'Without a potato futures market, volatility increases'

The potato futures market is an essential market institution for all market participants in the potato market, from farmers to the processing industry. This is stated by Joost Pennings, who has done a lot of research into the potato futures market and risk management in the past. Pennings is the director of the Marketing-Finance Research Lab (MFRL) at the university in Maastricht and a professor of Marketing and Consumer Behaviour at Wageningen University & Research. His research is now more focused on fraud detection in futures and options markets. However, for several questions about the importance and functioning of the potato futures market, he is happy to make some time. Even though he is traveling. He promises to respond next week when he is home again, but answers come in via email within two days. Pennings calls it very unfortunate for the potato sector that no trading has yet taken place in the futures market for the 2026 harvest. The prices formed by bid and ask rates contain valuable high-quality information. “As a farmer and also as a potato industry, you would like to have this information. Think of it as a light that may not illuminate the entire room, but makes the contours visible.” Making harder decisions Without those price signals, it becomes more difficult, according to him, to make strategic decisions. For farmers, this involves choices in crop rotation, investments in machinery, and storage capacity. The same applies to industry regarding investment decisions and planning the sales of potato products. According to Pennings, quite a bit of research has been conducted in the past on the consequences for the physical market when no trading takes place in the futures market. “The studies show that if there is no futures market for a commodity, the physical market becomes more volatile,” he states. For a farmer, the disappearance of the futures market would be very detrimental, according to him. “Uncertainty causes capital costs to increase and reduces your agility and ability to innovate. Furthermore, if there are no futures market prices, it becomes even more difficult for the farmer to assess whether a fixed contract price is a good reflection of the market. This applies of course also to processors and other market participants in the marketing channel of potatoes and potato products.” Consequences for risk management When there is no trading in the futures market, this, according to Pennings, limits the possibilities for effective risk management. Commodity futures markets are, according to him, important and efficient risk management instruments. Specific advantages he mentions are flexibility and the absence of default risk. These characteristics distinguish futures markets from other risk management instruments. Moreover, research shows that farmers appreciate that they can decide when to set prices in a transparent market. Pennings: “The use of futures markets not only reduces the volatility of cash flows and thus the capital costs of the farmer, but it often leads to an improvement in financial results (net cash flow). That latter effect occurs because the farmer becomes a better marketer if he has the knowledge and skills of futures markets.” Effect on contracts and free market For both contract farming and the free market, essentially the same applies: without a futures market, an important reference point for price formation and risk management is missing, which can lead to greater uncertainty and fluctuations. Although there is currently no trading in the potato futures market, according to Pennings, there are still opportunities for this market. “It’s important that the futures market structure – that is, the way the futures market is organized and the associated rules – continues to align well with all market players. A lot of research has been done on this.” Dynamic market requires adaptation The physical potato market is constantly in motion. Not only do production, demand, and international trade flows change, but the players in the market are also developing. The futures market will need to anticipate this. “The futures contract must reflect the physical market,” he emphasizes. This means that contract terms, specifications, and delivery conditions must align with the reality in the field. Additionally, it is crucial that access to the futures market is optimal and that the setup of margin requirements and clearing functions well. Only then can the futures market continue to fulfill its role as a reliable market instrument. Now that the market still lacks a futures market quotation for April 2027, it is, according to Pennings, up to the various interest representatives and involved parties to stimulate the futures market again. He points to LTO Netherlands, Rabobank, ABN Amro, and potato organization NAO, but also to brokers such as Marex and StoneX. He also mentions European organizations like EUPPA and Europatat and the futures market EEX. “The question is who will coordinate such an initiative to revitalize the potato futures market.”