Economics of Potato Storage: Case Studies

Keith O. Fuglie Agricultural Economist International Potato Center Bogor, Indonesia

Paper presented at the Symposium on Potato Storage, Processing and Marketing Global Conference on Potato New Delhi, India December 7-9, 1999

Economics of Potato Storage: Case Studies Keith O. Fuglie International Potato Center Bogor, Indonesia

Abstract Because of their storability, potatoes have become available in the market place year-round even in areas where production is highly seasonal. But to avoid high seasonal price instability requires good storage technology and marketing services to help storers keep storage costs low and manage risk. This paper discusses potato storage economics from three case studies: from the United States, Tunisia and India. The US example represents a well-developed potato market with advanced technology and marketing institutions. Market information services provide timely information on prices and stocks, and forward and futures pricing mechanisms help farmers reduce their expose to market risk. The Tunisian and Indian case studies are examples of areas where potato production is expanding rapidly but storage and marketing systems are not as advanced. In the Tunisian example, improvements in rustic farm storage technology introduced in the 1980s reduced storage losses and contributed to less seasonal supply and price variability. In India, price risk from potato storage is high relative to the US and serves as a disincentive for the private sector to invest in storage. New storage methods developed in the 1990s were shown to reduce losses in small-scale farm stores but were nevertheless not economical for most farmers.

Acknowledgements The comments of Tom Walker and Greg Scott on an earlier draft of this paper are gratefully acknowledged. Remaining errors are solely the responsibility of the author.

ii

Economics of Potato Storage: Case Studies

Keith O. Fuglie Introduction Potatoes are a semi-perishable crop. Unlike cereal grains, potatoes cannot be stored from one crop year to the next due to physiological deterioration. But unlike many vegetables and fruits, potatoes can be stored for several months without serious loss of quality. This characteristic of the potato has enabled it to become available in markets year-round even in areas where climate conditions limit production to a few months of the year. However, the absence of inter-year storage together with relatively high transportation costs has meant that supplies and prices of table potatoes are often highly variable from one year to the next. When the harvest is exceptionally large, prices can be dismally low. And when the harvest is small, prices can be exorbitantly high. Improved crop storage can help reduce market supply and price volatility by allowing the harvest to be more evenly distributed throughout the year. But storage itself is a risky enterprise if a store is not well-managed, significant quantity and quality losses may occur. If too much stock (in the aggregate) is held too late in the year and storers are forced to dump their collective stocks on the market, prices may fall sharply resulting in large losses for potato storers. To achieve an orderly system for potato storage requires careful attention to both the technical management of potato stores and the institutional mechanisms for price discovery and seasonal supply allocation. In this paper I discuss results from three case studies of the economics of potato storage and seasonal supply management. The US case study serves as a

benchmark example of a well-developed potato storage and marketing system. The other two case studies are from developing countries: Tunisia in North Africa and the lowland Ganges Plain of northern India. These case studies are examples of areas where potato production is expanding rapidly but storage and marketing systems are not as advanced. In the Tunisian example, improvements in storage technology introduced in the 1980s lowered storage costs and helped reduce seasonal supply and price variability. In the Indian case study, price risk from potato storage is high and serves as a disincentive for the private sector to invest in storage. New storage methods developed in the 1990s to reduce losses in rustic, on-farm potato stores were found to be technically feasible but not economical for most farmers. For each of the case studies I discuss the potato cropping and storage system, storage costs, seasonal potato prices, and seasonal supply management. A model of the economics of seasonal potato storage As Holbrook Working showed in his seminal 1949 article on the economics of crop storage, in a perfectly competitive market in which future seasonal prices can be forecast with certainty, the difference between current and near-future prices should reflect the cost of storage. The rise in market price between seasons, which we can call the storage price margin, is the gross benefit earned by storers on each unit of a crop that is put into storage at harvest for sale later in the year. In order for storage to be profitable, the storage price margin must be sufficiently high to compensate storers for all of the costs incurred for storage, including labor and materials, interest on foregone income from dela ying the sale of the crop, and storage losses due to transpiration or other factors. If the storage margin is lower than the cost of storage, then storers suffer a net loss and have little incentive to store at all. If the storage

