Insights Industry Insights Losing Flavor with the Public

       

French Fries: Losing Flavor with the Public

An American food, French fries are big business. The popularity of the tasty side grew during the late 1940’s and 1950’s with the advent of fast food restaurants such as McDonalds, Wendy’s and Burger King. Usually frozen and ready to fry, there are literally hundreds of variations, styles and flavors to choose from. Each year, more than 3.5 million tons of French fries are consumed in the U.S., but that number is expected to decline with decreased potato plantings, processing and demand, influenced by government mandates.

SUPPLY

Potato production increased from prior year

Potato production increased overall by approximately 4% for the 2008/2009 crop year. The boost in spring production of potatoes was driven by more harvested acreage, and the summer production was driven by higher yields. On a state-by-state level, some states saw an increase in production this past year which helped to offset the decreases seen by other states. The U.S. now has 11% more potatoes stocked and available as of February 2010 than compared to 2009 stocks.

Closing facilities and cuts in potato sourcing decreasing supply

The amount of French fries available varies depending on the success of the crop in each state and the production capabilities of food processing facilities. The softer economy has impacted potato processing firms and the potato industry overall. In March 2010, ConAgra announced the closing of one if its facilities responsible for the preparation of French fries and other potato products. McCain Foods, Ltd., one of the largest suppliers of ready to fry frozen French fries, announced that it was cutting potato sourcing by 20% to 30%. Potato farmers are reporting decreases in processed acreage, in some cases by as much as 20%. It is anticipated that other companies may close plants in the industry if they continue to operate below capacity. The U.S. Department of Agriculture estimates the amount of French fries “stocked” nationally on a monthly basis, as indicated in the chart below. It is expected that cold storage stocks will begin to decrease to lower levels in 2010.

Use of potatoes in processed foods has increased

The U.S. leads the world in the production and export of French fries, which is highly dependent on the availability of potatoes to be processed. The bulk of potatoes grown in the U.S. are cultivated in nine states: Idaho, Washington, North Dakota, Maine, Wisconsin, Colorado, Minnesota, California and Michigan. The majority of potatoes are converted into “processed” foods, which include French fries. Of the 61% of potato crops processed, 53% end up as frozen French fries. The percentage of potatoes processed has more than tripled since 1960, at which time only 19% were processed and the bulk of potatoes used were fresh.

DEMAND

Healthy, Hunger-Free Kids Act of 2010 legislation may decrease demand

In February 2010, new legislation was introduced to ban certain foods, including French fries, from schools in the U.S. This legislation would modify school breakfast and lunch programs in an effort to reinforce better eating habits of those attending. The Healthy, Hunger-Free Kids Act of 2010 directs the U.S. Department of Agriculture to set new nutrition guidelines and standards for all food serviced in schools, guidelines which have not been updated on a federal level since the 1970’s.

Export of French fries affected by 20% tariff

Exports have been driving most of the growth in demand for French fries, in part due to expansion of American style fast food restaurants in other countries such as Brazil, China, Japan and India. In the past eight years, export demand has grown from 2,145 million pounds of French fries per year to more than 3,271 million pounds, an increase of more than 60%. However, the dynamics of these exports have shifted. Japan’s demand seems to have leveled out while China and India are continuing to grow. Additionally, some international trade disagreements, while not a potato issue directly, are impacting the industry. In April 2009, the U.S. began to restrict trucks from Mexico from delivering goods within the U.S. Mexican authorities retaliated by imposing tariffs on many U.S. imported goods, including French fries, at a tariff of 20%. From April 2009, when the tariff started, to January 2010, the U.S. is estimated to have lost approximately $30 million in frozen potato exports.

Decreased restaurant demand affecting demand for French fries

The current economic recession has caused increased unemployment and decreased disposable income, meaning families are choosing to eat out in restaurants less frequently. This has resulted in a decrease in demand overall. All segments of the restaurant industry have been affected by the current state of the economy and sales overall have shown a significant decline since January 2009. According to the Nation’s Restaurant News, these declines are expected to continue through 2010.

Healthier side choices demanded

Changes in menu options providing healthier alternatives have influenced demand for French fries, especially in the quick service restaurant arena. In 2008, 75% of meals ordered included French fries, down 5% from one year earlier. The decrease was more significant for kids’ meals, where French fry orders plummeted 13%.

Did you like this article? Click here to sign up for The AccuVal AdVisory™ or send us an e-mail with your comments at inquiry@accuval.net.

---

About AccuVal
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.