The result is that after adjusting for inflation, or the prices of all other goods, US potato prices trend downward. The slope of the trend line is minus $0.11 per year expressed in 1983 dollars. Potatoes, especially at the grower level, should be considered commodities. A fundamental economic principle is that commodity prices trend downward. In relation to prices of other goods and services, which benefit from value-added manufacturing and branded advertising, farm-level commodities lose value through time. A contributing factor to this downward trend in potato prices is the technology supply shifter. As new yield-enhancing technology is developed and adopted by 136

PRICES $ 16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998

5.7 United States potato price trend, 1950–99, (1983 dollars).

growers, more potatoes can be produced on a given area of land. This force brings down per unit costs and because markets are competitive, prices come down as well. Another observation about Fig. 5.7 is that US potato price volatility lessened during the later years. During the 1990s prices did not vacillate about the trend line as much as during the earlier decades. Expanded use of contracts, including multi-year contracts, may explain some of the reduced volatility.

Cycles Price cycles are well documented for some agricultural commodities. North American beef cattle prices reliably follow a 10- to 12-year cycle. The pattern has to do with producer responses to current prices. A high cattle price encourages producers to retain breeding stock and build up their herds. After a time lag the increased production brings down prices, causing producers to liquidate breeding stock and reduce production. This causes prices to rise again, completing the cycle. Owing to the multi-year time lag between the 137

THE INTERN ATION AL POTATO INDUSTRY

decision to change production and the actual change in production the cattle cycle may be more reliable than a cycle for an annual crop like potatoes. A fundamental question is whether crop cycles are self-generating or caused by external events. An external event, like an early frost that cuts potato production, could start a cycle. Prices rise owing to the reduced supply, encouraging growers to expand production. The increase in supply then causes prices to go down, encouraging a cutback in production. The reduced supply then leads to high prices and the end of the cycle. The lack of another external event could cause the cyclical pattern to stop.The opposing hypothesis is that the cycles would continue to repeat, not because of biology or weather but because of human behaviour. Analysis of the price peaks in the British potato prices in Fig. 5.6 suggests a possible price cycle of several years. From the first peak in 1972 the next peak is four years later in 1976. Peaks recur in the following pattern of years between peaks: 3, 2, 2, 3, 3, 2 and 3. We do not know from the graph if 1998 is a true peak. During the 1970–98 period there are four cycles of two years, three cycles of three years and one cycle of four years. The graph of US prices shows a similar, but longer pattern of the following number of years between peaks: 2, 2, 3, 5, 4, 5, 2, 5, 3, 3, 3, 4, 2 and 2. The summary is five cycles of two years, four cycles of three years, two cycles of four years and three cycles of five years. The wide range of possible cycles from two years to five years makes it difficult to use cyclical patterns to predict prices.

Seasonal variation Prices for some commodities follow a pattern that is completed every 12 months. Price movements of this sort are called seasonal because they change with the season of the year. Seasonal patterns in supply or demand are the root causes of seasonal price patterns. For agricultural commodities biology and weather play important roles. Potato production in most regions consists of only one crop grown each year. Seasonal patterns develop from the weather-related supply situation of only one harvest per year of a perishable crop. Weather also plays a role in seasonal demand for potatoes. In temperate climates consumers prefer a different type of potato product during the hot summer months than during the cold winter months. While on summer holiday they are more likely to eat frozen potato products served at fast-food restaurants. In the winter they are more likely to buy fresh potatoes for at-home meal preparation. Seasonal price patterns are seen for grower-level prices in both the fresh and processed potato markets (Fig. 5.8). One observation is the upward trend in prices after October. Most US growers harvest potatoes in the fall, 138

PRICES £/cwt 9

8 Fresh market: Processed market: 7

6

5

4

0 Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

5.8 United States fresh and processed potato monthly average prices, 1986–98.

and October is the month during which most of the fall crop is harvested. As one would expect the monthly average price is lowest in October, when potatoes in the US are most abundant. Growers who lack adequate storage will sell potatoes off the field in October, avoiding storage costs. Growers who choose to store potatoes are, of course, concerned about covering the costs of storage. On the average, growers must receive progressively higher prices during the storage season or they will get out of the storage business. The graph for fresh potato prices reflects the costs of storage, with average prices rising every month from October through July. Although some growers store potatoes into the following August, the majority of US potatoes sold then are from the new crop. Since most fall-crop growers harvest few potatoes in August, the relative scarcity puts August average prices well above prices in September and October when harvest becomes more active. The highest prices are in July when some Western growers still have old-crop potatoes in storage and growers in several regions harvest new potatoes. The graph for processed potato prices has two distinguishing characteristics. First, it is lower than the fresh potato graph. Secondly, it is less 139

THE INTERN ATION AL POTATO INDUSTRY

steep. Grade differences explain some of the differences in price levels. Much of the fresh product is sold as US No. 1 grade. Potatoes that do not make grade for the fresh market because they are too small, misshapen or damaged are diverted to dehydrated processing at prices much lower than in the fresh market. Frozen and snack processors often buy directly from the growers at terms for grades US No. 2 or lower. Another factor is that in some states the growers are also the packers, and what are reported as growerlevel prices are actually shipper-level prices that include the value added through washing, sorting and packaging. There are several possible explanations for the processed graph being less steep than the fresh graph. Processors offer two types of contracts to growers – harvest-time and storage. Storage contracts include a schedule of increasing prices to account for storage costs. Growers who sign storage contracts forgo the opportunity of open-market price increases but eliminate the risk of prices going down. With a guaranteed price increase, even if it does not cover the full costs of storage, many growers chose to lock in a contracted storage return. Depending on their attitudes toward risk, processed growers with storage contracts may have more of an incentive to store than do fresh market growers who face the risk of prices going down. When fewer fresh growers choose to take on the risk of late-season storage, those who do are rewarded with higher open-market prices. The gap between the fresh and processed graphs later in the storage season is partially explained by the risk factor, but there are some other explanations as well. One is the Western tradition of marketing a large volume of dehydration-grade potatoes in the spring, which can skew downward the average processed prices during that time. Another is that snack processors, whose factories are scattered around the country near big cities, rely on potatoes harvested during the winter, spring and summer. Although frozen processors rely heavily on storage potatoes, year-round sales off the field to snack processors tend to dampen the seasonal upward trend in processed potato prices. The fresh price graph shows an average price increase from $5.16 per cwt in October to $7.55 in June to $8.65 in July, giving growers average returns of $2.39 and $3.49 per cwt respectively for storing into those two months. Many growers can store potatoes at costs less than those amounts, but risk is an important factor. First, there is the risk of quality deterioration when attempting to store potatoes for eight or nine months. Storage growers with old-crop potatoes that have been slowly losing quality face competition from high-quality new-crop potatoes. Second is the risk of prices in any particular year not rising enough to cover storage costs. Although storage can be profitable on the average, it can be a money loser in some years.

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Price forecasting Technical analysis Some market analysts pay little attention to the analysis of fundamentals – i.e. supply and demand. Problems they cite with fundamental analysis include: (1) nobody can know all the facts; (2) information is subject to error; (3) facts change continually; (4) buyers and sellers may deliberately give false information; and (5) the influence of each bit of information is not known. Instead they prefer to use something called technical analysis. People make markets. Human emotion – such as fear and greed – may influence markets more than fundamentals. For example, when prices are going up many farmers expect them to continue to go up. Prices do not necessarily depend on facts, but rather on what people believe the facts to be. Since the 1920s there has been a large group of technical traders. Technical analysis can be defined as ‘a study of market action with the purpose of determining probable price change’. The working tool of market technicians is the chart. For this reason they are also known as chartists. To forecast prices, technicians analyse historical price patterns and the strength of buying or selling pressures. An actively traded commodity, such as some futures markets, is needed for technical analysis. Chart forecasting consists of recognizing formations that have been associated with historical price movements. One of the primary formations that chartists look for is a trend. Chartists recognize that commodity prices tend to trade in channels. The top line of channels is called resistance. The bottom line is called support. A breakout is when the price crosses a channel line. Some trend-following rules are that prices are frequently in sideways channels, down trends usually turn into sideways trends and up trends often turn suddenly into down trends. Volume and open interest measure the activity coming into and leaving a market. Volume is the number of trades on a particular day. There is often a positive correlation between price and volume. However, a rapid increase in volume following a substantial up trend can signal that the trend may end. Open interest is the number of positions that have not been liquidated by delivery or an offsetting trade. It is not the same as volume. A high-volume day may have no impact on open interest. Open interest changes when old positions are liquidated or new positions are taken. Volume and open interest can often detect market activity that traders do not want known. For example, exporters often establish positions in the futures market before announcing a new export deal. Technical analysts use a variety of price movement formations to help forecast prices. One is the head and shoulders pattern. This is the oldest

141

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and perhaps most reliable trend reversal pattern. The traditional head and shoulders shape can occur at the top of the market. At the bottom of the market the shape is an inverse head and shoulders. A rule of thumb is that once the neckline is broken the subsequent move will at least equal the distance from the top of the head to the neckline. Other commonly used formations include flags, pennants, triangles, gaps, saucers, bowls and double tops or bottoms. Analysts have developed numerous rules for detecting and responding to chart formations. Since many traders use similar computer systems, charts have a tendency to become self-fulfilling prophecies. Some market observers claim that charts work because chartists make them work. Pure technicians ignore fundamentals. They reason that the supply and demand information will be incorporated into the market and that they can observe it there. The key is when market information becomes public knowledge. Technicians believe they can tell from the charts when prices are going to move, for whatever reason, before the information becomes public. By the time everyone has the information, those with inside knowledge and the chartists have already responded. Where potato futures markets exist, technical analysis may be a useful price-forecasting tool. As mentioned earlier, potato futures markets are available in Europe, but have gone defunct in North America. During some earlier periods when potato futures were traded in North America, technical analysts actively traded them.

Fundamental analysis Technical analysts rely on human psychology to predict prices, while fundamental analysts rely on supply and demand economics. Although there is some crossover between the disciplines of psychology and economics, the philosophies of technical and fundamental analysts are quite different. Technicians say that supply and demand analysis doesn’t matter but fundamentalists say it is all that matters. Fundamental analysts try to account for the supply and demand factors that influence price. They want to be aware of the changes in the four demand shifters and seven supply shifters and how each change will impact on prices. Analysts who are mathematically inclined build econometric models to explain the economic interrelationships of a market. They use historical data and statistical analysis techniques to build equations that can be used to forecast prices. Models can be complex multiple equation systems with hundreds of variables or single-equations with a few variables. One University of Idaho researcher built an econometric model to forecast monthly Idaho potato prices. Nuesca6 built forecasting equations to 142

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predict Idaho grower-level open-market potato prices in the months of October to July. She included the following as explanatory variables: Idaho potato production, US frozen potato stocks, US winter potato production, US spring potato production, Idaho October potato price, Idaho potato stocks in storage, US potato stocks in storage, Idaho harvest progress and Idaho crop quality. Nuesca also developed models to forecast values of the explanatory variables. She found that the model performed well with outof-sample forecasts. The Nuesca model, which consists of 19 equations and 24 variables, is one example of a complex econometric model. An example of an accurate but simple model comes from an independent potato market analyst, Bruce Huffaker, whose North American Potato Market News has a wide subscription base in the potato industry. Huffaker calculates an ‘Idaho grower return index’ (IGRI) price series, which he designed to depict grower returns for a fixed-quality lot of potatoes. Since shipper prices are reported more consistently than grower prices, the IGRI provides a valuable price series for market analysis. Huffaker forecasts future values of IGRI based on changes in potato supply. For example, he forecasts IGRI for May based on changes in US potato stocks for the first of January. This simple one-explanatory-variable model explains 77% of the change in the May IGRI and may be more accurate than complex models with many variables. Since Huffaker has pinpointed the main determinant of the Idaho grower potato price, the model need not be more complicated. Analysts build econometric models to quantify the impacts of forces that affect potato prices. The equations can help provide insight into the complexities of potato markets. There are several drawbacks, however. First, econometric models are built on historical data and therefore may not be good at predicting the future as technology and market structure change. Secondly, the models are limited by the availability of historical data. Important information that could help predict prices may not be available from either public or private sources. Third is the difficulty of predicting future values of explanatory variables. To forecast future values of one variable, potato price, the analyst takes on the challenge of forecasting future values of all the important factors that affect that price.

References 1 H Fraser, Fraser’s Potato Newsletter, Charlottetown, PEI, Canada. 2 G Scott, M Rosegrant and C Ringler, Roots and Tubers for the 21st Century, Lima, Peru, International Potato Center, 2000. 3 L Hinton, Potatoes in Surplus, Occasional Papers no. 37, Cambridge University, Department of Land Economy, 1987. 143

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M Topolewski, ‘Impact of the fast food industry and advertising on US frozen french fry demand’, MS thesis, Moscow, Idaho, University of Idaho, 1997. 5 J Araji, F White and J Guenthner, ‘Returns from potato research: accounting for state and regional effects’, Journal of Agricultural and Resource Economics, 1995 20:2. 6 M Nuesca, ‘Forecasting Idaho open-market potato prices’, MS thesis, Moscow, Idaho, University of Idaho, 1992.

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III THE TRADE

CHAPTER

6 Fresh potato trade

W

orld fresh potato trade is expanding. According to the United Nations,1 in the late 1990s the total value of fresh potato exports was bouncing around $1.5 to $2.0 billion (Fig. 6.1). The value of fresh potato exports has shown an upward but volatile trend since the late 1960s. The volatility of fresh potato value is tied to price variability. In 1993 fresh export value plummeted, based partly on a price drop from $0.20 to $0.17 per kg. Two years later, in 1995, the world potato price was at a record high of $0.31 per kg. Fresh export value also reached a record in 1995, increasing from $1.3 billion to $2.3 billion in two years. During the 1990s the year-to-year variation around the trend line was much larger than during earlier periods such as 1963–75. During the 1960s fresh potato export value was stable in the range of $180 million to $240 million. By 1975 exports exceeded $500 million, more than double the level of six years earlier in 1969. In the very next year, 1975, exports jumped above one billion dollars for the first time. Twenty years later, the $2 billion level was reached. The trend line in Fig. 6.1 indicates that fresh exports are increasing at the rate of about $50 million per year. If that trend continues fresh potato export value will reach $3 billion in 2023. Although fresh potatoes are bulky, perishable products that are expensive to transport, some producers have developed reliable markets in other 147

THE INTERN ATION AL POTATO INDUSTRY $2,500

$2,000

$1,500

$1,000

$500

$0 1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996 1999

6.1 Value of world fresh potato exports, 1963–99 ($ million) (FAO, United Nations).

countries. Consumers in some countries have come to rely on foreign potatoes, especially during certain seasons when domestic potatoes are scarce or of a different type. Many countries are both exporters and importers, with the net trade varying throughout the year. This chapter discovers who are the main players as well as what are some of the main issues in the international fresh potato market.

Fresh potato exports Fresh potatoes are traded across international borders all over the globe, but 70% of the export value came from European countries in 1999 (Fig. 6.2). The next largest exporting region was North and Central America at 13%, followed by Asia at 10%. On a global scale Oceania and South American fresh potato exports were relatively insignificant at one percent each. This does not suggest that potato production and consumption are unimportant in

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Asia 10%

S America 1% Africa Oceania 1% N & C America 5% 13%

Europe 70%

6.2 Fresh potato export value shares by continent, 1999 (FAO, United Nations).

Oceania and South America, but rather that the major fresh potato exporters are in other parts of the world. Fresh potato export data reveals three centres for export: northwest Europe, North America and the Mediterranean region. One-half of the 20 largest fresh potato-exporting countries are in Europe (Table 6.1). The four largest exporters – Netherlands, France, Belgium-Luxembourg and Germany – accounted for an average of $849 million of annual exports during the 1997–99 period. These four countries are in a contiguous belt of potato production in northwest Europe. By including North Sea neighbours the United Kingdom, the seventh largest exporter, and Denmark at number 14, the group exported nearly one billion dollars’ ($960 million) worth of fresh potato exports from this region each year. This group of six countries, all in a productive temperate growing zone, accounted for more than half the world’s potato exports during the late 1990s. The second region of export concentration is North America, with Canada and the United States holding fifth and sixth place respectively on the top 20 list. Together they accounted for nearly $200 million of fresh potato exports each year. Mexico and the Central American countries do not appear among the top 20. Canadian and US potato-producing regions are mostly in temperate zones with fall harvest and long storage seasons. The third centre of potato export activity is the Mediterranean region. The potato production zone named for this region features dry summers and cool, humid winters, with the coldest month averaging between 0°C and

149

THE INTERN ATION AL POTATO INDUSTRY Table 6.1

Top 20 fresh potato-exporting countries, 1997–99 average

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Netherlands France Belgium-Luxembourg Germany Canada USA United Kingdom Italy Spain Egypt Israel Morocco Turkey Denmark Cyprus Syrian Arab Republic Belarus Pakistan China Poland

Value ($ million) 355 236 141 117 105 90 86 84 71 44 30 27 25 25 23 19 17 12 9 9

Region

Trade centre

Europe Europe Europe Europe N America N America Europe Europe Europe Africa Asia Africa Asia Europe Asia Asia Europe Asia Asia Europe

North Sea North Sea North Sea North Sea N America N America North Sea Mediterranean Mediterranean Mediterranean Mediterranean Mediterranean Mediterranean North Sea Mediterranean Mediterranean – – – –

Source: FAO, United Nations Trade centre accounts for three concentrated regions of fresh potato trade. A blank means that the country does not fit into one of the centre categories Cyprus is reported in the region assigned by the source

10°C. Italy, Spain, Egypt, Israel, Morocco and Turkey, which hold places eight to 13 on the top 20 list, all border the Mediterranean Sea. Adding Cyprus and Syria, in fifteenth and sixteenth places, gives a group of eight countries with Mediterranean ports that are quite active in fresh potato exports. Collectively they accounted for an annual average $331 million in potato exports during the late 1990s. Perhaps the opportunity to ship potatoes by sea is an important factor in the development of both the Mediterranean and northwest Europe centres for fresh potato exports. The top 20 export list includes countries from four continents: Africa, Asia, Europe and North America. The largest fresh potato-exporting countries from each of the four continents are Egypt, Israel, Netherlands and Canada. Values of fresh potato exports from each of these four countries for the 1961–99 period are given in Fig. 6.3. The Netherlands stands well above the other three countries, but its export values are quite volatile, especially during the 1990s. An example of the whipsaw pattern is the two-year extremes of the 1991–97 period. In 1991 Dutch fresh potato exports were 150

FRESH POTATO TRADE $m 600 Canada 500

Egypt Israel Netherlands

400

300

200

100

0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997

6.3 Fresh potato export values for selected countries, 1961–99 ($ million) (FAO, United Nations).

at $527 million, then two years later dropped to $330 million. Two years after that, in 1995, export value leaped to $631 million. Following the pattern of the previous two-year cycle, exports dropped to $299 million in 1997. A similar, though dampened, pattern of fresh potato export values occurred in the other three countries graphed in Fig. 6.3. Export values in Egypt, Israel and the Netherlands usually went in the same direction, with rises in 1976, 1982, 1991 and 1995 and drops in 1978, 1985 and 1997. The fourth country, Canada, sometimes followed the patterns of the others but at times moved in the opposite direction. Prices in Netherlands, Egypt and Israel are linked by location. The shipping distance and costs are much lower in those countries bordering the Mediterranean and North Sea than between any of them and Canada, far across the Atlantic. General potato price levels in the region influence export values, but the location and strength of potato demand in importing countries are also important factors. Next we look at which countries have been importing fresh potatoes. 151

THE INTERN ATION AL POTATO INDUSTRY

Fresh potato imports Europe dominates fresh potato imports, with 67% of global import value going into that region (Fig. 6.4). That figure is only slightly less than the 70% of fresh potato exports that originate in Europe. The import–export shares of the other continents are also similar. This similarity suggests that the exporting countries’customers are mostly on the same continent. Since fresh potatoes are bulky and highly perishable, shipping long distances to other continents may not be done as regularly as with grain or processed potato products. European countries made up 13 of the top 20 fresh potato-importing countries during the 1997–99 period (Table 6.2). Five of the North Sea countries – Germany, the United Kingdom, Netherlands, Belgium-Luxembourg and France – are in the top seven as they were in the top seven for fresh potato exports. Including the eighteenth and nineteenth countries on the import list, Denmark and Ireland, the North Sea band of nations accounts for an annual average of $704 million in fresh potato imports. This is $221 million less 935 million of exports (Table 6.1) from the top six North Sea nations. Although there is much trade between the North Sea countries, the $221 million gap means that they export to other countries as well. Some of the fresh potatoes undoubtedly go to other European countries, both within and outside the European Union. The North American fresh potato centre includes the United States at number eight and Canada at number nine on the list. Together they imported

N & C America 12%

S America Africa 2% 8% Asia 11%

Europe 67%

6.4 Fresh potato import value shares by continent, 1997–99 average (FAO, United Nations). 152

FRESH POTATO TRADE Table 6.2

Top 20 fresh potato-importing countries, 1997–99 average

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Germany United Kingdom Netherlands Belgium-Luxembourg Spain Italy France USA Canada Portugal Algeria Greece Egypt Russian Federation Sri Lanka United Arab Emirates Malaysia Denmark Ireland Austria

Value ($ million) 161 141 137 133 119 98 96 92 63 47 45 37 33 24 23 21 20 19 16 16

Continent

Trade centre

Europe Europe Europe Europe Europe Europe Europe N America N America Europe Africa Europe Africa Europe Asia Asia Asia Europe Europe Europe

North Sea North Sea North Sea North Sea Mediterranean Mediterranean North Sea N America N America – Mediterranean Mediterranean Mediterranean – – – – North Sea North Sea –

Source: FAO, United Nations Trade centre accounts for three concentrated regions of fresh potato trade. A blank means that the country does not fit into one of the centre categories.

an annual average of $155 million worth of fresh potatoes during the late 1990s. This is $40 million less than the $195 million of exports (Table 6.1), making the centre a net exporter. Five of the countries on the top 20 import list are included in the Mediterranean trade centre region. Spain and Italy are in spots five and six. Algeria, Greece and Egypt occupy numbers 11 to 13. These five countries imported an average of $331 million of fresh potatoes during the late 1990s. The top 20 Mediterranean importing countries, although fewer at five against eight, import nearly the same as the annual export amount of $325 million. At first glance it appears that another possible fresh potato trade centre could be Asia, with Sri Lanka, United Arab Emirates and Malaysia ranked 15 to 17. Although they are all considered Asian countries the large distances that separate them make a common potato trade centre very improbable. The three countries probably import from different exporting nations. Although the FAO data do not have the detail to confirm the hypothesis, Sri Lanka’s proximity to the booming potato industry in the Indo-Gangetic 153

THE INTERN ATION AL POTATO INDUSTRY

Plain makes it a likely customer for fresh potatoes exported from India and Pakistan. The top 20 list includes countries from four continents. The top importing countries within each continent are Algeria in Africa, Germany in Europe, Sri Lanka in Asia and the United States in North America. A graph of the export values for each during the 1961–99 period is given in Fig. 6.5. One observation is that Germany’s imports were consistently much larger than the others. German imports were under $100 million during the 1960s and early 1970s, then jumped into the $100 million to $260 million range during the mid-1970s and late 1980s. During the 1990s import value volatility increased, with annual figures varying from $150 million to more than $400 million. The German export graph shows a familiar cyclical pattern that was discussed for potato prices in the United Kingdom in Chapter 5. From a peak in 1962 the graph moved in the following pattern of years between value peaks: 3, 5, 3, 3, 4, 2, 2, 3, 4, 4 and 3. Although quantities also affect export values, it appears that the cyclical price patterns common in fresh potato markets create a similar cyclical pattern in European potato trade. The cycli-

$m 450 400

Algeria

350

Germany Sri Lanka USA

300 250 200 150 100 50 0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997

6.5 Fresh potato import values for selected countries, 1961–99 ($ million) (FAO, United Nations). 154

FRESH POTATO TRADE

cal pattern may be in force in Africa and North America as well. The Algerian values peaked on a 4, 3 and 2 year pattern during the 1990s. The United States pattern was 4, 2 and 2 years during the same period. The situation in Sri Lanka appears more stable, but as that market matures it may develop a cyclical pattern.

Net trade for fresh potatoes Fifteen countries are on the top 20 lists for both fresh potato exports and fresh potato imports. These countries that are active on both sides of the market are listed in Table 6.3 according to their rank in terms of net trade. For this purpose net trade is defined simply as the total value of fresh potato exports minus the total value of fresh potato imports. At the top of the net trade list is the Netherlands. For the 1997–99 period the average annual Dutch net trade for fresh potatoes was $218 million. Another North Sea country, France, is in second place at $140 million. Other North Sea countries with a positive net trade are Belgium-Luxembourg and Denmark. Trade balances were negative in Germany and the United Kingdom.

Table 6.3

Net potato trade for selected countries, 1997–99

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Netherlands France Canada Morocco Egypt Belgium-Luxembourg Denmark USA Lebanon Austria Italy Portugal Germany Spain United Kingdom

Value ($ million) 218 140 42 14 12 8 6 -2 -10 -10 -13 -40 -45 -49 -56

Continent

Trade centre

Europe Europe N America Africa Africa Europe Europe N America Asia Europe Europe Europe Europe Europe Europe

North Sea North Sea N America Mediterranean Mediterranean North Sea North Sea N America Mediterranean – Mediterranean – North Sea Mediterranean North Sea

Source: FAO, United Nations Selected countries were in the top 20 for both imports and exports Value = export values minus import values

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The overall net trade for the North Sea countries in the table is a positive $273 million. For these six North Sea countries collectively, their fresh potato exports were larger than imports. One reason is that the North Sea zone is a temperate production zone with autumn harvest and a long storage season. With a year-round supply of potatoes, exporters in these countries have opportunities to serve potato markets in other countries where the fresh potato supply is more limited. Mediterranean fresh potato countries deal with the North Sea countries in both imports and exports. Although Morocco and Egypt at numbers four and five on the list have fresh potato trade surpluses, Italy and Spain have large deficits. Overall, for the five Mediterranean countries in the list the trade deficit is $46 million per year. This suggests that the lack of year-round fresh potato supplies in some of the Mediterranean countries creates an opportunity for exporting countries in the North Sea region. Some Mediterranean countries, such as Morocco and Egypt, may actually operate a trade deficit for more months than they have a surplus situation. The large volume of new potatoes shipped to European countries during a relatively narrow market window can more than offset fresh potato imports during the rest of the year. The trade in new potatoes in the UK is illustrated in Fig. 6.6. In all of the years new potato imports are larger than exports. One extreme example mt 1000

800

Imports Exports

750 700 650 600 550 500 450 0

1977

1980

1983

1986

1989

1992

1995

6.6 New potato trade in the UK, 1970–98 (1000 mt) (FAO, United Nations). 156

1998

FRESH POTATO TRADE

is in 1983 when the UK exported 28 000 metric tonnes and imported nearly 14 times that amount, 384 000 metric tonnes. The trend in the 1990s was a narrowing of the trade gap. In 1998 new potato imports were 246 000 metric tonnes and exports were 160 000 metric tonnes, a difference of 86 000 metric tonnes. The market window during which the British potato market takes new potato imports is shown in Fig. 6.7. The peak month is in June, when nearly a quarter of the total annual volume enters the UK. This is a time when only a few British potato producers can harvest new potatoes, and old-crop potatoes have lost consumer appeal following the long period in storage. July is also a strong month at 20% of the annual total. The threemonth period of May, June and July accounted for nearly two-thirds of the new potatoes imported. During the three-month period of August, September and October British imports of new potatoes are shut down because of the abundance of domestic new potatoes. Imports gradually increase during the following six months. The source countries for the new potato imports into the UK during the 1992–93 marketing season and their share of the total are:2 Belgium 1%,

% 30

25

20

15

10

5

0 Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

6.7 UK new potato imports by month, 1992–93 (Potato Marketing Board). 157

May

THE INTERN ATION AL POTATO INDUSTRY

Channel Islands 26%, Cyprus 37%, Egypt 25%, France 6%, Greece 3%, Italy 4%, Portugal 1%, Spain/Canary Islands 3%, and other countries 1%. All of these new potato exporters were able to provide new potatoes during the critical May, June and July period when the British new potato market window is open for large amounts of imports. Two Mediterranean countries, Cyprus and Egypt, together made up 62% of total new potato imports. The new potato import pattern in the UK may be typical of trade between the Mediterranean area and the North Sea area. The flow of fresh potatoes from the Mediterranean is mostly new potatoes during the spring and early summer. There does not seem to be a reciprocal flow of fresh potatoes in the other direction during the rest of the year, at least not in similar volumes. During the same 1992–93 marketing season the UK’s main customers for fresh potatoes in rank order were: Canary Islands 50%, Ireland 27%, Sweden 4%, Belgium-Luxembourg 3%, and Germany, Portugal and Spain all at 2%. Cyprus and Egypt, the two largest sources of new potatoes in the UK, do not appear on its fresh potato destination list. Fresh potato exports from the Netherlands show a pattern of potato movement mostly to nearby neighbours. The top customers in rank order for the 1999–2000 marketing season were: Belgium/Luxembourg 44%, Germany 30%, United Kingdom 6%, Italy 4%, Africa 4%, Asia 3% and America 3%.

Fresh potato prices World fresh potato export prices are on an upward trend (Fig. 6.8). Currency exchange rates play an important role in potato pricing. Many international fresh potato trades deals are made with only two currencies – the money of the importing country and the money of the exporting country. Since currency exchange rates fluctuate daily, it is challenging to express world prices for any good in one currency, especially one that may not have been involved in most transactions. Recognizing the limitations, Fig. 6.8 uses the United States dollar as the single measure of value. The upward trend for the 1963–99 period is rather steep, running from a bit above $0.06 per kg in 1963 to $0.25 per kg in 1999. The trend line slope is an increase of about $0.005 per year. Actual fluctuations about the trend line have given prices as low as $0.05 per kg in 1964 to as high as $0.31 per kg in 1995. Two prominent price spikes are evident in the graph – the 1995 price as well as the 1976 price, which jumped to $0.25 per kg from $0.15 the previous year. The world fresh potato export prices given in Fig. 6.8 do not account for inflation. Deflating the prices with the United States consumer price 158

FRESH POTATO TRADE US$/kg 0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00 1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

6.8 World fresh potato export prices, 1963–99 (US$/kg) (FAO, United Nations).

index gives a graph of a very different pattern (Fig. 6.9). The price trend for deflated prices is slightly downward, with a slope of -$0.002 per year. This is confirmation of the economic principle, discussed in Chapter 5, that commodity prices trend downward. Deflating by the CPI accounts for changes in prices of other goods and services. After accounting for changing price levels, fresh potato prices go down in the long run. Apparently fresh potato exporters have not been able to differentiate their product. Fresh potatoes in the global market are indeed a commodity, with the inherent downward price trend that is associated with all commodities. Commodity pricing does not mean that there are no differences between fresh potato-exporting regions. Table 6.4 shows fresh potato import and export prices for six geographic regions as well as developed and developing countries. Prices in the ‘Exports’column are quite similar, ranging from $0.19 per kg in South America to $0.25 per kg in Oceania. The differences in the import column are much larger, ranging from $0.21 per kg in South America to $0.44 per kg in Africa. The high import prices in Africa and Oceania stand out from the others. In Africa the import prices are double the export prices. Another striking difference is the gap between import 159

THE INTERN ATION AL POTATO INDUSTRY US$/kg 0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

6.9 World fresh potato export prices, 1963–99, deflated (1983 US$/kg) (FAO, United Nations).

Table 6.4 Fresh potato export and import prices by region, 1999 Imports

Exports

$0.44 $0.27 $0.24 $0.27 $0.38 $0.21 $0.24 $0.33

$0.22 $0.22 $0.23 $0.25 $0.25 $0.19 $0.23 $0.21

Africa Asia Europe N & C America Oceania South America Developed countries Developing countries Source: FAO, United Nations

160

1996

1999

FRESH POTATO TRADE

prices in developed countries, $0.24 per kg, and developing countries, $0.33 per kg. The highest fresh potato import prices in the world are paid in places in Africa and other developing regions where hunger is a serious problem.

