A reduction in plantings of 13.4 per cent on last year – to an historical low of 120,100ha – should ensure a better season in 2003-04 for prices, but there are other factors at play.

'Despite the reduced plantings, if yields are up by five per cent, then the overall level of supply could still prove burdensome, particularly given this year's surplus,' warned ADM's Mike Moore. 'Furthermore we believe demand is also under pressure. Recently we have seen the first fall in manufacturing usage following a long period of steady increases. Without new products the market looks saturated. Fresh consumption has also been under pressure for a number of years, as consumers are spoilt for choice with alternative and more conveniently prepared foods. We anticipate this pressure to continueSA yield increase of five per cent with a fall in demand of three per cent could easily negate the lower supply availability from reduced plantings.' But a futures contract can lock in attractive prices being offered already this summer and protect producers from a fall in values over the course of the season to guarantee a good return on investment.

How it works A grower with 1,000 tonnes of potatoes has a forward sales contract for 300t and supplies local outlets with 100t leaving 600t unsold. Production costs are calculated at £65 a tonne or £85-90 if the crop is stored until April-May 2004.

The futures market is traded in euros per tonne, and April 2004 contract futures are priced at e190 a tonne, equivalent to £135 per tonne. This represents a return on investment of 50 per cent. The grower decides to sell 20 per cent (200t) of his production at this price which is equivalent to eight lots of futures (one contract represents 25t). He can then issue further sell instructions at higher levels if the market rallies. If speculators drive prices higher over the summer because of dry conditions, for example, the grower could decide to sell a further 200t at e210 a tonne and a further 200t at e240 per tonne. By hedge-selling in this way, the grower has achieved an average price on the futures market of e213 and locked in a return on investment of 75 per cent.

The grower sells his physical potatoes in March through usual sources and receives a price of £120 a tonne. But futures values have fallen back to e180 for the April 2004 position. If the grower buys back his sold position at this level, his total profit is equivalent to £30 a tonne which can be added back to the £120 in sales of physical potatoes so that he receives a total of £150 a tonne.

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