margin is above the cost of storage then net benefits from storage are positive. If net benefits are consistently large then storers will have an incentive to increase the quantity in storage. An increase in the aggregate quantity stored will drive down market prices during the storage season and reduce the storage price margin. An equilibrium is reached when the storage margin is roughly equal to the costs of storage since at this point storers have no incentive to either reduce or increase the quantity stored. This model of crop storage is depicted graphically in Figure 1. In the upper diagram, total production is marketed in two seasons: at harvest (H) and during the post-harvest, or storage, season (S). The intersection of market demand (D) and marketed supply at harvest (SH) determines the price at harvest (P H). As time progresses the supplies held in storage are released to the market and the market price rises to P S to compensate for the cost of storage. The lower diagram shows the progression of market prices over several seasons. Each year the market price rises following harvest (H) to compensate for the cost of storage. As a new crop arrives the market price falls and the cycle is repeated. Note that in the lower diagram, the harvest price differs from year to ye ar, depending on whether there is a large or small crop, but the storage price margin is about the same each year. This is because unit storage costs remain relatively constant irrespective of the size of the total crop, with the exception that the opportunity cost of holding stocks will be correlated with the price at harvest (Gray, 1977). In actuality, prices and storage conditions a few months ahead are not known with certainty and potato storers face significant risks. Unexpected problems in storage management may result in excessive quantity and quality losses in the store.

Probably an even greater source of risk is unexpected price fluctuations that could result in a profit windfall or a net loss of income. If storers are averse to risk, then they would implicitly include a risk premium as part of their storage costs. A risk premium can be viewed as compensation for undertaking the risky business of potato storage rather than selling the entire crop at the prevailing market price at harvest. How much is demanded as a risk premium will depend on individual attitudes toward risk-taking and the perceived significance of the risk. In the case studies below I present some estimates of the risk premium and show that it is likely to be a much larger part of total storage costs in India than in the US. A reduction in the storage price margin can come about through the wide-scale adoption of improved storage technology or marketing services. Improved storage design and management may significantly reduce storage losses, for example. Better marketing services can improve the allocation of seasonal supplies and reduce seasonal price variability. By providing timely market information about total production, quantity remaining in stores, current prices and price forecasts, marketing services enable storers to make better judgments about future market conditions and plan their marketing strategies accordingly. Marketing services such as forward contracting and futures contract trading also help reduce exposure to price risk. By reducing price uncertainty, marketing services lower the risk premium associated with storage. Thus, better storage technology and improved marketing services can both lower storage costs and increase the net benefits from storage. If such improvements are widely adopted, there will likely be a noticeable increase in the aggregate quantity stored. This will increase market supplies and lower the market price during the storage period. This serves to reduce the storage price margin until a new market

equilibrium is reached. In the Tunisian case study below, improved pest control in rustic farm potato stores reduced storage losses and led to a reduction in price variability between seasons. Potato storage: Three case studies The examples concerning the economics of potato storage described below are based on fieldwork by the author and colleagues carried out in the 1990s. The case studies include one from the United States, specifically, the Red River Valley on the Minnesota-North Dakota border discussed in Fuglie (1993). The second study comes from potato growing regions in Tunisia (Fuglie et al., 1996). The third case study is from Ganges Plain of northern India, especially the state of Uttar Pradesh, and is described in Fuglie et al (1997). Some of the main characteristics of the potato . production and storage systems in the case studies are given in table 1. Cropping systems and storage seasons Potato production in the United States is a highly commercial enterprise. According to the 1997 Census of Agriculture, just 3,800 farms produced 99 percent of the US potato crop, each producing an average of 5,000 tons per year. Potato production is concentrated in three or four regions, especially Maine, the Northwest, and the Red River Valley of Minnesota and North Dakota. About 90 percent of the US potato crop is harvested in the fall season between September and December (Figure 2). Potato production in these areas during the rest of the year is constrained by low temperature but warmer states produce small crops of summer and winter potatoes. Over time production has become more concentrated in the fall season even though prices are still considerably higher for potatoes produced in the other seasons.

