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Situation and Outlook for Frozen French Fries
United States
The 1997/98 U.S. potato crop is forecast at 20.8 million tons, 8 percent below the previous season's harvest. In 1997/98, potato farmers have decided to reduce planted area by 7 percent, while yields are expected to decrease 1 percent to 39 tons per acre. Despite the decline, 1997/98 potato output will probably be the third largest on record.
About 29 percent of U.S. production potato is used to produce french fries. With a relatively large U.S. potato crop and a steady domestic demand for french fries, U.S. french fry production in 1997/98 is forecast to rise 1 percent to 3.4 million tons. From 1990 to 1996, U.S. production of french fries increased 4 percent annually. Most of the growth in U.S. french fry consumption comes from sales to the food service sector.
With the expansion of the U.S. french fry industry, exports of french fries, especially to food service markets, have risen significantly. In 1997/98, U.S. exports of french fries are projected to increase 9 percent to a record 420,000 tons (12 percent of domestic production). In 1996/97, exports registered an 11-percent gain over the previous year.
The top 5 U.S. french fry markets accounted for nearly 75 percent of 1996/97 shipments. These countries include Japan; with 50 percent of total exports; South Korea and Hong Kong with 7 percent each; and Taiwan and the Philippines at 5 percent each. Rising incomes in many countries, ongoing Market Promotion Program activities, and the increasing popularity of U.S.-style quick service restaurants, particularly in East Asia and Latin America, should continue to propel demand for U.S. french fries.
A major U.S. food conglomerate sold three large food service companies, and the new corporation plans to continue expansion of quick service restaurants in East Asia. However, economic uncertainties may slow growth in Southeast Asia and reduce the industry's 30,000 tons of sales to Indonesia, Malaysia, and Thailand. Increased competition from Canada and the Netherlands may also trim export growth.
U.S. food service companies have consistently increased their imports of french fries from Canada, the principal supplier to the United States. Favorable exchange rates, good product quality, expanding Canadian manufacturing capacity, aggressive U.S. retail pricing, and competitive transport costs are increasing imports.
Netherlands
In 1997/98, Dutch fresh potato production fell an estimated less than 1 percent from the previous year to 5.4 million tons. Prices of potatoes in the Netherlands dropped considerably in 1996/97 due to a large crop, 12 percent below 1995/96 average prices. For example, prices in July 1997 decreased to 11 Dfl (U.S. $7) per 100 kilograms, while comparable prices a year earlier were 21 Dfl (U.S. $13), down 48 percent.
The Netherlands is the world's largest french fry exporter. Exports in 1997/98 are forecast at 990,000 tons, 2 percent above 1996/97 shipments. About 95 percent of Dutch exports go to other countries in the European Union (EU).
In 1996/97, Dutch exports totaled 970,000 tons, 3 percent above the initial forecast. According to Dutch industry sources, several factors contributed to stronger exports. First, the continued growth of quick service restaurants throughout the EU, particularly in southern Europe, propelled exports, due to the proximity of Dutch plants. Second, Holland's processors of frozen potatoes have expanded sales in non-EU Europe, where exports grew 12 percent to 17,000 tons. Lastly, in 1996/97, customers of Dutch french fries benefited from an average FOB price of 1.22 Dfl ($0.72 U.S) per kilogram, because potato processors had paid less for their raw material.
The Netherlands maintains the largest french fry industry in Europe. Nevertheless, acute competitive pressures, such as rising variable industrial costs, markets far from the Netherlands, increasingly stringent environmental regulations, and more expensive agricultural land influence Dutch companies. Holland's french fry processors have expanded in Belgium and northern France where variable industrial costs of production remain lower than those in the Netherlands. Competitively priced agricultural land for growing potatoes remains available in France and Belgium. With considerable growth in demand for french fries in southern Europe, plants in France and Belgium reduce transportation costs. The Dutch manufacturers are also importing more potatoes from France and Belgium to augment domestic supplies.
In response to the continued U.S. demand for frozen potatoes, a Dutch company has opened a french fry plant in Jamestown, North Dakota. This factory is near a large potato production area and serves markets in the Middle West.
