As has often been the case in recent history, the outlook for potatoes is largely dependent on supply and demand. While that’s true of many crops, perhaps none feels it so acutely as the potato grower.
There is an inelastic demand, says economist Paul Patterson, University of Idaho Extension farm management specialist at the Idaho Falls Research and Extension Center, so a 5% increase in production can lead to a 20% decrease in price — or worse. That’s what happened with the 2012 crop, when growers produced a 7.9% increase that was too big to absorb.
“Fresh market growers are only getting half the cost of production in Idaho toward the end of the year,” he said shortly after Thanksgiving. “Most production is in Idaho, so we’re paying a heavier price than others — but no one is covering the cost of production.”
A combination of factors has made the situation difficult for spud growers, said Patterson. First, there has been a continuing, long-term decline in fresh market consumption as more and more meals are consumed away from home. The processing side was doing fine until the recession hit and the bottom dropped out of export markets in 2008. The processing side has begun to pick up, however, and there have been some bright spots, such as with specialty potatoes like Yukon Gold as well as the colored varieties. But the segment is overall too small to make up for the mainstream varieties.
Production costs are up because of higher labor costs and higher costs for inputs. Some growers in Idaho were paying up to $200 more per acre to take care of zebra chip disease. Rising fuel costs led to higher fertilizer costs, as dry nitrogen was up 13% in 2012 — and nearly half again as much as it was in 2010. Recent events around the world have certainly not improved matters.
“Instability in the Middle East means uncertainty over fuel costs, which means uncertainty over fertilizer costs and other inputs,” he said.
One bright light of recent years has been lower interest rates. “Farms run on borrowed money, and borrowed money is relatively cheap right now,” said Patterson. “But it can’t last forever — I’m amazed it’s lasted as long as it has — and it’s going to bite growers pretty hard when it goes up.”
What To Do
When it comes down to the outlook for 2013 and beyond, Patterson said it’s critical for potato growers to take a hard look at what they can control. For example, grain prices have been doing pretty well the last few years, and fortunately a lot of potato growers rotate acreage with grain. Right now interest rates are so low that few growers see the wisdom in putting money in the bank where they can’t get good interest. On the other hand, interest rates can only go up, and while he doesn’t think it will happen as soon as this year, it’s a real possibility for 2014.
“Consider putting some funds in reserve so when rates do go up you don’t have to borrow from the bank,” he says. “You might not make as much, but when rates go up to the 6% to 8% range, which we may see in two to three years, it can pay off.”
It all comes down to what is best for a particular grower, said Patterson, because no two growers are in the same spot. A grower in his late 60s is in a far different place than a few brothers in their 20s just starting out. The former might be wise to pay down debt, while the latter should perhaps be in expansion mode.
“It all comes back to having a good handle on your operation. Run through several scenarios of what-ifs, such as ‘What if interest rates go up 20%?’ Just sit down and go through all the what-ifs,” he said. “The right decision for one grower could be wrong for someone else.”