Most table potatoes reaching the market between January and June are supplied from storage. Many farmers have their own cold storage facilities or rent commercial cold storage space. A large portion of the US potato crop is marketed on a contract basis to agro-processors, especially to frozen French fry and potato chip makers. Consumers purchase about 60 kg/capita/year of potatoes, about 20 kg/capita/year as table potatoes and 40 kg/capita/year in processed form. Farmers supplying table potatoes may sell on the spot market or hedge agai st price risk by participating in the n potato futures market operated by the New York Commodity Exchange. In Tunisia, potatoes are produced on small, irrigated farms of usually less than five hectares. Potatoes can be grown year-round except during the hot summer months between June and September (Figure 2). The main production seasons are the Saison (spring) crop, harvested in May-June, and the Arriere-Saison (fall) crop, with harvest beginning in November. There is also a small Primeur (winter) crop. Potato production and consumption have increased steadily during the past three decades. Between 1960 and 1990, per capita potato consumption in Tunisia doubled to around 20 kg/capita/year and consumers have come to except potatoes to be available yearround. A portion of the spring harvest is stored in rustic farm stores for later sale during the summer or for use as seed potatoes for the Arriere-Saison crop. Storage losses after three or four months in farm stores are typically around 10 to 20 percent of initial weight due to transpiration, but can be significantly higher if insect and other pests and diseases are not adequately controlled. In India, more than 85 percent of the potato crop is produced during the Rabi (winter) season on small, irrigated farms in the Indo-Ganges Plain. Harvest begins in November and is most concentrated during January to March. Potato production in

lowland areas is limited because of hot weather during the rest of the year but a smaller Kharif (summer) crop is produced in highland areas. However, Indian consumers have come to rely on potatoes to provide a relatively low-cost vegetable throughout the year. Per capita consumption rose from 4 kg/capita/year in 1960 to 13 kg/capita/year in 1990. Most consumption is in the form of fresh table potatoes, which have been incorporated into many traditional dishes. At least 40 percent of the Rabi potato crop is placed into storage for sale later in the season and as seed for next years crop. Two different systems provide potato storage for table potatoes between April and October. The first system is small, onfarm storage in which potatoes are kept at ambient temperatures for one to three months following harvest. After three months of storage in farm stores, losses from transpiration and other factors average around 20 percent of the initial storage weight. The second system is commercial cold storage. Farmers or marketing agents may rent space in cold storage facilities to keep potatoes for sale as late as September or October. Seasonal price movements and mechanisms for risk reduction These production and storage patterns described above are reflected in seasonal price trends. Figure 3 shows seasonal indices of prices received by farmers in the three case studies.1 The seasonal price indices were constructed by normalizing monthly prices by the price during the main harvest months of each year, and then averaging the seasonal price indices over a ten-year period (1981 to 1990). Thus the price at harvest is set to 1.00 and the index value shows the average relative price change during the storage season. In the United States, prices rose an average of

about 40 percent between harvest time and the end of the storage period. In India, the average price at the end of the storage season was more than double the price at harvest. In Tunisia, the storage season following the harvest of the s Saison crop lasts only four months until the Arriere-Saison crop becomes available. Potato prices increased an average 80 percent over the storage period. Farmers in each of these markets face risks, especially from unforeseen price movements during the storage season. While experienced farmers may anticipate the price trends depicted in Figure 3, it is more difficult to foresee fluctuations around these trends. This is especially true if there is a lack of timely market information on aggregate stocks remaining in stores or market mechanisms for price forecasting and hedging against price risk. In the United States, the US Department of Agriculture publishes daily price information in major spot markets, weekly estimates of potato shipments into major urban markets, and monthly estimates of potato production and remaining stocks (Lucier, 1991). In addition, the New York Commodity Exchange operates a futures market for table potatoes. In a futures market, traders agree to buy and sell a given quantity and quality of potatoes at a specified price some months in the future. Futures contract prices are established in open auctions and are widely published. A farmer can use the futures market to establish a guaranteed price for his or her crop. Futures prices also serve as a valuable price-forecasting tool since they represent the collective judgment of traders about market conditions. Derivatives of futures contracts, called options contracts, are also available. For these contracts, a fee is charged for the option to sell or buy a given quantity of potatoes at a future date at an

