BusinessThe Frozen Truth

The Frozen Truth

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[deck]As new markets open overseas and demand increases, frozen potatoes are increasingly crucial to the Canadian potato industry.[/deck]

When asked what comes to mind when they think of potatoes, most Canadians would likely describe heaps of fresh spuds in the produce aisle, Russets destined to be mashed during holidays, or new potatoes rolling onto the countertop after a trip to the local farmers’ market.

In reality, most potatoes grown in Canada are frozen, processed and turned into french fries and other frozen potato products, bound for locations as close to home as the U.S. Pacific Northwest, or as far as Venezuela, China or India. The significance of the frozen potato export market has not been fully explored in the media—but it should be, because it forms the backbone of the Canadian potato industry.

According to Patrick Girard, senior media relations officer for Agriculture and Agri-Food Canada, a whopping 91 per cent of potatoes exported for the processing market are headed directly for the frozen potato market. In 2010/2011, frozen processed product exports accounted for $800,384,852 of the $1,101,859,560 generated by potato exports. “In 2011, Canada was the fourth-largest exporter of frozen potatoes, after the Netherlands, Belgium and the United States,” says Girard.

If you examine the numbers closely, they’ll tell you that exports decreased slightly in the last few years, according to Kevin MacIsaac, general manager of the United Potato Growers of Canada, but this is not a straightforward indicator of profitability. “In 2007/2008, the numbers would say that Canada exported 979 million kilograms [of frozen potatoes], and that’s declined every year to 2011 where we exported 876 million kilograms. If you look at the value, what it was worth was not a straight decline, because in at least one of those years there was a significant increase in value,” he explains.

Over the longer-term, the numbers look positive. Domestically, demand for frozen potato products has remained stable, says Girard. And further afield, demand is increasing. “Over the last 10 years, there have been ups and downs in exports of Canadian frozen potatoes but overall, the total value of exports has increased slightly,” he says.

The vast majority of frozen spuds are grown on contract for McCain Foods, with the remainder moving through, in order by volume, Cavendish on the East Coast, Simplot and Lamb Weston.

Even today, U.S. exports are almost 90 per cent replaced by products coming out of Canada. As U.S. exports grow to offshore locations that opens up more of a market for Canada.

– Bruce Huffaker

Close Ties

Where are these frozen potatoes headed? “The United States really takes the lion’s share of what we export,” explains MacIsaac. “After that in the ranking order would be Japan, Mexico, Venezuela and the Philippines.”

Bruce Huffaker, Idaho-based market analyst and president of North American Potato Market News, Inc., emphasizes the close ties between the U.S. and Canadian potato markets. “Canada’s major market for frozen fries has been and will be the United States. That’s the way the industry is set up,” he says. Processing giants such as McCain fulfill U.S. export contracts using both Canadian and U.S. potatoes, and vast orders of Canadian potatoes are shipped to the United States to be used as backfill in their exports abroad.

“Most of the production in the U.S. is in the Pacific Northwest, so what you see is that the Canadian market backfills the U.S. supplies,” says Huffaker. “Even today, U.S. exports are probably 90 per cent replaced by products coming out of Canada. As U.S. exports grow to offshore locations that opens up more of a market for Canada.”

Giants like McCain, he says, “have been emphasizing the superior quality of french fry products produced in North America, and they don’t distinguish between U.S. and Canada. They’ve been able to sign multi-year contracts by doing that. The original contracts were signed when European supply was tight,” he says. “It seems to be working—we’ve seen a lot of growth over the last few years.”

This arrangement is good for growers north of the border. As long as U.S. international markets continue to widen, business will be booming for Canadian processing growers.

But how does marketing play into this arrangement? Simply put, by expanding foreign markets, claim analysts. As long as processing giants continue to market potatoes as “North American” rather than distinguishing between U.S. and Canadian potatoes, foreign marketing initiatives will support growers on both sides of the border.

MacIsaac believes there are two reasons for increasing demand for North American potatoes abroad. First, as affluence increases in developing countries, a demand for Western-style foods also increases. Second, processing companies are engaged in aggressive grassroots-level marketing campaigns abroad that are generating results. “It’s difficult to start marketing into some of these countries unless you are informed about their cultures, and how they view menus and nutrition and so on, and these companies have worked hard and are starting to see some success,” says MacIsaac.

If you think you have the best variety in the world, if it’s not recognized by McDonald’s, Burger King and Wendy’s, it has no value because they won’t buy varieties they’re not sure about.

– Kevin MacIsaac

The Future of Frozen

How the markets will look in five or 10 years is difficult to predict, as markets continually fluctuate and developing countries ramp up production.

For Canada, a crucial influence on the success of the potato industry will be the value of the Canadian dollar versus the U.S. dollar. “The question is, is the Canadian dollar overvalued now, or undervalued? Can Canadian growers hold their prices for the raw product with that high dollar value? That will be another issue for Canadian growers,” says Huffaker. “Right now [Canadian growers] are probably getting more money for their potatoes under contract than what their counterparts in the U.S. are receiving.”

Historically speaking, processing companies such as McCain have increased or decreased production north or south of the border based on the value of the dollar. “If the Canadian dollar loses value to the U.S. dollar, there’d be a renewed emphasis on Canadian production,” says Huffaker.

“In the future the picture will probably be different, but how and when it changes is anybody’s guess.”

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Frozen Varieties

Variety marketing is a burgeoning concept in the North American potato market, but it has plenty of room to grow. According to Kevin MacIsaac, general manager of the United Potato Growers of Canada, the main varieties grown for frozen processing are Russet Burbank, Ranger Russet, Innovator and Shepody—but for agronomic reasons these are not necessarily the best varieties to grow for frozen processing. “We’re still using old, old varieties,” says MacIsaac. “The number one variety among processors is Russet Burbank, an ancient variety [with] lots of issues. Shepody is a newer variety, but it has a lot of agronomic [issues] that tend to not make it a great variety in terms of yield and dockage.”

However, growers can’t simply decide to try out new varieties for their customers—they grow specific varieties under contract, based on required qualities such as good fry colour and high specific gravity. If growers want to try out varieties that are easier to grow and still offer these premium qualities, says MacIsaac, those varieties must first be recognized by quick service restaurants. “If you think you have the best variety in the world, if it’s not recognized by McDonald’s and Wendy’s, it has no value because they won’t buy varieties they’re not sure about.”

Variety marketing needs to happen on multiple levels—at the level of the consumer and the customer—before newer, stronger varieties can be used to fulfill contracts, and save growers headaches. “Luther Burbank developed the Russet Burbank variety in 1871 as an improvement over the common Irish potato,” says MacIsaac. “Amazingly enough, in 2012 we are still waiting for new and more improved varieties to surpass it.”

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