SWOT analysis Dutch onion sector

The Dutch onion chain is in good shape. Thanks to the combination of the highest yield per hectare in the world and the lowest cultivation, processing and transport costs, the Netherlands is a leader when it comes to export. Furthermore, the sector, which is often cyclical in terms of production and price development, seems a bit more stable than before. The onion acreage is bigger than ever this year, with over 30,000 hectares. The acreage went up last year as well, while prices for growers remained at a higher level this past season than in the previous season. The cultivated area for seed and planted onions has gone up in the 2014/2015 season, which just started, by 20%, the area for sown onions grew by 2%. While the number of agriculture companies is going down fast, and arable farming is also seeing a downward trend, the number of companies cultivating onions is increasing. The new season, thanks to favourable growing conditions, seems to start with high volumes of good quality. For this reason, price volatility is looming. Prices will normally be lower than in the past two years, because of supplies. This could put returns under pressure, but does offer a further stimulus for export growth to more and more markets. 90% of the Dutch onion production is already being exported. There are other opportunities for the onion chain in the area of technological innovation and quality guarantees.

Onion increasingly important as agricultural product
In 2014, onions took up nearly 6% of the agriculture acreage. Grains (circa 37%), potatoes (30%), and sugar beets (15%) cover a much larger part of the acreage. Onion, as the fourth most important agricultural product, is the only one that saw the number of hectares go up since 2000, with about 50% in total (seedbed sown onions 60%, seed and planted onions 40%). The total acreage decreased by 18%. Also, for the first time in history, the onion acreage (30,240 hectares) is larger than that of barley (27,640 for spring and winter barley in total).

Currently, there are 3,590 onion companies: 2,870 are dealing with sown onions, 950 with seed and planted onions. A part of the agricultural companies is active in both sown and planted onions. The number of sown onion growers increased by 1% compared to 2013, that of planted onion growers by no less than 15%. That brings the number of planted onion growers back to 2003 levels. These companies hope to take advantage of the early end of the 2013/24 trade season (running from July until June), and the favourable growing weather in spring. Because of this, the first planted onions could be harvested extra early. The number of agriculture companies has gone down by 47% since 2000, the number of seed onion companies by only 3%. The number of seed and planted onion growers has gone down by 15% in this period. The scale of agricultural companies saw a huge increase, of more than 50%. The average onion acreage per company even increased by 66%: from 5.3 hectares per company in 2000 to 7.8 ha now. Of the total onion acreage of 30,240 hectares, 22,390 hectares consists of sown onions, and 7,440 hectares of seed and planted onions (and 420 hectares of pearl onions). Both acreages are seeing a growing trend (figure 1 and 2).

Below charts in Dutch:

There are limits to the growth of the onion acreage, however: a responsible agricultural enterprise is allowed to grow onions on 1/8th of its acreage maximum. The necessity of crop rotation in the cultivation plan (optimum land use is essential) is an important natural reason for this. On the other hand, the farmer will spread out (financial) risks through variation in the cultivated area for onions. By switching between contract cultivation with fixed prices or a free, more speculative cultivation, an onion grower can also adjust their own measure of risk appetite.

Netherlands global player on onion market
The most important onion production countries are China (share of over 30%) and India. The Netherlands, with a production of around 1.3 billion kilogram (average of the past five years) and a share of around 2%, falls just outside the top ten. Production has seen a growing trend: in 1980, production was 300 million kilos. The production growth completely benefited the export.

Now, around 90% of production is exported in the Netherlands, worldwide that's 10% at most. With an export share of around 20%, the Netherlands is, after India, the biggest onion exporter in the world, and for yellow onions the country has even been the number 1 for over forty years. India has overtaken it thanks to the strong position in red onions and shallots. China, the United States, Mexico and Spain follow on the export ranking, on places three to six.

Below, the most important strengths, weaknesses, opportunities and threats for the onion grower are named.