established price. The holder of the options contract will only exercise the option if the spot market price subsequently moves in an unfavorable direction. In India, statistical services and media publish spot prices and quantities delivered in major wholesale markets. However, there is need for accurate and timely estimates of the size of the potato crop and remaining stocks. In addition, without a large processing industry there are few opportunities for forward contracting available to farmers. As a result of this and possibly other factors, there is considerably more price variation around seasonal price trends in India than in the United States. In the case studies, the coefficient of variation of the seasonal price index at the end of the storage season was estimated to be 35 percent in India and 17 percent in the United States.2 Thus, Indian potato farmers face considerably more seasonal price risk than US farmers even if they correctly anticipate average seasonal price trends. Comparison of storage costs in the US, India, and Tunisia In a recent paper Fuglie and Ramaswami (1999) compared seasonal price movements with storage costs in the three case studies. In their model, they identified four main components of storage costs: 1) interest on stock, 2) compensation for quantity losses during storage, 3) direct costs for labor, materials, and storage facilities, and 4) a risk premium to compensate for price uncertainty during the storage season.3 The US and Indian case studies are based on six to seven months of storage in cold stores, whereas in Tunisia storage is assumed to take place in rustic farm stores for up to four months. An additional factor to consider in the Indian case study is government intervention in the market for cold storage. While most cold stores are privately own, cold storage rental rates have at times been regulated by the national or state level

government. While national price controls on cold storage rental rates were withdrawn in the 1980s, the Uttar Pradesh state government maintained price controls on cold storage until 1998. Rental rates were typically about 25 percent lower in Uttar Pradesh compared with neighboring states that did not have price controls (Fuglie et al., 1997). However, with the rent controls cold storage operation became increasingly unprofitable and by 1997, more than 200 out of 916 cold stores in Uttar Pradesh were closed to due lack of maintenance or financial insolvency. Further, farmers often complained of inadequate enforcement of regulations and additional charges levied by some cold storage owners (Dahiya and Sharma, 1994). The actual average cost of cold storage rental was probably higher than the official government rates during much of this period. Potato storage costs in India are derived for both regulated and estimated market rates for cold storage. The estimate of the risk premium is based on a mean-variance utility function in which farmers are assumed to be risk averse. In this model the risk premium is a function of the coefficient of variation of price and the Arrow-Pratt coefficient of relative risk aversion (R). Although precise estimates of R are not available, Binswanger (1980) found that R rarely exceeded a value of 2 in the case of Indian small farmers, and that R declined with income. A value of R=2 is assumed to represent the risk attitude of the typical Indian farmer, R=1.5 in the Tunisian case, and R=1 for the typical US farmer. The analysis of seasonal storage price margins and storage costs for the three case studies is presented in table 2. If the economic modelof potato storage described in Figure 1 is correct, then average storage costs should be close to the average storage price margin. In the US and Tunisia, the estimated storage costs, including

10

the risk premium, are almost identical to the average price rise between harvest and the end of storage. In India, the average storage price margin in Meerut district was 105.7 percent after 7 months of storage. Storage costs as a percentage of the harvest price were estimated to be 100.7 percent at the government controlled rate for cold storage rental and 113.2 percent at an estimated market rate (the market rate assumes a rental rate 25 percent higher than the government regulated rate). If actual costs borne by farmers for cold storage lies between these estimates, then the average storage price margin is again consistent with average storage costs. The results presented in table 2 show that high seasonal price markups in potato markets can be fully explained by an accounting of storage costs, including the cost of price risk, and are therefore consistent with competitive market behavior. We may attribute the high level of seasonal price variability in the Indian potato market to a lack of effective market mechanisms to guide the allocation of supplies throughout the year, such as accurate and timely production estimates, stock reports, price forecasts, and forward pricing mechanisms. This does not rule out the possibility that non-competitive forces may occasionally manipulate supply in order to achieve some monopolistic gains. But the dispersed nature of potato production and storage in India would seem to rule out the possibility of wide-scale collusion among suppliers. We think it is more likely that inadequate information lies behind the high and variable season price trends observed between potato harvests. The risk premium as a percent of the harvest price of potatoes was more than nine times higher in India compared with the US (28 percent versus 3 percent). The risk premium for Indian farmers amounted to 190 Rupees per metric ton (Rp/MT) compared with $2.80/MT in the US. These estimates are based on seven months of

