Buyers’ Market for Vegetables and Spuds
Cuts into Profit Margins for Processors
A From-the-Field Report By JOHN M. SAULNIER,
QFFI Chief Editor & Publisher

The good news in 2009 was that retail sales increased, says Pieter Kruithof, managing director of Venlo, Holland-headquartered Oerlemans Foods. The bad news is that foodservice volumes slipped as recession-weary consumers reduced dining out occasions and some company canteens cut back operations or even shut down temporarily.

So what’s in store for 2010? Leading producers and marketers from Belgium and the Netherlands provide their assessment of market conditions and future prospects.

Volume is up, prices are down. Falling margins bring a frown as pressure mounts to sell, and all is not well with the farmers in the dell.

That, in essence, describes the economic conditions under which frozen vegetable processors and their raw material suppliers in the Benelux and other European countries were faced with during most of the second half of 2009.

For their brethren toiling in the potato field, the landscape was even more challenging as rising capacity has continued to feed a relatively flat EU market.
As this story was being written in mid-December, it was reported that overall planting of ware potatoes in northern Europe’s five main producing countries (Holland, Belgium, the UK, France and Germany) was up by 2.3% over 2008, yielding 23.85 million tons of tubers compared to 23.20 million pulled the year before. The biggest increase was in Belgium at 11.4%.

Not known was the amount of spuds in storage, though falling prices into the end of the year indicated that farmers were getting rid of potentially deteriorating inventory at a time when market demand was soft.

“This is a year most industrial processors would like to put behind us and then move on as quickly as possible, even though one positive result of the financial crisis is that overall consumption of frozen vegetables has been good – so we should not complain too much. Retail sales have picked up, while the foodservice sector in general has gone the other way,” Pieter Kruithof, managing director of Oerlemans Foods BV, told Quick Frozen Foods International on Nov. 19.

Oerlemans Top Gastronomy range Carinthia-mix features an Austrian-style blend of whole green beans, sliced yellow carrots and salsify.

The VION Food Group unit that he heads ranks as the leading producer of frozen vegetables in the Netherlands. And its mother company continues to invest with long term growth in mind.

Pressure on vegetable pack prices started at the beginning of the contract season in June and July, when abundant sunshine interspersed with gentle rainfall made for ideal growing conditions that yielded more supply than demand. Buyers were reluctant to take positions too early in the growing cycle, betting that prices would fall further if bumper crops were harvested as expected in the late summer and autumn.

What Mother Nature brought, however, was an unwelcome two-and-a-half-month-long drought, with rains not resuming until early October in the prime agriculture regions of Holland and Belgium.

“As a result harvesting here in Western Flanders started three weeks later than usual, said Herwig Dejonghe, managing director and chief executive officer of PinguinLutosa. “The dry weather reduced yields considerably. Beans especially have been disappointing, and cauliflower has also been below expectation. Sizes of root crops are smaller than normal.”

While describing the bean crop in Poland as “lousy,” Oerlemans’ Kruithof added that yields of most vegetable varieties in Holland were equal to last year’s crops.

“I am just happy that we have two factories in Poland that produce frozen vegetables and fruits,” he commented. “The euro-zloty currency exchange rate has helped our bottom line. We are still very competitive compared to a year ago, when the exchange rate was at 3.25!”

Michel Delbaere, managing director of Ooigem, Belgium-based Crop’s NV, was quite content with results achieved in 2009, as the company rang up record sales of EUR 190 million during a recessionary period of challenging economic conditions in Europe and much of the developed world. Frozen vegetable sales hit 115,000 tons.

“We keep concentrating on what we do best, which is adding value,” he told Quick Frozen Foods International. “Our focus remains on sustainably providing customers high quality and tasty products, along with reliable service and promotion.”

Crop’s is structured to perform as three operating units: Fruit, Vegetables and Ready Meals. The family-owned company’s Fruit department has a fourth-generation member on the scene, as Michel’s son Pieter is in charge of its business development.

On the Ready Meals front, an ex-Unilever professional was recently hired to find new opportunities near and far.

“We are investing in each area to increase our success rate in the marketplace,” said the managing director, who aims to further enhance winning concepts that include microwaveable steamed vegetable products and colorful, multi-ingredient mixes.

“Grilled vegetable sales continue to grow, and we are cooperating with an Italian specialist company in this area,” he added.

Delbaere was particularly upbeat about ongoing prospects for increased sales of frozen fruit. “This unit had a good year,” he was pleased to report, noting that Crop’s offers a complete line of items ranging from 300-gram retail bags to one- and two-kilo packs for foodservice applications, as well as bulk packages for industrial use. Available year-round, the comprehensive assortment runs the gamut from tropical fruit and berry-based drinks and smoothies to bakery components.

“From Serbia to Costa Rica, and soon Chile, we are directly involved in growing, freezing, packing and supplying our fruit products to clients worldwide,” pointed out Delbaere.

Buyers’ Market, With No Real Shortages

Overall, there is no real shortage of vegetable raw materials to speak of, though some yields were down, concurred brothers Dries and Karel Talpe of Ardooie, Belgium-based d’Arta, both of whom are active in the company’s sales efforts on a daily basis.

“The pea crop was particularly good, which may have created panic and overaction in the market,” said Dries. “Some companies had a lot of stock on hand, so they needed to sell. Not surprisingly, it soon became a buyers’ market.”

