Coronavirus Crashes European Processing Sector

In a recently published analysis, the Agriculture and Horticulture Development Board (AHDB) found that the situation in mainland Europe closely echoes current trends in the UK. Fresh retail sales have been reported to have increased significantly and potatoes are moving from countries such as France and Germany to help meet demand in Eastern Europe. Meanwhile, the widespread closure of restaurants and other foodservice outlets has meant that demand for processed potato products has fallen significantly.

This has been reflected in the April 2020 potato futures contract (a contract to buy specific quantities of potatoes at a specified price with delivery set at a specified time in the future) with prices falling over EUR100/ton since the start of March, to close at EUR28/ton at the end of the month. This has even fallen below the equivalent contract in the oversupply year of 2017/18. Physical movement is now limited to contracts, with free-buy sales almost non-existent.

AHDB reveals that the loss of such a large end-market for processed products has led to many factories shutting down lines and scaling down production. This being particularly the case for lines producing fresh chips and other products, which are harder to store for any length of time. Production is continuing for frozen products, for the time being, and retail sales of frozen products are expected to increase due to the public stocking up on non-perishable foodstuffs.

However, retail sales only make up a small proportion of total sales and even with a potential increase it will not offset loses. Using the Netherlands as an example, according to a recent press release by the Dutch Processors Association (Vavi) approximately 80% of its members' output is sold into foodservice. Over the next four months (April-July) Dutch processors produce on average 581Kt of pre-cooked product. This means that if factories were running at full capacity, there could hypothetically be up to 486Kt of product that would be left without an end-market.

In light of this, processors are left with two options: either store frozen products for sale when the situation changes, or scale down production to meet retail demand. The first option is viable, but reports suggest that stores are already reaching capacity. The second has been accomplished by slowing production and pushing back contract supplies to later in the season, wherever possible, and hoping that the market situation will have improved by then.

Globally, the quantity of frozen products in store is likely to increase as processors in Europe and North America are unable to find an outlet for supply. This is likely to weigh on values when trade resumes, as producers compete for export share.

While processors can scale back production, there still remains a significant volume of potatoes which are unable to be sold into a market. The lack of free-buy sales means that anything remaining, which is surplus to contract, is left in a position with limited options. Equally, the current situation means that should processors run out of storage for frozen products, then they may be unable to utilize the full volume of contracted supplies.

The French are estimating that around half a million tons of processing potatoes will be left at the end of this season unable to be sold. There is an attempt to use these volumes in starch production and anaerobic digestion, but for some, the price paid is less than the cost of transport.

The impact of this large surplus of processing potatoes across Europe is likely to bleed into next season, says AHDB. They received reports of processors on the continent scaling back early areas to allow for as much old crop to be processed as possible. In addition, with the uncertainty set to continue and high stocks of finished product, it seems likely that for the first time, the processing area in the big 4 (France, Germany, Belgium and the Netherlands) could decline next season.