11

storage following harvest. Price risk tended to increase with the length of storage, particularly in India. In Tunisia, the risk premium was relatively small due to a much shorter storage season of only four months. Quantity losses in Tunisia were higher, however, since potatoes are stored under ambient conditions in rustic farm stores rather than under refrigeration. The largest component of storage costs in India and the US was the direct cost of labor, materials, and cold storage facilities. These costs were somewhat higher in India compared with the US when evaluated at exchange rates that prevailed in the 1980s (around 10 Rupees per dollar), despite substantially lower labor costs in India and government subsidies on the interest charged on loans for cold storage construction. Higher electricity usage during the warm sub-tropical summers partly explains higher costs in India. But it is also likely that out-dated cold storage technology and sub-optimal temperature management contribute to these differences. Many cold stores in India, for example, store both table potatoes and seed potatoes in the same chambers even though table potatoes can be stored at higher temperatures than seed potatoes (Fuglie et al., 1997). The results in table 2 suggest that if seasonal price uncertainty in India could be reduced, then a significant reduction in storage costs could be achieved since the premium necessary to compensate storers for bearing risk would be lower. For example, if the coefficient of variation of the seasonal price could be reduced to that of the US, then the risk premium would fall from 190 Rp/MT to 47 Rp/MT. At the market rental rate for cold storage, total storage costs would be reduced from 113 percent of the harvest price to 92 percent. More timely market information on quantities harvested, stocks remaining in stores, and price forecasts, and alternative

12

pricing and marketing mechanisms such as forward and futures contracting, could help to better coordinate the distribution of the annual harvest throughout the year and improve price stability and efficiency in the Indian potato market. Improvements to small-scale rustic farm storage Small-scale rustic farm storage plays an important role in meeting potato storage needs in many developing countries, as we have seen in the case of Tunisia. Even where cold storage facilities are available, many developing countries also rely on rustic, on-farm storage of potatoes to meet short-term storage needs of up to four months following harvest. These rustic farm stores provide a low cost means of meeting storage needs and also enable small farmers to benefit more directly from storage. But a significant constraint facing rustic farm stores is the high rate of losses from transpiration, pests and diseases that can occur when potatoes are stored under ambient conditions. Storage specialists at the International Potato Center and national agricultural research institutes have developed several new storage designs and management methods to reduce losses and maintain quality in farm stores. If such improvements can be successfully introduced to farmers on a wide scale, then more stable supply allocation and prices can be achieved. Below I discuss the results of economic evaluations of new on-farm methods for storing table potatoes in northern India and Tunisia. In the Indian example, new methods were found to substantially reduce losses compared with farmers existing methods, but construction costs may be too high for many farmers to afford. In Tunisia, the adoption and diffusion of improved pest control in on-farm stores significantly reduced storage costs, encouraged more potato storage, and led to lower seasonal price variability.

13

Evaluation of on-farm evaporative cool stores in India Beginning in the mid-1980s, scientists from the Central Potato Research Institute and the International Potato Center began working on ways to improve onfarm potato storage methods. Since weight and moisture losses in farm stores are due mostly to high ambient temperatures, the scientists investigated using evaporatively cooled structures to lower temperatures inside a store and thus reduce losses from transpiration. In evaporative cool storage (ECS) a pan of water is maintained beneath the store and potato tubers are cooled as evaporating water is drawn into the storage structure. During 1993 to 1996, ECS was tested in 40 on-farm trials in Uttar Pradesh under farmer-managed conditions and compared with farmers traditional, clamp methods of storage. The results of the trials verified that with good management, ECS performed significantly better than farmers rustic storage methods. Average losses after three months of storage were reduced from around 24 percent of initial weight in farmers clamps to only 10 percent in ECS. For a typical 10-ton store, this implies that an additional 1.4 tons of potatoes could be marketed each year. Another advantage of ECS is that they can extend the duration that a farmer can maintain on-farm storage from three months to four months, enabling him or her to receive a higher price for the potato crop. However, ECS involves higher construction and maintenance costs compared with farmers methods. Capital construction costs of ECS for a 10-ton store amounted to 2,100 Rp/MT of potatoes stored compared with only 100 Rp/MT using farmers traditional methods. Acceptance of the technology by farmers depends on whether the benefits from lower losses and higher prices are sufficient to offset the additional storage construction costs.

