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Economics of Potato Storage PDF
Economics of Potato Storage PDF
Keith O. Fuglie
Agricultural Economist
International Potato Center
Bogor, Indonesia
i
Economics of Potato Storage: Case Studies
Keith O. Fuglie
International Potato Center
Bogor, Indonesia
Abstract
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
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.
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
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
1
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
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
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
2
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.
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
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.
3
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
A reduction in the storage price margin can come about through the wide-scale
design and management may significantly reduce storage losses, for example. Better
marketing services can improve the allocation of seasonal supplies and reduce
production, quantity remaining in stores, current prices and price forecasts, marketing
services enable storers to make better judgments about future market conditions and
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
4
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
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.
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
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.
5
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
potatoes may sell on the spot market or hedge against price risk by participating in the
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
round. 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
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
6
lowland areas is limited because of hot weather during the rest of the year but a
throughout the year. Per capita consumption rose from 4 kg/capita/year in 1960 to 13
At least 40 percent of the Rabi potato crop is placed into storage for sale later
in the season and as seed for next year’s crop. Two different systems provide potato
storage for table potatoes between April and October. The first system is small, on-
farm 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 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
7
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
Farmers in each of these markets face risks, especially from unforeseen price
movements during the storage season. While experienced farmers may anticipate the
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
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
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
8
established price. The holder of the options contract will only exercise the option if
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
movements with storage costs in the three case studies. In their model, they identified
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
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
9
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
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
in which farmers are assumed to be risk averse. In this model the risk premium is a
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
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
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
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
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
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
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
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
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
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
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
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
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
encouraged more potato storage, and led to lower seasonal price variability.
13
Evaluation of on-farm evaporative cool stores in India
Institute and the International Potato Center began working on ways to improve on-
farm potato storage methods. Since weight and moisture losses in farm stores are due
cooled structures to lower temperatures inside a store and thus reduce losses from
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
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
whether the benefits from lower losses and higher prices are sufficient to offset the
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
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
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).
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.
The case studies illustrate the fundamental relationship between storage costs
and seasonal supply and price variability. When storage costs are high, price
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
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
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
There are also opportunities for improving the design and management of
small-scale, rustic farm stores. Potatoes stored under ambient conditions in simple
developing countries, though losses from transpiration, pests and diseases are often
high. Experiments with evaporative cool storage in India and improved storage pest
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
1
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 India’s 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
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., 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., 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.
19
Table 1. Potato production and storage systems in the case s tudies
US India Tunisia
2) November-December
Storage system(s) On-farm cold stores 1) On-farm rustic stores On-farm rustic stores
Availability of Yes No No
forward and futures
contracting
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
21
Table 3. Net present value of potato storage using traditional methods and evaporative cool stores
NPV (Rupees) at 6% discount rate NPV (Rupees) at 12% discount rate NPV (Rupees) at 18% discount rate
Storage Farmers’ methods Evaporative Farmers’ methods Evaporative Farmers’ methods Evaporative
period cool store cool store cool store
1 month 12,000 -9,200 8,900 -11,800 6,800 -13,600
2 months 38,600 25,600 29,800 15,700 23,700 8,800
3 months 60,400 58,300 46,800 41,500 37,300 29,900
4 months n.a. 63,000 n.a. 44,600 n.a. 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 Cost of
margin storage
PH
QS QH Quantity
Price
P S1
P H1
H1 H2 H3 Time
23
Figure 2. Main potato harvesting and storage seasons
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
24
Figure 3: Seasonal Potato Prices
2.5
Index (price at harvest = 1.0)
2.0
1.5 India
US
1.0 Tunisia
0.5
0.0
1 2 3 4 5 6 7 8 9
Months from harvest
25