It Takes More than You Think to Keep the Food System Running During a Pandemic
When COVID-19 hit, the dynamics in the food supply chain were catapulted into completely uncharted waters. Overnight, panic buying left grocery stores devoid of storable foods as people stocked up, preparing for what seemed to be an apocalyptic pandemic. Simultaneously, the near overnight shutdown of restaurants, quick service (fast food), and in some cases global trade, left a massive hole in the demand for certain crops.
At ClimateAi, we work closely with agribusinesses to help them find more profitability, efficiency, stability, and sustainability through artificial intelligence based resilience tools. We wanted to share our learnings from the pandemic but we realized that creating a general overview of how the food system has been impacted wouldn’t do justice to the story that we had watched and experienced first hand. Instead, in this article we will dive deep into 1 crop that has been front and center throughout the pandemic: the potato. What happens to the supply chain when McDonalds stops producing fries, restaurants around the world are forced to close overnight, and potato chips and table potatoes become retail gold?
This case study will help you build a deep understanding of the impacts that the pandemic sent rippling across the food supply chain and what that may mean for the future of our food system.
Background
The versatility of the potato earned it a home as a primary ingredient in some of America’s favorite foods: french fries, chips, baked potatoes, mashed potatoes, tater tots, etc. Each of these tasty meals demands a different potato variety, bred specifically for its end use.
Types of Potatoes:
- Table Potatoes: sold in the veggies section at Costco or Walmart. Commonly oval-long shaped and brown or round and colorful
- Fry Potatoes: Typically oval to long in shape, bred to be sliced long-ways into fries. Similar and often times (but not always) the same varieties as table Potatoes
- Chipping Potatoes: rounder in shape, often times white, and bred to be shaved and fried while maintaining their light color
- Seed Potatoes: most potatoes don’t come from seeds, they come from “seed potatoes” i.e. they come from other potatoes bred and grown specifically to be chopped up and used for seed. This is why your potatoes sprout when you leave them out too long!
You don’t need to memorize these, just remember that these 4 broad categories of potatoes use entirely different varieties, are grown with different quality metrics in mind, and are stored at different temperatures. This makes it difficult to replace one type of potato with another.
These potatoes all end up in very different places. Chipping potatoes get made into chips and go to grocery stores to be sold. Seed potatoes go to farmers who then plant them and grow potatoes for sale. Table and Fry Potatoes however are a bit more nuanced.
The forced shut down of the food service sector devastated vegetable markets nationwide, leaving processors and farmers with an overnight halt in sales.
The First Domino: Shut Down Decimates Food Service Sales
In Idaho, the top potato producing state, food service is 60% of overall potato demand. In Washington, the second largest potato producing state, about 90% of potatoes are sold to processors. Of those, 90% — 95% end up in restaurants, all of which were essentially shut down due to the coronavirus. (Chris Voigt, Washington State Farm Bureau Report). An unaided shut down, if given enough time, would the entire supply chain.
A large portion of the food service demand for potatoes comes in the form of frozen fries for the likes of McDonalds. As global french fry sales plummeted overnight, the frozen fry supply chain had nowhere to send its product. Almost immediately the entire supply chain began to overflow with processed potatoes. Below is a passage from the North American Potato Market News from April 1, 2020 describing the grim outlook for the industry:
“Distribution centers and transportation routes are filled with finished product. Cold storage inventories are approaching maximum levels. Processing plants are throttling back and changing product mix to hold down inventories. Some observers believe that most North American processing capacity focused on food service sales, including quick-service restaurants (QSRs), could shut down within 2–3 weeks, due to lack of space for finished product.”
While food service demand tanked overnight, grocery store sales skyrocketed across the board. Virtually all potato related products were flying off the shelves. Retail table potatoes (what you find in the vegetables section in your grocery store) saw sales jump an unprecedented 33%, on par with Thanksgiving sales. Similarly, potato chip processors were burning through their stored potato supplies so fast that many were projected to run out 4 weeks early. (NAPMN, Mar 2020)
The potato industry was left in a state of imbalance. There was a severe supply glut for food service potatoes with no restaurants to sell through and at the same time there was a shortage of retail potatoes, as panicked consumers rushed to stock up on notoriously shelf-stable potatoes and potato chips.
It’s important to remember that these potatoes are not all the same. For example, if you try to use a table potato for chipping, not only is it the wrong shape for the processing machinery, once fried it will turn a darkish brown color, considered undesirable by consumers and thus unsellable by chip companies.