14

Benefit-cost analysis of storing potatoes in northern Indian using farmers traditional methods and ECS is shown in table 3. The figures indicate the net present value of storing 10 tons of potatoes for a given number of months each year for 10 years, under various assumptions about the cost of capital. For example, the net present valued at a 12 percent annual discount rate of storing potatoes for 3 months each year for 10 years using farmers methods is Rp. 46,800 and using ECS is Rp. 41,500. If a farmer can extend storage to 4 months each year by using ECS, NPV would increase to Rp 44,600. But at 12 percent and higher interest rates, ECS is less profitable than farmers traditional methods even taking into account the possibility of extending the duration of storage. At a 6 percent interest rate, ECS does slightly better than farmers methods when the storage period is extended to four months each year. But few farmers have access to capital at this interest rate. Thus, ECS is unlikely to be profitable under the conditions described in the table. The current cost of new ECS stores appears to be too high to be an attractive option for most farmers. However, further refinements to ECS to reduce construction costs or extend their use to store other crops would improve their profitability relative to farmers rustic storage methods. Construction costs of ECS would have to be reduced by at least 30 percent per ton of potatoes stored before many farmers would likely find them a profitable alternative to their traditional methods (Fuglie et al., 1997). Market-level effects of storage improvement in Tunisia The potato tuber moth is a major insect pest of potatoes in North Africa, especially potatoes stored under ambient conditions during hot summer months. In

15

the late 1970s scientists from the International Potato Center and the Tunisian national agricultural research program began research and extension activities to improve pest control practices in rustic, on-farm stores (Fuglie et al., 1996). Farmers rapidly adopted these techniques in the late 1980s and farm surveys verified that storage losses from insect pests were substantially reduced. Improved practices reduced average losses after three months of storage from around 22 percent to 11 percent of initial storage weight. Farmers were also able to store their crop for a longer period to take advantage of higher seasonal prices. Improved storage allowed the aggregate supply of the crop to be more evenly distributed between harvest and storage seasons Analysis of seasonal price data showed that the storage price margin between harvest period and the end of the storage period fell steadily during the time in which farm adoption of new storage technology took place (Fuglie, 1995). Between 1980 and 1990, the average storage margin was estimated to have been reduced by about 40 percent. Gross benefits to producers and consumers were estimate to be 2.3 million Tunisian Dinars per year, or about 9 percent of the market value of the Saison potato crop. Summary and implications The case studies illustrate the fundamental relationship between storage costs and seasonal supply and price variability. When storage costs are high, price variability between production and non-production seasons is also high. If average storage costs can be reduced, it becomes economical to more evenly distribute supply across seasons. Using the United States as a be nchmark, the case studies indicate that there may be considerable scope for improving seasonal supply and price stability in many developing countries.

16

Reducing storage costs and providing a more orderly allocation of market supplies among seasons requires not only good storage technology and management but also marketing services and institutions to provide accurate and timely market information and mechanisms for managing price risk. A comparison of monthly farm-level potato prices in India and the US showed that Indian farmers face considerably more price risk during the potato storage season than US farmers. The additional price uncertainty adds to the cost of storage in the form of a risk premium to compensate storers for undertaking the risky business of potato storage. There are appears to be potential for improving the efficiency of cold stores in India with improved technology and management. There are also opportunities for improving the design and management of small-scale, rustic farm stores. Potatoes stored under ambient conditions in simple farm structures make an important contribution to potato storage systems in many developing countries, though losses from transpiration, pests and diseases are often high. Experiments with evaporative cool storage in India and improved storage pest management in Tunisia showed that storage losses could be significantly reduced compared with farmers methods. But in order for these methods to be profitable for small farmers, any additional costs of the new technology must be kept low. In Tunisia, new, low-cost technology to control insect pests in potato stores were rapidly adopted by farmers and had a significant, stabilizing effect on the seasonal potato supply and price. In India, the additional construction and maintenance costs of evaporative cool stores proved to be too expensive for many small farmers.