Strength of the sector: Highest yield plus lowest cultivation, processing and transport costs in the world

That the Netherlands is still, despite a small production share, a dominant player in the global market is - apart from the thoroughbred entrepreneurship and being a notoriously reliable trade partner - a consequence of the advantages the country has when it comes to the chain, logistics and strategic position.

High product yields

An onion is the vegetable that uses the most water. There is more than enough of that in the Netherlands. Partly for that reason, the annual yield per hectare is the highest in the world, and, moreover, structurally increasing: in good years, 60 to 80, and in some acreages, even over 100 tonnes gross per hectare. This is partly because of the ideal day length in the growing season. In addition, the onions can be grown and conserved year-round. When it comes to the breeding of onions, the Netherlands is also a leader.

Efficient chain

The onion sector is known as an efficient chain. There are over 3,500 growers, 50 packagers/sorters at most, and around 200 exporters. In some cases, there's a commission agent between grower and packager. Only in the Netherlands, growers and sorting companies are separated. Abroad, there are no free onion growers. Dutch growers are too small to invest in sorting and packing machines on their own. That's done by the packing plants. For that reason, nowhere in the world are sorters so specialized and cheap.

Port logistics

For both onion growth and onion trade, the Netherlands has the right strategical location by nature. Nowhere are costs for transport logistics of onions - packing costs excluded - so low as in the Netherlands: from grower to packing plant and from packager to port, both are € 0.01 per kg. Global market leader Wiskerke Onions drives the onions from the packing plant in Kruiningen in Zeeland, to the Maersk depot in Vlissingen. From there, each day three feeders with containers sail for the port of Rotterdam. The ports of Antwerp and Bergen op Zoom are also nearby for the packing plants in Zeeland and Flevoland. To compare: Pasco Onions from Texas in the US has to go to Seattle first for transport by sea (800 km round trip). From Rotterdam, the onions are transported by container ship to, for instance, export destination Senegal, where they can be preserved and eaten for up to two months. Transport by ship from Rotterdam to Dakar, Brazil or Asia is cheaper than road transport to Paris, for instance. With sea transport to Asia, onion exporters fill up the containers that sailed with onions from China and the like to Rotterdam. This way, they won't have to return empty, and transport costs are kept relatively low: about a third of the cost from East to West.

Weakness of the sector: imbalance in chain and weather and seasonal dependence

Imbalances in the chain

The chain power lies mostly with the (agency) exporters and retail. In addition, around 20 of the, at most, 50 wholesalers and sorters, control the market. The heavily competing onion growers are largely dependent on them. Apart from that, they're largely dependent on price developments determined by weather and seasonal influences. Due to the already wafer thin margins, that makes onion growers extra vulnerable. They can choose to store onions longer, and so speculate on higher prices with later delivery in the season, or otherwise for the certainty of fixed prices in contract cultivation.

Large price differences per season

A quantitatively and qualitatively good or bad harvest is a big factor in yields for the onion grower. Figure 3 shows that bigger harvests lead to lower prices. The record harvest in 2011 led to very bad prices in the 2011/2012 trade season. However, the severe winter of 2013 caused a smaller harvest that year, leading to lower yields in the past season (figure 3). Positive, however, is that the production and yields show a growing trend (figure 4). 2011/2012 was a negative outlier for trade prices, and more bad years will undoubtedly follow, but four of the five last years were above average when it comes to yields. In addition, export prospects remain positive.

Also for onion traders, revenue can strongly vary due to price fluctuations during the season and between the various years. For them, risk spreading is a must, for instance through planned purchasing. All sorts of combinations are possible: purchases can be made at a fixed price, partly at minimum price or even under the cost price or at bale prices (including tare), for instance with an amount of small (very early), medium and large onions. The WUR is currently researching opportunities for a futures market for onions, given the importance of risk spreading.

Opportunities mainly by reaching new markets and technological innovation

The Dutch market is saturated, so the opportunities are mainly found abroad. The world population is growing by nearly 200 million people per year, various sales markets in Asia and Africa are becoming wealthier, and the average human being eats 7.5 to 8 kilos of onions per year. These are favourable factors for the Dutch onion sector, a sector which is already heavily focused on export, and which saw the export volume increase by around 75% during the past 15 years.