Fresh potato trade issues Governments set up trade barriers for a variety of reasons. One primary reason is to protect domestic industries. Several basic types of tools are used to restrict imports. One is a tariff, which imposes a percentage or per unit tax on imported goods. Tariffs raise the price of imported goods, making them less competitive with the locally produced product. Another tool is a quota, which imposes a ceiling on the amount of product that can be imported. Some quota systems include a tariff that is triggered when certain quota amounts have been met. A third type of trade barrier is government subsidies of the domestic industry putting it at a competitive advantage over foreign industries. A fourth type of restriction is called non-tariff barriers to trade. An example is a plant health quarantine against a particular region, in an effort to reduce the risk of the domestic potato crop being exposed to a new pest problem. Trade barriers in general may be applied to all countries or selected countries. Trade arrangements with regional or political interests are commonly done to allow favoured treatment to certain nations. Trade barriers of all types have been used to restrict potato trade. In this section we provide further discussion of three issues – tariffs, phytosanitary restrictions and trade disputes.

Tariffs The World Trade Organization (WTO) is a global entity consisting of 140 member nations (as of 30 November 2000) that deals with terms of international trade. In the Uruguay Round of negotiations in 1994, members agreed to reduce trade barriers over a six-year period (1995–2000) for developed nations and a 10-year period (1995–2004) for developing nations. In addition to reductions in subsidies the agreement called for replacement of quotas with tariffs. In developed countries tariffs were scheduled to decrease an average of 36% for all agricultural products and a minimum of 15% for individual agricultural products. In developing countries the targeted tariff cuts are 24% and 10%, respectively. Some nations chose to make deeper cuts than the minimum. The tariff reductions are phased in equal annual increments.3 Fresh potato tariffs for selected countries at both the beginning and the end of the tariff-reduction period are given in Table 6.5. All the listed nations 161

THE INTERN ATION AL POTATO INDUSTRY Table 6.5

Fresh potato tariffs in selected countries

Country

Egypt Morocco Namibia South Africa Swaziland Tunisia Bangladesh China Indonesia Israel Japan Philippines South Korea Sri Lanka Thailand Turkey Hungary Romania European Union New potatoes 1 Jan–14 May New potatoes 15 May–31 Oct Other Canada Mexico United States Australia New Zealand Argentina Brazil South America Venezuela

Base rate

Bound rate

15% 45% 77% 77% 77% 200% 200% 50% 90% 270% 5% 100% 338% 66% 139% 25% 52% 200%

10% 34% 49% 49% 49% 150% 150% 40% 50% 230% 4.3% 40% 304% 50% 125% 19.3% 44.2% 180%

15% 21% 18% 7.72 c/kg $354/t, but <272% 0.77 c/kg 10% 0% 25% 45% 170% 50%

9.6% 13.4% 11.5% 4.49 c/kg $318/t, but <245% 0.5 c/kg 5% 0% 20% 35% 130% 20%

Bound date 2004 2004 2004 2004 2004 2004 2004 2004 2004 2000 2000 2004 2004 2004 2004 2004 2000 2000 2000 2000 2000 2000 2000 2004 2004 2000 2000 2000 2004 2004 2004 2004

Region Africa Africa Africa Africa Africa Africa Asia Asia Asia Asia Asia Asia Asia Asia Asia Asia Europe Europe Europe Europe Europe Europe N America N America N America N America Oceania Oceania S America S America S America S America

Source: USDA FAS Base rate = beginning rate on 1 January 1995 Bound rate = final rate on 31 Dec 2000 for developed nations, 31 Dec 2004 for developed nations

except for the North American countries of Canada, Mexico and the United States use a percentage tariff that is calculated by multiplying the tariff rate by the import potato price. Converting North American per unit tariffs to percentages for 1997–99 average import prices gives 29% and 17% for Canada, 159% and 107% for Mexico and 3% and 2% for the United States. Within North America the Mexican tariffs are the most protective of their domestic fresh potato industry. 162

FRESH POTATO TRADE

The fresh potato tariffs in Table 6.5 range from a low of 0% in New Zealand to a high of 304% in South Korea and 230% in Israel. To illustrate the impact of the Israeli tariff on fresh potato import prices, the world import price and Israel’s import price are graphed in Fig. 6.10 for the 1988–99 period. At one extreme Israel’s 1992 import price of $0.75 per kg was more than triple the world average import price of $0.23 per kg. That gap narrowed during the mid- and late 1990s, but the tariff continued to cause Israeli consumers to pay higher prices for imported fresh potatoes. Since the gap did narrow it suggests that some countries may have negotiated reduced tariffs for potatoes going into Israel. The WTO-published tariffs are legally binding only as a ceiling. Lower, negotiated tariffs, known as ‘applied tariff rates’, can be used and may change frequently depending on current supply, demand and politics. The WTO does not require notification of applied tariff rates. Since tariffs are not allowed to go above the published rates, the effect of the WTO agreement is a gradual reduction of imported fresh potato prices around the world.

$/kg 0.80 Israel

0.70

World 0.60

0.50

0.40

0.30

0.20

0.10

0.00 1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

6.10 Fresh potato import prices, Israel and World, 1988–99 (FAO, United Nations). 163

1999

THE INTERN ATION AL POTATO INDUSTRY

Egypt has the lowest tariffs among the six African countries listed in Table 6.5. In spite of having lower tariffs than its neighbours, Egypt had a positive trade balance for fresh potatoes during the 1997–99 period, ranking number five on the list of trade balances in Table 6.3. Since Egypt has developed a strong export market to European countries for new potatoes, lower tariffs were probably negotiated for potatoes going in the other direction. At the other extreme in Africa is Tunisia, with old tariffs as high as 200%. Japan has the lowest tariff in Asia at 4.3% as of 2000. Turkey has the second lowest tariff, but its Mediterranean neighbours Israel and Tunisia have very high tariffs. Sri Lanka, which is among the top 15 potato-importing nations, has a mid-level tariff moving from 64% to 50% during the phase-in period. The Oceania countries have some of the lowest fresh potato tariffs in the world, with New Zealand at 0% and Australia at 5%. South American tariffs are capped at 130% after the phase-in, but some individual nations, such as Argentina at 20%, have set tariff rates well below that. In Eastern Europe Romania has a high tariff of 180% until 2004 but Hungary’s is much lower at 44.2%. The European Union has three levels of fresh potato tariffs depending on the type of potato and the season. The highest rate, at 13.4%, is for new potatoes during the 15 May to 31 October period, which is when many member countries can harvest their own new potatoes. The new potato tariff is reduced to 9.6% during the 1 January to 14 May period. All other fresh potatoes are subject to an 11.5% tariff. Fresh potato tariffs vary over a wide range, but all WTO members have scheduled tariff reductions in order to continue their memberships. The overall effect is to encourage the international trade of potatoes. For those who want to continue to shelter domestic potato industries from competitive global forces, there are other tools, known as non-trade barriers, that can be used to reduce potato imports.

Phytosanitary restrictions Potato growers seek government protection from the introduction of new potato pests into their fields. Since pests can be carried on potato tubers, one preventive measure is to ban fresh potato imports from regions that have pests that are not already present. This is a problem not just for potatoes but also for other agricultural crops, livestock and human disease. The WTO has established regulations, known as Sanitary and Phytosanitary (SPS) Measures, to protect importing countries from the risks of pests, diseases and toxins. Although SPS is a continual work in progress, one point of general agreement is that rules should be based on scientific risk assessments. A second important principle is that protection should be consistent

164

FRESH POTATO TRADE

from one situation to another. A WTO SPS Committee is charged with using these principles as guiding lights in establishing procedures for international standards. Phytosanitary restrictions have often been used to restrict or shut down imports of fresh potatoes from certain countries or regions within a country. A North American example is a case in point. During the 2000–01 potato crop season a pest situation closed the door for fresh potatoes from Prince Edward Island (PEI), Canada to enter the United States. The pest was potato wart disease caused by a fungus named Synchytrium endobioticum. At one time the disease was common in Europe and was described by the UK Ministry of Agriculture, Fisheries and Food (MAFF) as the ‘most serious disease of potato’. It is an insidious disease whose causal agent can remain viable in the soil for up to 40 years. Resistant varieties, quarantines and statutory measures have helped control the disease in Europe, but new strains of the fungus are now putting formerly resistant varieties at risk. Potato wart disease is not new to North America. It was a problem in one Maryland garden in 1981 but, according to the United States Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS), the fungus that causes potato wart disease was eradicated from the US in 1992. The disease is well established in Canada’s Newfoundland, with its presence documented in 90% of the communities in that province. Strict quarantine measures to prevent plant material from leaving Newfoundland have kept the fungus from spreading to other parts of Canada. During October 2000 Synchytrium endobioticum was detected in a one-twentieth of a hectare portion of one field in Prince Edward Island. The Canadian Food Inspection Agency (CFIA) quickly conducted tests, determined that the infected area was limited to one location, implemented a quarantine and informed APHIS of its findings and actions. Since potato wart disease is recognized as a quarantine pest in the US, Canada and most potatoproducing countries, on 31 October APHIS closed the US border to fresh potatoes and seed potatoes from PEI. CFIA implemented restrictions regarding transport of PEI potatoes to other Canadian provinces. About 8% of PEI fresh potatoes are typically exported to the US. During a crop year when North American potato supplies were overabundant and open market prices at money-losing levels, the quarantine drove PEI prices lower. PEI growers claimed that closing the border was unnecessary and was a political trade issue rather than a true plant health issue. The US potato industry claimed that the pest could devastate their potato crops and that the border should be closed for imports from all Canadian provinces. On 13 December APHIS and CFIA agreed to ease restrictions. The agreement split the island into a ‘restricted area’ of about one-eighth of the land and an ‘unrestricted’ area. Potatoes from the restricted area were prohibited

165

THE INTERN ATION AL POTATO INDUSTRY

from entering the US, but could go to other Canadian provinces with certain restrictions. From the unrestricted area, shipments of fresh potatoes that were washed and treated with a sprout suppressant would be allowed into the US. Both the PEI and US potato industries were unhappy. PEI growers said that the restricted area was too large. The US industry was upset that APHIS did not consider input from the National Potato Council or a scientific review panel. APHIS, however, did not specify a timetable for implementation for administrative reasons. The administrative concerns turned out to be a political firestorm from the US potato industry. APHIS claimed the 13 December agreement was for discussion purposes only and the border remained closed. The PEI industry responded by pushing the Canadian government to retaliate with threats of anti-US trade restrictions. On 29 December APHIS proposed tough new regulations to CFIA for movement of potatoes into the US and within Canada. CFIA agreed to the regulations regarding entry into the US, but not with the restrictions within Canada. APHIS replied that the provisions in its 29 December letter were not negotiable and that the US border remained closed until Canada met all the APHIS requirements. Canadian officials responded by claiming that the issue had gone beyond phytosanitary restrictions and called for a consultation under the North American Free Trade Agreement (NAFTA). Resolution under NAFTA guidelines could take several years. The stakes in this phytosanitary dispute are high. Canadian officials risk the closing of the US border to all seed potatoes and perhaps all fresh potatoes. (There is no evidence that the fungus can survive potato processing.) The US potato industry faces the risk of an eradicated pest returning to infest its fields, which could restrict US export opportunities. The US also faces the risk of appearing to be anti-free trade at a time when it is asking other countries to open their borders. During the potato wart disease crisis, US potato industry officials were lobbying Japan to relax its phytosanitary quarantine against US fresh potatoes. Ironically, one of the two pests in the Japanese quarantine is potato wart disease. The other is golden nematode. Japanese potato growers who want to protect their industry from US competition may use the US–Canada dispute to strengthen their position. As the potato wart example illustrates, potato pest restrictions that are designed along the lines of a simple principle – protecting crops from pests – can lead to complex trade disputes.The challenge for WTO is to establish standards for phytosanitary regulations that are science-based and consistent. As can be seen in the North American potato wart disease situation, it is difficult to get agreement regarding what are reasonable procedures to protect potato plants versus procedures that are designed to protect potato prices. 166

FRESH POTATO TRADE

Trade disputes Although phytosanitary regulations can be a source of fresh potato trade disputes, many other issues can trigger disputes even among close trading partners. Another North American example involves ‘anti-dumping’ regulations in the Canadian province of British Columbia (BC). Beginning in 1984 British Columbia imposed duties on US fresh potatoes coming into the province when Western US fresh potato prices were below the ‘normal values’ (estimated break-even prices) established by the government. Canadian law requires anti-dumping regulations to expire in five years unless a review is requested. The anti-dumping law for fresh potatoes was reviewed and upheld in 1990, 1995 and 2000. The intent of the BC law is to protect domestic potato producers from the risk of low prices. Since duties are imposed when US fresh potato prices descend to a trigger price, and the duties are equal to the gap between the market and normal values, the law puts a floor on fresh potato prices for BC growers. During the 2000 hearing of the Canadian International Trade Tribunal (CITT) potato industries from British Columbia and the state of Washington presented testimony. The BC industry argued that its growers could not compete with US growers and could not survive financially without the floor price. Further it claimed that normal values represented true production costs and that Washington producers lost money on their fresh potato operations. The BC industry argued that Washington producers were able to survive financially because their losses in the fresh market were more than offset by profits in the processed potato market. The Washington industry argued that the ‘normal values’ based on potato production and shipping costs were outdated and that Washington growers and shippers were indeed operating profitably on open-market prices. They cited technological improvements and economies of size that reduced per unit costs in Washington while BC production costs increased. With profitable floor prices, BC growers bid up the prices of potato production inputs. An example is the price of potato farmland. While the average price for farmland in Washington’s Columbia Basin, the centre of its potato industry, were around $US 1500 per acre ($US 3750 per hectare), in the late 1990s BC growers bid up potato land prices to more than $CN 10 000 per acre ($US 18 000 per hectare). Interest on land costs alone create a huge gap in potato production costs between BC and Washington. The BC land costs of nearly five times the costs in Washington’s Columbia Basin, the world’s potato yield leader, certainly appears to be a market distortion created by government policy. The economic principle that ‘costs follow prices’ appears to hold true in the BC–US dispute. Washington growers, faced with lower prices, found ways to produce at lower costs. BC growers, faced with prices supported by government intervention, did not have the same incentive to 167

THE INTERN ATION AL POTATO INDUSTRY

reduce costs. The problem is that government support becomes a selffulfilling prophecy. The mantra that potato producers cannot produce without government intervention becomes true as government policy distorts markets and renders its producers unable to compete. The government reasons, then, that the best solution is not the rigours of the free market, but rather the restrictions of free trade. The Canadian government is not alone in providing protection to potato industries. Governments around the world are influenced by the political power of producers who want government protection from the risks of competition. BC potato growers are not the only ones who have sought and achieved government assistance in their fresh potato trade situations. The wide range of potato tariffs in Table 6.5 reveals the protectionist tendencies of some nations.

References 1

United Nations, Food and Agriculture Organization, FAO Statistical Databases, January 2001. http://apps.fao.org/page/collections?subset=agriculture 2 Potato Marketing Board, Potato Statistics in Great Britain, 1989–93, Oxford. 3 United States, Department of Agriculture, Foreign Agricultural Service, WTO Tariff Schedules, January 2001. www.fas.usda.gov:80/scriptsw/wtopdf_lout.asp

168

CHAPTER

7 Frozen potato trade

I

nternational trade in frozen potatoes did not get started with significant volume until the 1970s, but the value of world trade in frozen potato products has expanded rapidly since then (Fig. 7.1). Frozen potato export value grew dramatically from $6 million in 1977 to $2.1 billion in 1999. In 1988 frozen exports first reached the half-billion-dollar level, then doubled six years later to one billion dollars, then doubled again to two billion dollars five years later. Fresh potato trade exceeded frozen potato trade by more than one billion US dollars as recently as 1991. Following the remarkably rapid growth of the global frozen potato industry, frozen trade exceeded fresh trade six years later in 1997. During the late 1990s the total value of both fresh and frozen potato trade was about $4 billion, but Fig. 7.1 reveals two differences between fresh and frozen trade. First, frozen potato export value is much more stable from year to year than is fresh potato export value. The underlying reasons are differences in price elasticity of demand and pricing mechanisms. Since frozen potato products are more price elastic and the industry uses contracts, relative price stability moderates changes in export value. Fresh potatoes rely on individual negotiation pricing in a market that is very price inelastic, resulting in wide swings in both prices and export value. Secondly, although both graphs trend upward, the trend for frozen products is steeper in the later years. A linear trend line for frozen potatoes from 1990 to 1999 has a slope of $143 169

THE INTERN ATION AL POTATO INDUSTRY $m 2500

2000 Frozen Fresh 1500

1000

500

0 1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

7.1 Value of world fresh and frozen potato exports, 1963–99 ($ million) (FAO, United Nations).

million per year. Extending the trend into the future gives an estimate of frozen potato export value exceeding $3 billion in 2007 and exceeding $4 billion in 2014. International potato trade involves many countries on the export side and many countries on the import side, but the Netherlands is regarded as the world leader in potato exports. Figure 7.2 shows that the Dutch industry exports well over 90% of its frozen potatoes, about two-thirds of its seed potatoes and about a quarter of its fresh potatoes. The chart also reveals that nearly all of its frozen potatoes are exported to other European Union countries. Since frozen potatoes are expensive to transport it makes sense that the Netherlands’ best customers are close to its borders. On the import side some countries do indeed transport frozen potatoes long distances. Japan, which is a long way from major frozen potato-processing centres, stands out as a high-import country with more than 90% of its frozen potato products coming from overseas. With this prelude to the biggest frozen potato players on the export side and the import side, discussion of the types of frozen products that are sold in the international markets is appropriate. The fast-food industry is the main 170

FROZEN POTATO TRADE % 100

Export–Other

90

Export–EU

80 70 60 50 40 30 20 10 0 Fresh

Frozen

Seed

7.2 Export shares of Netherlands fresh, processed and seed potatoes, 1999 (NIVAA).

Table 7.1

Fries share of United States frozen potato exports, 1998

Destination North America C & S America Europe Middle East and Africa Asia and Oceania Total

Fries value ($1000)

Other value ($1000)

Fries share (%)

36 666 10 117 8 361 614 247 455 302 213

2 241 829 1 905 218 13 487 17 680

94 92 81 74 95 94

Source: National Potato Council

driver in the growth of the international frozen potato trade. The staple of these quick-service restaurants is frozen fries (aka French fries or chips), but the industry markets other frozen potato products as well. Frozen potato rounds, frozen potato squares and potato hash browns are three of the products, which are sold in both retail and food service markets. Table 7.1 shows the split between US fries and other frozen products going into global markets. Overall, 94% of the frozen potato products exported by the US industry is in the form of fries. Asia and Oceania, the largest buying region 171

THE INTERN ATION AL POTATO INDUSTRY

for the US frozen potato industry, purchases 95% of its product in the form of fries.

Frozen potato exports Europe and North America, which together accounted for 95% of the world market in 1999, dominate the international trade of frozen potato products (Fig. 7.3). Although this is a one-year snapshot, the dominance by those two continents has existed since global frozen potato trade began in the 1970s. Market shares could change in the future. At the turn of the century global frozen potato-processing firms have expanded into South America, Oceania and Asia. Initially the factories may produce for the domestic markets, but future expansions could develop into exports. The frozen export market is concentrated in fewer countries than is the fresh export market. The four largest frozen potato-exporting countries – Netherlands, Canada, the United States and Belgium-Luxembourg – sold $1.7 billion of frozen potato products in 1999 (Table 7.2). Thus the big four made up 85% of the total world market. By contrast, the four largest fresh potato-exporting countries – Netherlands, France, Belgium-Luxembourg and Germany – had a 51% share of the world fresh export market during the same period. Two large trade centres are evident in the top 15 ranking of frozen potato-exporting countries in Table 7.2. North Sea nations Netherlands, Oceania 1% Asia S America 1% 3%

N & C America 37% Europe 58%

Note: Africa’s share is less than 1%.

7.3 Frozen potato export shares by continent, 1999 (FAO, United Nations). 172

FROZEN POTATO TRADE Table 7.2

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Top 15 frozen potato-exporting countries, 1999

Netherlands Canada USA Belgium-Luxembourg France Argentina UK Germany Poland China New Zealand Denmark Ireland Australia Spain

Value ($ million)

Quantity (1000 mt)

Price ($/kg)

684 383 361 295 87 51 43 37 19 16 8 6 6 6 5

897 576 491 407 115 57 39 44 31 20 15 8 5 8 8

0.76 0.66 0.73 0.72 0.76 0.90 1.08 0.84 0.61 0.79 0.54 0.85 1.11 0.72 0.64

Region North Sea N America N America North Sea North Sea S America North Sea North Sea E Europe Asia Oceania North Sea North Sea Oceania Mediterranean

Source: FAO, United Nations

Belgium-Luxembourg, France, United Kingdom, Germany, Denmark and Ireland occupy positions one, four, five, seven, eight, 12 and 13, respectively. These seven countries accounted for 58% of the total export value of the top 15 countries. Another frozen potato trade centre is North America, with Canada and the United States occupying the second and third spots on the list. Unlike the fresh market, the Mediterranean region is not a significant player in the frozen market, with only one country making the top 15. Three other regions are represented on the list of top frozen exporters. China is the lone entry from Asia, but trade sources suggest that some of China’s exports may indeed be exports from other countries but routed through Greater China Ports. Argentina at number six is the sole representative from South America. Oceania’s Australia and New Zealand are ranked at 11 and 14. The frozen export list was terminated at 15 nations rather than the 20 nations in the fresh market analysis because the frozen market is more concentrated. Spain, the number 15 nation on the frozen list, had only $5 million in exports, while number 15 on the fresh list, Cyprus, had $23 million of exports. The growth of exports in the top four countries is plotted in Fig. 7.4. None of the four had significant exports before the late 1970s, confirming that the frozen potato trade is relatively young. The relative positions of the Netherlands, the largest exporter, followed by the United States, BelgiumLuxembourg then Canada was the pattern until 1997 when Canada moved into third place. Two years later Canada surged past the US to occupy second 173

THE INTERN ATION AL POTATO INDUSTRY $m 900

800 700

Bel-Lux Canada

600

Netherlands USA

500 400

300 200

100 0 1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

7.4 Frozen potato export values for selected countries, 1978–99 ($ million) (FAO, United Nations).

place among frozen potato exporters. All four countries seem to be on different types of growth patterns. The US pattern is one of monotonic growth, with export value never falling below previous years, but never growing very rapidly. Canada was in a similar pattern of steady growth, but the growth accelerated during the mid- and late 1990s. The Belgium-Luxembourg situation was steady growth until the 1990s when the pattern became quite volatile with steep peaks and valleys.The Netherlands graph has shown rapid growth, but also a great deal of volatility in later years. A jump from just under $400 million in 1993 to nearly $800 million two years later in 1995, then a drop below $600 million the next year shows the variable nature of Netherlands exports. The big four frozen potato-exporting countries are not the only nations in the business. Table 7.2 shows three tiers of export levels. The first tier, of course, includes the big four countries with $295 million to $684 million of exports. Below the first tier is a very large drop to another group of four countries with export values in the range of $37 million to $87 million. The second tier includes three North Sea countries – France, United Kingdom 174

FROZEN POTATO TRADE

and Germany – as well as one South American nation – Argentina. The third tier of countries, those with exports of $19 million or less, are scattered through Europe, Asia and Oceania. Historical patterns of frozen potato exports were analysed to identify second-tier and third-tier countries that were expanding (Fig. 7.5). Secondtier nation Argentina entered the frozen potato export market in 1996 when McCain Foods built a frozen fry factory in Balcarce. Expansion of frozen potato exports followed with total export value jumping to more than $52 million in 1999. Third-tier Australia and New Zealand grew very rapidly from 1994 to 1995, tripling exports from $5 million to $15 million in one year. Growth in those two Oceania countries slowed and then declined in the late 1990s. Exports from Poland have grown steadily since 1995. McCain Foods also has a frozen potato-processing facility in Poland, at Strzelin. These three countries as well as other countries in the top 15 or even some below the top 15 could expand frozen potato exports in the future. As world demand for frozen fries expands, processors will explore opportunities to expand production in countries where they already operate as well as build new factories in other countries.

$m 60

50 Argentina Australia & NZ

40

Poland

30

20

10

0 1990

1991

1992

1993

1994

1995

1996

1997

1998

7.5 Frozen potato export values for selected countries, 1990–99 ($ million) (FAO, United Nations). 175

1999

THE INTERN ATION AL POTATO INDUSTRY

Frozen potato imports Asia is a large trade deficit region for frozen potato trade. Although Asian countries exported only 1% of the world’s frozen potato products in 1999 (Fig. 7.3), they imported 20% of the total world trade (Fig. 7.6). European import shares of 57% are almost identical to their export shares of 58%, suggesting that much European frozen potato trade is within the region. The South American and Oceania shares of imports and exports are nearly the same, but North America’s situation is different. With 37% of the export share and 18% of the import share, North America has a trade surplus. The 19% North American trade surplus is the same as Asia’s 19% trade deficit. Apparently North American processors ship a large amount of frozen potatoes to Asian buyers. Although the United States exports heavily to Asia, it was the largest frozen potato importer in the world in 1999 (Table 7.3). Its leading export customer, Japan, is in third place on the import list, slightly behind United Kingdom at number two. Frozen potato imports are less concentrated than frozen potato exports. The top four importers – US, UK, Japan and France – account for 58% of the global market while the top four exporters supplied 85% of the total. In view of the lesser concentration the list of top importers was expanded to 25 nations. Seven of the 25 countries are in the North Sea region. Including those seven countries, European nations occupy 15 of the 25 spots on the list. The remaining 10 nations include six from Asia, three from North America and one from South America.

S America 4% Oceania 1%

Asia 20%

N&C America 18%

Europe 57% Note: Africa’s share is less than 1%.

7.6 Frozen potato import value shares by continent, 1999 (FAO, United Nations). 176

FROZEN POTATO TRADE Table 7.3

Top 25 frozen potato-importing countries, 1999

World 1 USA 2 UK 3 Japan 4 France 5 Germany 6 Italy 7 Spain 8 Ireland 9 China 10 Brazil 11 Netherlands 12 Belgium-Luxembourg 13 Greece 14 Mexico 15 Denmark 16 Sweden 17 Portugal 18 Korea, Republic of 19 Russian Federation 20 Saudi Arabia 21 Canada 22 Malaysia 23 Austria 24 Singapore 25 Finland

Value ($ million)

Quantity (100 mt)

Price ($/kg)

2225 316 294 274 207 206 111 85 66 61 59 52 41 38 36 34 33 27 26 22 21 16 15 14 13 13

2877 472 334 281 274 234 129 123 77 81 76 74 58 60 49 40 40 37 31 92 24 20 20 15 15 14

0.77 0.67 0.88 0.97 0.76 0.88 0.87 0.69 0.85 0.75 0.77 0.71 0.71 0.63 0.74 0.85 0.82 0.71 0.85 0.24 0.88 0.81 0.75 0.97 0.88 0.93

Region

N America North Sea E Asia North Sea North Sea Europe Europe North Sea E Asia S America North Sea North Sea Europe N America North Sea Europe Europe E Asia Europe Middle East N America E Asia Europe E Asia Europe

Source: FAO, United Nations

The frozen potato-importing nations can be fitted into three trade centres: North America, Europe and East Asia. The three North American countries of the United States, Canada and Mexico imported $369 million of frozen potato products in 1999. The total for the European top 25 countries was $1.24 billion. The five East Asian nations in the top 25 imported $390 million of frozen potatoes. The three import centres differ from the two export centres for frozen potatoes. The one common centre is North America. The European import centre is dispersed through all of Europe, while the European export centre is concentrated in the North Sea nations. The East Asia trade centre consisting of Japan, China, South Korea, Malaysia and Singapore on the top 25 as well as some countries off the list, is an important destination for the world trade of frozen potato products. 177

THE INTERN ATION AL POTATO INDUSTRY

The top 25 importing countries are on four continents: Asia, Europe, North America and South America. Frozen potato import patterns for the top countries in each continent are shown in Fig. 7.7. Brazilian frozen potato imports were non-existent until 1990, grew rapidly during the mid-1990s then flattened during the late 1990s. Imports in Japan, United Kingdom and the United States were all at higher levels than in Brazil. The graph lines for these three countries cross. For a period in the 1980s the United Kingdom was the largest importer, then Japan took the top spot until the late 1990s. In 1999 the United States took over as the number one importer. Several other observations can be made regarding Fig. 7.7. First, only the United Kingdom shows much volatility in its import values. Secondly, the growth in imports in the United Kingdom and the United States accelerated during the 1996–99 period. Both of these observations may be partially explained by currency exchange rates.The United States imports frozen potatoes from Canada. A strengthening US dollar in comparison to the Canadian dollar created an economic incentive to ship Canadian frozen potatoes into the US. Frozen potatoes could be produced at Canadian cost levels and

$m 350

300 Brazil Japan UK

250

USA 200

150

100

50

0 1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

7.7 Frozen potato import values for selected countries ($ million) (FAO, United Nations; US Dept of Commerce). 178

FROZEN POTATO TRADE

sold in the US market for high-valued US currency. Frozen potato processors built up their Canadian production to take advantage of this economic incentive. A similar situation occurred in the United Kingdom with its strong pound in relation to European currencies, including the Euro when it was introduced in 1998. The strong pound was a factor in import growth during the late 1990s, and changing currency rates may have been responsible for some of the earlier volatility in import values. The opposite effect may have occurred in Brazil, whose weakened currency stifled imports during the late 1990s.

Net trade for frozen potatoes Eleven nations that appeared on both the top 15 frozen potato export list and the top 25 frozen potato import list are in the net trade tabulations in Table 7.4. The North Sea region is represented at both the top of the list, which shows the countries with the largest trade surplus as well as the bottom of the list, which shows the countries with the largest trade deficit. The Netherlands frozen potato trade surplus in 1999 was $632 million. At the bottom of the list, the United Kingdom trade deficit was $252 million. The collective trade balance for the seven North Sea countries on the list was a surplus of $257 million. The large surplus supports the point that the

Table 7.4

Net frozen potato trade for selected countries, 1999

Country 1 Netherlands 2 Canada 3 Belgium-Luxembourg 4 USA 5 Denmark 6 China 7 Ireland 8 Spain 9 France 10 Germany 11 UK

Export value ($ million)

Import value ($ million)

Net trade ($ million)

684 383 295 361 6 16 6 5 87 37 43

52 16 41 316 34 61 66 85 207 206 294

632 367 253 45 -28 -45 -60 -80 -120 -169 -252

Source: FAO, United Nations Selected countries were in top 25 for imports and top 15 for exports.