17

End notes

US potato price data are prices received by farmers in Minnesota, reported by the

National Agricultural Statistics Service. Indian potato prices are wholesale prices in Meerut, Uttar Pradesh, and are from the National Horticultural Board. Meerut is a major center of potato production in Indias largest potato growing state. Tunisian prices are from the Tunis wholesale market from the National Statistics Institute. Tunis lies within one or two hours by road from the major potato growing areas. Thus, prices in the Meerut and Tunis wholesale markets are likely to be closely correlated with farm-level prices.
2

The coefficient of variation of the seasonal price index is equal to 0.00 at harvest

(since these prices are all normalized to 1.00) and then tends to increase with the duration of storage. By calculating the coefficient of variation from the seasonal price index rather than from the prices themselves, annual price shocks are removed from the data. Thus, the coefficient of variation of the seasonal price index measures the degree of deviation from the seasonal price trend once the price at harvest is known (Fuglie and Ramaswami, 1999).
3

Another potential source of risk not considered in their model is uncertainty about

the rate of quantity or quality losses in storage. The rates of quantity losses and quality deterioration are assumed to be fixed parameters and the same for all farmers. If all potatoes available on the market at a given point in time are of the same quality, then quality deterioration is already reflected in market prices. References Binswanger, Hans P. Attitudes Toward Risk: Experimental Measurement Evidence in Rural India, American Journal of Agricultural Economics 62,3 (August 1980): 395-407. Dahiya P.M. and H.C. Sharma. Potato Marketing in India: Status, Issues, and Outlook. Social Science Department Working Paper No. 1994-2. Lima, Peru: International Potato Center, 1994. 18

Fuglie, K. How to Get Higher Prices for Your Potatoes, Training and Extension Bulletin. Lima, Peru: International Potato Center (CIP), 1993. Fuglie, K. O. Measuring Welfare Benefits from Improved Storage Technology with an Application to Potatoes in Tunisia, American Journal of Agricultural Economics 77,1 (February 1995): 162-173. Fuglie, K., H. Ben Salah, M. Essamet, A. Ben Temime, and A. Rahmouni. Economic Impact of IPM Practices on the Potato Tuber Moth in Tunisia, in Case Studies of the Economic Impact of CIP-Related Technologies (T.S. Walker and C.C. Crissman, eds.) Lima, Peru: International Potato Center, pp. 157-172, 1996. Fuglie, K. O., V. Khatana, S. Ilangantileke, J.P. Singh, D. Kumar, and G. Scott. Economics of Potato Storage in Northern India. Social Science Working Paper No. 1997-5. Lima, Peru: International Potato Center, 1997. Fuglie, K. O., and B. Ramaswami. Seasonal Price Risk and the Cost of Storage in the Indian Potato Market, unpublished mimeo, International Potato Center, Bogor, Indonesia, July 1999. Gray, R.W. The Futures Market for Maine Potatoes: An Appraisal, in Selected Writings on Futures Markets: Basic Research in Commodity Markets (Anne E. Peck, ed.). Chicago, Illinois: Board of Trade of the City of Chicago, 1977. Lucier, G., A. Budge, C. Plummer, and C. Spurgeon. U.S. Potato Statistics, 1949-89. Statistical Bulletin No. 829. Washington, DC: Economic Research Service, U.S. Department of Agriculture, August 1991. National Agricultural Statistics Service. Agricultural Prices. Washington, DC: U.S. Department of Agriculture (various issues). National Horticulture Board. Horticulture Statistics. New Delhi, India: Ministry of Agriculture (various annual and monthly issues). National Statistics Institute. Bulletin Mensuel de Statistique (Monthly Statistics Bulletin). Tunis, Tunisia: Ministry of Planning (various issues). Working, Holbrook. The Theory of the Price of Storage, American Economic Review 39 (December 1949): 1249-1262.

