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WWW.POTATOGROWER.COM 35 for potatoes, higher prices can correspond to higher industry revenues. But is the price elasticity of demand inelastic for the fresh retail, processing and foodservice segments of the potato industry? In a general sense, yes, but there are reasons to believe that they would not be equally inelastic. Richards and Kaiser estimate that the price elasticity of demand for processing potatoes is close to that for retail potatoes. However, data issues for processing potatoes make the elasticity more difficult to estimate for that segment. USDA National Agricultural Statistics Service (NASS) data show that, for potatoes, processing sales are more stable than fresh sales. This is explained by some structural characteristics of the processing versus the fresh markets. Potato processing capacity is relatively fixed from year to year, with more capacity coming online after an investment over several years. Thus, with relatively fixed capacity, it is expected that processing demand remains relatively steady even if prices fluctuate. This is consistent with inelastic demand. Fresh potato sales are influenced by the relative prices of substitute vegetables and general consumer demand-related factors such as consumer income and population. Since income and population, and hence retail fresh potato sales, can change year- to-year to a higher degree than processing capacity, it may be likely that fresh potato retail demand is more price elastic than that for processing potatoes. Despite differences across market segments, since potatoes are the most consumed vegetable in the U.S., the nature of generally price inelastic demand is unlikely to change in the near term. Farm Profitability With this context of price inelastic demand, the next important component for 2022 profitability is the behavior of potato prices. A key aspect of potato prices in the U.S. is the level of potato production. This is in large part due to it being costly to transport potatoes from production to processing regions, which means that production in other potato- producing regions (even in Canada) cannot be cheaply substituted for local production. Thus, with price inelastic demand and few substitutable supplies, reductions in U.S. production tends to correspond with higher prices. Since NASS is estimating lower production in 2021 relative to 2020, it is likely the case that prices in 2022 will be higher than 2021. Price data from the USDA Agricultural Marketing Service (AMS) show that U.S. potato prices were increasing from November to December 2021. An index of historical prices shows that prices tend to, on average, increase from January to April. Thus, potato producers may expect higher prices for at least the first few months of 2022. Risk for downward price movements will arise around April when area-planted estimates for potatoes and other crops become known. Will your operation realize profits in 2022? This question is largely determined by your operation's position in the potato supply chain, and whether you sell to retailers, foodservice or processors. Each of the segments has its own return and risk profile. Selection among varieties such as Burbank versus Norkotah, and the associated ability to sell each type in each segment of the potato supply chain, can also influence the ability to successfully market potatoes at a desired price. Another key factor is the extent to which and the type of contracts that are used. Sales contracts that have a fixed sales price reduce the risk of selling when non- contract market prices decline. However, in this period of higher input costs, locking in only sales prices can ultimately lead to lower profits. Thus, we recommend that potato producers use this period of substantial increase in input costs as a time to take stock of current business operations. Is your marketing arrangement providing you your desired return and risk profile? Are there any adjustments you can make to your production plans to make it less at risk of lower profits if costs increase in the future? Are the risk management tools (e.g., contracts) currently being used sufficiently lowering risk and providing enough returns? We hope this period of change can be an opportunity to make or at least consider worthwhile adjustments. This article is based on a presentation by the authors at Potato Expo 2022 in Anaheim, California, on Jan. 6. Patrick Hatzenbuehler is a crops economics extension specialist at the University of Idaho's Twin Falls Research & Extension Center. He can be reached at phatzenbuehler@uidaho.edu. Liang "Jimmy" Lu (llu@uidaho.edu) is a UI assistant professor of agricultural economics. References are available upon request. PG