Closing contracts on the potato futures market has been common for years. Besides, the futures market is an indicator of the mood on the actual market. Especially the rise of the chips industry caused a major change. According to broker De Vries & Westermann, growers, but also users, can gain much on the potato futures market.
The Dutch mercantile house with its roots in the brokerage guild of Amsterdam in the Golden Age was one of the first brokers on this market after the introduction of the potato futures market in 1959. “Much has changed. Many parties no longer exist, and all stock exchanges have been digitised because of the internet,” says Jan Kraak from De Vries & Westermann. By now, the Dutch stock exchange has been absorbed by German Eurex, which moved the agrarian futures market to the European Energy Exchange (EEX) in Leipzig two years ago. The broker, who has been working for the stockbroking house in Hoofddorp since 1980, says the potato futures market is a niche market. “For that matter, the agrarian futures market is enormous. Especially for products such as wheat, corn and soy. In addition to grain, soy, sugar and milk, it’s still our core business.” De Vries & Westermann has domestic and international customers, and serves the entire supply chain, in which relations of the potato futures market mostly come from the Netherlands, Belgium, France, Germany and the UK.
On the futures market, bills of sale and buying are closed to supply product on a future term. The goal of the futures market is decreasing price risks in the final product, and offering price transparency on the other hand. Jan mentions that mobility of the market has increased in recent years. Peaks on the market, due to, for example, drought or flooding, are interesting moments. “For both growers and buyers. The entire column can use the potato futures market,” he says. How pricing is established on the futures market? “Naturally, supply and demand are the basis. However, no grower has the need to sell below cost price, and no buyer wants to pay more than contracts indicate. The futures market always starts around the cost price level of between 13 and 15 euro with a bit more. After this, you have to wait and see how it’ll grow. And that’s the great thing about agrarian materials: the harvest is always unpredictable. It’s not that we came up with the futures market. It emerged from the need to cover risks at times of abundance or shortage.”
Market’s mood barometer
Closing contracts on the potato futures market should be seen as an addition or an alternative to regular types of contracts, according to Jan. Growing storage potatoes requires a considerable investment. To be certain this pays itself back, it is recommended to secure a large part of this. “But when a grower secures everything with a factory at 12 to 15 cent, he’s not going to earn anything. By selling a share on the futures market, this is possible. Bear in mind that the futures market is the barometer for the mood on the market. Without a futures market, there’s no indication as to what people on the market are thinking.”
Futures market offers options for surplus tonnes
The rise of the chips industry in the 1990s has given the potato futures market a new boost. Four million tonnes are processed each year, compared to a production of 3.3 million tonnes, making the Netherlands very much an import country. “A forward contract can only be successful if the product concerned is used a lot, which is the case with chips. In this industry, much is secured with contracts. Especially in the field of surplus tonnes the potato futures market could make a significant contribution,” Jan says. “Not just for the growers, but also for trade and processors, for example. That’s why EEX has a chips contract quoted. Growers can sell their free potatoes with us at a price that can often not be achieved on the actual market. On the other hand there’s the users, such as processors, exporters or peeling companies, which buy the product from us and cover their price risk that way.”
The chips trade caused a transition on the potato futures market, but the job of brokers has also changed over the years. “Until about 15 years ago, we were mostly a link in the execution of orders between customers and the stock exchange. This is still an important part of operational management, but additionally we started providing information much more. We are still constantly monitoring the markets in the Netherlands, Europe and even globally. We spread the news by means of a newsletter or text message subscription service, and, if desired, supplemented with technical analyses. We also connect trade on the actual market.”
The brokerage office is positive about the continued existence of the potato futures market because the export of chips is still increasing. The chips industry has also positively changed the potato futures market, and given it new options for the future. That the potato futures market is a niche market is an advantage as well. Jan: “We are dealing with an extremely mobile market. In the past 15 years there have been at least five years in which we had considerable lows. But we know the market through and through by now. Some customers have been with us since the founding of the potato futures market, and that creates trust. Closing a contract is not that difficult. The handling of it is actually more important than the business itself. As long as there’s demand for material, and there’s no control over how large or small the harvest will be, there will continue to be a need for covering price risks.”
De Vries & Westermann