19

Table 1. Potato production and storage systems in the case s tudies

US India Tunisia

Location

Red River Valley, Minnesota-North Dakota 1981-1990 September-October

Meerut District, Uttar Pradesh

Potato growing areas near Tunis

Period of study Main harvest period

1981-1990 January-February

1981-1990 1) May -June 2) November-December

Main storage season Storage system(s)

November-May On-farm cold stores

March-October 1) On-farm rustic stores 2) Farmers rent cold storage

July -October On-farm rustic stores

Potato utilization

Table potatoes Processing (chipping)

Table potatoes Seed potatoes No

Table potatoes Seed potatoes No

Availability of forward and futures contracting

Yes

Further information on potato market prices and storage costs are given in table 2.

20

Table 2. Storage price margins and components of storage costs in three case studies
Storage price margin (Prices are 1981-1990 averages) Price at harvest (Ph) Price at end of storage period (Ps) Storage price margin (Ps-Ph) Storage cost components Interest on stock Storage losses Direct costs Risk Premium Total Costs Storage cost assumptions India Meerut, Uttar Pradesh, wholesale price Rupee/MT % of Ph 688 100.0 1415 205.7 727 105.7 Controlled storage costs Market storage costs Rupee/MT % of Ph Rupee/MT % of Ph 96 14.0 96 14.0 64 9.3 64 9.3 343 49.9 423 61.5 190 27.6 190 27.6 693 100.7 779 113.2 Minnesota Price received by growers $/MT % of Ph 89 100.0 127 143.0 38 43.0 $/MT 5 4 27 3 38 % of Ph 5.3 4.0 30.8 3.2 43.2 Tunisia Tunis wholesale price Dinar/MT % of Ph 156 100.0 240 153.3 83 53.3 Dinar/MT 6 41 27 8 81 % of Ph 4.0 26.1 17.3 5.0 52.4

Storage period (months) Annual interest rate Storage losses Direct costs (local currency/MT) Coefficient of Variation of Ps Relative risk aversion coefficient

7 24.0% 4.5% 301 34.8% 2.0

7 24.0% 4.5% 371 34.8% 2.0

7 9.0% 2.8% 26 17.3% 1.0

4 12.0% 17.0% 26 17.9% 1.5

21

Table 3. Net present value of potato storage using traditional methods and evaporative cool stores
NPV (Rupees) at 6% discount rate Storage period 1 month 2 months 3 months 4 months Farmers methods 12,000 38,600 60,400 n.a. Evaporative cool store -9,200 25,600 58,300 63,000 NPV (Rupees) at 12% discount rate Farmers methods 8,900 29,800 46,800 n.a. Evaporative cool store -11,800 15,700 41,500 44,600 NPV (Rupees) at 18% discount rate Farmers methods 6,800 23,700 37,300 n.a. Evaporative cool store -13,600 8,800 29,900 31,900

NPV = net present value of storing 10 tons for indicated storage period each year for 10 years. For example, the net present valued (at a 6% annual discount rate) of storing 10 tons of potatoes for 3 months each year for 10 years using farmers methods is Rp. 60,400 and using ECS is Rp. 58,300. Source: Fuglie et al. (1996)

22

Figure 1. Economic model of potato storage Price

SS

SH PS Storage margin PH D Cost of storage

QS

QH

Quantity

Price
P S1 P H1

H1

H2

H3

Time

23

Figure 2. Main potato harvesting and storage seasons

US

storage

Fall harvest

Tunisia

Primeur harvest

Saison harvest

storage

Arriere Saison

India

main Rabi harvest

storage

early Rabi harvest

Jan

Feb

Mar

Apr

May

June
24

July

Aug

Sep

Oct

Nov

Dec

Figure 3: Seasonal Potato Prices

2.5 Index (price at harvest = 1.0) 2.0 1.5 1.0 0.5 0.0 1 2 3 4 5 6 7 8 9 Months from harvest

India US Tunisia

25