179

Region North Sea N America North Sea N America North Sea Asia North Sea Europe North Sea North Sea North Sea

THE INTERN ATION AL POTATO INDUSTRY

North Sea region is a frozen potato production centre that is a net exporter on the world market. The trade balance for the two North American nations in Table 7.4 is a surplus of $412 million, but most of that comes from Canada. The situation in the United States evolved from that of a large trade surplus during the 1980s to a shrinking surplus in the late 1990s to a trade deficit in 2000 (Fig. 7.8). From a trade surplus of $222 million in 1995 the United States moved to a projected $70 million trade deficit in 2000. Although US frozen potato exports continue to grow steadily and even rapidly at times, imports grew even more rapidly since 1996. Considering the three countries in the North American Free Trade Agreement (NAFTA) – Canada, Mexico and the United States – as a whole, a very different picture emerges. Net trade surpluses for the NAFTA group steadily increased from $56 million in 1985 to $129 million in 1990 to $307 million in 1995 to $375 million in 1999. Including Mexico, which has always been a trade-deficit nation for frozen potatoes, brings down the net trade figures. Although the US trade surplus has evaporated, the trade surplus for North America continues to grow.

$m 600

500

Exports Imports

400

300

200

100

0 1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

7.8 Frozen potato trade for the United States, 1978–2000 ($ million) (FAO, United Nations; US Dept of Commerce). 180

FROZEN POTATO TRADE

Statistics about the value of frozen potato exports and imports are available from the United Nations Food and Agriculture Organization,1 but the data does not include details about sources and destinations for individual nations.Trade statistics from some selected countries shed light on trade flow for frozen potatoes. Table 7.1 shows the export destinations for US frozen potatoes. Buyers in Asia and Oceania make up 82% of US frozen potato product destinations, 12% goes to North America and the remaining 6% is scattered to other destinations. Looking at specific countries, Japan was the top US customer in 1998, taking 53% of its frozen potato exports.2 Hong Kong was next, at 6%, followed by North American neighbours Mexico and Canada, at 6% and 5% of the market, respectively. East Asian countries China, South Korea and Philippines were at 5%, 5% and 3%, respectively. Canada, with 97% of the total, dominates the US frozen potato import market. During the 1990s the North American frozen potato trade was dominated by two major flows: one from Canada to the United States and the other from the United States to Japan. Trade between European Union nations dominates the European frozen potato trade. The largest player, Netherlands, sent 96% of its processed potato exports to other European countries in 1999. The United Kingdom took 29% of the Dutch exports, Germany bought 22% and France was the destination for 12%. Going in the other direction, the Netherlands took onethird of British exports. For Germany the top export customer is the Netherlands, which took more than 70% of German exports in 1999/2000. The Netherlands was also the leading source of frozen potato imports into Germany, accounting for more than half the import total in 1999/2000.

Frozen potato trade prices World frozen potato prices trend upward in nominal terms but downward in deflated terms (Fig. 7.9). The upward slope for nominal prices is about one cent per year. After compensating for changes in the United States consumer price index (CPI), the trend is downward at the rate of nearly one and a half cents per year as measured in 1983 US dollars. As we have noted before, an important economic principle is that in the long run commodity prices trend downward. The downward slope for deflated prices suggests that frozen potato products are commodities. Frozen fries for the fast-food industry, which dominates global frozen potato trade, may be homogeneous products at the processor–restaurant link of the market chain. At the consumer level the quick-service restaurants try to differentiate their potato products, but the frozen fries they buy from one processor are quite similar to those purchased from other processors. 181

THE INTERN ATION AL POTATO INDUSTRY US$/kg 1.00 Price, nominal 0.90

Price, deflated Trend (Price, nominal) Trend (Price, deflated)

0.80

0.70

0.60

0.50

0.40

0.30 1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

7.9 World frozen potato prices, nominal and deflated 1963–99 (US$/kg) (FAO, United Nations) (deflated prices are in 1983 US dollars).

Frozen potato prices at the world level are volatile, though not as volatile as fresh potato prices. One large nominal price drop was in 1985, when prices fell from $0.61 per kg to $0.45 per kg, but then two years later prices popped up to $0.66 per kg. The price spiked in 1995, rising from $0.70 per kg to $0.90 per kg, then dropped back down to $0.73 per kg in 1996. Differences in 1999 export prices and import prices between different regions of the world are seen in Table 7.5. The highest import price, $0.89 per kg, was paid in Asia, where transport costs from the main suppliers in North America add to the price. Import prices in Oceania were also high owing to long distances from suppliers. The lowest import price, $0.69 per kg, was in North America where transport costs are minimal since most of the trade flow is to the US from Canadian frozen potato factories near the US border. European import and export prices are only $0.01 per kg apart, which suggests that transport and tariff costs within Europe are quite low. Export prices were lowest in Oceania, where Australia and New Zealand are the two main players. The highest export price is in South America, 182

FROZEN POTATO TRADE Table 7.5

Frozen potato import and export prices by region, 1999 ($/kg)

Asia Europe N & C America Oceania South America Developed countries Developing countries World

Imports

Exports

Difference

0.89 0.77 0.69 0.88 0.78 0.77 0.78 0.77

0.79 0.76 0.70 0.60 0.90 0.73 0.80 0.74

0.10 0.01 (0.01) 0.28 (0.12) 0.04 (0.02) 0.04

Source: FAO, United Nations

where there is one major exporter, Argentina, and one major importer, Brazil. The confusing situation is that South American import prices are lower than export prices. Apparently Brazil and some other South American countries are able to import frozen potatoes at a lower price than Argentina gets for its exported frozen potatoes. Currency exchange rates could play a role here, because Argentina’s currency is pegged 1 : 1 at the US dollar while other South American currencies are not and are often quite volatile. Tables 7.2 and 7.3 show frozen potato import and export prices for individual countries in 1999. Two gaps are apparent. One is the gap between prices in the British Isles and those on the continent in the North Sea countries. North Sea neighbours Netherlands at $0.76, Belgium-Luxembourg at $0.72 and France at $0.76 had export prices within a narrow $0.05 per kg range. Meanwhile import prices in Ireland and the United Kingdom were $0.85 and $0.88 per kg. When looking at the export prices, the gap is even larger. The highest export prices were in Ireland, at $1.11 per kg, and nearby United Kingdom at $1.08 per kg. Export prices for the other North Sea countries were in the range of $0.72 to $0.84. The additional costs of shipping by sea may account for the higher prices in the British Isles. The other gap of interest is that between import prices and export prices within the same country. In Ireland export prices are $0.26 per kg higher than import prices. In the United Kingdom the gap is $0.25 per kg. On the continent the gap ranges from a minus $0.05 in Netherlands to a positive $0.04 in Germany. Possible explanations for the larger gap in the UK and Ireland could be differences in product mixes, currency exchange rates, customers, tariffs and transport costs. Temporal differences in frozen potato import prices in Japan, the European Union and the United States for the 1980–99 period are highlighted in Fig. 7.10. Prices in Japan are consistently the highest. During some years Japanese import prices were more than double the US and EU import prices. 183

THE INTERN ATION AL POTATO INDUSTRY US$/kg 1.10 European Union Japan 1.00

USA

0.90

0.80

0.70

0.60

0.50

0.40 1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

7.10 Frozen potato import prices, United States, Japan and European Union, 1980–99 ($/kg) (FAO, United Nations).

Transport costs could make up most of the differences. The US and EU regions contain frozen-potato production centres, but Japan is a frozen potato-deficit country that is a long distance from the world’s major frozen potato factories. US prices are the lowest of the three except for one year when the volatile EU prices dipped below those in the US. Low transport costs could explain the low import prices in the US, but other factors, such as tariffs, may be involved as well.

Frozen potato trade issues Tariffs A government can raise the price of imported frozen potatoes by implementing tariffs. Usually applied as a percentage of the incoming customs price, the tariff is essentially a tax that must be paid for goods to enter a market. This leads to a two-tier price system for frozen potatoes: a domestic 184

FROZEN POTATO TRADE

price and an import price. Since the reason to implement tariffs is most often to protect an industry, frozen potato tariffs make the import price higher than the domestic price. This discourages consumption of the foreign product and protects domestic producers from world competition. Nations can charge different tariffs to different countries, with favoured countries getting lower rates. This complicates the situation and creates markets with multiple tiers and re-exporting operations that attempt to profit from differences in tariff rates. The World Trade Organization (WTO), in an attempt to reduce trade barriers, organized a schedule of tariff reductions for its member nations. The tariff schedule for frozen potato products is given in Table 7.6. This schedule specifies the maximum tariff that individual member countries can charge. They can negotiate lower rates for some or all of their trading partners. Also known as bound tariffs these maximum rates were scheduled to be in force by the end of 2000 in developed countries and the end of 2004 in developing countries. There is a wide range in bound rate tariffs, from no tariff in the Czech Republic to a 153% bound tariff in Israel. The Israeli tariff system is quite protective of its potato industry, since it also has a 230% bound tariff on fresh potato imports. Within Asia, Israel and Bangladesh (150%) are at the high end and Japan is at the low end of the range of frozen potato tariffs. Since Japan’s bound rate is only 8.5%, the high Japanese import prices in Fig. 7.10 are more likely from high transport costs rather than trade barriers. Although other East Asian countries import large amounts of frozen potato products none has a WTO tariff as low as Japan’s. Frozen potato bound tariffs in Africa are in the range of 34% to 49%, except for Tunisia, which is an outlier at 125%. None of the African countries was on the top 25 import list (Table 7.3). Frozen potato tariffs in Oceania are in the low range, with Australia at a bound rate of 11% and New Zealand at 7.5%. South America’s frozen potato tariffs are in the 20% to 40% range. Brazil, South America’s largest frozen potato importer, has a bound tariff of 35%. The European Union has a relatively low bound tariff of 14.4%.This tariff is applied to frozen potatoes coming into the Union, but member countries do not apply the tariff to other member countries. North American bound tariffs range from 6.4% in Canada to 14% in the United States to a much higher 36% in Mexico. Like the European Union, the North American Free Trade Agreement (NAFTA) grants better rates to its three members, so the WTO tariffs are only applied to frozen potatoes coming from outside North America. For example, NAFTA regulations included a 15% tariff on US frozen potatoes entering Mexico at the beginning, but the entire tariff was scheduled to phase out in 10 years. Twenty-one countries in the Pacific Rim participate in a programme called APEC (the Asia Pacific Economic Cooperation) in which tariffs are 185

THE INTERN ATION AL POTATO INDUSTRY Table 7.6

Frozen potato tariffs in selected countries

Country Egypt Morocco Namibia South Africa Swaziland Tunisia Bangladesh China Indonesia Israel Japan South Korea Philippines Sri Lanka Thailand Turkey Czech Republic European Union Hungary Romania Canada Mexico United States Australia New Zealand Argentina Brazil Venezuela

Base rate

Bound rate

Final date

50% 45% 77% 77% 77% 150% 200% 50% 90% 180% 10% 30% 50% 66% 60% 25% 1% 18% 70% 50% 10% 50% 17.5% 20% 10% 25% 55% 50%

40% 34% 49% 49% 49% 125% 150% 40% 50% 153% 8.5% 27% 40% 50% 30% 19.5% 0% 14.4% 44.8% 45% 6.4% 36% 14% 11% 7.5% 20% 35% 40%

2004 2004 2004 2004 2004 2004 2004 2004 2004 2000 2000 2004 2004 2004 2004 2004 2000 2000 2000 2004 2000 2004 2000 2000 2000 2004 2004 2004

Region Africa Africa Africa Africa Africa Africa Asia Asia Asia Asia Asia Asia Asia Asia Asia Asia Europe Europe Europe Europe N America N America N America Oceania Oceania S America S America S America

Source: USDA FAS Base rate = beginning rate on 1 January 1995 Bound rate = final rate on 31 Dec 2000 for developed nations = final rate on 31 Dec 2004 for developing nations

provided on the internet (http://www.apectariff.org) and updated twice a year. Several examples from early 2001 indicate that some applied tariffs for frozen potato products can be much less than the WTO rates. Australia has a WTO tariff of 11% but applies tariffs as low as 4% for some countries. Canada applied a 5% tariff to some countries, which is slightly under the WTO bound rate of 6.4%. China’s applied rate for most favoured nations was 13% as compared to a WTO bound rate of 40%. Other examples of WTO and the lowest APEC-applied rates for frozen potato tariffs as of January 2001 were: Indonesia 50%, 5%; Mexico 36%, 15%; New Zealand 7.5%, 0%; and Philippines 40%, 10%. 186

FROZEN POTATO TRADE

It is interesting to compare frozen potato tariffs with fresh potato tariffs. WTO comparisons with frozen potato bound tariffs followed by fresh potato bound tariffs are: Australia 11%, 5%; Egypt 40%, 10%; Israel 153%, 230%; Japan 8.5%, 4.3%; New Zealand 7.5%, 0%; Romania 45%, 180%; South Korea 27%, 304%; Thailand 30%, 125%; and Venezuela 40%, 20%. South Korea is a striking example of a wide difference in potato tariff rates. Apparently the South Korean government was convinced that the domestic fresh potato industry needed protection to the tune of a 304% tariff. It would be difficult indeed for foreign fresh potato producers to compete in the South Korean market where prices triple as they cross the border. The much lower frozen tariff may be because there is no significant domestic frozen processing industry to protect. Other countries that may have reacted to a similar situation include Romania and Thailand. Egypt is an example of a different situation where tariffs are higher for frozen potatoes than for fresh potatoes. Since a large amount of Egyptian fresh potatoes enter the European market, reduced tariffs may have been negotiated for fresh potato tariffs going both ways. Other countries, including Argentina, Brazil, China, Morocco and the Philippines, have exactly the same tariff rates for both fresh and frozen potatoes. Many other nations have tariffs that are quite similar for both types of potato products. Tariffs are one type of government intervention that can provide barriers to enter a particular market. A combination of government policy and other non-government barriers can influence frozen potato industry development in a country.

Barriers to entry Frozen potato processing factories are expensive to build and operate. The high cost of getting started is, in itself, a barrier to entry for those who want to build a domestic frozen potato-processing business. In some countries that is important because of laws that require that some food products must be locally produced. In those countries small domestic frozen potatoprocessing industries have been developed but they have difficulty competing in terms of costs and quality. In other countries large frozen potato processors have investigated whether building factories in country or shipping frozen potatoes from other countries is more economical. Since most factories built by the large global processing firms are in long-established processing areas they have so far found it best to ship frozen potatoes long distances. Economies of size are evident in frozen potato processing, and small operations can be quite costly per unit of output. A discussion with a CEO of a global frozen potato processing firm 187

THE INTERN ATION AL POTATO INDUSTRY

indicated that he considered there were three important factors when deciding where to build a new factory: raw product, raw product and raw product. His point was that the most important issue is a reliable supply of high-quality raw product to supply the processing facility. Fast-food consumers are the driving force for quality that influences the entire potato marketing chain back to the seed growers. Frozen potato processors respond to the quality demands of the quick-service restaurants that claim their customers want light-coloured fries that are crisp on the outside and mealy inside. Processors who cannot meet the standards are shut out of the market. Locating a factory in an area where raw product quality is questionable or unreliable can be very risky. Problems with raw product quality are related to climate, biology and grower attitudes. The varieties, production techniques and storage practices necessary to produce high-quality raw product for the frozen potato industry have been developed with the help of decades of research, experimentation and education in the main production centres in the world. Those two centres are Europe’s North Sea region and a North American band across the northern United States and southern Canada.The methods that work in those two regions do not automatically work in other parts of the world where the growing conditions and people are different. Even within North America some frozen potato-processing firms failed in their attempts to build processing facilities in Mexico. They found that the Russet Burbank variety that does so well in northern latitudes did not flourish in Mexico. In other parts of the world the rural social structure is a problem for processors. For example, a North American processing firm that built a facility in Mainland China found it difficult to acquire consistent high-quality raw product. In North America it dealt with a small number of large growers who understood how to produce the required quality. In China it had to deal with many small farmers who were reluctant to take advice from foreigners about how to grow potatoes; they preferred to use practices that had been successful for generations in the Chinese system. In spite of problems with raw product quality, global potato-processing firms are interested in expanding around the globe. Given continual changes in currency exchange rates, tariffs, non-tariff barriers, transport costs, economic development, technology and weather patterns, processing firms face a risk of concentrating too much production in one region of the world. By building production capacity in a variety of locations they can quickly shift production to the most economical locations. Of course, when a processor expands by building a factory in another country, potato growers can become concerned that it was not built near them. That is a concern even among close trading partners like countries within the European Union and NAFTA.

188

FROZEN POTATO TRADE

Trade disputes During the late 1990s the United States potato industry became concerned about what it saw as a trade imbalance between Canada and the US. Although the industry was concerned about fresh potatoes and seed potatoes as well, the primary concern for many was a rapidly increasing flow of Canadian frozen potato products into the US. Processors had expanded production capacity in Canada with an eye on the US market. Meanwhile US frozen potato exports to the Asia Pacific Rim were also growing rapidly. US growers claimed that the Canadian government used unfair trade practices to give Canadians an advantage in the US market. As a result the United States Trade Representative (USTR) called for an investigation by the US International Trade Commission (ITC). The ITC has a fact-finding mission but cannot change trade policy. Investigators found that both governments provided assistance to their potato industries. The US government had programmes in crop insurance, disaster assistance, credit assistance, community grants for infrastructure, research, extension education, export promotion, government potato purchases and previously developed irrigation projects. The Canadian Federal and Provincial governments provided programmes in subsidized loans, financial assistance for wastewater facilities, subsidies to build potato storage facilities, irrigation development, subsidized land leases, loan assistance, crop insurance and disaster insurance. ITC investigators were unable to quantify the value of government assistance to potato industries on either side of the border so the question of which provides more subsidies was not answered.4 The US government took no action following the ITC investigation. Trade disputes between Canada and the US continued into early 2001. An Alberta, Canada frozen potato processor attempted to import raw product from the US because of the scarcity of raw product in Alberta. Canadian law allowed growers in Manitoba, Canada to block the imports under the claim that they should be allowed to supply the Alberta factory even if they preferred US potatoes. This action came during the same time when the US blocked shipments of fresh and seed potatoes from Prince Edward Island in response to phytosanitary restrictions against potato wart disease, which was found in a PEI field (see Chapter 6).

References 1

United Nations, Food and Agriculture Organization, FAO Statistical Databases, January 2001. http://apps.fao.org/page/collections?subset=agriculture

189

THE INTERN ATION AL POTATO INDUSTRY 2

National Potato Council, Potato Statistical Yearbook, Denver, USA, various annual issues. 3 United States Department of Agriculture, Foreign Agricultural Service, WTO Tariff Schedules, January 2001. www.fas.usda.gov:80/scriptsw/wtopdf_lout.asp 4 United States International Trade Commission, Fresh and Processed Potatoes; Competitive Conditions Affecting the US and Canadian Industries, Washington, DC, 1997.

190

CHAPTER

8 Seed potato trade

T

rade in seed potatoes differs from trade in other agricultural seeds for several reasons. First, seed potatoes are highly perishable. Grain seeds can be stored for years without special temperature and humidity controls, but seed potatoes can perish in a matter of days if they are not stored under proper conditions. Secondly, seed potatoes are expensive. For many commercial potato growers the costs of seed potatoes make up the largest share of total costs. When seed potatoes are shipped across international borders costs per unit can double or triple through transport, tariffs and other costs of trade. Thirdly, seed potatoes are necessary to a viable commercial potato industry. Although true potato seed (TPS) can be used to grow potato plants, genetic variation is a problem. Seed potato tubers produce identical clones of the mother plants and a consistent quality demanded by modern consumers. The trade-off is that seed potato tubers carry a higher risk of seed-borne disease. In order to reduce that risk the international trade requires that seed potatoes pass certification standards. Europe dominates global use of seed potatoes, accounting for two-thirds of the total (Fig. 8.1). This share of seed use is higher than the European share of total global potato production, which was slightly more than half during the latter part of the 1990s (Fig. 3.2). Europe’s larger relative share of seed use indicates that its seed use efficiency is lower than in the world as a whole. Asia accounts for 20% of seed use and 31% of total potato pro191

THE INTERN ATION AL POTATO INDUSTRY N & C America Oceania Africa 3% 5% 1% S America 4%

Asia 20%

Europe 67%

8.1 World seed potato use by region, 1998 (FAO, United Nations).

duction in the world. These figures suggest that Asian growers use seed potatoes efficiently. In North America the figures are 5% for seed use share and 9% for total potato production share, indicating that North American growers also make efficient use of seed potatoes. The other regions of the world have identical seed shares and total potato production shares. The seed share statistics seem perplexing. If accurate, they point out some important issues. The developed countries in North America and Europe are viewed by many as the leaders in world potato production technology. It seems that Europe should be a more efficient user of seed potatoes than Asia, but the United Nations1 statistics indicate the opposite. Since European potato yields are consistently higher than Asian potato yields (Fig. 3.5), the possible explanations are narrowed. One explanation is that the UN under-counts Asian seed potato use and/or over-counts use of seed potatoes in Europe. Another possible explanation is that Asian seed potato planting density is much less than that in Europe. Potato growers adjust their potato planting rates depending on variety, market channel, climate, input availability, soil type and the price of seed potatoes. It may be that these factors provide incentives for Asian growers to plant seed potatoes at densities that are lower than European planting densities. The planting density difference would need to be large enough to offset the higher European yields per hectare. This brings up the concept of seed yield. The more familiar concept of potato yield is the amount of potatoes harvested per unit of land, either in hectares or acres or some other area of land measurement. An example potato yield is 25 tonnes per hectare. Seed yields are the amount of potatoes harvested per unit of seed. Since both seed potatoes and commercial 192

SEED POTATO TRADE % 19

18

17

16

15

14

13

12

11

10 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

8.2 World seed potato use share of total potato production, 1961–2000 (FAO, United Nations).

potatoes can be measured in the same units – tonnes, kilograms, pounds or hundredweight – the units can be dropped. For a potato field that yielded 25 tonnes per hectare planted at the rate of 2.5 tons per hectare the seed yield is 10. Another field with a lower harvested yield per hectare could have a higher seed yield. If a grower planted seed potatoes at the rate of one tonne per acre and harvested 12 tonnes of potatoes, the seed yield would be 12. Another way to look at seed yield is the percentage of a crop that is planted as seed. Figure 8.2 shows the seed use share of world potato production for the period 1961 to 2000. At the beginning of the period about 17% of the world potato crop was used for seed. That is the same as world seed yield of 6 (the inverse of 0.17). The trend of world seed use is downward. Conversely the seed yield trend is upward. Through time world potato growers are becoming more efficient users of seed potatoes. During the early 1960s world growers, on average, produced six times the amount of seed planted. By 2000 the seed use was approaching 11%, which is the same as a seed yield of 9. That is a 50% increase in seed yield in four decades. 193

THE INTERN ATION AL POTATO INDUSTRY

Improved seed potato quality may be a factor that contributes to the trend of increasing seed efficiency. Seed potato growers may have been steadily improving seed quality in terms of disease, vigour, storage techniques and other quality attributes. Although world seed potato quality is difficult to measure, new technology could certainly have helped improve it. The same technological advances that help seed growers could also help commercial growers achieve higher yields both in terms of land and seed use. Continuation of the seed efficiency trend could mean a decreasing demand for seed potatoes. If in the future growers can produce more commercial potatoes for a given amount of seed their demand for seed potatoes will go down. Growth in commercial potato demand could offset the seed efficiency factor and still allow total demand for seed potatoes to expand. The end result depends on relative growth rates between seed efficiency and global potato demand.

Seed potato exports Global demand for seed potatoes is met primarily by producers in temperate climate zones. Given the difficulties of storing seed potatoes in hot weather and year-round pest pressure, growers in the Mediterranean and tropical zones rely on seed potatoes imported from temperate zones. Seed potato growers in temperate zones supply domestic commercial potato growers but some have developed international markets. The Dutch seed potato industry is widely recognized as the leader in global seed potato markets. Figure 8.3 shows that the Netherlands exports about three-quarters of its seed potatoes. The domestic market during the 1994–99 period was quite stable, with annual sales falling in a narrow range of 229 000 to 249 000 metric tonnes. Meanwhile exports varied over a wider range, from 585 000 metric tonnes in 1996/97 to 741 000 metric tonnes in 1994/95. Global seed potato use in the late 1990s was about 35 million metric tonnes. Dutch seed potato production during that same time was about one million metric tonnes. While Dutch seed potato production is only about 3% of world seed potato use, the Dutch industry dominates the global trade part of the seed potato market. Unfortunately, data on the total size of the seed potato export market is not readily available. The United Nations FAO, which compiles statistics on international trade of other potato products, does not provide seed potato trade statistics. An off-repeated opinion among seed potato marketers is that the Dutch industry may have made up as much as half the world’s seed potato exports during the 1990s. 194

SEED POTATO TRADE 1000 mt 1000 900 800 700 600 Export Domestic

500 400 300 200 100 0 1994/95

1995/96

1996/97

1997/98

1998/99

8.3 Dutch seed potato exports and domestic use, 1994–99 (1000 mt) (FAO, United Nations).

Netherlands seed potato plantings are much larger than in other European Union countries. In 2000 Dutch growers planted 39 800 hectares of seed potatoes, nearly double the 20 000 hectares planted by German growers. Other EU seed potato plantings were 17 400 hectares in the UK, 14 700 in France and 5500 in Denmark. The top five were all in the North Sea region. The North Sea region as a whole can be considered a seed potato export centre. The Netherlands, of course, is the driving force of seed potato production and marketing in the region, but neighbouring countries are also involved in the trade. As with fresh and frozen potato exports, Germany, the UK, France, Denmark and Belgium are players in the seed trade. Table 8.1 shows seed potato exports for three North Sea countries – Germany, Netherlands and the United Kingdom – for which seed trade data is readily available. Dutch seed potato exports ranged from 611 000 to 741 000 metric tonnes. United Kingdom seed potato exports were much lower, ranging from 42 000 to 70 000 metric tonnes.The UK average export volume for the period 195

THE INTERN ATION AL POTATO INDUSTRY Table 8.1 Seed potato exports from Germany, Netherlands and United Kingdom, 1994–99 (1000 mt)

Year 1994/95 1995/96 1996/97 1997/98 1998/99 Average

Germany

Netherlands

United Kingdom

24 28 24 26 29 26

741 737 585 660 611 667

42 52 59 67 70 58

Sources: ZMP; NIVAA; British Potato Council

was 58 000 metric tonnes, above Germany’s 26 000 but well below the volume of the Netherlands – 667 000 metric tonnes. German seed potato exports were in a narrow range of 24 000 to 29 000 metric tonnes during the mid- to late 1990s, but varied over a much wider range during an earlier period. Exports during the 1990/91 marketing season were 134 000 metric tonnes, but then dropped to 14 000 metric tonnes two years later. The 1990/91 market was apparently an aberration. That year German seed potato exporters sent 107 000 metric tonnes to the USSR.2 That was during a period of abrupt changes in the USSR including a shift from communism to capitalism. The one-off opportunity for the German seed potato industry in the USSR disappeared and was not replaced in the following decade. The North Sea region is the source of a large amount of seed potato exports, but a few other countries are involved as well. In the Western Hemisphere Canada is the main player. Canadian seed potato exports during the 1990s were in the range of US$22–$43 million (Fig. 8.4), with most of that going to the other North American countries. Although Mexico takes some Canadian seed potatoes, most of the Western Hemisphere export trade is from Canada to the United States. The Canada to US flow accounted for 86% of Canadian exports in 1999.

