Parable of the great potato crisis

By STUART McKINLAY*

Potato growers in the lower half of the South Island, fearing that this season's crop could be lower than average, raised their price to the wholesale market sixfold compared with what they had been asking a week or two earlier.

The wholesale market for potatoes was largely designed by the Potato Growers' Association, and the way it works is that the highest price paid by the market - in this case to growers in the lower half of the South Island - is the price paid to all growers nationwide, from Kaitaia to the Bluff.

The Kaitaia growers think this is pretty good, even though there is no shortage of potatoes in their region.

The president of the Lower South Island branch of the association, asked about the high price of potatoes, explained the logic of this pricing signal to the market. The reporter was perplexed, however, to learn that the growers in this region were still offering the same volume of potatoes to the market as they were two weeks ago.

Securing the sixfold price increase, but maintaining the same supply volume, was the prudent thing to do, the president said. After all, he couldn't say for sure that there would be a shortage of potatoes later in the season.

The reporter finally grasped what prudent meant, and how this thoughtful strategy would help the Lower South Island growers to finance their Australian potato-growing venture.

The Potato Growers' Association was ably assisted in the design of the market by some market economists, who, when interviewed recently, nodded with enthusiastic approval when asked: was the market working?

The design and operation of the market was, they said, based on sound economic theory.

Almost all the big supermarkets, which supply about 85 per cent of potatoes bought by New Zealanders, are, interestingly, owned by the Potato Growers Association. These supermarkets don't mind paying this high price because what they might lose by buying costly potatoes from the market and selling them to customers at the same price they were a week or two earlier is offset by the high income their owners, the growers, earn.

The big chip manufacturers, who consume about 15 per cent of the crop and buy their potatoes directly from the wholesale market are not so fortunate. They have to pay the high wholesale price for potatoes but have no means of offsetting this cost increase.

Fortunately for some of the chip manufacturers, they have taken out insurance to protect themselves against a rise in the price of potatoes. Interestingly, the insurance providers are the Potato Growers Association, and they either limit the amount of insurance offered to the chip manufacturers, or price it so high as to be unaffordable.

So the growers have this market pretty well sewn up. Their return on investment is meeting their cost of capital and they can pay substantial dividends. Economically this is a very good outcome for the growers.

With the cost of potatoes going through the roof, the chip manufacturers had to slash production, at least to the level that their potato costs were hedged by insurance.

When the manufacturers began laying off staff and complained to the Minister for Potatoes that all was not well, his first question was, "Why didn't you take out more insurance?" since the Potato Growers' Association had told him insurance was available.

That the high price for insurance offered by the growers would have driven the chip manufacturers out of business didn't seem to register.

It was only when international companies such as McDonald's, Pizza Hut and Burger King started to complain about the lack of potato chips available from New Zealand producers, and said they would either have to shut down or import chips from China, that the Government started to get concerned about the effect that the high price of potatoes was having on the economy.

When, finally, the sizeable Fish and Chip Shop Owners' Association, reliant on a steady supply of potato chips, joined the chorus saying the situation was a threat to the economy, the Government finally decided it was time to intervene.

One reporter suggested that it was only when some senior Cabinet ministers' favourite fish and chip shop near the Beehive ran out of chips that they finally realised there was indeed a real crisis that deserved the Government's urgent attention.

The Minister of Potatoes told an interviewer there was no straightforward solution, but the Government was actively looking at a number of alternative options.

* Stuart McKinlay is managing director of Pan Pac Forest Products.