Growers urged to scrutinise potato costs

With potato prices hitting the floor this season, one consultant urges growers to scrutinise their business to ensure the figures stack up

Potato growers are feeling the pinch following this season’s dramatic collapse in the market, driving a number to question reinvestment and, in some cases, to consider their future in the crop.

Back in the latter half of April, the Potato Council’s GB average price was £193.70/t, almost double that seen the previous year, and with a dry spring many growers were looking forward to a tight supply.

Since then the picture has reversed. Values in mid-October stood at just over £100/t, £20 below year-ago levels. The free market collapsed even more dramatically; a tonne of potatoes was only worth £83.47/t in mid-October, almost £56 below the same week in 2010.

“The relative prosperity of 2010 has been followed by a sharply different set of circumstances,” says Jay Wootton, a partner at Farm Business Consultant Andersons. “It should certainly be concentrating minds – growers should be seriously questioning what price their business can tolerate.”

While these snapshot figures demonstrate the volatility of today’s market, more meaningful long-term averages should be used to budget a realistic return, he advises.

The Potato Council’s five-year average price at the farmgate has, since the mid 1990s, remained relatively stable at £127-140/t, he points out. “This is a weak range to work with given today’s cost of production. Ideally, growers need to ensure their businesses can stand on their own in the mid range of price risk, which is not on for many at these levels.

“Too often, growers use the relative profitability of cereals to subsidise their potato operations – we often see investment in potato resources when cereals are doing well.

“If they can’t, they need to take action. The days of one in five years making a super profit and one in five a considerable loss have gone. No business can expect to lose money for several seasons at a time.”

It is not necessarily the smaller operators that are most at risk, in the short-term at least. “Many of these will have depreciated stores and equipment, and can tolerate lower returns, as they don’t have to lay cash out. Many bigger growers are more vulnerable – they may well be renting land and stores, and will have big investments in machinery, management cost and crop financing.”

The first issue growers must address is their cost of production. “More growers are looking at this, and most will know well enough how much they are spending on direct inputs, such as seed, fertiliser, sprays, casual labour and sundries”.

“However, indirect costs such as power and machinery, land, buildings and finance, as well as their own labour, are often not fully costed.

The use of the PCL Benchmarking tool is a good starting place, and many growers decide to carry out a thorough cost of production exercise on all their business enterprises, to ensure a realistic allocation of cost. While direct costs are well understood, the allocation of indirect costs leaves considerable room for error, and needs to be carefully checked. The important factor is to ensure the exercise is based entirely on the growers own costs, not just using standard cost figures, which will distort the result.

Calculating costs accurately is only part of the equation. Several other factors, all of which are key triggers for decision making, need to be explored.

The first of these is the balance of soil types. Yield and quality are also key parameters and must be appraised realistically if any breakeven price is to stand up to scrutiny. The quality of soils available to the grower dictate initial potential, says Mr Wootton.

“Assess your land to ensure it is capable of producing high yields that meet the quality and consistency demanded by your customers.”

Most growers will find they are compromising on soil quality on about 10-15% of their area, and this could equate to loss-making production on that area.

Growers then need to ask whether the business can justify renewing the present machinery, and whether the enterprise carries a realistic return. The average working capital for a potato crop is more than £5,000/ha.

The purchase of a new harvester at a net cost of £120,000 will give rise to a significant depreciation and finance cost – at about £22,000 a year, which equates to £7.33/t assuming an area of 60ha yielding 50t/ha. The forthcoming reduction in capital allowances will also have an impact on investment decisions.

In some cases, the overdraft may not be a source of finance if the grower has failed to retain profit and their bankers are unwilling, although asset finance is often available, it too is more difficult to obtain than in the past.

Provided these points have been honestly and robustly assessed, growers will then be in a much better position to realistically assess the viability of the enterprise, says Mr Wootton.

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