Seed potato imports The main seed potato exporter, the Netherlands, sent 57% of its product to European Union countries and 12% to other European countries in 1999 (Fig. 8.5). Almost 70% of the Dutch export total stayed in Europe. Within the EU, 196

SEED POTATO TRADE US$ m 50 45 Other N America

40 35 30 25 20 15 10 5 0 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

8.4 Canadian seed potato exports, 1990–99 (US$ million) (FAO, United Nations).

Europe, Other 12%

Africa 19%

Americas 3% Asia 9%

EU 57%

8.5 Dutch seed potato destinations by region, 1999 (NIVAA).

197

THE INTERN ATION AL POTATO INDUSTRY

Dutch seed potatoes were widely distributed, with none of the other 14 members taking more than 20% of the total (Table 8.2). North Sea neighbours Belgium, Denmark, France, Germany, Luxembourg and the United Kingdom collectively took nearly half the EU total. Low costs of shipping seed potatoes within the North Sea band of potato production facilitate the

Table 8.2 Dutch seed potato destinations in Europe, 1997–99 (mt) Average

Share (%)

EU Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Portugal Spain Sweden United Kingdom Total EU

6 216 41 815 2 301 660 54 626 54 035 18 868 0 72 017 543 41 245 49 113 983 23 499 365 919

2 11 1 0 15 15 5 0 20 0 11 13 0 6 100

Rest of Europe Bosnia Bulgaria CIS Croatia Cyprus Czech Republic Hungary Macedonia Malta Poland Romania Serbia Slovakia Slovenia Switzerland Turkey Subtotal

4 204 1 188 13 846 7 417 6 709 3 462 6 516 1 412 1 474 2 664 1 463 2 658 1 179 4 274 4 428 9 903 73 319

6 2 19 10 9 5 9 2 2 4 2 4 2 6 6 14 100

Europe total

439 238

Source: Pootaardappel Contact Commissie

198

SEED POTATO TRADE

trade in that region. Four EU countries with a Mediterranean climate – Greece, Italy, Portugal and Spain – took 54% of the Dutch exports to the EU. Given the difficulties of establishing seed potato operations in a Mediterranean climate zone, growers in those countries rely on high-quality seed potatoes from their EU partners in the North Sea region. Dutch seed potato exports to the rest of Europe are distributed to 16 countries, with none accounting for a large share of the total. African nations imported 19% of Dutch seed potato exports during the 1997–99 period. Nearly all of these seed potatoes went to the band of countries in North Africa with Mediterranean ports (Table 8.3). Algeria and Egypt alone took three-quarters of the total. A band of five Mediterranean countries, from west to east, Morocco, Algeria, Tunisia, Libya and Egypt, took 97% of Dutch seed potato exports to Africa. This is a reflection of several factors. First, the transport costs are lower to the Mediterranean countries than to the rest of the African continent. Secondly, with the exception of South Africa, the potato industries in North Africa are more developed than in the rest of Africa. Subsistence growers in Africa’s interior are less likely to be able to afford to import Dutch seed potatoes than are the Mediterranean growers producing new potatoes for the European market. In spite of long shipping distances, about 3% of Dutch seed potato exports go to the Western Hemisphere. Cuba is the primary market for Dutch

Table 8.3 Dutch seed potato destinations in Africa, 1997–99 (mt)

Algeria Angola Cape Verde Egypt Ivory Coast Kenya Libya Mali Mauritania Morocco Senegal South Africa Sudan Tunisia Others Total Africa

Average

Share (%)

51 273 2 014 779 42 169 7 14 3 659 46 13 12 889 99 6 516 11 169 21 124 672

41 2 1 34 0 0 3 0 0 10 0 0 0 9 0 100

Source: Pootaardappel Contact Commissie

199

THE INTERN ATION AL POTATO INDUSTRY

seed potatoes in that region (Table 8.4). Although Canada also exports seed potatoes to Cuba, its closest seed-producing neighbour, the United States, is locked out of the market. The US government has long imposed a trade embargo on Cuba for political reasons. Brazil is the second largest importer of Dutch seed potatoes in the Americas. The hot tropical climate in both Cuba and Brazil is not conducive to seed potato production. Mediterranean countries are the most important Asian markets for Dutch seed potatoes (Table 8.5). Israel, Lebanon and Syria received nearly two-thirds of the Netherlands seed potato shipments to Asian countries. Except for nearby Jordan and Saudi Arabia the rest of the Dutch Asian exports are scattered among many countries ranging from Iran to Bangladesh to Vietnam to South Korea. One remarkable part of the Dutch seed potato industry is the number of countries that are customers. The German seed potato industry is also an important player in global markets, but its volume and customer lists are both much smaller (Table 8.6). Germany’s four African customer nations are all in the Mediterranean region of North Africa. German customers in the Americas and Asia are a smaller subset of the Netherlands list of customers. Moving on to Europe, the Netherlands is Germany’s second largest customer, behind Spain. Both the North Sea countries and the Mediterranean countries of Europe are important recipients of German seed potatoes. Nearly three-quarters of Germany’s seed potato exports go to other European nations. Canada, the main seed potato exporter in the Western Hemisphere, also has a diverse customer list, but with one dominant purchaser (Table 8.7). For the 1995–99 period the United States, on the average, took 70% of Cana-

Table 8.4 Dutch seed potato destinations in Western Hemisphere, 1997–99 (mt)

Argentina Brazil Cuba Haiti Honduras Jamaica Panama Uruguay Venezuela Others Total

Average

Share (%)

114 2 656 11 305 25 674 576 203 728 119 48 16 447

1 16 69 0 4 4 1 4 1 0 100

Source: Pootaardappel Contact Commissie

200

SEED POTATO TRADE

dian seed potato exports. NAFTA partner Mexico is far down the list and only imported Canadian seed potatoes in two of the five years. Cuba is Canada’s second-largest customer. The top four Canadian seed potato customers are in the Western Hemisphere, but surprisingly a European nation, Italy, is fifth on the list. Even though Italy did not buy Canadian seed potatoes in two of the five years, its large purchase in 1995 was large enough to put it in second place for that one year. Portugal was also a large customer in 1995, which suggests that there was a powerful reason for some European growers to buy North American seed instead of European seed that year. The Canadian list of seed potato customers shows that many nations are not reliable buyers. Of the 33 countries on the list, only eight bought Canadian seed potatoes during each of the five years. Of those eight loyal customers, one is in North America, one in the Caribbean, one is Asia, one in Europe and four in South America. Customer loyalty is an important part of domestic seed potato markets, but may be less of a factor in global markets.

Table 8.5 Dutch seed potato destinations in Asia, 1997–99 (mt)

Bangladesh Indonesia Iraq Iran Israel Jordan Kuwait Lebanon Oman Pakistan Saudi Arabia South Korea Sri Lanka Syria Thailand UAE Vietnam Yemen Others Total Asia

Average

Share (%)

439 427 592 483 9 392 3 537 996 14 158 668 3 196 7 580 150 853 10 881 95 796 156 225 131 54 751

1 1 1 1 17 6 2 26 1 6 14 0 2 20 0 1 0 0 0 100

Source: Pootaardappel Contact Commissie

201

THE INTERN ATION AL POTATO INDUSTRY Table 8.6 German seed potato destinations by country, 1999 (mt) Average

Region

Algeria Egypt Morocco Tunisia Brazil Dominican Republic Venezuela Cyprus Indonesia Iran Israel Sri Lanka Turkey Austria Bel/Lux Croatia Czech & Slovakia Denmark France United Kingdom Greece Hungary Italy Netherlands Poland Portugal Russia Spain Switzerland Others Total

1 675 12 39 380 93 486 488 766 514 28 127 175 2 531 935 412 128 2 663 848 2 050 207 337 831 1 058 3 111 884 717 609 4 001 255 2 352 28 703

Africa Africa Africa Africa Americas Americas Americas Asia Asia Asia Asia Asia Asia Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Unknown

Region shares Africa Americas Asia Europe

2 105 1 066 4 140 19 041

8% 4% 16% 72%

Source: ZMP

Seed potato net trade Some nations are both importers and exporters of seed potatoes.The balance of trade for the United Kingdom, for example, has been both positive and negative in what appears to be a cyclical pattern (Fig. 8.6). UK seed exports 202

SEED POTATO TRADE Table 8.7

Canadian seed potato destinations ranked by value (US$), 1995–99

Country USA Cuba Uruguay Venezuela Italy Portugal Turkey Brazil Uganda Hungary Slovenia Argentina Dominican Republic Yugoslavia Thailand Mexico Croatia Jamaica Greece Ukraine Trinidad/Tobago Poland Colombia Barbados Sri Lanka Guyana Nicaragua Bermuda Algeria Slovakia Honduras Russia Belize Total

1995

1996

1997

1998

1999

Average

18 870 3 221 3 862 3 027 5 259 2 125 481 103

28 689 4 608 1 478 1 783 481 351 498 351 737 421 298 262

21 465 3 580 3 355 1 140

30 842 3 919 465 1 233 742 587 779 743

31 641 1 788 1 038 1 719

315

70

26 301 3 423 2 040 1 780 1 296 708 569 376 147 142 119 88 87 77 67 57 57 46 40 34 30 19 6 6 5 5 5 4 3 2 2 1 1 37 544

270 296 79 31

279 74 199

152 1 011 541

326 75 143

19 45

277 4 46

58

8 293

46 109

35

298 8

7

43

172 151 97 30 29 27 4

22 25 22 15

5

7 9 4

3 38 245

40 779

31 514

39 859

37 323

Source: Statistics Canada

were at a high level during the mid-1980s then fell during the late 1980s and early 1990s, but then rose again during the mid- and late 1990s. The pattern for imports followed a similar but offsetting cycle, rising when exports fell and falling when exports rose. Net trade follows the export pattern, peaking when exports peak and dipping to negative levels during the late 1980s and early 1990s. 203

THE INTERN ATION AL POTATO INDUSTRY 1000 mt

Exports 80

Imports Net trade

60

40

20

0 1984

1986

1988

1990

1992

1994

1996

1998

–20

8.6 United Kingdom seed potato trade, 1980–98 (1000 mt) (British Potato Council).

Several supply and demand factors could contribute to the cyclical patterns in the United Kingdom’s seed potato trade. Supply response to seed potato prices could create production cycles of expansion followed by contraction. Since seed potato production requires several years of field multiplication to build up supplies, the time lag of the response is longer than with commercial potatoes. During the expansion phase domestic markets could be saturated and export markets aggressively seek to take up the surplus. During the contraction phase, domestic seed supplies could become scarce and more seed potatoes are imported. On the demand side the introduction of new varieties could contribute to cyclical patterns. Popular new varieties only available, even if temporarily, from the import market could cause a surge of imports until domestic seed potato growers are able to build up stocks. The new variety pattern could also happen with seed potato exports. Canadian seed potato export values to the United States also seem to follow temporal patterns (Fig. 8.7). A downward trend in the early 1990s was reversed with an upward trend in 1993. A two-year up–down cyclical pattern also began that year. The cyclical pattern in seed potato export value is probably related to a price cycle that is commonly seen in open potato markets. 204

SEED POTATO TRADE US$ m 35

30 CN to US US to CN

25

20

15

10

5

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

8.7 Canadian seed potato trade with the United States, 1990–98 (US$ million) (Statistics Canada).

US seed potato export values to Canada, except for a big decline in 1997, were stable but at a relatively low level in the range of $2 million to $4 million. The seed potato market is one more potato market channel where Canada enjoys a trade surplus. Canada’s net trade surpluses in 1999 were $56 million for fresh potatoes, $367 million for frozen potatoes and $53 million for seed potatoes. Trade with the United States accounts for large shares of the trade surpluses for all three types of potatoes. Although many factors are involved in international seed potato trade, the rising value of the US dollar in relation to the Canadian dollar was quite likely one of the main driving forces during the 1990s. As the dominant player in global seed potato exports the Netherlands has a trade relationship with its North Sea neighbours that is similar to the US–Canadian situation. During the 1995–2000 period average annual Dutch seed potato exports to Germany were 42 600 metric tonnes, while average annual German exports to Netherlands were 2400 metric tonnes. For every tonne of seed potatoes Germany exported to Netherlands they imported 20 tonnes. 205

THE INTERN ATION AL POTATO INDUSTRY

Seed potato prices In previous chapters it was shown that world fresh potato prices and frozen potatoes prices trended downward after adjusting for inflation. This was taken as evidence that both fresh and frozen potato products are commodities. Since the United Nations FAO does not publish data on international trade of seed potatoes a similar analysis has not been done for seed potatoes. One characteristic of a commodity is that the product is homogeneous, which means that one grower’s product is not different from another grower’s product. Seed potatoes may have a degree of differentiation that frozen fries and fresh potatoes do not. One point of seed potato differentiation is reputation, which may be partially tied to the country of origin. Variety is another point of differentiation. Together with size sorting and disease readings these attributes contribute to price variations for seed potatoes. Although seed potatoes do seem to have product differentiation, the key question of whether long-run world seed potato prices, after adjusting for inflation, trend downward remains unanswered owing to lack of data. Price volatility is evident in the German seed potato market (Fig. 8.8). The import price series is more volatile than the export price series. Seed

DM/dt 9

Import

8

Export 7

6

5

4

0 1985/86

1987/88

1989/90

1991/92

1993/94

1995/96

1997/98

1999/00

8.8 German seed potato export and import prices, 1985–2000 (DM/dt) (ZMP). 206

SEED POTATO TRADE

potato import price jumped 50% from DM 40.50 in 1987/88 to DM 60.00 one year later. The export prices seem to follow a reliable cyclical pattern. Beginning in 1987/88, the pattern was three years between price valleys. The gap between export and import prices is positive for the entire period but almost disappeared during the three-year period of 1988/89 to 1990/91. For the other years German seed potato exports received price premiums up to about DM 20 over seed potato imports. The mix of potato varieties produced by seed potato growers in Germany and its North Sea neighbours may explain at least some of the annual changes in the import–export price differential. German seed potato prices for 10 varieties during four time periods are shown in Table 8.8. The average price ranges from DM 56 for Quarta and Solara to DM 81 for Berber, indicating a significant price premium for that variety. Two varieties, Satina and Secura, have nearly identical prices during the entire period. Price levels for all varieties were at a peak during the spring of 1999. The German seed prices are averages during the entire spring and fall periods and do not capture variations around the average. Seed potato prices typically vary a great deal across varieties and time periods. For example, Fraser3 reported the following seed potato prices during the week of 30 November 1995 in the Red River Valley of the United States: Shepody $15.00 to $16.00; Russet Burbank $11.00 to $13.00; Goldrush $9.00 to $11.00; Norchip $6.50 to $8.00; Snowden $6.00 to $7.00; and Red Pontiac $8.00 to $10.00 per cwt. All six are public varieties so none of the differ-

Table 8.8

German seed potato prices for selected varieties, 1999–2000 (DM/dt)

Variety

1999 Spring

1999 Autumn

2000 Spring

2000 Autumn

Average

Adretta Berber Cilena Granola Linda Quarta Rikea Satina Secura Solara

75 105 98 80 95 76 86 82 82 76

54 72 73 50 65 49 58 50 51 50

57 73 75 50 65 49 60 50 51 50

52 72 69 48 62 48 55 48 48 48

60 81 79 57 72 56 65 58 58 56

Average Low High

86 75 105

57 49 73

58 49 75

55 48 72

64 56 81

Source: ZMP

207

THE INTERN ATION AL POTATO INDUSTRY

ence was due to proprietary rights. Prices are set by individual negotiations for individual varieties, each of which has a separate supply and demand relationship. Although potato varieties are substitutes for each other, there is enough product differentiation for prices to range from $6.00 to $16.00 during the same week in the same location. Commercial potato growers in Europe’s North Sea region and North America’s band of autumn potato production along the US–Canadian border enjoy an abundant supply of high-quality seed potatoes at relatively low prices. Potato growers in other parts of the world who import seed potatoes pay higher prices. Table 8.9 shows examples of international sales of seed potatoes going from Canada to Latin America. First, notice the difference in prices that commercial growers in Canada pay versus those paid by the Latin American growers. A Canadian grower could buy a public variety for $10.00 per 50 kg plus shipping costs to the farm, which we might assume at $1.00 per 50 kg. The cost at the farm level in Canada is $11.00 but $23.00 at the Latin American farm. This does not mean that the Latin American grower is making an unwise decision or even that his operation is less profitable. What it does mean is that the Latin American grower has fewer choices. He does not have the choice of going to a seed potato grower in his country and buying high-quality seed of the variety he wants. He does have the choice of replanting potatoes from his previous harvest or purchasing lower-quality seed potatoes, but the financial risks of crop loss or complete failure are higher with those alternatives. The private variety example carries a higher price both in Canada and in Latin America. Variety owners can control supply because they decide who

Table 8.9

Example costs, Canadian seed potatoes imported into Brazil (CN$/50 kg)

Category

Public variety

Private variety

10.00 1.00

12.00 1.00

1.50 0.50 8.00 1.00 1.00

1.50 0.60 8.00 1.10 1.00 1.50 5.00 31.70

Ex farm price Paid to North American grower Transport to North American port Port to port (CIF) Customs Insurance Freight, ocean Duties and import fees Transport from Latin American port Property rights fee Investment recovery (profit) Total cost to Latin American grower

23.00

Source: Wolf & Wolf International, Inc., Orlando, Florida

208

SEED POTATO TRADE

grows seed potatoes for the varieties they own. There are no such supply control measures for public varieties. That is why the estimated price in North America is 20% higher for the private variety. Although there is little difference in total costs of customs, transport and insurance the final gap is widened owing to returns to the variety owner. The example includes both a property rights fee of $1.50 plus a profit of $5.00 per 50 kg. At the Latin American farm the private variety price at $31.70 gets a premium of $8.70 over the public variety. The investment recovery figure, of course, depends on supply and demand; some actual transactions have varied from zero to $13.00 for Canadian seed going into Latin American markets. In spite of the higher price for the private variety, the transaction is probably a win–win situation for both the buyer and seller. The seller gets additional profit to cover several things needed to stay in business. First, the profits are needed to recoup the investment costs of developing the variety. Secondly, the profits are also used to offset the losses of investments in varieties that were developed but not accepted in the market. Thirdly, the profits will be invested in the development of new varieties, which can be a risky enterprise. The buyer benefits from having access to a superior variety that is profitable for his operation. The variety may have pest resistance that boosts yields and reduces costs and a mix of quality attributes popular with consumers. For the Latin American grower a combination of lower production costs per tonne and higher prices for the harvested potatoes can more than offset the extra cost of private variety seed potatoes.

Seed potato trade issues Trade barriers Governments put up trade barriers to protect domestic seed potato industries as they do for producers of other goods. Imposing tariffs, which in effect raise the price of imported seed potatoes, is one way to protect the domestic seed industry. Another method is to use phytosanitary regulations to keep out seed potatoes from certain production areas. The phytosanitary rules have a noble goal of keeping potato pests out of the country. Tariffs established by World Trade Organization (WTO) members are shown in Table 8.10. The range is from 0% in New Zealand to more than 300% in South Korea. The same seed potatoes that would enter New Zealand at no charge would have their prices quadruple by passing through the South Korean border. Among the African countries in Table 8.10, Egypt has the lowest seed potato tariffs. Since Egypt does not have the climate for high-quality seed potato production and it exports a large share of its 209

THE INTERN ATION AL POTATO INDUSTRY Table 8.10

World Trade Organization seed potato tariffs in selected countries

Country Egypt Morocco Namibia South Africa Swaziland Tunisia Bangladesh China Indonesia Israel Japan Korea, South Philippines Sri Lanka Thailand Turkey Czech Republic European Union Hungary Romania Switzerland Canada Mexico United States Australia New Zealand Argentina Brazil Colombia Venezuela

Base rate

Bound rate

Bound date

30% 45% 77% 77% 77% 200% 150% 50% 60% 180% 5% 338% 100% 66% 133% 25% 3.8% 7% 52% 200% 52% 7.72 c/t 10% $0.077/kg 10% 0% 25% 45% 100% 50%

20% 34% 49% 49% 49% 150% 50% 40% 52% 158% 3% 304% 40% 50% 125% 19.3% 3.2% 4.5% 44.2% 160% 44% 4.49 c/t 9% $0.05/kg 5% 0% 20% 35% 70% 20%

2004 2004 2004 2004 2004 2004 2004 2004 2004 2000 2000 2004 2004 2004 2004 2004 2004 2000 2000 2004 2004 2000 2004 2000 2000 2000 2004 2004 2004 2004

Region Africa Africa Africa Africa Africa Africa Asia Asia Asia Asia Asia Asia Asia Asia Asia Asia Europe Europe Europe Europe Europe N America N America N America Oceania Oceania S America S America S America S America

Source: USDA FAS Base rate = beginning rate on 1 January 1995 Bound rate = final rate on 31 Dec 2000 for developed nations = final rate on 31 Dec 2004 for developing nations

commercial potato crop to Europe, the low tariff policy is helpful to Egyptian growers. Asian seed potato tariffs vary but are lowest in Japan, with a bound rate of 3%. Japan’s tariffs are consistently low, with a 4.3% tariff applied to fresh potatoes and 8.5% on frozen potato products. Although Japan is among the world’s top importers of frozen potatoes, the country did not appear on the

210

SEED POTATO TRADE

destination lists of seed potato exports from the Netherlands, Germany or Canada discussed earlier in this chapter. European Union seed potato tariffs are relatively low at a 4.5% bound rate, but there is a 0% tariff applied to other EU members. In North America, Mexico has lower tariffs for seed potatoes than for fresh or processed potatoes, but it imposes phytosanitary restrictions to protect its domestic seed potato industry. For example, Mexico only allows US imports from states that share a border with the country. Tariffs in Australia are among the lowest in the world, but not as low as in its Oceania neighbour New Zealand. South American tariffs are high compared to some other regions but not nearly as high as countries like Tunisia, Israel, South Korea and Thailand. The WTO tariffs in Table 8.10 are ceiling rates. Any WTO member country can choose to use lower rates, known as applied tariffs, with any or all of its customer nations. WTO does not keep track of applied tariffs but the Asia Pacific Economic Cooperation Forum (APEC) organization of Pacific Rim countries provides an updated list for its member nations twice each year. As of early 2001 Australia’s applied tariff for seed potatoes was 0%, the same as its neighbour New Zealand. Canada, Indonesia, Malaysia, Peru and the United States also offered 0% tariffs to some or all countries in early 2001. China provides a reduced tariff of 11% to some countries as compared to a WTO bound tariff of 40%. The Philippines provides the most dramatic reduction in seed potato tariffs. At the beginning of the WTO tariff schedule in 1995 the Philippines agreed to a seed potato tariff of 100%, which was scheduled to go down each year until it reached the bound tariff rate of 40% in 2004. According to APEC, the Philippines made a further cut by implementing an applied tariff of 3% for seed potatoes beginning in 2000.

Varieties Potato variety development is an important part of a continual improvement in potato production technology. A large amount of money is invested in potato variety research both at public and private institutions. At the public institutions the traditional goal has been to provide improved varieties that are available to the general public at no fee. The incentive for private firms is to develop varieties that will return a profit on their investment. Although changes in plant property rights in some countries has led to a system of royalty fees for publicly developed varieties, the private firms must be in closer touch with consumer demand than the public institutions. A private firm’s survival depends on developing varieties that are accepted in the market place. A public potato breeding entity’s survival depends not on the market as much as on political clout to secure government funding.

211

THE INTERN ATION AL POTATO INDUSTRY Table 8.11

Top 15 Dutch potato varieties, hectares planted, 1996–99

Variety

1996

1997

1998

1999

Average

Bintje Spunta Desiree Agria Diamant Monalisa Kondor Nicola Marfona Jaerla Premiere Mondial Asterix Lady Rosetta Felsina

5018 2363 2478 1948 1559 1176 956 1038 889 948 612 576 461 560 288

5349 2433 2539 2036 1578 1202 1026 1036 980 878 681 635 592 560 446

4736 2905 2647 2171 1496 1102 970 809 910 888 669 664 640 578 585

4534 3011 2829 2410 1364 1100 1099 811 912 807 694 664 666 641 636

4909 2678 2623 2141 1499 1145 1013 924 923 880 664 635 590 585 489

Source: NIVAA

The challenge for seed potato growers and traders is to choose profitable varieties several years ahead of the market. Seed growers need several years to multiply parent seed stocks into commercial quantities of seed potatoes. Profits depend on seed potato prices for the variety that a grower has multiplied. The supply and demand for each individual variety drives the profit equation. A snapshot of the Dutch varieties popular in the late 1990s is given in Table 8.11. Although public statistics of seed potato export prices by variety are not available, the Dutch plantings give an idea of global trade by seed potato variety. Since the Dutch industry exports about three-quarters of its seed potatoes, many of the top varieties listed in Table 8.11 must be popular in global markets. Dutch seed variety plantings can be split into three tiers. At the top is one variety, Bintje, that has nearly double the plantings of the second variety. The next tier consists of three varieties with annual plantings in the range of 2000 to 3000 hectares. The third tier consists of 11 varieties with annual plantings in the 500 to 1500 hectares range. Trends are observed for several varieties. Those showing downward trends include Bintje, Diamant, Nicola and Jaerla.Trends appear upward for Spunta, Desiree, Agria and Felsina. Given the pace of technological development and the resources put into potato variety development, it is likely that by 2010 the top variety lists for most countries will look very different. This will create opportunities for innovative seed potato growers and traders to profit from global potato markets. 212

SEED POTATO TRADE

References 1

United Nations, Food and Agriculture Organization, FAO Statistical Databases, January 2001. http://apps.fao.org/page/collections?subset=agriculture 2 Zentrale Markt- und Preisberichtstelle GmbH (ZMP), Kartoffeln 2000, Bonn. 3 H Fraser, Fraser’s Potato Newsletter, Charlottetown, PEI, Canada.

213

CHAPTER

9 Other potato trade

T

he previous three chapters covered trade of three types of potatoes: fresh, frozen and seed. Fresh potato consumption is the largest use of potatoes in the world. Frozen potatoes make up the largest and most rapidly growing segment in the category of processed potatoes. Seed potatoes are required for viable commercial potato production in regions where the development of domestic seed production is difficult. For these reasons entire chapters were devoted to fresh, frozen and seed potatoes.This chapter covers trade of potato snacks, dehydrated potato products, potato starch, canned potatoes and potato alcohol. Since trade data for these potato products is not as readily available as it is for the main three, analysis is necessarily more limited in this chapter.

Potato snack trade Potato snack foods are popular in Europe, North America and in other countries scattered around the globe. The top potato snack-producing countries in Europe in the late 1990s were, in rank order: the United Kingdom, Germany, France, Netherlands, Italy and Sweden.1 During the 1990s consumers in Great Britain ate about three kilograms of potato snacks each year. 214

OTHER POTATO TRADE

With a conversion rate of four kg of raw product to one kg of final product, that represents about 12 kg of potatoes per person going into snack consumption. British consumers eat about one-tenth of their potatoes in snack food form. German consumption of potato snacks is only about one-third the British rate (Fig. 9.1). Potato snack consumption in the United States, on a per capita basis, is about midway between the German and British consumption. As a percentage of total potatoes consumed, however, the US consumption rate is around 10%, the same as the UK’s. According to Pepsico’s 1999 Annual Report, per capita consumption of all snack chips is higher in the US than in the UK. The ‘all snack chip’ category includes products made from maize, which are quite popular in the US. Transport of potato snacks is expensive, reflecting the low density of the final product. The light weight of potato snacks means that shipping containers reach a physical capacity long before a weight capacity. Potato snack companies locate their factories close to population centres because raw

kg/person 14 Great Britain United States Germany

12

10

8

6

4

2

0 1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

9.1 Potato snack consumption in Germany, UK and United States (kg/person) (ZMP; BPC; NPC) (note: figures are for raw product, assuming a conversion rate of 4 : 1). 215

THE INTERN ATION AL POTATO INDUSTRY

product is cheaper to transport than is final product. In spite of the challenges of transport economics, there is significant international trade of potato snack food products. Exports of United States potato snacks grew rapidly beginning in 1990 (Fig. 9.2). During the late 1980s German potato snack exports were much higher than the amount exported from the US. Subsequently, while German exports remained stable and even declined a bit, US exports grew remarkably fast. In 1990 US potato snack exports more than doubled from the previous year, jumping from 9400 metric tonnes to 20 100 metric tonnes. Two years later exports nearly doubled again to 38 400 metric tonnes, then two years later export volume leaped to 70 500 metric tonnes. During the 1998 to 2000 period US potato snack exports reached a plateau of slightly more than 100 000 metric tonnes, five times the amount exported in 1990. A simple linear trend shows a US potato snack growth rate during the 1986–2000 period of about 8000 metric tonnes per year. Since the United Nations FAO does not publish potato snack food trade data, as it does for fresh and frozen potatoes, lists of top exporting and importing nations are not presented here. Given the rapid growth of United

1000 mt

100 Germany United States 80

60

40

20

0 1986

1988

1990

1992

1994

1996

1998

9.2 German and United States potato snack exports, 1986–2000 (1000 mt) (ZMP; NPC) (2000 data for Germany unavailable). 216

2000

OTHER POTATO TRADE

States potato snack exports that country is probably one of the key export players in the international trade. The 1998 list of US customer nations provides some evidence of who are the main importing nations (Table 9.1). North American neighbours Canada and Mexico are the top two importing countries of US potato snacks. Together they account for about one-third of total US potato snack exports. Since potato snacks are expensive to transport, it makes sense that the largest buyers are those who are closest to the United States. Next on the list is Japan, an important US trade partner for many other goods, including frozen potato products. East Asian countries Japan, Hong Kong, China, South Korea, Singapore, Thailand and Malaysia collectively make up 27% of the US export total. Other significant customers are scattered around Europe, South America, Oceania and the Middle East. The global potato snack market is dynamic, with export and import volumes continually adjusting to current market conditions. For example, the international market for US potato snacks underwent some serious changes from 1998 to 1999. The fourth largest customer for US potato snacks

Table 9.1 United States potato snack export destinations, 1998 (metric tonnes) Country Canada Mexico Japan Russia Belgium Hong Kong Brazil China South Korea Argentina Poland Australia United Kingdom Singapore Israel Thailand Panama Malaysia Others World

Quantity

Share

19 000 14 955 11 864 10 636 7 227 6 091 5 864 5 227 1 955 1 955 1 682 1 545 1 273 1 273 1 273

18% 14% 11% 10% 7% 6% 6% 5% 2% 2% 2% 1% 1% 1% 1%

818 636 636 9 682 103 591

1% 1% 1% 9%

Source: National Potato Council Note: quantities are million pounds of final product

217

Region N America N America E Asia E Europe W Europe E Asia S America E Asia E Asia S America E Europe Oceania W Europe E Asia Middle East E Asia C America E Asia

THE INTERN ATION AL POTATO INDUSTRY

in 1998, Russia, dropped completely off the list in 1999, back to the zero imports it had recorded in 1996. Japan, the third largest customer in 1998, jumped up to first in 1999, with a 66% increase in imports. Venezuela, which was in the ‘others’ category in 1998, moved into eighth place in 1999, with a 580% increase in imports. Among other changes South Korean imports went up 120% and Mexican imports went down 22%. Changes in prices of US potato snacks, especially after accounting for currency exchange and tariffs, most likely had an influence on export volumes to various countries. Export prices of United States potato snack food products appear to have followed two trends during the 1990s (Fig. 9.3). The trend was upward during the first five years and downward during the latter five years. Prices for five of the 10 years were clustered quite closely around a price of $2.40 per kg. The movement of prices up above $3.00 in 1995 may have been an unusual occurrence or evidence of a cyclical pattern that may be repeated in the future. The prices in Fig. 9.3 are overall averages for all destinations. Prices to individual destinations vary with the costs of getting the product into different countries. Together the quantity and price information in Fig. 9.2 and Fig. 9.3 tell us something about export demand for US potato snacks. During the early

$/kg 3.20

3.00

2.80

2.60

2.40

2.20

Fiscal year 2.00 FY 91

FY 92

FY 93

FY 94

FY 95

FY 96

FY 97

9.3 United States potato snack export prices ($/kg) (NPC). 218

FY 98

FY 99

FY 00

OTHER POTATO TRADE

1990s both quantity and prices moved upward together. It seems contradictory to economic theory that increases in quantity will give higher prices, until one considers the many other factors that influence international trade. Changes in tariff rates imposed by importing countries, in effect, change prices to the consumers in those countries. Reductions in tariffs could actually reduce prices to consumers in spite of higher US export prices. Changes in any of the four demand shifters – population, consumer income, prices of other goods, and consumer tastes and preferences – could also contribute to an outward shifting demand that would cause both quantities and prices to increase. For example, increases in US potato snack advertising could have enhanced consumer preferences for the product during the early 1990s. With the change in consumer preferences causing an outward demand shift, a larger amount of US potato snacks could be sold at a higher price. Following the 1995 peak, US potato snack export quantities dropped to a lower plateau of about 60 000 metric tonnes for three years, then jumped to an all-time high plateau of more than 100 000 metric tonnes for another three years. Meanwhile prices dropped during the first three years, then were stable around $2.40 for the latter three years. The flat quantities and prices during the 1998–2000 period suggest a stable demand situation. US potato exports seem to have followed three phases of demand during the 1990s. During the early years demand grew quite rapidly, with both quantities and prices going up. During the 1995–97 period demand declined, with quantities stable but prices going down. During the 1998–2000 period demand increased to a new stable plateau during which prices and quantities changed little. German potato snack export prices trended downward during the 1986–98 period (Fig. 9.4). With a relatively stable quantity situation and the downtrend in prices, it appears that export demand for German potato snacks declined. The German price pattern moves in the same direction as the US price pattern at times, but opposite to the US pattern at other times. Prices for both countries dropped from 1992 to 1993, then moved up in 1994. At that point the prices go in opposite directions, with US prices going up in 1995 and German prices going down. The price trend from 1995 is downward for the US and upward for Germany. The price data suggests that the potato snack export market is competitive and the gain of one exporter is at the expense of another. The overall downward price trends for both countries provide additional evidence of the competitive nature of the global potato snack market. The US potato snack industry exports some conventional potato snack products, but much of the volume is in the form of fabricated products that use dehydrated potato flakes as an ingredient in the manufacturing process. The international trade of potato snacks and dehydrated potatoes is closely intertwined. For countries that export potato products the relationship 219

THE INTERN ATION AL POTATO INDUSTRY DM/kg 5.4

5.2

5.0

4.8

4.6

4.4

4.2

4.0 Fiscal year

3.8 FY 86

FY 88

FY 90

FY 92

FY 94

FY 96

FY 98

9.4 German potato snack export prices (DM/kg) (ZMP).

appears to be a trade-off situation. Expansion in exports of one product may be offset with reductions in the other.