The trend toward more extreme weather conditions, appears to lead to more failed harvests or even a definitive end to onion cultivation elsewhere in the world. The Netherlands is well able to 'fill such gaps' and benefit from sales prices, which are going up as a result. An example from the past is the food riots regarding onions, which occurred in Latin America, or the fact that onion cultivation has stopped in Israel, due to the water problem (shortage and salinity) there. The Dutch onion chain benefits from this, because Israel is now importing its onions from the Netherlands.

Continuing to develop new markets worldwide
In the 2012/13 onion season, for the first time over 1 million tonnes of onions were exported. In the 2013/14 season, the export was 959,00 tonnes because of a lower harvest. Onion growers are successful in expanding the number of markets worldwide. Russia and the rest of Eastern Europe, the Far East (Malaysia, Indonesia), Latin America (Brazil and recently Panama and Costa Rica) and the Caribbean are proving to be growth markets. Since 2008, however, mainly Africa is a booming market (figure 5). The average yearly volume growth to Africa has been 18% since then, while sales within the European Union stagnated. Because of this, the European market share went down from 48% to 32%, and the African share increased from 29% to 44%. The past years, Senegal has been the most important export country, with Ivory Coast and Sierra Leone taking 3rd and 4th spot in 2013. The UK is the 2nd export market.

Technological innovation
More important than the introduced innovation regarding a digital trade platform (uienhandel.com) are the technological innovations that growers and sorters can still undertake. These entrepreneurs would do well to focus even more on quality and food safety (100% control). Growers are still focusing too much on maximizing the number of kilos, rather than quality. Packing plants are focusing on investments in new sorting machines, including cameras (assessment of onions is often still done by hand). Wiskerke has the first computerized sorting machine with infrared laser and optical cameras. Such investments are only profitable, however, at a low cost price per product, and hence high export volumes. There's still a technological challenge ahead when it comes to measuring and then lowering the nitrogen level of onions, which is often still too high.

Threats due to increasing competition, currency risks and danger of quality loss

Increasing competition leads to price pressure

Due to high onion prices in the past two years, not only the Netherlands, but also surrounding countries will see more cultivation. When harvests are good, this will result in lower prices. Subsistence, for instance in African markets, will also increase then. In Senegal, import often stops in January, in order to sell their own onions first. When they're out of these, the borders are opened up again. If the current local production - at a sufficient quality - can be increased, Dutch onion sales will go down, and new markets will have to be found.

In China, for instance, although there's a growth in export of onions and a higher production quality, their export focus will remain on industrial goods, because of higher added value. In addition, China needs their own onions because of the continuing population growth and migration from the countryside to the cities.

Dependence on exchange fluctuations
Onion export mainly takes place to countries outside the Euro zone. Because of this, trade is highly dependent on currency fluctuations. When Dutch prices are high, Asian countries will move to import from India or China. Export flourishes with a cheaper Euro, to Africa, Asia, Latin America, but also to the United Kingdom. So it's good news that the ING Economic Bureau is expecting a weakening of the Euro against both the British pound and the American dollar.

Neck rot risk asks for focus on quality and innovation
More extreme weather also means more rain, and too much humidity is bad for production quality. Neck rot is often already a big problem in the sector, especially during a wet and warm growth season. For the image of the Netherlands as an onion country, but also for company costs and revenue, this can have negative consequences. There are also always risks of soil fertility decreasing. Such quality problems in cultivation and storage of onions not only lead to lower production volumes, but also to dissatisfaction with buyers. Minimizing neck rot risk is a big challenge for the entire onion chain, from breeding to export country. So an even bigger focus on innovations, in order to increase quality, is a must.

For more information:
ING Economic Bureau
Cor Bruns, Sector manager agricultural production
+31(0)6 5431 3314
Henk van den Brink,
Sector economist agriculture
+31(0)6 1930 3153
ING.nl/zakelijk