Potato Grower

May 2010 Potato Grower

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UNITED STAND by Dr. Richard Sexton, University of California, Davis United Challenges A Q-and-A with Dr. Richard Sexton NATIONAL FARMERS cooperative expert, Dr. Richard Sexton, professor, Department of Agricultural and Resource Economics, University of California, Davis, spoke to growers who attended the Fourth Annual North American Potato Grower Summit, February 9. Following is a question and answer interview with Dr. Sexton conducted by United staff following his presentation. In your remarks at the Summit, you said, “United has achieved a remarkable degree of success in its short life. United now faces challenges due to its success.” What did you mean by that statement? Less supply means greater grower revenues, and lower costs due to producing fewer potatoes. I was referring specifically to the large share of North American potato growers who have chosen to join United and the success of the cooperative in increasing grower returns over the past two years. By managing the flow of product to the market, United has helped achieve an increase in the U.S. grower return index from $6.94 in 2006–07 to $8.41 in 2007–08 and then $10.85 in 2008–09. You spoke of supply management and key economic aspects of the industry saying that supply management in one region will benefit all regions and that expansion of production in one region will harm all regions. Tell us more about that situation. It means that the different growing regions are all linked together economically in one broad U.S. or North American market. Economists would say that the different growing regions are “integrated” into the same market or that the “law of one price” applies across regions. This law does not say that the prices in different regions will be the same, only that the prices will move together. I did some basic statistical tests to verify this point. This means that supply changes in one region will affect prices not only in that region but all others as well. What do you mean when you say short-run returns can be increased through supply management? Most agricultural commodities have a demand that is price inelastic, which means that a given percent change in production will cause an opposite and greater percent change in price. This status almost certainly applies to potatoes for the fresh market. Therefore, less supply means greater grower revenues, and lower costs due to producing fewer potatoes. Both the revenue and cost-side effects of supply management contribute to higher grower returns. What warning signs associated with supply management should United consider? Successful supply management programs run into two types of problems: Free riders and new entrants. Free riders are the ones who don’t participate in the supply management program but reap the benefits nonetheless. It is disheartening for growers who are participating to see outsiders benefit disproportionately because they are not cutting back on production. If returns from potato production come to consistently exceed returns from alternative crops in potato-growing regions, more potatoes will be grown, which will have a detrimental impact on price. PG 28 Potato Grower | MAY 2010

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