Dehydrated potato trade Global export data for dehydrated potato products is not available from the United Nations FAO, but reports from individual countries provide insight into international trade patterns. According to Germany’s ZMP, four European Union countries produced significant amounts of dehydrated potatoes in 1999. In rank order, the producing countries were Germany, Netherlands, France and the United Kingdom. Dehydrated potato exports from two of those countries – Germany and the United Kingdom – as well as the United States are shown in Fig. 9.5. German exports were on an upward trend, while British exports were flat during the 1992–98 period. The increase in German exports was from less than 10 000 metric tonnes in 1992 to around 30 000 during the late 1990s. 220

OTHER POTATO TRADE 1000 metric tonnes 140

120

United States Germany United Kingdom

100

80

60

40

20

0 FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

9.5 Dehydrated potato exports from Germany, United Kingdom and United States, 1992–98 (1000 metric tonnes) (ZMP; BPC; NPC) (note: German exports are potato flakes, US for flakes and granules, UK for all dehydrated).

The pattern for US exports was an upward trend to 1995 followed by a downward trend, then back up again. The US trade was quite volatile, with exports doubling from 1993 to 1995. The most dramatic jump came in 1999, when exports leaped from 36 900 metric tonnes to 124 700 metric tonnes, a nearly fourfold increase in one year. This huge increase was tied to potato flakes. Nearly all of the 1999 increase went to one country, indeed to one snack food processor in that country.2 Procter and Gamble (P & G), producers of the fabricated potato snack product known as Pringles, imported the US flakes, which are used in potato snack manufacturing, for their factory in Belgium. P & G built the Belgian Pringles factory in the mid-1990s with the intention of using European flakes as raw product, but the 1998 European potato crop disaster caused P & G to import US potatoes into its Belgian factory. The huge movement of US flakes to Belgium may not be repeated because Europe’s first standalone potato flake facility began production in 221

THE INTERN ATION AL POTATO INDUSTRY

the spring of 2000. The factory, although located in the United Kingdom, is expected to be a major supplier of the P & G Pringles operation in Belgium. Growth in the demand for fabricated potato snacks around the globe has driven growth in international trade of dehydrated potatoes. The list of nations that import potato flakes from the US gives hints about the import side of the trade. Table 9.2 shows that Belgium was by far the leading importer of US potato flakes in 1999, but it imported almost none in 1998. The Belgian flake imports in 1999 made up 70% of the total for that year. Japan was the second leading import customer in 1999, but was first in the other three years, and has traditionally been the top US customer. Before Belgium jumped into the market in 1999, Japan accounted for about half of US potato flake exports. US flake exports to Mexico grew rapidly from 1997 to 1999 because of a Mexican puffed potato snack that is popular in that country, Central America and the Caribbean. Exports to other American countries declined in 1999 after a new potato flake plant came on stream in Argentina. Net trade for dehydrated potato products in Germany, Great Britain and the United States is shown in Fig. 9.6. Although the figure is only for one year, 1997, it reveals that the UK can be a net dehydrated potato importer in spite of its large potato industry. The US and Germany are net exporters, but collectively their surplus is less than the UK’s deficit. That means that some other nations, such as the Netherlands or France, may have shipped dehydrated potato products to the UK. Prices for German dehydrated potato exports show some volatility (Fig. 9.7). A four-year downtrend from 1986 to 1990 was followed by an uptrend,

Table 9.2 United States potato flake export destinations, 1996–99 (1000 mt)

Belgium Japan Mexico Asia NES EU NES America NES Taiwan Australia Middle East Other Total

1996

1997

1998

1999

3.5 18.6 1.0 5.9 2.4 1.7 1.3 1.2 0.9 1.1 37.5

5.7 17.7 1.9 2.2 1.0 2.6 1.1 1.7 1.1 2.1 37.1

0.02 15.3 4.2 2.0 0.9 3.0 0.7 1.9 1.1 1.7 30.8

82.2 15.8 7.2 2.5 2.4 2.2 1.9 1.8 1.2 0.9 118.1

Source: Huffaker, North American Potato Market News NES = not elsewhere specified

222

1000 metric tonnes 200

150

100

50

0 Exports

Imports

Net trade

–50

–100

Germany United Kingdom

–150

United States

–200

9.6 Net trade for dehydrated potatoes in Germany, Great Britain and United States, 1997 (1000 metric tonnes) (ZMP; BPC; NPC).

DM/t 140

120

100

80

60

40

20 FY 1986

FY 1988

FY 1990

FY 1992

FY 1994

FY 1996

9.7 German dehydrated potato export prices, 1986–99 (DM/t) (ZMP).

FY 1998

THE INTERN ATION AL POTATO INDUSTRY

then a flat period. The overall trend for the whole period is flat. United States dehydrated potato export prices trended downward during the 1991–98 period (Fig. 9.8). The rate of decline was about $0.07 per kg each year. The dehydrated export price trends are the opposite of the export price trends for potato snacks in Germany and the US. For snacks the German prices trended downward while the US prices were relatively flat. For dehydrated potatoes, the US price trend is downward, while the German prices are flat. Although many factors influence price trends, it may be that the US potato snack products and German dehydrated potato products have some differentiation that brings them price premiums over the commodity-type products exported by others. World Trade Organization (WTO) tariff rates established for dehydrated potatoes are shown in Table 9.3. The rates range from 0% in New Zealand to a bound rate of 304% in South Korea. Other nations with low tariffs include Japan at 3%, the European Union at 4.5%, Australia at 5% and the three North American countries. High-tariff countries in addition to South Korea include Tunisia, with a bound rate of 150%, Israel 158% and Thailand at 125%. The

$/kg 1.60

1.50

1.40

1.30

1.20

1.10

1.00

0.90

0.80 1991

1992

1993

1994

1995

1996

1997

9.8 United States dehydrated export potato prices, 1991–98 ($/kg) (NPC).

224

1998

OTHER POTATO TRADE Table 9.3

World Trade Organization tariff rates for dehydrated potatoes

Country Egypt Morocco Namibia South Africa Swaziland Tunisia Bangladesh China Indonesia Israel Japan Korea, South Philippines Thailand Turkey European Union Hungary Romania Canada Mexico United States Australia New Zealand Brazil Venezuela

Base rate

Bound rate

Bound date

30% 45% 77% 77% 77% 200% 150% 50% 60% 180% 5% 338% 100% 139% 25% 7% 52% 200% 7.72 c/t 10% 0.77 c/kg 10% 0% 45% 50%

20% 34% 49% 49% 49% 150% 50% 40% 50% 158% 3% 304% 40% 125% 19.3% 4.5% 44.2% 160% 4.49 c/t 9% 0.5 c/kg 5% 0% 35% 20%

2004 2004 2004 2004 2004 2004 2004 2004 2004 2000 2000 2004 2004 2004 2004 2000 2000 2004 2000 2004 2000 2000 2000 2004 2004

Region Africa Africa Africa Africa Africa Africa Asia Asia Asia Asia Asia Asia Asia Asia Asia Europe Europe Europe N America N America N America Oceania Oceania S America S America

Source: USDA FAS Base rate = beginning rate on 1 January 1995 Bound rate = final rate on 31 Dec 2000 for developed nations = final rate on 31 Dec 2004 for developing nations

WTO tariffs are ceilings, and member countries are free to establish lower rates for some or all nations. The European Union applies different tariffs to different potato products. The WTO bound tariff for dehydrated potatoes at 4.5% is much lower than the EU bound tariff of 14.4% for frozen potatoes and fresh potato tariffs ranging from 9.6% to 13.4%. Egypt puts dehydrated potato tariffs of 20% in between its frozen potato tariffs of 40% and fresh potato tariffs of 10%. Although other countries treat different potato products differently when applying tariffs, some have the same rates for all potato products. Israel, South Korea and Tunisia consistently apply high tariffs to all potato products while Australia, Japan and New Zealand are consistently on the low end of the range.

225

THE INTERN ATION AL POTATO INDUSTRY

Starch potato trade Starch potato production is important in seven European Union countries (Fig. 9.9). More than half the 2000 potato crop in Denmark was planted to potatoes for starch production. In Germany, the EU country with the largest potato plantings, one-third of the crop was planted for starch potato production. In the Netherlands, the world’s leading potato exporter, 29% of the 2000 crop was for starch. Among the seven starch potato-producing countries, France plants the lowest share to starch potatoes, but that figure is 18% of total French plantings. Potato starch production in the rest of the world is negligible compared to European production. In North America the potato starch industry is quite small because of the competition from maize starch. Germany was the largest producer of starch from potatoes in 2000, making 36% of the total, and well ahead of second-place Netherlands (Table 9.4). The band of North Sea nations, Germany, Netherlands, France and Denmark, accounted for more than 90% of EU potato starch production in 2000. As the world’s dominant potato starch producer, Germany also dominates global exports of potato starch. During the late 1990s more than half of Germany’s potato starch production was exported.

Sweden

Finland

Austria

Denmark

France

Netherlands

Germany 0

10

20

30

40

50

%

9.9 Starch potato shares of European Union potato plantings, 2000 (ZMP). 226

60

OTHER POTATO TRADE Table 9.4

European Union potato starch production, 2000

Germany Netherlands France Denmark Finland Sweden Austria Total

Plantings (000 h)

Raw product (000 t)

Final product (000 t)

101 52 31 22 9 9 7 231

3000 2200 1300 790 240 300 180 8010

650 523 300 175 54 63 40 1805

Exports (000 t)

Imports (000 t)

Net trade (000 t)

63 64 71 106 120 144 163 171 225 192 243 234 313 292 358 370

16 19 35 52 36 63 92 92 48 33 52 32 28 28 27 31

47 45 36 54 84 81 71 79 177 159 191 202 285 264 331 339

Source: ZMP

Table 9.5 Year FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

German trade of potato starch, 1984–99

Source: ZMP

German potato starch exports grew rapidly during the late 1980s and 1990s (Table 9.5). From a volume of 106 000 metric tonnes in 1987 German potato starch exports nearly tripled to 313 000 metric tonnes in 1996. The trend of German potato exports for the 1984–99 period is an increase of 21 000 metric tonnes per year. Table 9.5 shows that Germany is also a potato starch-importing country. Imports peaked at 92 000 metric tonnes in both 1990 and 1991, but then trended down during the rest of the decade. 227

THE INTERN ATION AL POTATO INDUSTRY

Germany has enjoyed a positive and growing balance of trade in potato starch during the entire period. The organization that publishes German starch potato data does not provide information regarding destinations of the product. Although the United States is a minor player in potato starch trade, it is interesting to look at the list of countries that ship potato starch into the US. During 1998 US importers purchased $11 million of potato starch from the Netherlands, $2.9 million from Germany and $1.1 million from Canada.3 Other sources included Denmark, France and the Czech Republic. Other than Canada the starch sources are in Europe. Prices for the German potato starch product were volatile during the 1984–99 period. Figure 9.10 shows both a trend and a cycle in the price pattern. The highest prices were during the first two years of the period, contributing to a slight downward trend. The most extreme move was from DM 848/t in 1985 to DM 599/t in 1986 to DM 483/t in 1987. A cycle of about six or seven years might be occurring, based on bottoms in 1987 and 1993 and peaks in 1989 and 1996. More data would be needed to determine if the cyclical pattern is repeated regularly.

DM/t 1000

900

800

700

600

500

0 FY 1984

FY 1986

FY 1988

FY 1990

FY 1992

FY 1994

FY 1996 FY 191998

9.10 German export prices for potato starch, 1984–99 (DM/t) (ZMP). 228

OTHER POTATO TRADE DM/dt 14

13

12

11

10

9

8

7 FY 1989 FY 1990 FY 1991 FY 1992 FY 1993 FY 1994 FY 1995 FY 1996 FY 1997 FY 1998 FY 1999

9.11 German export prices for starch potatoes, 1989–99 (DM/dt) (ZMP).

German potato growers also export raw product to potato starch manufacturers in other European Union countries. Prices for Germany’s exported raw product are shown in Fig. 9.11. Both the final product and raw product export prices have common movements, such as the dip in 1993. One main difference is that the downward trend is much steeper for the raw product. Prices for raw product within Germany also trended downward, indicating that potatoes for starch manufacture are a commodity.

Miscellaneous potato trade Canned potato consumption is a minor use of potatoes. In the United States canned potato consumption has been stable but at a low level of a bit less than one kg per person per year, or 1.2% to 1.9% of total potato consumption (Table 9.6). The export market for US canned potatoes was mostly in North America (Table 9.7). Mexico and Canada accounted for nearly 90% of 229

THE INTERN ATION AL POTATO INDUSTRY Table 9.6

Canned potato use in the United States, 1978–98

Year

Canned potato consumption (kg/head)

Total potato consumption (kg/head)

Canned share (%)

1980 1985 1990 1995 1998

0.86 0.86 0.86 0.91 0.77

52.14 55.64 58.05 62.77 64.86

1.7% 1.6% 1.5% 1.4% 1.2%

Source: National Potato Council

Table 9.7 United States canned potato export destinations, 1998 (metric tonnes) Country

Quantity

Share

10 029 7 725 658 625 412 382 241 69 66 64 30 21 19 19 20 384

49.2% 37.9% 3.2% 3.1% 2.0% 1.9% 1.2% 0.3% 0.3% 0.3% 0.1% 0.1% 0.1% 0.1% 100%

Mexico Canada Philippines China (Taiwan) Russia Hong Kong Japan Singapore United Kingdom Dominican Republic Israel Malaysia Jamaica Panama World

Region N America N America E Asia E Asia E Europe E Asia E Asia E Asia W Europe Caribbean Middle East E Asia Caribbean C America

Source: National Potato Council

the market in 1998. Other buyers were scattered around East Asia, Europe, Central America, the Middle East and the Caribbean. The British Potato Council reports data for canned potatoes in a category named ‘canned & other’. The BPC records show a persistent net trade deficit in that category (Table 9.8). Potatoes are also used to produce alcohol, both for human consumption and for fuel. During the 1990s about 2% to 3% of Germany’s potato crop went into alcohol production. The pattern of use through time shows an upward trend during the 1980s, then a downward trend during the 1990s 230

OTHER POTATO TRADE Table 9.8 Great Britain trade of canned & other potatoes, 1989–99 (1000 t) Year 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99

Exports

Imports

Net trade

4 5 7 7 9 10 14 17 26 17

40 39 60 53 63 98 119 155 100 104

-36 -34 -53 -46 -54 -88 -105 -138 -74 -87

Source: British Potato Council

1000 t 700

600

500

400

300

200

100

0 1983/84

1985/86

1987/88

1989/90

1991/92

1993/94

1995/96

1997/98

9.12 German use of potatoes for alcohol, 1983–2000 (1000 t) (ZMP). 231

1999/00

THE INTERN ATION AL POTATO INDUSTRY

(Fig. 9.12). Changes in energy prices influence ethanol production from potatoes. In North America potato producers become enthusiastic about ethanol production when potato prices are low and energy prices are high, but without government subsidies fuel production from potatoes has not been profitable. Data on international trade of alcohol produced from potatoes for human consumption were not found from readily available public sources.

References 1 Zentrale Markt- und Preisberichtstelle GmbH (ZMP), Kartoffeln 2000, Bonn. 2 B Huffaker, North American Potato Market News, Idaho Falls, 9 March 2000. 3 National Potato Council, Potato Statistical Yearbook, Denver, USA, various annual issues.

232

CHAPTER

10 The marketing chain

T

he concept of a potato marketing chain is simple, with growers at one end of the chain and consumers at the other. The chain links between the two ends facilitate the movement of potatoes from field to table.The firms occupying links on the marketing chain add value to potatoes in three different ways: form, place and time. Potato processors modify the physical shape or form of potatoes, converting raw tubers into crisps, chips, fries, flakes, granules, hash browns, canned potatoes, ethanol and other products. Potato fresh packers change the form of potatoes by taking piles of raw product and sorting, washing and packaging them into products that can be attractively displayed to consumers. Restaurants and other food service institutions are also involved in changing the form of potatoes. Food service workers cook, arrange, package and present ready-to-eat potato products to their customers. Transport firms add value to potato products by moving them to a place where they are in demand. An example potato transport trail begins during harvest with a lorry owner who is hired to haul a grower’s potatoes from a field to a processing facility. After converting raw product to frozen fries, the processor contracts with a railway company to transport the fries to a port facility in another city. An importer hires an ocean shipping firm to move containers of frozen fries from that port to another port halfway around the world. There, a wholesale distribution firm moves the product to a frozen 233

THE INTERN ATION AL POTATO INDUSTRY

food storage facility. Next, a local vendor picks up and delivers several bags of frozen fries to an individual restaurant. This restaurant has a delivery service so a young worker delivers a meal with cooked fries to someone two blocks away. The delivery worker gets a tip for timely service, completing the transport trail from field to consumer. Time is the third type of value that is added in the potato marketing chain. In the temperate climates, where much of the world potato crop is grown, the potato harvest lasts several months or several weeks but consumption is year round. Several links on the marketing chain provide storage to spread the potato supplies through time. Some growers have on-farm storage, others sell their potatoes off-the-field to processors or fresh packers or storage companies. Processors store both raw product and final product in separate, high-tech facilities. Wholesalers, brokers, retailers, transporters and even restaurants also contribute to the storage function. Any firm that takes possession of potatoes, however briefly, is involved in the system of adding value through time. Marketing chains vary by product and by region. The farm-to-consumer chain for US dehydrated potato flakes fabricated into a snack food at a Belgian factory, then consumed at a German sporting event is different from the chain for fresh potatoes eaten in a South American home a short distance from the field where they were grown. In spite of these differences there are several types of marketing chain links that have powerful effects on potato markets all over the globe. This chapter includes discussion of quickservice restaurants, potato processors, retailers, fresh packers and growers. An additional link, futures markets, is included in view of the vital role that futures can play in reducing price risk for firms in the marketing chain.

Quick-service restaurants The increasing popularity of quick-service restaurants (QSR), also known as fast-food restaurants, is driving the frozen potato market. In developed countries QSRs are associated with convenience, fast service and inexpensive meals. In developing countries the same attributes are important, although the price of a QSR meal may be quite high for low-income consumers. The additional attraction of a QSR meal in a developing country is to have something special. In some countries, this may include the mystique of eating USstyle or Western-style foods on special occasions. The burger-and-fries meal that is the focal point of many QSR restaurants originated in the United States but has expanded well beyond US borders. In 1978 McDonald’s had a total of 5185 restaurants, of which nearly 70% were in the United States. As of September 2000 McDonald’s had 28 454 234

THE MARKETING CHAIN

restaurants around the globe. The US restaurants made up 12 703, or 45%, of the total. More surprisingly, only about 9%, 179 of the 2500 new restaurants opened in 2000, were located in the US. The number of countries in which McDonald’s operates steadily increased from 24 in 1978 to 120 in 2000. Other QSRs have also grown globally. The world’s second QSR Chain, Burger King, had 11 150 restaurants in 58 countries in 2000. US restaurants made up nearly three-quarters of the total, but 362 of the 635 Burger King restaurants opened in 2000 were outside the US. The milestone of when nonUS restaurant openings exceeded US openings was in 1999 for Burger King. For McDonald’s the first year in which non-US openings exceeded US openings was in 1989. Wendy’s is in third place on the global list of QSRs. In 2000 there were 5500 Wendy’s restaurants operating in 34 countries. These big three global QSR chains dominate the market from a global perspective but many smaller chains and local, domestic restaurants offer serious competition in some countries. For example, the Japanese firms Lotteria and Mos Burger compete with McDonald’s, Burger King, Wendy’s and others in that country. The big three QSR chains continually modify their menus, but the emphasis remains on burger-and-fries meals. The British fish-and-chips meal is also popular in QSRs, but large global fish-and-chips chains have not emerged. In spite of the lack of large firms, the fish-and-chips restaurants are large users of potatoes for the chips portion of the meals. The big three use frozen fries almost exclusively but fish-and-chips shops and other restaurants also use fresh potatoes and chilled potatoes to make their potato servings. In the few cases where the big three do not use frozen fries it is mostly in countries where government policy requires the purchase of local supplies. Some QSR chains, such as Pizza Hut, do not include potato items on their menu, while others include non-fried items. For example, Kentucky Fried Chicken (KFC) features mashed potatoes rather than fries in many of its restaurants. In 1997 KFC crossed the threshold of having more restaurants outside the US than inside the country. In 1999 there were 5231 KFC restaurants in the US and 5595 in other countries. Back to the burger-and-fries QSRs, where McDonald’s is by far the largest player. Bruce Huffaker1 estimated that in 2000 McDonald’s used 27% of the frozen potato products produced globally. He also estimated that Burger King came in a distant second, using 6% of global frozen potato production. Several economic researchers have documented the importance of McDonald’s restaurants in the international trade of frozen potatoes. Topolewski2 found that the number of McDonald’s restaurants in a country was a significant explanatory variable in econometric models that he built to forecast US frozen potato exports. Zhang et al.3 also found McDonald’s 235

THE INTERN ATION AL POTATO INDUSTRY

restaurants to be an important variable in forecasting US frozen fry exports to Greater China.

The McDonald’s Index Since McDonald’s is undoubtedly a driving force in the international trade for frozen potatoes, the number of restaurants in a country can provide a measure of frozen potato trade in that particular country. Another measure that accounts for a country’s population might be even more useful in analysing a country’s potential for growth in frozen potato trade. A simple, easy-to-calculate measure, known as the McDonald’s Index (MI), serves that purpose. The McDonald’s Index is calculated by dividing a country’s population by the number of McDonald’s restaurants in that country, then dividing by 1000. The MI tells us a country’s McDonald’s concentration expressed in terms of one thousand people per restaurant. For example, in 1999 Germany’s population was 82.1 million and it had 1008 McDonald’s restaurants, for an MI of 81. That is, there are about 81 000 German residents for each McDonald’s restaurant in the country. The MI for any country can change through time with changes in the population and the number of McDonald’s restaurants. The MI for the United States followed an interesting pattern during the 1978–2000 period (Fig. 10.1). From a relatively high MI of more than 60 in 1978 the MI dropped below 40 four years later. The MI then slowly, but steadily, declined until it reached a floor in 1996. From 1996 to 2000 the US McDonald’s Index remained at 22. This floor represents the reaching of QSR market maturity, and by extension frozen fry market maturity, in the United States. In 2000 McDonald’s US restaurant numbers grew from 12 529 to 12 708, an increase of 1.4%, which is only slightly larger than the 1% rate of growth in US population.

Western Hemisphere Since McDonald’s originated and matured in the United States, the US McDonald’s Index provides one level of comparison by which to measure another country’s market potential (Table 10.1). With a 1999 McDonald’s Index of 22, which means there are 22 000 people per restaurant, the United States sets a standard of market maturity. Within North America, Canada’s MI is 28, which is much closer to the US MI than is Mexico’s MI of 590. Mexico’s lower consumer income is no doubt one important reason for the lower MI. McDonald’s has not opened more restaurants in Mexico because large segments of the population have low incomes that prevent them from being 236

THE MARKETING CHAIN

10.1 McDonald’s Index for the United States, 1978–2000 (McDonald’s Corporation annual reports; US Census Bureau) (note: McDonald’s Index is the number of residents, in thousands, per McDonald’s restaurant).

regular customers of fast-food restaurants. If a strong Mexican economy causes consumer income to grow there is potential for many more McDonald’s restaurants to open and a corresponding increase in frozen potato demand. Changes in Mexico’s MI through time suggests that the country is moving toward the US MI standard. In 1990 there were 21 McDonald’s restaurants in Mexico, which then had a population of 84.7 million, giving an MI of 4033. In 1995 the MI fell to 707. In 2000 the Mexican MI dropped from 590 to 537. Although the difference between the US MI and the Mexican MI remains large, the trends show that Mexico is closing the gap. Since the US MI is flat, there is more market growth potential in Mexico than in the US. The McDonald’s Index for Caribbean countries ranges from 20 in the Virgin Islands to 903 in the Dominican Republic. The overall MI for the Caribbean region is 100, which is well below the 426 average in Central America and the 252 in South America. The importance of tourism in the Caribbean region may be one reason that its MI is lower than the other two regions. McDonald’s restaurants that are patronized mostly by non-residents 237

THE INTERN ATION AL POTATO INDUSTRY Table 10.1

McDonald’s Index for Western Hemisphere countries, 1999

Population* (million)

Number of McDonald’s restaurants**

McDonald’s Index***

31.01 100.29 272.64 403.94

1 125 170 12 629 13 924

28 590 22 29

Caribbean Dominican Republic Guadeloupe Jamaica Martinique Netherlands Antilles Puerto Rico Trinidad Virgin Islands Caribbean totals

8.13 0.42 2.65 0.41 0.21 3.888 1.10 0.12 16.93

9 6 13 7 4 121 4 6 170

903 70 204 59 52 32 276 20 100

Central America Costa Rica El Salvador Guatemala Honduras Nicaragua Panama C America totals

3.67 5.84 12.34 6.00 4.72 2.78 35.34

22 3 27 5 3 23 83

167 1946 457 1199 1572 121 426

South America Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela S American totals

36.74 7.98 171.85 14.97 39.31 12.56 5.43 26.63 3.31 23.20 341.99

205 6 921 61 21 7 12 10 32 83 1 358

179 1331 187 245 1872 1795 453 2663 103 280 252

Region/Country North America Canada Mexico United States N America totals

* Source: US Census Bureau, 1999 midyear population ** Source: McDonald’s Corporation 1999 Report *** McDonald’s Index is thousands of people per restaurant

238

THE MARKETING CHAIN

in countries with low resident populations can push the MI downward. The second lowest MI is in Puerto Rico at 32, which is a territory of the United States and has an MI near the North American average. The lowest Caribbean MI is in the Virgin Islands, a US territory, where tourism is important. At the other extreme is the high MI in Dominican Republic, where consumer income is low and tourism is less important than in other Caribbean countries. The Central American countries have the highest average MI among the regions in the Western Hemisphere, but three of the nations – Costa Rica, Guatemala and Panama – have lower MIs than North America’s Mexico. In South America the two nations with the highest per capita GNP, Argentina and Uruguay, have the lowest McDonald’s Indexes. Considering a broader view of the Western Hemisphere market provides an interesting observation. Splitting the entire Western Hemisphere into two regions – North America as one and the rest of the countries into the other – gives two regions of nearly equal population (North America = 404 million, others = 394 million). The ‘other’ region had 1611 McDonald’s restaurants for a McDonald’s Index of 245, much higher than the North American MI of 29. It appears that the most potential for growth in Western Hemisphere frozen potato demand lies outside North America. Within North America, Mexico has more potential than the mature markets of Canada and the United States.

Europe The McDonald’s Indexes for European countries reveal regional differences within the continent (Table 10.2). The average MI for Western Europe at 88 is much lower than the average for Eastern Europe at 631. In general, residents of Western Europe enjoy higher incomes than Eastern Europeans. Western Europeans can better afford to pay for convenience foods so they eat more frequently at fast-food restaurants. Since the Western Europe MI is closer to the US standard of a mature market, growth potential may be higher in Eastern Europe. The McDonald’s Indexes within Western Europe vary between countries, but over a more narrow range than in North America or other Western Hemisphere regions. At the low end of the range are Denmark, Finland, Malta, Sweden and the United Kingdom, all with a McDonald’s Index of less than 60. At the high end are Belgium, Greece, Italy, Portugal and Spain. Four of the five nations with high MIs are in the Mediterranean region. Consumer income may be a factor. According to the World Bank, the gross national product (GNP) per capita in Denmark, Finland, Sweden and the United Kingdom in 1997 was $35 000, $25 000, $26 000 and $21 000, respectively. In the Mediterranean high-MI countries the per capita GNP was $12 000, 239

THE INTERN ATION AL POTATO INDUSTRY Table 10.2

McDonald’s Index for European countries, 1999

Region/Country

Population* (million)

Number of McDonald’s restaurants**

McDonald’s Index**

Western Europe Austria Belgium Denmark Finland France Germany Greece Iceland Ireland Italy Luxembourg Malta Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom W Europe totals

8.14 10.18 5.36 5.16 58.98 82.09 10.71 0.27 3.63 56.74 0.43 0.38 15.81 4.44 9.92 39.17 8.91 7.28 59.11 386.69

135 63 93 92 790 1008 40 3 55 242 5 7 201 54 75 229 202 110 1014 4418

60 162 58 56 75 81 268 91 66 234 86 55 79 82 132 171 44 66 58 88

Eastern Europe Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Russia Slovakia Slovenia Ukraine E Europe totals

8.20 4.68 10.28 1.41 10.19 2.35 3.59 38.61 22.33 146.39 5.40 1.97 49.81 305.20

16 14 53 6 71 6 6 160 43 52 8 14 35 484

512 334 194 235 143 392 598 241 519 2815 675 141 1423 631

* Source: US Census Bureau, 1999 midyear population ** Source: McDonald’s Corporation 1999 Report *** McDonald’s Index is thousands of people per restaurant

240

THE MARKETING CHAIN

$20 000, $11 000 and $14 000 for Greece, Italy, Portugal and Spain, respectively. In addition to consumer income, consumer tastes and preferences may also affect the European McDonald’s Indexes. Eastern European McDonald’s Indexes vary over a wider range, from 141 in Slovenia and 143 in Hungary to 1423 in Ukraine and 2815 in Russia. In general, the countries with the highest McDonald’s Indexes lie to the east of those at the low end of the range. A band of nations along the western edge of Eastern Europe, including Poland, Czech Republic, Hungary and Slovenia, have the lowest MIs in Eastern Europe. Differences in consumer income are a factor, but consumer tastes and preferences also matter, with the influence of nearby Western European lifestyles and food preferences helping to boost Eastern European demand for food served at QSRs.