However, some varieties can be swapped. Most potatoes grown for the fry market can also be sold as table potatoes. Soon after COVID-19 hit, growers, shippers, processors, potato brokers, and state potato commissions began mobilizing a massive reorientation of the supply chain to divert these previously french fry-bound potatoes to the retail sector.
Keeping Grocery Store Shelves Stocked at all Costs
The perception of a food shortage, even if temporary, causes widespread exacerbation of panic with dangerous implications for political stability and maintaining order. The potato industry among others, was called upon in a war-time fashion to meet the challenge of preventing such panic, ensuring that shelves remained stocked at all costs.
Kelly Turner, executive director of the Michigan Potato Industry Commission, explained the physical and emotional strain this created for the entire supply chain:
“One of our growers who also packs fresh potatoes for retail sale called to discuss their situation. They were scared that their spouse, children, and close family members could potentially be exposed to this virus and die. They had a real gut check moment, a moment of heroism in my book, and decided to continue to protect their workers and family members as best as they could while deciding to continue to meet the demand for potatoes by scared consumers, even though it meant putting their entire business and family in jeopardy.”
Kelly and her counterparts in all the major potato producing states worked day and night to keep the supply chain running at max capacity to keep potato shelves stocked and consumers out of panic mode.
The Oversupply
Despite these efforts, the supply glut from the loss in food service was far too large to compensate for the gain in table potato sales. This sparked a parallel effort by the industry to find new homes for their orphaned potatoes. State commissions along with PotatoesUSA, an industry marketing group, started publishing potato recipes and storage guidelines to help consumers make the most of their recent potato stockpile purchases, try new recipes, and continue purchasing more U.S. grown spuds. “In Idaho, 50 lb cartons of potatoes previously destined for restaurants were coming in and going straight onto the empty shelves” describes Frank Muir from the Idaho Potato Commission. “Why were the shelves empty? Right up there with toilet paper and hand sanitizer, potatoes were flying off the shelves”
Any potatoes that were not sold were often sent to local food banks, the dehydrated potato market, or to animal feed, all of which come at a heavy pay cut to the farmers.
Contract Cuts and Reallocating Acres
Many of the fry processors launched efforts to redirect their product from food-service (e.g. McDonalds) to retail (e.g. Walmart), forcing them to retool their processing plants to produce grocery store suitable frozen fries — smaller packaging with the proper consumer labeling. This approach proved infeasible for the vast majority of processors. For many, the changes required too big a shift from their existing focus and were often too expensive to warrant.
With very few processors actually able to retool their facilities and an uncertain future for the potato food service sector as a whole, the fry processors were forced to take additional measures and reduce grower contracts for the 2020 crop. At the time of these announcements in April, the Columbia Basin in the pacific northwest had already seen 75% of its crop planted and the remaining 25% of the acreage had already been prepped for planting (NAPMN, April 1, 2020). According to Mike Larsen, general manager at Mart Potato, “anywhere from ⅓ to ½ of the cost of the entire season is spent before the crop is planted; field fumigation, seed purchase, and prepping the fields all happen before the seed potato ever even touches the soil.”
In Wisconsin, growers like Andy Dierks were able to switch part of their acreage to other albeit less valuable crops like corn and soybeans. These crops typically require a fraction of the prep cost of potatoes. “Switching came at a heavy cost; it certainly wasn’t ideal.” Farmers in Wisconsin and other mid-western states are unique in their ability to switch from potatoes to other crops. In the Pacific Northwest, diversification typically comes in the form of different potato varieties and markets rather than entirely different crops since the volumes they are expected to produce are much higher.
Seed Potato Growers Left Holding The Bag
As growers received notice of their 10% — 100% contract cuts, many then went on to reduce their purchases from their seed potato suppliers. “Seed potatoes are prepped differently” says Muir. “They’re not going to store like table potatoes, they’re designed to go in the ground and start sprouting. You start putting those potatoes in the market, they’re going to start sprouting right there on the shelves.” In many cases, seed potato growers’ only options were to sell their highly valuable product to the dehydrated potato or cattle feed market, both of which offered essentially nothing relative to the price of a seed potato.
“You also saw some seed potato growers that were actually dumping potatoes and inviting people to just come take them away and eat them,” says Muir. “They’re perfectly edible, they’re just not designed to go into normal retail or food service operations”.