Imports of french fries into the Netherlands have remained small, accounting for about 5 percent of total supply. From a limited base, 1997/98 imports of french fries are forecast to increase 7 percent with an unchanged Dutch potato harvest.
Canada
Reacting to strong domestic and foreign demand for french fries, Canadian potato farmers continue to expand planted area, particularly in the provinces of Alberta, Manitoba, and Saskatchewan. In 1996/97, production in these provinces combined increased 45 percent to 1.7 million tons, accounting for almost 42 percent of Canada's entire potato crop. The total Canadian harvest for 1997/98 is estimated to have increased 3 percent to 4 million tons.
Canada's french fry production rose 19 percent in 1996/97 to 775,000 tons and is forecast to increase by 13 percent in 1997/98. Processors in Canada have continued to enlarge production capacity, which ranges from 850,000 to 900,000 tons, to satisfy robust demand for french fries in both the home and international markets.
In July 1997, the U.S. International Trade Commission (ITC) released a study identifying several policies and economic factors affecting U.S.-Canada potato trade. In response to the U.S. Trade Representative, the ITC conducted a 6-month Section 332 investigation of the structure and performance of the U.S. and Canadian potato industries. The ITC study described the composition of the U.S. and Canadian french fry industries. ITC analysts noted that the number of plants in both countries has declined, but their size has increased steadily. The remaining factories cluster in major potato production regions.
A major U.S. french fry company, which wants to remain fully competitive with its Canadian and U.S. rivals, continues to explore the feasibility of building a factory in Alberta or Saskatchewan. Both provinces have specific business advantages. Whatever the final decision, many industry observers believe that western Canada can produce high quality potatoes. The U.S. manufacturer can then efficiently process this raw material into french fries for shipment to the nearby U.S. market.
Canadian french fry makers increasingly depend on exports for additional sales. Exports in 1996/97 surged 48 percent to a record 344,813 tons, reflecting last year's expansion of french fry capacity in Manitoba and increased production for export at Eastern production points. Approximately 72 percent of these Canadian exports enter the United States. Exports of french fries to the United States increased by 60 percent in 1997/98. A 20 to a 25-percent increase in exports to the United States is expected in 1997/98. Sales by Canadian suppliers are also increasing in Japan, Malaysia, and Guatemala.
By contrast, Canadian imports of french fries have remained small. U.S. exports of french fries grew 5 percent to 12,073 tons in 1996/97. Obstacles facing increased U.S. french fry exports to Canada include a weak Canadian currency, increased Canadian production, and Canada's labeling requirements, which continue to stipulate metric multiple labels on food service-size outer containers.
Japan
Much of Japan's gradually declining domestic potato production enters the more profitable fresh market. In 1996/97, less than 5 percent of Japan's total potato output went to processing. Japan produces 14 percent of total french fries consumed in the country. From 1993/94 to 1995/96, imports took an increasing share of the Japanese market. Imports accounted for almost 88 percent of Japan's total 1996/97 french fry supply.
In 1996/97, Japanese french fry imports increased 9 percent to 234,242 tons. The United States supplied 87 percent of Japan's french fry imports. Canada held a 10-percent market share, while China and Australia accounted for 2 percent and 1 percent, respectively.
Japan's french fry imports are forecast to rise 7 percent to 250,000 tons in 1997/98. Meanwhile, Japan's domestic production is expected to decline 6 percent to 31,000 tons.
As elsewhere in the world, most french fries (nearly 88 percent) in Japan enter the food service market. Japan has more than 5,000 hamburger shops. For example, two U.S. quick service restaurant chains with more than 3,200 outlets together purchase more than 41 percent of Japan's total supply of domestic and imported french fries. Retail outlets, public school lunch programs, and food processors account for the balance of french fries consumed in Japan.
Japan's uncertain economy hit hard the Japanese food service sector, and many restaurant operators have altered their menus to highlight lower-priced items in response to growing consumer demand for value. Despite this situation, industry sources believe that companies will still open quick service restaurants, especially in Japan's regional cities and towns. In coming years, the Japanese fast food sector will continue to expand and require larger quantities of french fries.
For further information on supply, distribution, and
trade, contact William Janis at 202-720-0897. For further
information on U.S. marketing opportunities, contact Teddy
Goldammer at 202-720-8498.)
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