Asia and Oceania There are huge differences in the McDonald’s Indexes in Asian and Oceania countries (Table 10.3). At the low end are Australia and New Zealand, with MIs of 27 and 25, respectively, which puts them in the company of the United States. The QSR industries in those two countries may be approaching, or may have already reached, maturity. Several Asian countries, such as Hong Kong, Japan, and Singapore, have McDonald’s Indexes in the 31 to 42 range, indicating that those markets are also nearing maturity. Japan has more McDonald’s restaurants than any country outside the United States. It is also the largest importer of frozen potato products. For these reasons Japan may set the standard pattern for frozen potatoimporting countries in Asia and perhaps in other parts of the world as well. Figure 10.2 shows the change in the Japanese McDonald’s Index for the 1980–2000 period. The shape of the graph is similar to the US graph in Fig. 10.1. In both countries the MI declined monotonically and rapidly at times until it slowed and reached a floor. The US floor was at 22, where it remained during the last five years of the period. The Japanese graph appears to have reached a floor in the last few years, but it actually continued to decline, from 44 in 1998 to 39 in 1999 to 37 in 2000. The QSR industry in Japan is approaching maturity but has not reached the level of the United States. Nevertheless comparing other Asian importing countries to the Japanese MI for the same year gives an idea of growth potential. The Asian countries with the largest McDonald’s Indexes have the greatest potential for frozen potato demand growth in percentage terms. Those with large populations and large MIs have a great deal of potential in absolute terms. China and India stand out in that category. Both countries have populations of more than one billion. Western-style QSRs are relatively new in both countries. The first McDonald’s restaurant came to Mainland China 241

THE INTERN ATION AL POTATO INDUSTRY Table 10.3

McDonald’s Index for Asian and Oceania countries, 1999

Region/Country Asia China Hong Kong India Indonesia Japan Macau Malaysia Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Asia totals Oceania Australia New Zealand Oceania totals

Population* (million)

Number of McDonald’s restaurants**

McDonald’s Index**

1246.87 6.85 1000.85 216.11 126.18 0.44 21.38 138.12 79.35 3.53 46.89 19.15 22.11 60.61 2988.42

252 163 22 65 3258 10 129 11 217 113 176 1 319 74 4810

4 948 42 45 493 3 325 39 44 166 12 557 366 31 266 19 145 69 819 621

18.78 3.66 22.45

684 146 830

27 25 27

* Source: US Census Bureau, 1999 midyear population ** Source: McDonald’s Corporation 1999 Report *** McDonald’s Index is thousands of people per restaurant

in 1991 and to India even later. With populations about five times the size of Japan’s, China and India have tremendous potential for growth. The keys to realizing future growth lie with consumer income and consumer tastes and preferences. If the economies of China and India grow and consumers develop preferences for fast-food meals with fries, as they did in Japan, eventually those two countries could become the top frozen potato-consuming nations.

Africa and the Middle East The McDonald’s Indexes for African and Middle East countries are given in Table 10.4. Only three African countries – Egypt, Morocco and South Africa – are listed in the table because McDonald’s had not yet opened restaurants in other African nations. These three countries are involved in international potato trade and may be more receptive to foreign restaurant chains enter242

THE MARKETING CHAIN

10.2 McDonald’s Index for Japan, 1980–2000 (McDonald’s Corporation annual reports; US Census Bureau) (note: McDonald’s Index is the number of residents, in thousands, per McDonald’s restaurant).

ing their markets. The most important factor in Africa is probably consumer income. McDonald’s has not expanded beyond three countries because consumers in other African countries lack the disposable income to be QSR customers. The Middle East countries have McDonald’s Indexes that vary over a more narrow range than in Africa, Asia, Europe, South America and Central America. The lowest MIs are in Cyprus at 84, Israel at 73 and Kuwait at 80. At the high end of the range are Jordan with 652, Lebanon with 713 and Oman with 816. The overall Middle East average of 218 puts it lower than Africa, Asia, Eastern Europe and South America.

Processors Frozen potatoes The frozen potato processing industry has hitched its wagon to the global QSR industry. As the number of fast-food restaurants expanded around the 243

THE INTERN ATION AL POTATO INDUSTRY Table 10.4

McDonald’s Index for African and Middle East countries, 1999

Region/Country Africa Egypt Morocco South Africa Africa totals Middle East Bahrain Cyprus Israel Jordan Kuwait Lebanon Oman Qatar Saudi Arabia United Arab Emirates Middle East totals

Population* (million)

Number of McDonald’s restaurants**

McDonald’s Index**

67.27 29.66 43.43 140.36

32 10 75 117

2102 2966 579 1200

0.63 0.75 5.75 4.56 1.99 3.56 2.45 0.72 21.51 2.34 44.27

7 9 79 7 25 5 3 5 48 15 203

90 84 73 652 80 713 816 145 448 156 218

* Source: US Census Bureau, 1999 midyear population ** Source: McDonald’s Corporation 1999 Report *** McDonald’s Index is thousands of people per restaurant

globe, the demand for frozen potato products expanded as well. As in the fast-food industry a few large frozen potato processors have emerged. According to Bruce Huffaker, global frozen potato processing capacity shares in 2000 were dominated by three firms (Fig. 10.3). McCain Foods, a familyowned firm with headquarters in New Brunswick, Canada had the top spot, with 35% of the total. In second place, with a 23% share, was Lamb-Weston, a company with roots in the US Pacific Northwest, which became a subsidiary of agribusiness giant ConAgra. Looking at just the top two firms, the frozen potato processing industry is more concentrated than the QSR industry. McDonald’s and Burger King together had an estimated 33% share of the global fast-food industry, while McCain and Lamb-Weston together owned a 57% share of the global frozen potato industry capacity. Simplot, another family-owned corporation with headquarters in Boise, Idaho, occupied third place with 17%. The big three frozen potato processors control about threequarters of global capacity. North America dominates frozen potato-processing capacity (Fig. 10.4). Nearly one-half of the world’s frozen potato processing is in the United States. That is twice as much as the combined capacities of Canada and the 244

THE MARKETING CHAIN Others 13% McCain 35%

Aviko 7% Farm Frites 5%

Simplot 17% Lamb-Weston 23%

10.3 World frozen potato production capacity by company, 2000 (North American Potato Market News).

Others 28%

United States 48%

Netherlands 15% Canada 9%

10.4 World frozen potato production capacity by country, 2000 (North American Potato Market News).

Netherlands. The big three frozen potato processors have most of their factories in their home continent of North America, but are building new capacity in many other places around the globe. The largest, McCains, had 29 frozen potato-processing factories in 11 countries on four continents in 2000. In North America the company operated five frozen potato facilities in Canada and five in the United States. In South America McCain Foods owned frozen potato factories in Colombia and Argentina. European factories included four in the United Kingdom, one in Belgium, three in France, one in Poland and four in the Netherlands. McCain also has three frozen potato facilities in Australia and one in New Zealand. These scattered pro245

THE INTERN ATION AL POTATO INDUSTRY

duction facilities give McCain Foods the opportunity to reduce crop disaster risk, reduce time and costs of shipping and provide customers with just-in-time supply systems.

Frozen potato processing in North America Fraser’s Potato Newsletter4 provides a more detailed inventory of frozen potato-processing factories in North America. Tables 10.5 and 10.6 show the individual processing firm capacities in both 1980 and 2000. Since several factories changed ownership, the 1980 list of owners differs from the 2000 list. In the Pacific Northwest (Table 10.5) Washington overtook Idaho as the

Table 10.5 Pacific Northwest frozen potato-processing capacity in the Pacific Northwest, 1980 and 2000 1980 Capacity (000 mt) Idaho Carnation Idaho Frozen Foods Lamb-Weston McCain Foods Ore-Ida Simplot Idaho totals

1.1 3.4 3.6 3.4 8.9 20.5

Oregon Gourment Foods Heinz Lamb-Weston Logan International Ore-Ida Simplot Oregon totals

2000 Capacity (000 mt)

10.5 5.0 12.3 27.7

1.8 2.3 0.2 3.0 3.0 10.2

5.5 7.7 0.9 5.5 19.5

Washington Carnation Chef-Reddy Lamb-Weston McCain Foods Rogers Simplot Twin City Foods Washington totals

1.5 14.0

5.7 3.2 28.9

Pacific Northwest totals

44.7

76.1

2.5 2.0 6.0

15.0 5.0

2.0

Source: Fraser’s Potato Newsletter, 18 January 2001

246

THE MARKETING CHAIN Table 10.6 Frozen potato-processing capacity in the Midwest, Maine and Canada, 1980 and 2000 1980 Capacity (000 mt) Central states Aviko Chef-Reddy International Co-op Lamb-Weston McCain Foods Mid-America Northern Star Ore-Ida Simplot Taggares/Offutt Central state totals

2000 Capacity (000 mt)

2.0 0.5 1.1 2.3 6.6 0.2 0.5 2.4

0.5 3.6

0.9 5.5

Maine A&P McCain Foods Potato Service Maine totals

0.2 2.0 1.6 3.9

Canada Carnation Cavendish Farms Hardee Farms Lamb-Weston Maple Leaf McCain Foods Michal St Arneault Midwest Foods Spetifore York Farms Canada totals

15.0

3.6 3.6

0.7 1.0 0.1

4.3

3.6

2.0 0.9 9.3 0.5 3.1

0.1 0.3 5.9

20.2

Source: Fraser’s Potato Newsletter, 18 January 2001

top frozen-potato processing state. In two decades Washington’s capacity more than doubled, Oregon’s nearly doubled and Idaho’s capacity grew 36%. As a whole Pacific Northwest frozen potato capacity grew 70%. The Pacific Northwest frozen-potato processing industry became more concentrated over the 20-year period. Six of the firms that owned factories in 1980 no longer did in 2000, but two new firms entered the industry. In 1980 10 firms operated frozen potato-processing factories in the Pacific Northwest; by 2000 that number had dropped to six. Facilities owned by Idaho Frozen Foods, Gourmet Foods and Rogers Brothers became part of the Lamb-Weston operation. The factories owned by Carnation in 1980 went 247

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through two transitions. First they were purchased by Nestlé, then by Simplot. McCain Foods, which did not own any Pacific Northwest frozen potato facilities in 1980, had purchased two by 2000. It is interesting that no new frozen potato factories were built in the Pacific Northwest during the two decades. The processors expanded the capacity of existing factories in the Pacific Northwest, but chose to build new facilities outside the region. Capacity of some of the factories, particularly in Washington, more than doubled during the two decades. Frozen potato-processing capacity in the rest of North America also changed during the 1980 to 2000 period (Table 10.6). In the central states capacity nearly tripled. Two factories, both in Michigan, closed and one new factory was opened in North Dakota by the Dutch firm Aviko. The capacity of one facility, the Ore-Ida factory in Wisconsin that was purchased by McCain, quadrupled. Simplot tripled the capacity of the former International Co-op facility in North Dakota. Four firms left the central states region, but the big three entered the market during the two decades. Maine is the only region in which frozen potato-processing capacity did not expand during the 1980s and 1990s. Two of the three 1980 processing firms closed operations, but the remaining company, McCain Foods, expanded capacity by 80%. The capacity situation in Maine could change dramatically in the early 2000s. Two of the big three, McCain and LambWeston, are considering the construction of new factories that could double Maine’s total capacity. Canada’s frozen potato-processing capacity leaped from 5900 metric tonnes in 1980 to 20 200 metric tonnes in 2000. Cavendish Farms on Prince Edward Island and Midwest Foods in Manitoba quadrupled firm capacity. Two small operations closed, but three new factories were built. McCain Foods, the world’s largest frozen potato processor, went from three to five factories and increased the company’s total Canadian capacity from 3600 metric tonnes to 9300 metric tonnes. One processor, Simplot, has plans to build another factory in Manitoba, with an expected opening in 2002. Capacity of the new Simplot facility may be around 2300 metric tonnes.

Frozen potato processor concentration Two important trends mark the North American frozen potato-processing industry from 1980 to 2000. First, total capacity expanded significantly, moving from 60 000 metric tonnes in 1980 to 115 000 metric tonnes in 2000. The second major trend is that the industry became more concentrated. The three largest firms and their shares of 1980 capacity were Lamb-Weston 20%, Simplot 20% and Ore-Ida 15%. The three largest in 2000 were Lamb-Weston

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33%, McCain 26% and Simplot 24%. Total shares for the top three increased from 55% in 1980 to 83% in 2000. The top five measure of industry concentration confirms the same trend. The fourth and fifth largest firms in 1980 were McCain at 9% and Carnation at 7% of North American frozen potato-processing capacity. In 2000 the fourth and fifth largest were Heinz at 5% and Cavendish Farms at 4%. The top five concentration increased from 71% in 1980 to 92% in 2000. Yet another measure of concentration is the Herfindahl Index (HI). The HI is calculated by summing the squares of each firm’s share. The HI can range from a low of zero for a perfectly competitive market to one for a monopoly. The HI for the North American frozen potato-processing industry in 1980 was 0.12. In 2000 the HI moved up to 0.23, indicating that the market indeed did become less competitive. Yuman Zhang5 has used three measures to analyse market concentration in frozen potato exports. One measure, the four-firm concentration ratio, showed that the top four firms had a 10% share in 1978 but a 46% share in 1993. The other three measures also showed increasing concentration and the development of an oligopolistic market for frozen potato products. She also found that the Herfindahl Index suggested that there is less oligopoly power in mature markets such as in Japan.

Potato snacks One firm, Frito-Lay, dominates global potato snack trade. In the United States in 1999, Frito-Lay brands made up $9 billion of retail sales, which was 56% of the snack chip market. Frito-Lay was nine times the size of its nearest US snack chip competitor, Procter & Gamble, which had a 6% market share. Frito-Lay had nine of the top 10-selling US snack chip brands, including the top-selling Lays Potato Chips. Procter & Gamble’s Pringles, at number seven, was the only other company’s snack in the top 10. The market share figures above are for a category that includes potato snacks, tortilla chips, extruded snacks and pretzels. For potato snacks alone the Frito-Lay share of the US market was 64%, eight points higher than the share for the allinclusive category. Frito-Lay is also the world’s largest snack food manufacturer. According to the 1999 Annual Report of Pepsico, Frito-Lay’s parent company, they had a 40% share of the $36 billion in world snack sales. Although Pepsico is the umbrella name of the firm, snack food sales have overtaken beverage sales. The Frito-Lay portion of Pepsico’s sales increased from half of company revenue in 1997 to 62% in 1999. Perhaps owing to the increasing importance of snack foods within the company, Pepsico changed the name of its

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international snack food arm from Pepsico Foods International to Frito-Lay International. The Frito-Lay brand may have more influence on international consumer tastes and preferences for snack foods than the Pepsi brand that is associated with beverages. Frito-Lay brands generated global 1999 retail sales of $14 billion for the 42 countries in which they operate. The company was the market leader in more than half those countries. Outside the United States, Frito-Lay snack volume was concentrated in Latin America and Europe, which together made up 81% of non-US volume. Frito-Lay shares of snack chip sales in some international markets included Mexico 81%, Netherlands 60%, South Africa 59%, Brazil 50%, Australia 43%, Spain 42% and United Kingdom 40%. Unlike frozen potato processing, there are not a handful of potato snack processors that compete on a global scale. Frito-Lay International faces no major multinational competition, and its competitors are domestic snack food firms within individual countries. The Frito-Lay strategy has been to buy out the main competitors in the countries it wants to dominate. Acquisitions of international snack businesses have helped Frito-Lay buy market share in Europe, Australia and Latin America. In an annual report the company describes Mexico, where it bought the leading firm Sabritas and owns an 81% market share, as a model for expansion in other countries. Another example of Frito-Lay acquisitions is the United Kingdom where Frito-Lay purchased three large potato snack processors – Smith Foods, Walker’s Crisps and United Biscuits. Pepsico’s 1998 Annual Report lists snack food firm acquisitions that year in Australia, France, Netherlands, Belgium, Egypt, Chile and a nine-country joint venture in Latin America with Empresas Polar.

Dehydrated potatoes The dehydrated potato industry has a history of building excess capacity. During the 1970s North American capacity jumped 50% in a short time, and it took about 15 years for demand to catch up to capacity. Some people in the industry were worried that the same thing would happen again in the late 1990s. The concern was that strong demand for potato flakes put excess optimism into the minds of some firms interested in expanding. Procter & Gamble’s Pringles and Frito-Lays’ Baked Lays, which are potato snack food products manufactured from dehydrated potato flakes, were driving the optimism. North American firms geared up for anticipated growth in demand by building five new factories and expanding capacity of existing factories. In addition to expanded capacity in North America, a new flake plant in the United Kingdom provides serious competition on the supply side of the international market. On the demand side, global demand for potato snack foods manufactured from potato flakes will be the key driver. 250

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Basic American Foods owns three-quarters of the capacity in the North American dehydrated potato granule market. A privately owned company with headquarters in California, Basic American also owns a fresh potatopacking business, Sunspiced, Inc. Pillsbury and General Mills had been leading competitors, but in the late 1990s Basic American bought Pillsbury’s facility in Shelley, Idaho as well as its entire food service business. Although Pillsbury kept its retail granule business, Basic American agreed to make the dehydrated product for them. General Mills made an earlier agreement for Basic American to manufacture the dehydrated potato products that General Mills markets under its Betty Crocker label.

Retailers Food retailers are important outlets for most types of potato products. The one exception is frozen potatoes, for which the primary market outlet is the food service industry. According to NIVAA, 73% of Dutch fresh potatoes in 1999 were sold in supermarkets and another 9% by greengrocers. Pepsico’s 1999 Annual Report lists the following outlet shares for distribution of FritoLay snack food products: supermarkets and grocery stores 53%, convenience stores 16%, mass merchandisers and warehouse clubs 13%, food service and vending machines 9%, and other 9%. The supermarket industry is increasingly becoming a global enterprise. Supermarkets in nations that advocate free trade have long carried food products imported from foreign countries, but supermarket firms themselves have also gone global. Small, local grocers are being replaced by multinational supermarkets in a consolidation trend similar to other links on the potato marketing chain. Royal Ahold, with its headquarters in the Netherlands, is one example of a global supermarket chain. In 1999 Ahold obtained 67% of its revenue in the United States, 32% in Europe, 7% in Latin America and 3% in Asia. The firm operated 3100 European stores in the Czech Republic, Netherlands, Poland, Portugal and Spain. Latin American operations included 400 stores in Argentina, Brazil, Chile, Ecuador, El Salvador, Guatemala, Honduras, Paraguay and Peru. Eighty Asian stores were located in Indonesia, Malaysia and Thailand. Royal Ahold employed more than 300 000 people who served 30 million customers each week.The firm’s revenue grew from 7.7 billion euros in 1989 to 33.6 billion euros in 1999. An Ahold press release in December 2000 quotes company president and CEO Cees van der Hoeven as saying ‘we intend to double the 1999 size of our company expressed in Euro sales in 2002’. According to the company’s website, its mission is ‘to become the best and most successful food provider in the world’. 251

THE INTERN ATION AL POTATO INDUSTRY Table 10.7 nies, 1999

Top 20 North American retail food compa-

Rank

Firm

Sales (billion $)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Kroger Albertson’s Wal-Mart Safeway Costco Ahold Sam’s Club Supervalue Fleming Winn-Dixie Publix Loblaw A&P Food Lion Meijer Sobeys Canada H-E-B Wakefern C&S Super Kmart

43.1 35.7 32.0 25.4 24.3 23.4 20.7 17.8 15.1 13.9 12.1 11.0 10.5 10.2 8.6 7.0 6.9 5.2 5.1 4.4

Source: Supermarketworld.com

Ahold was sixth on the 1999 top 10 list of US food retailers (Table 10.7). Kroger led the list with $43.1 billion in sales in 1999, which increased to $45.4 billion in 2000. A 1999 merger between Kroger and Fred Meyer, Inc. created the largest supermarket firm in the US. The merger increased the number of Kroger stores from 1410 to 2288 and the number of states in which it operates from 24 to 31. As of early 2001 Kroger did not have stores outside the US. Albertson’s, the second largest supermarket chain, is similar to Kroger. Albertson’s grew by merging with American Stores Company, giving the chain nearly 2500 stores, all of which are within the United States. Wal-Mart, the third largest chain, is a very different story. Wal-Mart Stores, Inc. operates four different retail divisions: Wal-Mart Discount Stores, Wal-Mart Supercenters, Wal-Mart Neighbourhood Markets and Sam’s Club. Numbers of stores of each type as of February 2001 were 1736 Discount, 888 Supercenters, 475 Clubs and 19 Neighbourhood Markets. All four types of stores sell some food items, but the Supercenters and Sam’s Club have full grocery lines. Sam’s Club, a members-only discount warehouse club, is in seventh place on the top 20 list of US supermarkets. Combining the sales 252

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revenue of Wal-Mart and Sam’s Club gives 1999 revenue of $52.7 billion, well above first-place Kroger. Wal-Mart first entered the international market in 1991 by opening a store in Mexico City. The first opening outside North America was in Argentina in 1995. The company entered Asia in 1996 and Europe in 1998. By February 2001 the number of international units had grown to 1072. Global employees of 1.2 million served 100 million customers each week. Wal-Mart’s February 2001 inventory of international stores was: Mexico 499, Puerto Rico 15, Canada 174, Argentina 11, Brazil 20, China 11, South Korea 6, Germany 95 and United Kingdom 241. During the summer of 2000 Wal-Mart acquired the British supermarket chain ASDA. The price tag for the 232 stores in England, Scotland and Wales was £6.7 billion, Wal-Mart’s largest acquisition to date. ASDA brings a strong grocery business to the Wal-Mart table. ASDA stores average 60% of its sales in grocery items compared to 30% for Wal-Mart Supercenters. ASDA has also been an industry leader in its home meal-replacement departments. ASDA was the third-largest supermarket chain in the United Kingdom, but aggressive expansion plans may move it up the list. By 2005 the company plans to open two new ASDA Supercenters as well as 50 new ASDA ‘fresh’ format stores that feature fresh foods and prepared meals. Wal-Mart also entered the German market in a big way by purchasing 74 Interspar hypermarket stores in 1999, bringing its total number to 95. The global trend is for increasing consolidation in the retail food industry. This creates concerns as well as opportunities for the global potato industry. The main concern is that the larger size of retailers will give them a market power advantage. On the other hand, the rapid growth of retailers gives their potato suppliers an opportunity to grow with them.

Fresh packers Fresh potato packers have been merging, consolidating and growing in size, but the fresh-pack industry is much less concentrated than the potatoprocessing industries. Some potato processors also operate fresh-pack businesses, but economies of size that favour large frozen potato factories, for example, do not apply to fresh-pack facilities. Fresh-pack facilities also benefit from economies of size but reach an optimal level at a much lower volume than processing facilities. The consolidation efforts among fresh packers have come at the sales desk rather than the packing floor. The increasing concentration of fresh potato buyers has led many fresh packers to seek countervailing market power through consolidating sales with former competitors. 253

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Sunspiced – the largest fresh potato packer in North America, with facilities in Washington, Idaho and Wisconsin – decided that it was not large enough to have sufficient market power. In July 2000 Sunspiced announced that its Washington fresh potatoes would be marketed through Basin Gold Marketing Co-operative. They joined existing members Bud Rich Potato, Harvest Fresh Produce, Skone & Connors Produce and Balcom & Moe. All five packers planned to continue to operate their facilities independently, but handle sales through one entity to enable them to negotiate better with large buyers. Sunspiced may enter similar co-operative arrangements with its operations in Idaho and Wisconsin. Other fresh potato packers are also interested in consolidation. During 2000 four Idaho packers consolidated their sales desks. Three packers in Colorado’s San Luis Valley also decided to do the same. In other instances groups of growers have formed co-operatives to vertically integrate into the fresh-pack business. A group of about 60 Idaho growers formed the Sun Valley Potato Company for that purpose in 1998. European potatoproducers have also seen advantages in operating fresh potato-packing co-operatives. One example in the United Kingdom is Anglian Produce. A Dutch example is Agrico, a grower-owned co-operative that is also involved in seed potatoes and processing potatoes.

Growers Potato producers in many regions have been on a long-term trend toward fewer, but larger farms. According to the British Potato Council, the number of registered potato producers in Great Britain declined from 76 825 in 1960 to 43 346 in 1970 to 30 225 in 1980 to 18 331 in 1990 and 7331 in 1999. Looking at a longer time horizon, the US Department of Agriculture records show that the number of US potato farmers in the first half of the twentieth century was stable at around 2.5 to 3 million. In the latter half of the twentieth century the number of US potato growers dropped from 1.6 million in 1949 to 684 000 in 1959 to 55 000 in 1969 to 26 000 in 1979 to 15 000 in 1989 and 10 000 in 1999. The decline in grower numbers has corresponded with an increase in size among the remaining growers. Some potato growers built remarkably large operations in the latter part of the twentieth century. American Vegetable Grower magazine publishes an annual list of the 100 largest vegetable growers in the United States. The largest 10 potato growers on the 1999 list are given in Table 10.8. The Ronald D Offutt operation has headquarters in North Dakota but grows potatoes in the Midwest, Pacific Northwest and Southwest. The second largest US potato producer, Blaine Larsen, grows potatoes in Idaho and Nebraska. The Navajo 254

THE MARKETING CHAIN Table 10.8 Largest 10 potato growers in the United States, 1999 Rank

Grower

Headquarters

1 2 3 4 5 6 7 8 9 10

Offutt Larson NAPI Taggares AgriNorthwest Heartland Tri-Campbell Paramount Gargiulo Wysocki

Minnesota Idaho New Mexico Washington Washington Wisconsin North Dakota Wisconsin Florida Wisconsin

Hectares 26 300 11 300 11 200 6 500 5 300 4 700 4 300 3 400 3 400 3 300

Source: American Vegetable Grower, October 199

Agricultural Products Industry (NAPI) grows its potatoes on the Navajo Indian reservation in New Mexico. The fourth and fifth largest operations, Taggares and AgriNorthwest, grow their potatoes in the Pacific Northwest. The state of Wisconsin is headquarters for three of the top 10, the most of any state.

Potato futures markets The purpose of the futures market is to reduce risk. Growing potatoes is a risky business. It seems like a good match. Since open-market potato growers face a lot of price risk, a potato futures market should be a useful tool to them. They can use futures to reduce the risk of lower prices. Buyers can also use futures to protect themselves against risk – the risk of higher prices. Both growers and buyers can transfer price risk to a third group of people – speculators. Speculators can enter either side of the market, accepting risk in exchange for the opportunity to make money. Successful futures markets must attract all three types of players.

History of potato futures in North America Potato futures trading began in North America in 1931. The Chicago Mercantile Exchange (CME) established a russet potato contract that year. A few years later there were allegations that the market was being ‘manipulated’. 255

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The United States Department of Agriculture (USDA), the agency in charge of futures regulation at that time, determined that the charges were unfounded. In 1941 the New York Mercantile Exchange (NYME) began trading a futures contract for round white potatoes. During the 1950s and the 1970s some traders were accused of manipulating this market as well. J R Simplot, the Idaho potato magnate, was convicted of wrongdoing. He paid a $50 000 fine and was banned from trading in any futures market. The CME and NYME contracts were both traded into the 1980s, but both died due from lack of interest. Most potato people no longer trusted the futures markets.

NYCE contract North America grain and livestock producers have long had access to futures markets to reduce price risk. Fruit and vegetable producers have not been so fortunate. In spite of high price risk, the only fruit and vegetables traded on US futures markets have been potatoes, onions and frozen orange juice. Onion futures were traded in the US but banned in 1958. After potato futures trading ended, that left frozen orange juice as the only horticultural crop traded in North American futures markets. The New York Cotton Exchange (NYCE) has traded the orange futures contract since 1966. It has also traded cotton futures since 1870. With this background it decided to offer a new fresh potato contract. After a year of planning and US government review, potato futures trading began on 17 September 1996. The contract specified 850 cwt of russet potatoes. The product split was two-thirds non-size A 10s (strippers) and one-third count cartons. Contract months were September, November, January, March, May and July. The NYCE contract had an important rule change from previous potato futures contracts. The brokerage houses, rather than the customers, were now required to pay the futures exchange. Since brokerage firms had the incentive and obligation to police its customers, default became much less likely. Unfortunately, the NYCE contract died after several years of light trading. Some analysts cite poor timing as a reason for failure. Trading began at harvest time during a very low price year. Had the futures contracts been available the previous winter or spring growers might have been able to hedge a profitable price before the crop was produced. As it turned out the futures prices during the fall of 1996 did not offer growers a profitable pricing opportunity. Speculators also avoided the market owing to the low volume of trading. Although some processors and fresh buyers were interested in the contract, the lack of activity from producers and speculators made for such a thinly traded market that they too avoided it. 256

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Hedging Hedging is the traditional way producers use the futures market. Potato growers and shippers can use futures to protect themselves against the risk of low prices. When the futures market offers an attractive price in some future month, growers concerned about the price falling can ‘lock in’ a price. For example, consider the situation of hypothetical grower John Murphy. He harvested a high-quality crop of potatoes and put them in storage where they are storing very well. Current prices are attractive but Mr Murphy has high-quality potatoes that can be stored into the following summer. Murphy is interested in protection from the risk of a price drop at the end of the season. In early March the NYCE potato futures price for July delivery is trading at $17.00. Mr Murphy worries that the price will fall. He wants to lock in the attractive July price for the spuds he plans to store until then. He figures that his basis – the difference between his raw product price and futures – is $8.00. Included in the basis are the costs of packing and the diversion of his off-grade potatoes to dehydration. Mr Murphy sells futures at $17.00, giving him an expected grower price of $9.00. He protects himself against the risk of a price drop. Prices did indeed drop at the end of the marketing season. The grower price went down to $4.00 in July. Mr Murphy, however, got his $9.00. He sold his potatoes in the cash market for $4.00, but he made $5.00 on futures. Remember he sold his futures contract for $17.00. When potato prices dropped in July, he was able to buy back his futures contracts at $12.00. He sold at $17.00 and bought at $12.00, for a profit of $5.00. Added to the $4.00 he got in the cash market, the net price is $9.00. Mr Murphy is happy about his decision, especially when he talks to neighbouring growers who did not hedge and sold at $4.00. If prices had gone up instead of down, his neighbours who did not hedge would have been happy, but Murphy would have still got the $9.00 he locked in. In that case his losses on futures would have been offset by gains in the cash market. Still, Murphy would have liked to have had protection against low prices without giving up the opportunity of high prices. Perhaps an option would have been a better tool for him to choose.

Options Potato options is another pricing tool that the New York Cotton Exchange made available when it began to offer potato futures contracts. Buying an option is like buying insurance. Growers can buy hail insurance to protect against the risk of crop losses through hail. They can also buy options to protect against losses through falling prices. The options market allows growers to buy a price floor. An option is a right, but not an obligation, to 257

THE INTERN ATION AL POTATO INDUSTRY

take a position in the futures market. For a potato grower, that would involve buying a ‘put’ option. Potato buyers interested in price ceilings would buy a ‘call’ option. Imagine again that it is March and Mr Murphy worries about the potato price falling. He can buy a July put option for $17.00.The price of that option is $0.50 per cwt. He chooses to buy the option, providing a price floor of $8.50 per cwt ($17.00 minus $8.00 grower basis minus $0.50 option cost). July comes, and the option does indeed give Mr Murphy the $8.50. Prices dropped and in July he sold his potatoes in the cash market for $4.00. He made $5.00 on the futures market, using his option to sell at $17.00 and buying at $12.00. His net price was $4.00 plus $5.00 minus the $0.50 cost of the option, giving him a net price of $8.50. The option netted Mr Murphy less than the hedge. The difference was the $0.50 he paid to buy the option. What did he get for the $0.50? He got a price floor rather than a locked-in price. What if the market had gone the other way and if prices had increased at the end of the 1995–96 marketing season? The hedge would have still paid the locked-in $9.00. The option, however, would have paid more. Let’s assume that July futures, instead of going down, went up to $20.00. The put option would have given Mr Murphy $19.50 per cwt. Remember that the put option gave him the right, but not the obligation, to sell at $17.00. He would simply ignore the option and sell his potatoes at $12.00 (grower price = futures price minus $8.00). His net price, after deducting the cost of the option, is $11.50. Mr Murphy’s example points out the advantage of the options market. It provides a price floor. If the market drops below the floor, the grower is protected. If it stays above the floor, it is not needed. It is like not needing to collect on hail insurance.

