The Sultans of Spuds
Battered by their own success, farmers form the 'OPEC of Potatoes'
Once a month, usually on a Wednesday morning, about a dozen men arrive at the Salt Lake City airport on separate flights from around the country. They are whisked into waiting cars for the five-minute trip to a glass-fronted office building nearby. There, in an unpretentious conference room, they meet several more of their associates.
These men are the leaders of a little-known international cartel, and at meetings such as these, they fine-tune an elaborate system of production targets and quota transfers to control the price of the commodity around which their world revolves. It is a serious business, backed up with reconnaissance from satellites orbiting high above the Earth, and the organization's strict code of conduct allows for the use of what its members artfully refer to as "punitive measures" against anyone who violates the rules.
And, at lunchtime, the men always pause to sample their merchandise.
"We always serve potatoes. We always serve potatoes, whether it's chips or fried or mashed or whipped or salad," says Barb Shelley, one of a small cadre of people who carry out the organization's legwork. Not even lunch, it turns out, is safe from the group's intense scrutiny: "When we order from the caterer, we say, 'These are potato growers. We want your highest quality potatoes. Do not'" - Shelley pauses ominously - "'give us bad quality.'"
This may sound like a plot lifted straight out of a Mel Brooks movie, but the potato cartel is real. And its existence speaks volumes about the often-perverse dynamics of American agriculture.
Potato farmers have long been haunted by the market-destabilizing effects of what they refer to as "the pile" - the more than 40 billion pounds of spuds that they grow every year. They, like most American farmers, have a seemingly pathological compulsion to produce as much of their crop as is humanly possible. And when prices for a particular crop edge up, farmers often respond by growing more - flooding the market, driving prices down, and turning a one-year jackpot into several years of misery.
Potato farmers, in particular, have ridden that roller coaster for as long as most of them can remember, and it hasn't helped that per capita potato consumption in the U.S. has been steadily decreasing for at least 25 years. Their response has been the United Potato Growers of America, a sophisticated effort to regulate potato production and dampen the wild price swings that have plowed many a farmer into the ground. It's the kind of endeavor that seems sharply at odds with the popular image of the fusty spud.
"We're our own worst enemies," says Albert
Wada, an Idaho farmer who helped dream up the confederation of
local potato-grower cooperatives that most farmers now refer to as
simply "United." "We're so in love with what we're doing that when
we get that smell of dirt in our nose, we just gotta go plant - and
we don't worry about the market till later."
After back-to-back bruising years that bottomed out in 2004 - when a potato farmer in Idaho got about $2.42 for growing a hundred pounds of potatoes - Wada and several other farmers decided something had to change.
"It's always been a fragmented bunch of growers who went out and did what their gut - or their horoscope, or their almanac - told them," says Wada. "It sounds trite, but it's true. We just had no strategy of supply being planned to match demand, and then supply-demand takes over - and then you're done."
The alternative was not an easy sell. Farmers, Wada says, have a tendency to see cooperatives as "a controlling, socialistic-type of administration - it kind of goes against the grain of free-market economics." And to be truly effective, the effort would have to span not only the many potato-growing areas in the U.S., but Canada as well - all of which are notorious for their inter-regional rivalries.
Normally, a coordinated effort by independent businesses to manage supply and control prices would violate federal antitrust laws, but a 1922 law gives farmer cooperatives the power to band together to market their products. So, early in 2005, Wada and several other growers started the United Potato Growers of America, which is essentially a confederation of state and regional co-ops.
Forming the confederation required overcoming "a lot of
parochialism and market-share protectionism. You could smell
burning rubber often," says Buzz Shahan, who is United's chief
operating officer. "These are very strong guys that have been
kicking people's butts since junior high. And to get them in a room
and have them discuss market share and things like that" - Shahan
searches for the right words - "it gets a little Western."
Yet it didn't take long for growers to recognize the value of adopting a more coordinated approach to potato production. Today, United has eight member chapters, representing growers in seven Western and five Midwestern states, and the group says its members account for about three-quarters of the 3,600 potato farmers and roughly million acres of potatoes grown in the U.S. (United's headquarters is in Salt Lake City, because, with almost no potato production, Utah is like the Switzerland of the Balkanized potato world.) In 2006, the group's founders helped organize the United Potato Growers of Canada.
This is by no means the first time that potato growers have tried to organize themselves. "Most of the prior efforts were: 'Let's find a government handout that will take some potatoes off the market that were already grown and in storage somewhere,' " says Jack Hetherington, who worked as a banker in Twin Falls, Idaho, for 33 years. "United was focused on changing the long-term supply dynamics, and that's done by controlling the acreage."