Images of dumped potatoes — previously destined for various customers segments — flooded the internet. Some praised these farmers for sharing these “free potatoes” with hungry consumers. Others expressed outrage at the food waste this likely signified among other farmers who didn’t have the social media skill or government support to fully make use of their perfectly good crop. And lets not forget the financial devastation “free potatoes” implies for our farming communities.
Frank explained that Idaho potato growers donate to food banks all year round and were certainly doing so during the pandemic. The reality of the situation is that there is a shipping cost associated with getting these calorie and nutrient dense foods to food banks across the country and there was no capital being deployed to help the farmers get these potatoes to hungry people in need. To ask these farmers that had been taking a loss on their sales to then foot the bill to send potatoes all over the country, is basically asking them to bankrupt themselves. “So one of the things we’ve asked the federal government is to come in and help. There are food banks that need potatoes, we’ve got military personnel that need potatoes, hospitals… Come in and buy these potatoes, help make the growers whole, and ship them to where they are needed most.” This level of help from the government has not yet taken shape.
The Current State of the Industry — No Such Thing as Static
As states begin opening back up, food service demand has started to climb to near pre-COVID levels much sooner than expected, catching many fry processors off-guard. Many of them are talking to their growers, trying to buy back any extra potatoes they can get their hands on to help them meet this earlier-than-anticipated rise in fry demand. Unfortunately, they are finding that a sizable portion of growers opted to not plant these uncontracted acres. Many sought to cut their losses rather than sink another ~$2,500/acre to plant, grow, and harvest crop with no assurance that they could find a home for them. Market prices for fry potatoes quickly shot up as processors set out to buy back potatoes from a supply pool that they were forced to cut by 10% — 20% 3 months prior. (NAPMN, Jun — Jul 2020)
The implications of many of these challenges will extend far beyond 2020: potential supply gluts, supply shortages, and creative means of adapting to societal rules that remain constantly in flux. As the pandemic unfolds, the industry will need to be ready to continuously adapt to new situations. There is no such thing as static in the current state of the food system.
The Value of Resilience — Thriving Despite Adversity
For businesses closely tied to agriculture, long term success and profitability has never been solely about yield per acre or year-over-year revenue growth. It turns out sustainable and increasing profits boil down to 1 key metric regardless of whether you are a farmer, processor, input supplier, food/beverage company, or grocery store — resilience.
In simplest terms, resilience is about diversifying risk, building flexible and nimble processes, and always looking 3 steps ahead.
Successful long-term farmers small and large work to ensure resilience to any supply/demand shifts through a diverse portfolio of crops, varieties, and markets in addition to the help of predictive ag-management tools. This helps them prepare for evolving consumer tastes, unexpected trade policies & tariffs, crop loss from poor weather, and most recently pandemics.
Successful processors are those that have ingrained resilience into the fabric of their companies. They sell to a variety of different markets in case one is severely impacted by a supply/demand shock like the one dealt by the coronavirus. They source from climate risk-diverse regions to ensure they can continue to thrive despite the increasing frequency and intensity of storms, frost events, droughts, and heatwaves. And they retain the ability to alter their production-lines based on the needs of the market.
At ClimateAi it is in our DNA to help build resilience, improve profitability, and sustainably intensify production across the entire agriculture supply chain. If you would like to see how we could help you build resilience this season or in preparation for the next, we would be happy to help. Please feel free to reach out to us through our website.
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References:
Frank Muir, President & CEO at Idaho Potato Commission
Kelly Turner, Executive Director at Michigan Potatoes
Tamas Houlihan, Executive Director at Wisconsin Potato & Vegetable Growers Association
Andy Dierks, 4th generation potato grower in Coloma, Wisconsin
Mike Larson, General Manager at Mart Produce
Chris Long, Potato Extension Specialist (chipping potatoes)
Nora Olsen, Professor at University of Idaho (potatoes)
Ben Harris, Associate Manger of Research at Potatoes USA
North American Potato Market News. (2020, March — June). https://napmn.com/
Bob Larson. “Washington Potato Surplus Pt 1.” Washington State Farm Bureau Report, Chris Voigt, Apr 24th, 2020, https://www.aginfo.net/report/45788/Washington-State-Farm-Bureau-Report/Washington-Potato-Surplus-Pt-1.