Exchange of futures for physicals (EFP) A third way to use potato futures is with an arrangement called an EFP. The initials stand for exchange of futures for physicals. This involves an agreement between a potato buyer and a potato seller. The agreement is to price the product independently on the futures market. As an example, let us assume that Sunspiced, a major potato shipper, arranges an EFP with the supermarket chain Albertson’s. They have done business in the past and regard each other as valuable customers. It is October and they are planning to make a deal for potatoes in January. They decide to do it with an EFP. They sign a contract specifying the quantity and quality to be delivered in January. They do not need to haggle on prices. They will independently choose prices on the futures market. 258

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In October, shortly after they sign the EFP, January futures are trading at $14.00. Albertson’s likes this price and locks it in with the futures market. Sunspiced is not satisfied with current prices, so it does nothing. In December, the potato stocks report is very bullish and prices increase. January futures are trading at $16.00. Sunspiced likes this price and takes it on the futures market. Both Albertson’s and Sunspiced have now priced their potatoes. Albertson’s purchase price is $14.00. Sunspiced’s selling price is $16.00. In January the cash price and the price of January futures converge at $15.00. Sunspiced ships the potatoes to Albertson’s. Their futures broker informs the NYCE (or would do if its potato contract was still trading) that their futures contracts will be liquidated by an EFP. They exchange their potatoes at the current $15.00, but both made $1.00 on the futures market. The net prices are $14.00 for the buyer and $16.00 for the seller. They are both happy. They exchanged their potatoes, but did not haggle over prices. By choosing to price on the futures market at different times, they both got better prices than they would have without the EFP. The same EFP mechanism could be used with potato processors and their contract growers. Instead of haggling over contract prices, growers and processors could simply agree on quantity, quality and delivery dates. Pricing could be done independently on the futures market.

Current contracts The European potato industry continues to have the opportunity to use potato futures. Although the French futures exchange MATIF closed its potato futures contract in 1997, as of early 2001 potato futures trading was still being conducted in London, Amsterdam and Hanover. The MATIF contract was traded for 12 years, but was closed, like the North American contracts, owing to a lack of trading. The London International Financial Futures and Options Exchange (LIFFE) offers a potato futures contract that specifies 20 tonnes of bulk, unwashed potatoes. Quality standards include a size minimum of 50 mm, maximum faults of 10% and a minimum dry matter of 18%. Acceptable varieties are subject to change, but at one time included Bintje, Wilja, Estima and Marfona but excluded Russet Burbank and Record. The Dutch potato futures contract is much more narrowly specified. It calls for 25 tonnes of Bintje variety potatoes grown on clay soils that pass visual and specific gravity standards. The Hanover contract specifies 25 tonnes of mainly Class 1 ware potatoes of EU origin. Additional requirements of the German contract include sizes of 32–62 mm for long varieties and 259

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35–65 for round varieties. Varieties should be firm-cooking types that account for at least 3% of German certified seed production. The key to survival of any futures market is a large trading volume. Without sufficient volume, futures exchanges will close potato futures trading. The NYME, CME, NYCE and MATIF have all done so. The London potato futures contract may be the next to become defunct. During early 2001 trades and open interest for some of the potato futures contract months were zero for weeks at a time. Current information about the LIFFE potato futures contract is available on the exchange’s website (http://www.liffe.com). During January 2001 the Hanover potato futures market had open interest for each contract month, but zero-trade days for some contracts were not uncommon. The Amsterdam potato futures volume was higher in early 2001 but much lower than it had been several years earlier. Futures, options and EFPs are modern business tools that are useful in many industries. Opportunities for those in the potato industry to use such tools are diminishing. Perhaps other risk management tools such as revenue insurance and multi-year contracts will become more widely available in the future.

References 1 B Huffaker, North American Potato Market News, Idaho Falls, 2 November 2000. 2 M Topolewski, ‘Impact of the fast food industry and advertising on US frozen french fry demand’, MS thesis, Moscow, Idaho, University of Idaho, 1997. 3 L Zhang, J Guenthner, R Dwelle and J Foltz, ‘US opportunities in China’s frozen french fry market’, American Journal of Potato Research, 1999 76:5. 4 H Fraser, Fraser’s Potato Newsletter, Charlottetown, PEI, Canada, 18 January 2001. 5 Y Zhang,‘Oligopoly power in US frozen potato export’, MS thesis, Moscow, Idaho, University of Idaho, 1996.

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IV KEY ISSUES FOR THE FUTURE

CHAPTER

11 Technology issues

T

he international potato industry has undergone many technological changes since the Incas of South America first grew potatoes and processed them into chuño. Some subsistence farmers in developing countries use potato technology that is not much different from that of the Incas. High-tech growers in developed countries are on a technology treadmill that continually improves potato yields and quality. Some of the emerging technology issues at the turn of the century will influence global potato trade for years to come. This chapter discusses some of those issues that appear to be important in 2001. Technological change has long had an influence on the potato industry, but the rate of change seems to have accelerated. The rapidity of technology advancements concerns some people. In order for technology to be fully accepted in the potato industry, three groups of people must be satisfied. First, the potato producers must be willing to use the technology. Secondly, the other end of the marketing change, the consumers, must accept the change if it affects the potatoes they eat. Thirdly, society in general must accept the new technology. Consumers and society in general are closely related but are not the same. Consumers who want a new technologically advanced product may be denied access to that product because of societal pressure. This chapter deals first with acceptance of genetic technology, followed by issues involving seed potato technology, plant property rights and electronic technology. 263

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GMO acceptance Grower acceptance Many potato growers were quick to accept genetically modified organism (GMO) technology during the 1990s. Monsanto’s NewLeafTM potatoes, which were genetically modified to resist Colorado potato beetle (CPB), became popular among growers where the pest was a serious problem. NewLeaf PlusTM, Monsanto’s next potato product, also had genetic resistance to net necrosis caused by potato leafroll virus (PLRV). Monsanto was first in the market, but other firms and universities were also conducting research and field-testing GMO potatoes. Scientists around the world were working on the development of pest-resistant GMO potatoes. The most profitable target appeared to be resistance to potato late blight, the disease that caused the Irish Potato Famine. Some GMO potato research was being conducted on improving potato-processing characteristics such as higher specific gravity. Plantings of GMO potatoes trended upward. During the late 1990s about 3% of North American seed potatoes were Monsanto’s GMO varieties. At first, the food industry, consumer groups and activists were relatively silent. Then voices of opposition were heard in the potato business. The move away from GMO potatoes began when quick-service restaurants (QSR) encouraged frozen fry suppliers to stop using GMO potatoes. In response one processor tried to differentiate its frozen fries by guaranteeing that they were GMOfree. Others began to move away from the technology as well. The potatoprocessing industry saw benefits of GMO technology but needed to satisfy customer requests. Fresh market channels continued to accept GMO product, but with the processing market door closing most growers no longer wanted to take on the risk of planting GMO potatoes. The anti-biotechnology movement and its impact on the marketability of genetically modified potatoes caused consternation in the potato industry. Some people speculated that the anti-GMO juggernaut could not be stopped and that GMO technology would never be accepted. Others thought that acceptance would come soon. A serious blow to the GMO potato industry was struck in the spring of 2001 when Monsanto closed its potato subsidiary NatureMark. GMO potato research continued in other places, but the future of the industry was uncertain.

Societal acceptance Social scientists’ views about technology acceptance can shed light on this situation. We might learn about future acceptance of GMO technology by studying acceptance patterns of previous technology. In his best-selling book 264

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Megatrends, John Naisbitt said: ‘Technological innovation rarely goes the way of straight-line extrapolation, but proceeds as part of a lurching dynamic of complicated patterns and processes.’ In Megatrends 2000 Naisbitt2 accurately predicted that the 1990s will be ‘a decade of debate about what scientists are doing’. In a later book, High Tech/High Touch, Naisbitt3 discussed the societal polarization of those who hate technology and those who worship technology. Alvin Toffler also wrote a trilogy of books dealing with future impacts of technology: Future Shock,4 The Third Wave5 and Powershift.6 Toffler explains that changes in society are not chaotic, unpredictable events, but rather the result of driving forces whose patterns can be identified. In Future Shock (p 27), he says: Technological innovation consists of three stages, linked together in a self-reinforcing cycle. First, there is the creative, feasible idea. Second, its practical application. Third, its diffusion through society.

The cycle has shortened from the 2000 years it took engineers to apply the conic sections discovered by Appollonius. In the food industry, mechanical grain harvesters and food canning moved through the three stages in about a century. More recently, the time between market rollout and peak production (Toffler’s stage three) was 34 years for electric refrigerators and eight years for electric frying pans in the United States. Toffler wrote about techno-rebels in The Third Wave. He said that for 300 years the two driving forces for societal acceptance of technology were economic gain and military clout. Now, techno-rebels want to be gatekeepers who determine if new technologies pass ecological and social tests. Toffler predicted that ‘they will not vanish but multiply in the years ahead’ (p 169). In Powershift, Toffler explains that environmental disasters such as Three Mile Island, Chernobyl, Bhopal and the Exxon Valdez push the ecological test to the top of the agenda for many techno-rebels. Techno-rebels will lengthen the acceptance pattern for some technologies. Society will more rapidly accept technologies that do not draw the ire of the techno-rebels. One example is electronic technology where frequent computer improvements and quick consumer acceptance are the norm. For agricultural biotechnology, which is on the hit list of techno-rebel organisations such as Greenpeace, the cycle will be longer. How much longer deserves investigation.

The microwave oven model We searched for another, similar technology that had already been accepted by society. In a recent study, the author and others explored whether analy265

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sis of that acceptance pattern might help forecast a pattern for GMO potato acceptance. Two points of similarity seemed important. First, the technologies are, or could become, an important part of the food system. Secondly, people have health concerns about the technologies. We chose the microwave oven as a similar technology and paradigm for GMO acceptance. The technology now is widely accepted. We found in previous research that the appliance was an important factor in the demand for potatoes.7 The US Department of Commerce tracks the percentage of US homes that own various appliances. We assumed that if a household owns a microwave oven, it has indeed accepted the technology. The Commerce data provided the foundation of analysis of GMO food acceptance, assuming similar length of time and acceptance patterns for both technologies. Percy Spencer, a Raytheon engineer, invented the microwave oven in 1946 while researching military technology. In 1947 Raytheon sold the first commercial microwave oven to a Boston restaurant. Tappan marketed the first microwave oven for home use in 1955. It was a bulky machine that required complex plumbing and sold for $1295, which is the equivalent of $17 300 in 2000 currency. Since it was a market failure, it was not the touchstone of Toffler’s stage two. In 1967, 21 years after Spencer’s invention, Amana sold the first countertop microwave oven, which it priced at less than $500. This marked Toffler’s stage two – the practical application of the new technology. The 21year time span is consistent with Coates’s8 claim that it takes 15 to 40 years for a scientific discovery to be practically applied in society. Societal acceptance of microwave ovens, Toffler’s stage three, took about a quarter of a century. Consumers concerned about health risks of this new technology feared that microwaves could cause radiation poisoning, cancer, blindness, sterility and impotence. Microwave warning labels in food service locations frightened people. Although many US consumers eat food prepared in microwave ovens, some still refuse to do so. The percentage of US households that own microwave ovens shows an S-shaped growth pattern (Fig. 11.1). Researchers often use logistic growth functions to model this type of new-product acceptance. The author and a co-researcher9 estimated a logistic equation to forecast microwave oven ownership and its impact on potato demand. Figure 11.1 shows the four phases – introduction, growth, maturity and decline – of the S-shaped product life cycle common with most commercial products. Well-known food products such as frozen orange juice and powdered coffee creamers remained in the introduction phase for many years before they entered the growth phase. For microwave ovens the introduction phase took about a decade. The microwave growth phase lasted about 12 years from about 1980 when it first passed 10% to 1992 when the graph began to flatten. During the middle part of this period, growth was very rapid. The percentage of 266

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households owning microwave ovens tripled in five years, from 25% in 1983 to 75% in 1988. Twenty-five years after introduction, ownership flattened around 83%, marking the beginning of the maturity phase of the product life cycle. Toffler’s stage one for GMO food could be considered to be 1953, when Watson and Crick developed the model for DNA molecules. Stage two came 41 years later, in 1994, when Calgene sold the first food product from genetically modified plants, the Flavr Savr tomato. Since then we have been approaching Toffler’s stage three via the product life cycle. After a false start toward the growth phase, the early 2000s are still the introduction phase of the GMO product life cycle. If it follows the microwave pattern, the growth phase will begin about 2007, more than a decade after the Flavr Savr debut. Rapid growth until market maturation about 2019 can be expected. The introduction phase seems long, but with active GMO groups, societal acceptance may be delayed even longer.

Acceptance issues The biotechnology industry wants to compress the acceptance timeframe. During April 2000 seven companies formed the Council for Biotechnology 267

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Information in order to educate US and Canadian consumers. Both sides of the GMO issue will raise and spend money trying to influence societal acceptance of GMO food. The leading anti-GMO organization is Greenpeace (website http://www.greenpeace.org). If the societal acceptance pattern for GMOs is similar to that of microwave ovens, GMO potatoes will eventually be accepted. GMO acceptance is slowed by concerns about health and the environment, which are similar forces to the health and cost concerns that slowed microwave oven acceptance. Consumer convenience was a powerful accelerating force in microwave oven acceptance. The GMO industry does not yet have such a consumeracceptance accelerator. Product development has focused on attributes that are attractive to producers rather than consumers. If the industry develops products with a powerful consumer pull, it might compress the societal acceptance timeline.

Seed technology The global potato industry faces a planting material challenge. The traditional use of seed tubers carries the problems of seed-borne disease, low multiplication rates and high costs of storage and transport. True potato seed (TPS) can solve those problems but creates other problems including genetic variation, slow plant development and high labour costs. Both types of seed systems work and are used around the world, but costs and risks are high. New technology, however, is improving potato-planting material and reducing some of the costs and risks. The production of basic seed and its multiplication has benefited from some major technological advances. The old system of finding healthy, disease-free potato plants in the field and reproducing them as clonal selections in subsequent field generations has become outdated. The new system involves the production of pre-basic seed in artificial, sterile conditions in laboratories. Known as ‘in vitro’ systems, the process uses plant parts to produce whole plants that are free from disease. New technology will focus on reducing costs while maintaining quality during multiplication. One important aspect of the seed tuber production system is the reduction of time from laboratory to commercial potato grower.The trend is toward fewer generations of seed potato multiplication in the field. Carrying the trend to the limit, eventually commercial potato growers might plant ‘in vitro’ material that has never been in the field. True potato seed production has received a lot of attention from the International Potato Center. TPS is seen as a viable alternative to conventional 268

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seed tubers, especially in developing countries where high-quality seed tubers are difficult to produce domestically and expensive to import. Advantages of TPS include the fact that most diseases are not transmitted in TPS, low transport costs owing to small seed size and a storage life of two years at room temperatures. TPS is labour-intensive because it requires hand pollination, but that may not be a barrier in places where labour is cheap. TPS use is increasing in scattered locations around the globe including Bangladesh, China, Egypt, India, Nicaragua, Peru and Vietnam. One problem with the use of TPS is that the commercial potato crops produced from TPS do not have the consistent quality attributes demanded by potato processors. Several large firms are active in global seed potato markets. Some are in the import–export business, some own varieties and some market seed production technology. One firm, Technico, sells entire seed chain systems based on patented techniques for minituber production and early-generation seed multiplication. Technico advertises that it can produce seed potatoes in as little as two years from laboratory to commercial grower. In 2000 the company had production operations in the United States, Mexico, Australia, China and India. Technico is example of the benefits of private property rights in the seed potato industry. Without legal protection of its intellectual property, there would have been little or no economic incentive for Technico to develop a technology that can benefit potato industries in both developed and developing countries.

Plant property rights Intellectual property rights laws in some countries have created opportunities to own potato varieties in general, not just those developed with GMO technology. For example, the Netherlands National Seed Law of 1967 puts potato varieties into two categories: licensed varieties and public varieties. Growers can plant public varieties, also known as ‘free’ varieties, without paying fees. Growers who plant licensed varieties must pay royalty fees to the owners of the varieties. The licence system provides economic incentives for plant breeders to develop new varieties and be compensated for their efforts, expense and risk. The government, in effect, gives the owner a monopoly, but only for a fixed amount of time. Thirty years after the first licensing in the Netherlands, a variety becomes public, available to all at no fee. Private potato breeders are plentiful in the Netherlands, with more than 200 in operation during the late 1990s, according to Struik and Wiersema.10 269

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Opportunities to protect intellectual property rights and own potato varieties were a factor in the development of a private breeding industry in the Netherlands. The powerful economic incentives to develop new varieties in the Netherlands did not exist in other countries, including the United States, until decades after the Dutch government allowed variety ownership. Struik and Wiersema point out that plant property rights also provide benefits to those who do not own varieties. A large assortment of Dutch varieties gives all Dutch seed growers opportunities in the international market place that seed growers in other countries lack. The variety ownership system also provides price stability. Private variety prices in the Netherlands are on average higher than public varieties, but they are less volatile. Since variety owners can control plantings they can better match production with market demand. Plantings of public varieties are not controlled and vary in a boom-or-bust cycle of high prices followed by low prices that is common in the potato industry. Plant property rights can help change potato products from commodities to value-added branded products. As we have seen, a problem for growers is that long-run commodity prices trend downward. If the variety that is owned is differentiated from the public varieties and supply can be controlled, producers can gain higher prices. If the producers themselves own the varieties they can control who grows the variety and prevent the market from being flooded. The issue of who owns the plant property rights determines who collects the returns to ownership. Many of the links on the marketing chain have incentives to own varieties. At the grower end of the chain, both individuals and groups of growers own varieties. Agrico, a grower co-operative with headquarters in the Netherlands, employs a plant breeding staff to develop new potato varieties. Agrico is active in international trade so it also attempts to secure legal property rights for its varieties in each country in which it operates. Individual farming operations also acquire variety property rights either through purchasing them, hiring plant breeders or discovering mutated plants in their fields, which they can patent and trademark. One example of individual grower ownership is the McCullough family in Washington that owns the HiLite Russet variety. At the other end of the marketing chain are retailers, restaurants and other firms that deal directly with consumers. In the United Kingdom, one supermarket chain, Sainsbury’s, has entered the potato variety ownership business. Sainsbury’s owns the Anya variety, which it displays attractively in its stores by brand name and variety name. Since the retailer owns the variety it controls who can grow Anyas and how much they can produce and market. Since it is differentiated, the Anya variety of potatoes becomes a branded product rather than a commodity. Although the deal is too new to verify results, with proper supply control and marketing, the Anya could bring 270

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higher prices and margins to the retailer and perhaps to other links in the Anya chain. If successful, the Sainsbury’s Anya might be but the first in a line of retailer-owned potato varieties. Potato processing is another marketing chain link that is active in variety ownership. Frito-Lay, the world’s leading snack food processor, has long had a potato plant-breeding programme. Frito-Lay’s goal is to develop potato varieties that give the company production and marketing advantages over its competitors. Plant property rights will legally prevent its competitors from growing or processing Frito-Lay varieties. Although Frito-Lay continues to purchase raw product produced from other varieties, it plans to increase the share of its own varieties. Property rights can vary between countries. A frozen potato-processing firm owns the Canadian property rights to one potato variety that is a public variety in the United States. Plant breeding companies, of course, use property rights laws to protect their new potato varieties. The incentive for these firms is to develop varieties that are popular with both consumers and growers. The typical revenue-collecting mechanism is to charge a royalty fee for the right to plant or market the variety. The challenge is to collect royalties for the successful varieties that are sufficient to more than cover the development costs of the successful and unsuccessful varieties. Since this requires deep pockets, there has been a trend toward mergers, acquisitions and consolidation. The pockets must be even deeper if the firm uses GMO techniques that have not been fully accepted by society. As we have seen, Monsanto, the leading firm in developing genetically modified potatoes through its subsidiary NatureMark, chose to discontinue its GMO potato programme. When it dropped out of the potato business in 2001 it chose to focus its GMO efforts on crops that were more widely planted, giving a potentially higher return. Public institutions are also becoming involved in variety ownership. The land-grant universities of the United States traditionally developed varieties that were available to anyone at no fee. Partly because of declining public funds for variety development, the universities are increasingly looking at retaining ownership or licensing ownership to others. A recent agreement between Potato Growers of Idaho and the University of Idaho specified that varieties developed with grower funding would become the property of the growers. An improved potato variety that could only be grown by Idaho growers could enhance Idaho’s reputation for high-quality potatoes and perhaps increase the price premium for Idaho fresh potatoes. Plant property rights laws provide a legal framework and economic incentive for one link or alliances of links on the marketing chain to get out of the commodity business and into the branded product business. Individual growers also have the opportunity to own potato varieties. Private and public institutions invest a great deal of money in potato variety development, but sometimes growers discover new potato types that occur 271

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naturally in their fields. That is how new varieties were discovered before the advent of modern breeding techniques. Growers who find new types of potatoes growing on their own property may be able to patent and trademark them. Seed production technology already in use may create more opportunities for growers to discover new varieties. According to Struik and Wiersema, the rapid multiplication techniques that reduce seed costs and disease risks carry the burden of genetic drift. Potato plants that are generated from very small plant parts, meristems, are subject to spontaneous mutations. These genetically altered plants may have different characteristics from the mother plant. Other factors that contribute to the mutations include composition of the medium, tissue culture techniques and the amount of time in culture. The spontaneous mutations are, of course, a problem in seed programmes where maintaining genetic type is important. Nevertheless, modern seed production systems will increase the likelihood that growers might find useful genetically altered potatoes in their fields for which they can claim property rights. Enterprising growers of the future might even try to purposely produce varieties by using tissue culture techniques that actually increase genetic mutations. Plant property rights provide an economic incentive for growers to become involved in such endeavours.

Electronic technology In developed countries electronic technology has improved farm equipment, storage systems, record keeping, business analysis and communications. It has also reduced the size of land management units. Global positioning system (GPS) technology has led to the development of precision agriculture that allows growers to adjust seed, fertilizer, water and pesticides applications to small grids of less than one hectare. Also known as variable rate technology, or site-specific management, precision agriculture is information technology applied to farming. Potato growers can use information from yield monitors and application equipment to learn about the combination of inputs that produce the most profitable yields of potatoes. Several electronic technology trends will have an impact on global potato markets in the future. The costs of electronic technology continue to trend downward, which could increase the rate of adoption of precision agriculture. As more potato growers use precision agriculture, the repercussions will reverberate through potato markets in the future. Yield increases among potato growers who use precision agriculture have been impressive. 272

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Increased yields reduce costs, which, coupled with the reduced input use possible with precision agriculture, may lead to substantially reduced costs. The reductions may be in terms of costs per hectare, but more importantly the reductions may even be in terms of costs per tonne. This downward push on costs together with the upward push on total potato supplies mean that precision agriculture will force down potato prices. Precision agriculture could also have a positive impact on potato quality. With conventional production practices seed, fertilizer, water and other inputs are applied at the same rate across the entire field. Sites with poor soil, slope drainage and fertility receive the same rate of inputs as the best sites in the field. That means that some sites receive either too much or too little, not just for optimal yield but also for optimal quality. For example, water and fertility affect potato specific gravity, an important quality attribute in potato processing. Precision agriculture could help growers improve quality, but one challenge is monitoring quality in each site. Yield monitors measure potato yields as the harvest equipment goes across the fields with the use of sensors that measure the weight of potatoes moving on conveyers. A future technology could monitor potato quality attributes as the crop is harvested. This could provide growers with more information to make decisions that could enhance potato quality.

References 1 J Naisbitt, Megatrends, New York, Warner Books, 1982. 2 J Naisbitt, Megatrends 2000, New York, William Morrow & Co, 1990. 3 J Naisbitt, High Tech/High Touch: Technology and Our Search for Meaning, New York, Broadway Books, 1999. 4 A Toffler, Future Shock, New York, Random House, 1970. 5 A Toffler, The Third Wave, New York, William Morrow & Co, 1980. 6 A Toffler, Powershift: Knowledge, Wealth and Violence at the Edge of the 21st Century, New York, Bantam Books, 1990. 7 J Guenthner, J Biing-Hwan, and E Levi, ‘The influence of microwave ovens on the demand for fresh and frozen potatoes’, Journal of Food Distribution Research, 1991 3 45–52. 8 J Coates, ‘The next twenty-five years of technology: opportunities and risks’, in 21st Century Technologies: Promises and Perils of a Dynamic Future, Paris, Organization for Economic Co-operation and Development, 1999, p 33. 9 Y Gao and J Guenthner, ‘The global demand for frozen potatoes in year 2000’, HortTechnology, 1993 3 239–44. 10 P Struik and S Wiersema, Seed Potato Technology, Netherlands, Wageningen Pers, 1999.

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12 Market issues

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he globalization of the potato industry has caused the emergence of a number of issues that will have an impact on future markets. One issue is what will happen in Greater China, the country with the world’s largest population, which also happens to be the world’s largest potato-producing country. Other issues covered in this chapter include trade agreements, currency exchange, branding by variety and international growers.

Greater China Greater China – consisting of Mainland China, Hong Kong and Taiwan – may become the world’s leading trader and the world’s largest consumer in the twenty-first century. At the turn of the century Greater China had about onesixth of the world’s population and the third largest economy after the European Union and the United States. The people of Greater China have similar cultural traditions, and political barriers are coming down. Mainland China is the country with the third largest land area in the world, behind Russia and Canada and slightly ahead of the US. Its popula274

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tion is 1.2 billion, but 90% of the people live on 15% of the land, mostly along the east coast. After three decades of difficult economic struggles, Mainland China opened its door to economic reform and trade in 1978. Since then its economic growth has averaged a remarkable 10% per year. Nearby, four other Asian countries became known as the ‘Four Little Dragons’because of their rapid economic growth. The countries are Hong Kong, Singapore, South Korea and Taiwan. Two of the four, Hong Kong and Taiwan, are part of Greater China. Great Britain governed Hong Kong for over 150 years. British free trade policy helped Hong Kong develop a powerful economy in a small land area. On 1 July 1997 the British lease ended and Hong Kong was returned to Mainland China. It is now administered as a special economic unit within China. Taiwan’s history is different. After Mao Tse-tung’s communists took control of Mainland China in 1949, Chiang Kai-shek went to Taiwan where he became president of Nationalist China. For many years the United States recognized the government in Taiwan, but not the one in Beijing. Following the strengthening of economic and political ties, by the late 1990s many global business people considered Taiwan to be part of the Greater China market. Taiwan and Hong Kong have both been long-term traders with many nations around the world. Hong Kong imports a large amount of food products as a consequence of its free trade policy and limited amount of agricultural land. Japan is the leading importer of US frozen fries, but Hong Kong has long been in second place. Taiwan is in fourth place. Mainland China is a relatively new customer for US frozen fries. Although Chinese growers produce more potatoes than growers in any other country, their processing industry is tiny. Idaho’s Simplot Company set up a small fry plant in Beijing in 1992, but it took five years to reach full production and can only meet a small fraction of China’s demand for fries. US fries began to enter Mainland China during the 1980s. Traders used Hong Kong as the door to enter the market. At first US fries were only available as a luxury good at large hotels. Then the US fast food industry arrived. In 1991 McDonald’s built its first restaurant in Mainland China. Since that first US fast-food restaurant in Beijing, many more have been built. In 2000 there were 294 McDonald’s in Mainland China and 855 in Greater China. McDonald’s takes pride in providing its customers all over the globe with high-quality fries. Greater China is no exception. Most of the frozen fries used in Greater China are imported to ensure the quality demanded by QSRs and their customers. The top sources of the Greater China market are processing factories in the United States, Canada and Netherlands.

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Zhang’s model 1

In 1999 Lingyun Zhang built an econometric model for US frozen fry exports to China (see Fig. 12.1). He found that the following variables influence Chinese demand for US frozen fries: US frozen fry price, Canadian frozen fry price, tariff rates on US fries, China’s population, income of Chinese consumers, the number of McDonald’s restaurants in China and US foreign investment in China. The price of exports from the Netherlands was a statistically insignificant variable, perhaps because Dutch processors focus on exports to European countries. International trade theory says that trade barriers and currency exchange rates are important to international trade. Accordingly, the model also included currency exchange rates between each region of Greater China and the US, as well as import tariffs in each of the three regions. Zhang used the model to forecast US frozen fry exports to China into 2005. He found forecasts of his explanatory variables from government and private sources in the US and China. By plugging in the future estimates for such factors as Chinese population and income, he was able to forecast exports for each year. The model predicts that US processors will export as much to Mainland China in 2005 as they did in 1997 to their leading customer, Japan. It also predicts that in seven years US exports to Greater China will be larger than all US exports in 1997. But with a lack of high-quality raw product, domestic supply of frozen fries is limited in Greater China. Zhang says that even though China is the leading potato-producing country in the world, the domestic potato industry will not be able to produce a significant volume of high-quality fries until at least 2010. Zhang’s forecasts and judgement are tempered by his first-hand experience in China’s frozen potato-processing industry. For five years he worked in Simplot’s Chinese potato-processing operation.

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Zhang cites inconsistent quality, lack of varieties suitable for Chinese agriculture and farm structure as reasons why China will import large amounts of frozen fries. Historically, China’s potato breeders developed potato varieties for high yield and disease resistance rather than processing attributes. As a result, there are no suitable potato varieties that work well in the field and processing plant in China. Another disadvantage for China’s potato processing is small farm size. With average family farms consisting of only 2.4 acres of land, it is hard to get enough volume of consistent, highquality raw product to produce acceptable fries. This situation may not change much in the near future owing to the long breeding process, the huge rural population and limited cropland in China. Modern agricultural development in China only began in the early 1990s. As the world’s biggest potato-producing country, someday China may produce the quality raw potatoes required for processing. When that time comes, domestic frozen fries will provide competition but not close the door to imports.

Future developments Demand for frozen fries in Greater China will continue to expand. Frozen fry consumption per capita in Mainland China in the late 1990s was only about 2%–3% of that in Hong Kong, the most developed market in Greater China. Since Mainland China is still in the introduction stage, Greater China may have a long, steep growth stage for frozen fry imports. Fries are still new products served in Western-style restaurants in Mainland China. Compared with the huge population, there are currently few restaurants that serve fries in Mainland China. Thus, consumer demand has a very high response to the opening of new fry outlets. In the meantime, foreign direct investment has brought about an environment for Chinese consumers to know Western people, culture and foods. Foreign investment also introduces a new style of living and working to Chinese people. One of them is the efficiency and time saving of meals offered in fast-food restaurants. With the economy developing and consumer income increasing, Chinese people are looking for convenient, high-quality foods. Frozen fries fit these changes and will become increasingly popular among Chinese consumers. As the economy develops and per capita income, the fast-food industry and foreign direct investment increase, demand for frozen potatoes will grow. Although there are some differences, future demand behaviour in Mainland China will probably follow the historical patterns in Taiwan and Hong Kong. Some future challenges are anticipated, especially in Mainland China. Such problems may result from uncertain government policy and whether or not Mainland China is accepted for WTO membership. Some ana277

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lysts expect China to develop the world’s largest economy in the twenty-first century. Admission to WTO will accelerate economic growth and make that more likely. It would also reduce trade barriers and open the door for more global potato trade.