Each year around Thanksgiving, the United board, relying on information from a team of data analysts, calculates a production target for the coming year. That target is always set below the national potato acreage in 2004. This year, United gave each of its members a quota that was 15 percent below his 2004 "base acreage."
Buzz Shahan says that growers pay
anywhere from $2,400 to $80,000 - an average of about $10 an acre -
to fund United and the confederated member chapters. He concedes
that it's counterintuitive for a farmer to pay that much money to
an organization whose purpose is to prevent him from growing as
many potatoes as he wants. But, as Shahan says one grower recently
told him, " 'I'd spend $50 an acre to make $500 an acre any day.'
It's a very interesting psychological gymnastic performance to
United's tactics for finessing supply were initially fairly crude: In 2005, the Idaho chapter took about 4 million hundredweight of already-harvested potatoes and plowed them back under. Last winter, by contrast, Idaho growers dealt with an oversupply of seed potatoes by turning them into potato flakes, which are used in products like instant mashed potatoes.
United has also worked to realign some of the internal dynamics of the potato world. Until recently, farmers who grow "processing" potatoes for chips or frozen french fries and hash browns would be required to deliver a certain tonnage to the processor. To ensure that they'd have enough potatoes to meet the tonnage requirements if their crop partially failed, farmers would often grow up to 20 percent more than they'd need. If the crop didn't fail, however, they would wind up with far more potatoes than they could sell under contract - which they would then dump on the open market. United helped convince processors to switch to acreage-based contracts, instead.
United uses satellite imagery to ensure that its members comply with the quota; it also checks farmers' acreage against the paperwork they submit to the federal Farm Service Agency for government-support programs. United's bylaws allow it to levy fines of $100 per acre against growers who violate the quota, though Shahan and Wada say such fines are infrequently used.
United also helps coordinate transfers of quotas between the various potato-growing regions to regulate overall supply. This year, for instance, growers in Wisconsin ponied up an extra $50 an acre so they could grow more than the target recommended by United. United then used that money to "buy down" additional acreage in Idaho, effectively transferring part of Idaho's market share to Wisconsin.
And even after it sets a yearly target in the
fall, United is constantly working on "flow control." The group
uses a precise tally of how many bags of potatoes shoppers carry
home from the grocery-store checkout stand - data gathered by
Nielsen, the company better known for its TV ratings work - to
establish a week-to-week demand curve for potatoes; then United
slots the harvest into the market to match demand.
The effort seems to be paying off: After the $2.42 dumps of 2004, growers in Idaho have received more than $6 a hundredweight the past two years, according to Bruce Huffaker of North American Potato Market News.
If prices stay up this year, it will be the third year in a row of decent prices - something growers haven't seen in decades. Returns still aren't as high as 2001, when Idaho growers got about $8 per hundredweight, or 1989, when they got $10, but long-term consistency may be more important than awesome prices.
"Everybody likes the upside peaks, but you don't get them without the downside," says Tim O'Connor, the president and CEO of the U.S. Potato Board. "United has tried to level those peaks and valleys. It's like going up to bat and saying, 'I'll just take a single every time,' versus swinging for the fences and striking out nine times out of 10."
And while United's track record is short, it has attracted notice from bankers like Jack Hetherington who make loans to potato farmers. If United is successful, he says, "we've got a reasonably good chance of having potato prices above the cost of production, and that is a very comforting feeling as a banker." Hetherington, who retired this summer and now serves as an advisor to United, says bankers have an incentive to encourage growers to follow the group's target recommendations even if they're not members: Each grower who plants more than his portion of the quota has the potential to drag down profits for all the growers the bank loans to.
But there are some variables that not even a cartel can control. Good growing conditions that produce top-notch yields could cancel out the effect of United's recommended acreage reductions. And United is still battling its farmers' inborn drive to produce ever more.
"Growers know their fields very well," says Shahan, and even as they reduce potato acreage to meet United's quota, they are abandoning their least-productive fields and shifting their potatoes to higher-yielding land.
Albert Wada has another
fear: United's success could encourage its own failure. "The
growers, now that they've come back from the brink of disaster and
are enjoying a little bit of profitability, aren't quite as
motivated to do the cooperative march as they were two or three
years ago," he says. "That's the challenge - that they'll back away
from the cooperative model when economic times allow their
independent nature to start to surface again."
The author is a contributing editor of High Country News.