Trade agreements As we have seen, governments impose agricultural trade barriers for a number of reasons. One reason is to provide food security to its citizens. Domestic subsidies can increase food production at home and reduce reliance on foreign supplies that could be at political risk. Sometimes governments impose trade barriers in retaliation for another government’s action that may not even be related to trade. Another reason for trade barriers is to provide tariff revenue to governments. Governments use a variety of tools to influence trade. On the import side, tariffs, quotas, voluntary restraints and technical restrictions have been used. On the export side, export taxes, export subsidies and embargoes are the tools of choice for many countries. State trading agencies and currency exchange rate manipulations are also used to influence trade. In this environment of many reasons and many tools to restrict international trade, a world-wide emphasis on free trade has been emerging for several decades. The General Agreement on Tariffs and Trade (GATT) was an international trade organization that had the goal of reducing trade barriers. GATT consisted of seven rounds of negotiations, concluding with the Uruguay Round in 1995. In that year the World Trade Organization (WTO) replaced GATT. WTO consisted of 130 member nations, with others expecting to join. In early 2001 China had not been admitted but its prospects looked favourable. WTO has the goal of reducing trade barriers, not just for goods but also for services and intellectual property rights. In the future potato variety ownership rights might apply to all WTO members. Other WTO goals are to reduce export subsidies, reduce domestic subsidies, convert quotas to tariffs then phase out tariffs completely, open closed markets and establish science-based rules. The WTO goals are compatible with increased global trade of potatoes. The WTO is one type of economic integration but there are several others. Free trade agreements are designed to reduce barriers between member nations and keep separate policies for non-members. The North American Free Trade Agreement (NAFTA) reduced potato trade barriers between Canada, Mexico and the United States. Government leaders are exploring opportunities either to expand NAFTA or develop a broader agree278

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ment for Western Hemisphere countries. Another type of economic integration is the customs union, which has a common policy for non-members. A common market is the same as a customs union, with the added provision of free movement of factors of production between members. One step beyond that is the economic union, which aspires to fully unified social, agricultural and economic policies as well as a common currency. The European Union recently made most of the transition to that stage of economic integration, with the euro set to replace some but not all member currencies. The European Union will undoubtedly play a major role in future global potato trade. For every type of potato product, EU countries are involved as leading exporters, importers or in some cases both exporters and importers. We have seen that much of the international potato trade is between EU members. The free trade policies within the EU increased the flow of potato products between member nations. Expansion of the EU would stimulate additional potato trade in Europe and perhaps around the globe as well. The advantage for potato industries in the entering countries is that they will no longer have to pay tariffs for exports to EU member countries. The disadvantage for potato industries in existing member countries is that there will be more competition. One advantage for both old members and new members is that the total market size would grow. Remember that population is one of the four demand shifters. When the population of the ‘home’ market increases through new membership, demand for potato products could increase. EU bound tariffs for other nations that are WTO members are 9.6% to 13.4% for fresh potatoes, 14.4% for frozen potatoes and 4.5% for dehydrated and seed potatoes. It would seem that the largest impact of EU expansion would be for those products with the highest tariffs, fresh potatoes and frozen potatoes. EU expansion into Eastern Europe could provide serious competition in the frozen potato-processing market. If processors can obtain consistent quality raw product at low prices in a new Eastern European member, such as Poland, production capacity might expand there. With the removal of the 14.4% tariff that comes with EU membership, Eastern Europe potato processing looks more attractive. On the fresh side, EU membership extended to countries on the Mediterranean Sea could impact the market. Current Mediterranean exporters of fresh potatoes to the EU, such as Egypt, may be at a competitive disadvantage if a new member can provide the same product during the ‘new potato’ market window. As government leaders and citizens gain a better understanding of the benefits of free trade, additional economic integration agreements will develop. These agreements will be complements rather than substitutes for the WTO. The expansion of the European Union is an example of the desire of nations to enter into economic integration agreements even at the strongest level of economic integration. 279

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Currency exchange Changes in currency exchange rates can have a large influence on global potato trade. A strengthening yen boosted United States frozen potato exports to Japan. From the early 1980s to the 1990s the trend was a steadily stronger yen in relation to the US dollar. Every year during that period US frozen fry exports to Japan increased. As an example of the impact of currency exchange rates, consider frozen fries selling for $0.30 per pound. In 1982 a Japanese customer would have paid 75 yen to buy one pound of frozen fries, but in 1991 she would have paid only 41 yen and in 2000 she would have paid only 32 yen merely because of changes in currency values. Between the United States and Canada, the impact has been the opposite from the US perspective. A weakening Canadian dollar made the US market profitable for Canadian growers. For example, Canadians selling potatoes in the US for $5.00 in 1991 would have taken home $CN 5.75 but the same $5.00 potatoes in 1998 would provide $CN 7.70. The weak Canadian dollar helped the Canadian potato industry set production records and led the US to import more frozen potatoes than it exports. The US dollar was abnormally strong in relation to the Canadian dollar during the 1990s and early 2000s, but if the exchange rate follows historical cyclical patterns that will change. A stronger Canadian dollar will lead to lower prices in Canada, followed by lower production. The United Kingdom was in a similar situation during the late 1990s and early 2000s when a strong pound brought in a large amount of potato imports. Changes in value of a country’s currency can boost, halt or reverse the international flow of potatoes. For the US and the UK their strong currencies provided economic incentives for their neighbours to export potatoes to them. Ironically, some UK and US people talk about economic recessions helping their industries because it would weaken the pound and the dollar. Although domestic demand would be adversely affected by a recession, they understand that currency exchange rates play a large role in potato markets, and they feel helpless about it. An important economic concept is that commodity prices are global, but production costs are local. In Canada about 80% of the production costs are local and the remaining 20% represent inputs purchased in the US. This means that selling in the US allows Canadian growers to receive revenue in high-value US dollars and pay 80% of their production expenses in low-value Canadian dollars. The situation is more complicated in Europe, but the costs of land, labour, taxes and weather are local. Currency exchange rates are difficult to predict because there are many economic forces and political forces involved. But there is one important observation about any market: trends do not last forever. Currencies that

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have been getting stronger will some day weaken, which might cause changes in the international flow of potatoes.

Branding by variety Long ago in England a new type of apple was developed – the costard. The new variety became so popular that the people who sold apples from their carts became known as costermongers. The costermongers discovered an important economic principle that applies to modern produce markets – branding by variety increases demand. The apple vendors of old England realized the economic advantage of showing to consumers the good things about each variety. The costermongers of today are supermarkets. They understand the lesson from the costermongers of old. It can be seen in their fresh produce departments, where they display apples by variety. Variety branding creates economic opportunities for growers to get out of the commodity business, where as we have seen prices trend downward. Those opportunities are evident in United States apple prices reported at the shipper level. For example, on 12 January 2001 shipping-point apple prices by variety were Red Delicious $9.50, Golden Delicious $13.00, Granny Smith $15.00, Fuji $13.00, Braeburn $17.00 and Cameo $20.00. The prices are midpoints of the daily range for a particular grade of apples – Washington Extra Fancy 72s – packed in 42-pound cartons. The lowest price was for the Red Delicious – a variety that has a lot in common with the Russet Burbank potato variety. Both varieties date back to the 1870s when they were discovered as mutants. After 130 years Red Delicious and Russet Burbank are still the most popular varieties among US growers, but they are also public varieties that are in excess supply. Apple growers are ripping out old Red Delicious orchards to plant varieties that bring higher prices. They have the opportunity to produce higher-valued apples because the industry brands by variety all the way to the consumer. The apple variety that brought the highest prices that day was Cameo, a private variety. A visit to a US supermarket can reveal a stark contrast between apple and potato marketing. In the fresh apple display there will be at least a halfdozen varieties in an attractive, clean display where the apples are identified by variety. The fresh potato display may also be clean and well displayed but there will be two differences. First, there will not be as many potato varieties. Secondly, consumers will not know what potato varieties are offered

281

THE INTERN ATION AL POTATO INDUSTRY

because they will not be labelled. One retail sales expert claims that to maximize apple sales supermarkets needed to carry at least eight varieties. One retailer offered 40 different apple varieties. Apple displays with many varieties create an excitement for the product that can boost demand for all apples. The economic principle is that ‘when you give consumers more choices demand will increase’. If you are a shoemaker who only offers even sizes, demand for your product will increase if you also offer half-sizes. The same goes for potatoes. If you only offer three types of potatoes, then go with six or eight, demand for potatoes will increase. Not everyone likes the same type of potato. By providing more choices it is more likely that a consumer will find and buy the particular type of potato he or she prefers. Meanwhile fresh potato varieties in the United States continue to be sold as commodities. They are grouped in displays based on red, white or russet skin colours, but they are still commodities. The lesson from the costermonger says there is an economic advantage to branding by variety at the consumer level. That lesson has not been implemented by the US potato industry, but it has been implemented by the British potato industry. Customers at British supermarkets can choose Maris Piper, Desiree, King Edward or a number of other varieties. In Sainsbury’s, as we have seen, the consumers can choose Anya, a potato variety that the supermarket owns. British consumers eat about twice as many fresh potatoes as consumers in the United States. One of the reasons is that British potato industry brands its product by variety, giving consumer more choices and thereby increasing demand. In countries that do not already do it, variety branding can help the fresh potato industry to get out of the low-priced commodity business and into the branded product business.

International growers Global trade offers opportunities to companies and people who are good at what they do. Fast-food firms, like McDonald’s, are rapidly increasing their international business. Potato-processing companies that hitched their wagons to the fast-food industry are also growing. Where does that leave growers? Those who are already growing for processors have the comfort of knowing that the total market is increasing. They must also realize that the market is becoming increasingly competitive and that there are opportunities to be international farmers. Farmers who are good at producing low-cost, high-quality potatoes have valuable skills in the international market. Their opportunities are no longer 282

MARKET ISSUES

limited to their home towns or even their home countries. They can become international farmers. Global potato processing firms search for growers who can provide a consistent supply of high-quality raw product for their operations. When they build a factory in a new country there may be a scarcity of domestic potato growers who can supply the company’s needs. The processor faces at least four alternatives. First, it can buy lesser-quality potatoes from local growers. Secondly, it can import raw product of a suitable quality but perhaps at a higher cost.Thirdly, it can take on the risk of growing potatoes itself. Fourthly, it can encourage successful growers in other countries to come to the new country and grow potatoes for it. Some potato growers in Europe and North America have become international potato growers by entering neighbouring countries. Most of them have been invited or encouraged by processors or signed agreements with processors before growing potatoes in a foreign country. Some Western European growers have expanded their operations into Eastern Europe this way. Some United States growers are growing potatoes in Mexico and Canada. Some growers have made the bold decision to grow potatoes on another continent. One Idaho grower who has grown potatoes in Russia, Georgia and Turkey is an example. A Washington grower who expanded his operation to Argentina is another. In the future more growers will develop international potato production operations. Given expanding global markets they will have opportunities to make money and become industry leaders not only at home but also in other places around the globe.

Reference 1

L Zhang, J Guenthner, R Dwelle, and J Foltz, ‘US opportunities in China’s frozen french fry market’, American Journal of Potato Research, 1999 76:5.

283

Bibliography American Vegetable Grower, Meister Publishing Co, Willoughby, Ohio, various issues. Araji, J, White, F and Guenthner, J, ‘Returns from potato research: accounting for state and regional effects’, Journal of Agricultural and Resource Economics, 1995 20:2. Belich, J, Making Peoples, Auckland, Penguin Press, 1996. British Potato Council ·http://www.potato.org.ukÒ Brown, C, ‘Origin and history of the potato’, 76th meeting of the Potato Association of America, Past, Present and Future Uses of Potatoes Symposium, Fredericton, Canada, University of Idaho, 1992. Burton, W, The Potato: A Survey of its History and of Factors Influencing its Yield, Nutritive Value, Quality and Storage, Wageningen, Holland, Veenman & Zonen, 1966. CIP/FAO (International Potato Center and Food and Agriculture Organization of the United Nations), Potatoes in the 1990s: Situation and Prospects of the World Potato Economy, Rome, FAO, 1995. Claydon, K, The Economics of Potato Production in the United Kingdom, University of Nottingham, 1995. Coates, J, ‘The next twenty-five years of technology: opportunities and risks’, in 21st Century Technologies: Promises and Perils of a Dynamic Future, Paris, Organization for Economic Co-operation and Development, 1999. Dana, H, Two Years Before the Mast, New York, Westvaco, 1992. Davis, J, Aristocrat in Burlap, Boise, Idaho Potato Commission, 1992. Fraser, H, Fraser’s Potato Newsletter, Charlottetown, Prince Edward Island, Canada. Gao, Y and Guenthner, J, ‘The global demand for frozen potatoes in year 2000’, Hort Technology 1993 3 239–44. Guenthner, J, ‘Acreage response: an econometric analysis of the United States potato industry’, PhD dissertation, Pullman, Washington, Washington State University, 1987. Guenthner, J, Past, Present and Future Uses of Potatoes Symposium, 76th meeting of the Potato Association of America, Fredericton, Canada, University of Idaho, 1992. 285

BIBLIOGRAPHY Guenthner, J, Biing-Hwan, L and Levi, E, ‘The influence of microwave ovens on the demand for fresh and frozen potatoes’, Journal of Food Distribution Research, 1991 3 45–52. Guenthner, J, Levi, A and Lin, B-H, ‘Factors that affect the demand for potato products in the United States’, American Potato Journal, 1991 68:9 569–79. Guenthner, J, Levi, A and Lin, B-H, Forecasting the Demand for Idaho Potatoes, AES Bull. No. 734, Moscow, Idaho, University of Idaho, 1992. Harris, G and Niha, P, Ng¯a Riwai M¯aori – M¯aori potatoes, Lower Hutt, New Zealand, Open Polytechnic, 1999. Harris, P, The Potato Crop, London, Chapman & Hall, 1992. Hawkes, J, The Potato, Washington, DC, Smithsonian, 1990. Hinton, L, Potatoes in Scarcity (Occasional Papers no. 21), Cambridge University, Department of Land Economy, 1977. Hinton, L, Potatoes in Surplus (Occasional Papers no. 37), Cambridge University, Department of Land Economy, 1987. Hobhouse, H, Seeds of Change, New York, Harper & Row, 1986. Horton, D, Potatoes: Production, Marketing, and Programs for Developing Countries, London, Westview Press, 1987. Huffaker, B, North American Potato Market News, Idaho Falls, various issues. MacKerron, D, Agrometeorological Aspects of Forecasting Yields of Potato within the EC, Brussels, Commission of the European Communities, 1992. Meltzer, M, The Amazing Potato, New York, HarperCollins, 1992. Naisbitt, J, Megatrends, New York, Warner Books, 1982. Naisbitt, J, Megatrends 2000, New York, William Morrow & Co, 1990. Naisbitt, J, High Tech/High Touch: Technology and Our Search for Meaning, New York, Broadway Books, 1999. National Potato Council ·http://www.npcspud.comÒ National Potato Council, Potato Statistical Yearbook, Denver, USA, various annual issues. Nederlands Instituut Voor Afzetbevordering van Akkerbouwproducten (NIVAA) ·http://www.nivaa.nlÒ Niederhauser, J C, ‘The role of the potato in the conquest of hunger’, 76th meeting of the Potato Association of America, Past, Present and Future Uses of Potatoes Symposium, Fredericton, Canada, University of Idaho, 1992. Nuesca, M,‘Forecasting Idaho open-market potato prices’, MS thesis, Moscow, Idaho, University of Idaho, 1992. Potato Marketing Board, Potato Statistics in Great Britain, 1989–93, Oxford. Potatoes South Africa ·http://www.potatoes.co.zaÒ Reeve, D, ‘The farm-retail price spread for Idaho fresh russet potatoes: a case study’, MS thesis, Moscow, Idaho, University of Idaho, 1996. Salaman, R, The History and Social Influence of the Potato, Cambridge, University Press, 1949. Scott, G, Markets, Myths and Middlemen, Lima, Peru, International Potato Center, 1985. Scott, G, Potatoes in Central Africa: A Study of Burundi, Rwanda and Zaire, Lima, Peru, International Potato Center, 1988. Scott, G, Rosegrant, M and Ringler C, Roots and Tubers for the 21st century, Lima, Peru, International Potato Center, 2000. Smith, O, Potatoes: Production, Storing, Processing, Westport, AVI, 1968. Struik, P and Wiersema, S, Seed Potato Technology, Netherlands, Wageningen Pers, 1999. 286

BIBLIOGRAPHY Toffler, A, Future Shock, New York, Random House, 1970. Toffler, A, The Third Wave, New York, William Morrow & Co, 1980. Toffler, A, Powershift: Knowledge, Wealth and Violence at the Edge of the 21st Century, New York, Bantam Books, 1990. Topolewski, M, ‘Impact of the fast food industry and advertising on US frozen french fry demand’, MS thesis, Moscow, Idaho, University of Idaho, 1997. United Nations, Food and Agriculture Organization, FAO Statistical Databases, January 2001. http://apps.fao.org/page/collections?subset = agriculture United States, Department of Agriculture, Food Consumption, Prices and Expenditures, 1970–98, Washington, DC, 2000. United States, Department of Agriculture, Agricultural Research Service, Continuing Survey of Food Intake by Individuals, Washington, DC, 1996–96. United States, Department of Agriculture, Foreign Agricultural Service, WTO Tariff Schedules, January 2001. www.fas.usda.gov:80/scriptsw/wtopdf_lout.asp United States, International Trade Commission, Fresh and Processed Potatoes: Competitive Conditions Affecting the US and Canadian Industries, Washington, DC, 1997. Viola, H and Margolis, C, Seeds of Change, Washington, DC, Smithsonian, 1991. Walker, T, Schmiediche, P and Hijmans, R, ‘World trends and patterns in the potato crop: An economic and geographic survey’, Potato Research, 1999 42 241–64. Zentrale Markt- und Preisberichtstelle GmbH (ZMP), Kartoffeln 2000, Bonn. Zhang, Y, ‘Oligopoly power in US foreign potato exports’, MS thesis, Moscow, Idaho, University of Idaho, 1996. Zhang, L, Guenthner, J, Dwelle, R and Foltz, J,‘US opportunities in China’s frozen french fry market’, American Journal of Potato Research, 1999 76:5.

287

Index

advertising, 29, 54, 81, 83, 84, 108, 115, 133, 136, 219 Agrico, 254, 270 AgriNorthwest, 255 Albertson’s, 252, 258, 259 alcohol, 32, 92, 106, 214, 230, 232 Amana, 266 American Stores Company, 252 American Vegetable Grower, 254 Amsterdam, 128, 259, 260 Anglian Produce, 254 Animal and Plant Health Inspection Service (APHIS), 165, 166 anti-dumping, 167 antitrust, 115 Antoinette, Marie, 6 Anya, 270, 271, 282 Asia Pacific Economic Cooperation (APEC), 185, 186, 211 applied tariff rates, 163 ascorbic acid, 20 ASDA, 253 asset fixity, 72, 73, 116 Aviko, 248

bacterial ring rot (BRR), 58 Baked Lays, 105, 250 bargaining associations, 129, 131 Basic American Foods, 251 Basin Gold Marketing Co-operative, 254 beans, 4, 89 Beijing, 275 Bennett’s model, 13, 14 branded product, 270, 271, 282 breakout, 141 British Columbia (BC), 167, 168 British Potato Council (BPC), 84, 230, 254 Burger King, 116, 235, 244 Calgene, 267 Canadian dollar, 178 Canadian Food Inspection Agency (CFIA), 165, 166 Canadian International Trade Tribunal (CITT), 167 Cara, 27 Carnation, 247, 249 Catholic Church, 7

288

INDEX cauldron, 13 Cavendish Farms, 248, 249 Central Africa, 11, 47 certification, 26, 32, 57, 58, 59, 98, 116, 191 chartists, 141, 142 Chicago Mercantile Exchange (CME), 255, 256, 260 chlorpropham (CIPC), 64 chuño, 4, 5, 29, 263 collusion, 114, 115 Colorado potato beetle (CPB), 264 Columbia Basin, 39, 54, 167 ConAgra, 244 consumer packs, 29, 125 Consumer price index (CPI), 83, 136, 159, 181 contracts, 30, 59, 60, 68, 70, 72, 116, 130, 137, 140, 169, 233, 256, 257, 260 convenience stores, 251 co-operatives, 115, 129, 254 costard, 281 costermongers, 281, 282 costs follow prices, 167 cotkas, 51, 52 Council for Biotechnology Information, 267 count cartons, 29, 123, 125, 256 Cruza, 148, 47 currency exchange rates, 54, 66, 158, 178, 183, 188, 276, 280 customs union, 279 cycle, 136, 137, 138, 151, 203, 204, 228, 265, 266, 267, 270 de Surville, 11 demand shifters, 79, 81, 105, 107, 136, 142, 219, 279 demographics, 85 Desiree, 27, 212, 282 differentiated, 115, 116, 123, 270 diminishing marginal utility, 77 Drake, Francis, 5 Dunlap, Ray, 17 East Africa, 47 Eastern Europe, 6, 14, 24, 42, 51, 60, 85, 94, 95, 98, 164, 239, 243, 279, 283

economic union, 279 elasticity, 20, 77, 78, 79, 80, 81, 82, 169 Elizabeth I, Queen, 7 embargoes, 278 emotion, 141 Empresas Polar, 250 Estima, 27, 259 ethanol, 32, 33, 232, 233 European Community, 73 European Union (EU), 46, 50, 52, 164, 170, 181, 184, 185, 188, 195, 196, 211, 220, 224, 225, 226, 229, 274, 279 exchange of futures for physicals (EFP), 258, 259, 260 fabricated potato snacks, 222 factories, 16, 30, 42, 51, 54, 55, 105, 122, 123, 140, 172, 175, 182, 184, 187, 215, 245, 246, 247, 248, 253, 275 fast-food restaurants, 80 Federal-State Market News Service, 123 females in the labour force, 108 flavour, 23, 24, 77, 84 Flavr Savr tomato, 267 Food & Agriculture Organization (FAO), 18, 50, 98, 100, 153, 194, 206, 216, 220 foreign investment, 276, 277 Four Little Dragons, 275 Fraser, H, 117, 123, 207, 246 Fred Meyer Compnay, 252 Frederick the Great, 15 french-fries, 24, 171 Frito-Lay, 48, 105, 249, 250, 251, 271 functions, 63, 109, 266 futures markets, 63, 127, 128, 141, 142, 234, 255, 256, 257, 258, 259, 260 General Agreement on Tariffs and Trade (GATT), 278 General Mills, 195, 251 genetic drift, 272 genetically modified organism (GMO), 264, 267, 268, 269, 271 Global Positioning System (GPS), 272 glycemic index (GI), 22 gnocchi, 24 Goodrich, C E, 25

289

INDEX Lamb-Weston, 51, 244, 247, 248 Larsen, Blaine, 254 late blight, 9, 10, 11, 18, 62, 71, 264 Lays Potato Chips, 249 licensed varieties, 269 logistic growth, 266 London, 8, 67, 259, 260 London International Futures and Options Exchange (LIFFE), 259, 260 Lotteria, 235

Gourmet Foods, 247 Greater China, 236, 274, 275, 276, 277 Greenpeace, 265, 268 Gross National Product (GNP), 16, 239 Hanover, 121, 259, 260 haulm, 38, 61, 63 head and shoulders pattern, 141 hedging, 257 Henry II, King, 7 Herfindahl Index (HI), 249 High Demand and Production (HDP), 110, 111 HiLite Russet, 270 hilling, 60 Hispanics, 85 hog, 88, 89 homogeneous, 114, 116, 206 Huffaker, Bruce, 143, 235, 244 hunger, 10, 12, 15, 17, 18, 21, 161 Idaho Frozen Foods, 247 Idaho Grower Return Index (IGRI), 143 Idaho Potato Commission (IPC), 54, 55, 84, 106 in vitro, 268 Incas, 3, 4, 5, 13, 37, 61, 263 income elasticity, 79, 82 Indo-Gangetic Plain, 41, 50, 64, 89 inelastic, 77, 78, 79, 80, 135, 169 inelasticity of the human stomach, 77 inferior goods, 82 International Food Policy Research Institute (IFPRI), 110 International Model for Policy Analysis of Agriculture Commodities and Trade (IMPACT), 110 International Trade Commission (ITC), 189 Interspar, 253 Iron Curtain, 51 Jefferson, Thomas, 10 Kartoffel Krieg, 15 Kennebec, 26 Kentucky Fried Chicken (KFC), 102, 235, 253 Kroger, 252, 253

MacKerron, 73 maize, 4, 12, 18, 24, 40, 65, 72, 76, 83, 85, 215, 226 maleic hydrazide (MH), 64 Maori, 11, 14 Maris Piper, 27, 282 marketing orders, 115, 129 mass merchandisers, 251 MATIF, 259, 260 McCain Foods, 175, 244, 245, 246, 248 McCullough family, 270 McDonald’s, 243 McDonald’s Index (MI), 236, 237, 239, 241, 242, 243 meal deal, 80, 108 Mediterranean, 39, 41, 42, 46, 51, 64, 92, 93, 94, 149, 150, 151, 153 microwave oven, 28, 102, 108, 265, 266, 267, 268 Middle East, 11, 41, 48, 51, 217, 230, 242, 243 Ministry of Agriculture, Fisheries and Food (MAFF), 165 minitubers, 32, 57, 58 Monsanto, 264, 271 Mos Burger, 235 Musket Wars, 14 Naisbitt, John, 265 National Potato Promotion Board (NPPB), 22 Nature Mark, 264, 271 Navajo Agriculture Products Industry (NAPI), 255 Nestlé, 248 Netherlands National Seed Law of 1967, 269 New Leaf, 264

290

INDEX new potatoes, 23, 25, 42, 46, 139, 156, 157, 158, 164, 199 New York Cotton Exchange (NYCE), 256, 257, 259, 260 New York Mercantile Exchange (NYME), 256, 260 Niederhauser, John, 18 nightsoil, 50, 61 non-price competition, 115, 116 non-tariff barriers, 161, 188 Norkotah, 27, 117 Norland, 25, 26 normal values, 167 North Africa, 46, 199, 200 North American Free Trade Agreement (NAFTA), 54, 134, 166, 180, 185, 278 nutrient density, 21, 22 Offutt, Ronald D, 254 olestra, 105 open market, 30, 68, 129, 132, 143, 165, 167 options, 104, 257, 258, 259, 260 Ore-Ida, 248 Pacific Northwest, 30, 54, 104, 244, 246, 246, 247, 248, 254, 255 pack out, 128 packers, 30, 59, 69, 128, 140, 233, 234, 253, 254 patent, 114, 115, 269, 270, 272 Pentland Dell, 27 Pepsico, 215, 249, 250, 251 petiole analysis, 38 phythophthora infestans, 9 phytochemicals, 22 Pillsbury, 251 Pizza Hut, 235 Potato Growers of Idaho (PGI), 130, 271 Potato Growers of Washington (PGW), 130 Potato Leafroll Virus (PLRV), 264 potato rings, 13 Potato War, 15 potato wart disease, 165, 166, 189 precision agriculture, 272, 273 price flexibility, 78, 79, 80 price floor, 72, 257, 258 price takers, 114

pricing mechanisms, 126, 127, 132, 169 Prince Edward Island (PEI), 165, 166, 189, 248 Pringle’s, 105 private variety, 208, 209, 270, 281 Procter & Gamble (P & G), 221, 222, 249 product life cycle, 266, 267 promotion, 22, 29, 54, 84, 115, 189 property rights, 114, 209, 211, 263, 269, 270, 271, 272, 280 psychology, 143 public variety, 208, 209, 271 publicity, 83, 84 put option, 258 Quick-service Restaurants (QSR), 80, 171, 181, 234, 235, 236, 241, 243, 244, 275 quota, 133, 134, 161, 278 Raleigh, Walter, 5 Raytheon, 266 resistance, 47, 141, 209, 264, 277 Resistant Starch (RS), 22 respiration, 39, 62 retailers, 78, 118, 119, 125, 127, 234, 235, 270 roesti, 24 Rogers Brothers, 247 Rough Purple Chili, 25 Royal Ahold, 251 royalty fees, 211, 269 Russet Burbank, 24, 26, 27, 104, 105, 117, 188, 207, 259, 281 Sabritas, 250 Sainsbury’s, 270, 282 Sam’s Club, 252, 253 Sanitary & Phytosanitary Measures (SPS), 164, 165 Scott, 19, 42, 44, 45, 47, 50, 73, 109, 110, 132 scurvy, 20 seasonal variation, 138 seed potato export centre, 195 seed yield, 192, 193 Shepody, 27, 117, 207 Simplot, Jack, 16, 17 site-specific management, 272

291

INDEX skin set, 61 Smith Foods, 250 solanum tuberosum, 24 Spaulding, Henry, 10 specific gravity, 30, 129, 259, 264, 273 speculators, 255, 256 Spencer, Percy, 266 sprouting, 64 sticky downward, 118, 119 suberization, 64 subsidies, 132, 134, 161, 189, 232, 278 Sun Valley Potato Company, 254 Sunspiced Inc., 251, 254, 258, 259 supermarkets, 76, 132, 251, 252, 281, 282 synchytrium endobioticum, 165 Taggares, P, 255 Tappan, 266 taxes, 65, 68, 278, 280 Technico, 269 texture, 22, 23, 77 tissue culture, 32, 57, 58, 272 Toffler, Alvin, 265 trade centres, 172, 177 trade disputes, 166, 167, 189 trends, 42, 45, 73, 87, 109, 136, 141, 212, 218, 219, 224, 237, 245, 265, 272, 280 Tristan da Cunha, 11 True Potato Seed (TPS), 59, 106, 191, 268, 269 United Biscuits, 250 Uruguay Round, 161, 278 US Department of Agriculture (USDA), 254, 256

US dollar, 54, 169, 178, 181, 183, 205, 280 US Trade Representative (USTR), 189 utility, 77 van der Hoeven, Cees, 251 van Gogh, Vincent, 13 variable rate technology, 272 vending machines, 102, 251 vines, 38, 61 Vitamin C, 20, 21 volatility, 73, 120, 121, 135, 136, 137, 147, 154, 174, 178, 179, 206, 222 Von Thunen’s Principle, 121 Walker’s, 42, 50, 84, 250 Wal-Mart, 252, 253 warehouse clubs, 251 Wendy’s, 102, 235 Western Europe, 24, 28, 51, 55, 88, 94, 95, 98, 104, 239, 241, 283 Western Hemisphere, 196, 199, 200, 201, 236, 239, 279 World Trade Organization (WTO), 161, 163, 164 165, 166, 185, 186, 187, 209, 211, 224, 225, 277, 278, 279 World War I, 15 World War II, 16, 30 yen, 109, 280 Yukon Gold, 26 Zentrale Markt- und Preisberichtstelle (ZMP), 220 Zhang, Lingyun, 276

292