Observing that today’s prices are not realistic in terms of the cost of production inputs, Karel commented: “Common sense needs to return to the industry.

Maybe it will take a reduction in land that farmers dedicate to growing vegetables bound for processing for this to come about.”

Dries was pleased to report, however, that the economic crisis mentality of consumers has not hurt the frozen vegetable business as it has those selling automobiles, furniture and other high-ticket goods.

Eye appeal is buy appeal, and Crop’s Orchard’s Delight Red Fruit Mix packaging has plenty of visual impact.

With Guy Van den Broeke (left) stepping down as head of Lutosa operations upon retirement in January, stepping up as general manager of the PinguinLutosa Food Group is Erwin Wuyts (center). He will report to CEO Herwig Dejonghe (right), who heads the integrated frozen potato and vegetable products company headquartered in Langemark, Belgium.

“Overall volume sales are being maintained,” he stated. “The day that people stop buying cut green beans because they can’t afford them is probably the day that we will all have to move into the YMCA.

Karel pointed out that renewed elevision advertising campaigns now being aired by major frozen vegetable brand name distributors, such as Bonduelle and Iglo, should have a positive effect on further stimulating retail sales and at-home consumption of value added vegetable products.

Potato Processing Capacity Still Rising

On the frozen potato front, inguinLutosa’s Guy van den Broeke [who will have officially retired from the firm by the time this story is read] said that Belgian and Dutch french fry producers continue to ship large volumes of product to the United Kingdom despite the fall of sterling’s value vis-a-vis the euro. “It has gone from .86 to .92 during the past four for five weeks,” he told QFFI on Nov. 12. “Nonetheless, at a level of .90 it is still possible to export to Britain because domestic processors there are not producing enough to fill demand in the home market.”

Meanwhile, the diving US dollar has further eroded the competitiveness of European producers against North American suppliers in Asian, Middle-Eastern and South American markets – which is why PinguinLutosa is focusing sharply on value-added products rather than on commodity items in those parts of the world.

The strategy for growth at PinguinLutosa – which exported to 94 countries and generated over EUR 446 million in sales on volume of nearly 597,000 tons in 2008 – is to provide more tailor-made products and address niche markets with even greater vigor.

Agristo’s highly efficient operation in Holland features six lines outfitted with case packers supplied by BluePrint Automation that rapidly insert bags of french fried potatoes containing from 400 grams to 2.5 kg into cartons. Thereafter, a CSI palletizer makes the cartons ready to transport into on-site cold storage facilities.

Agristo’s new factory in Tilburg can produce 120,000 tons of french fries per year.

“We have a big sales team to do the job, and the logistics synergy among our product offerings means that we can fill half of a container with potatoes and the other half with vegetables, if that is what clients want,” said Van den Broeke.

As retirement was looming just around the corner, the Lutosa co-founder was naturally looking back on a long and fruitful career as he met with QFFI editors. With Lutosa’s merger with Pinguin several years ago, the combined organization today employs over 1,700 people at eight production sites in Europe and 13 subsidiaries and sales offices on four continents.

The veteran frozen food company executive’s main concern about the future was not necessarily the euro’s strength relative to the greenback, nor the fact that relatively high dry matter content in spuds harvested across the European potato belt in the autumn and winter posed quality issues. Instead, it was the stark reality of production overcapacity and downward pressure on producer prices that was most worrisome.

“Production increases and higher capacities are not corresponding with increased demand in the market. In Germany and France there has been no real increase in the consumption of frozen potato products,” he told QFFI.

It has been estimated that at least 30% of the global supply of frozen potato products is in the hands of entrepreneurial private label-oriented packers who are not members of the “Big Six” retail brand-name and/or long-established suppliers to quick service restaurant chains that include McCain, Lamb Weston, Simplot, Aviko, Farm Frites and Lutosa. Among players in the fiercely competitive “others” grouping from Belgium alone are Peruwelz-based Ecofrost [founded in 2003 by the Pol and Dries Vervaeke and Luc and Mark Hoflack families], Clarebout Potatoes of Nieuwkerke, and Harelbeke-headquartered Agristo.

Clarebout recently invested in a major expansion by building a factory near the French border, while Agristo has boosted production in Tilburg, Holland. Agristo’s combined Netherlands operation is now able to turn out upwards of 35 tons of finished product per hour, while its Flagship factory in Harelbeke is capable of adding another 15 tons an hour to the pipeline. Its goal of reaching 350,000 tons of annual sales by 2012 is now clearly within reach.

Agristo has been producing in Tilburg since 2001, when it took over a french fry factory which had passed hands several times among various owners in previous years.

“In 2002 we automated the packaging department for the first time, followed by an upgrade of the production process and the addition of a new french line,” said Antoon Wallays, managing director and co-owner of the company. “Last year we began construction of a brand new factory at the site, which has a highly automated, six-line packaging department. It is now operational.”

All Eyes on Farmers

Adding production capacity is one thing. Having enough raw material available to process is another matter altogether.

“What will farmers do in 2010, grow less or more? That is the question,” posed PinguinLutosa CEO Dejonghe. “We think they will plant approximately the same number of hectares. But will the yields be good or bad? Nobody knows.”

Oerlemans Managing Director Kruithof offered this take on the situation: “Will farmers choose to cultivate fewer consumption vegetables and instead grow more alternative crops such as wheat, which carry less risk? Or will they plant energy crops? This will depend largely on the market price of oil and the state of alternative energy supply resources.”

In a paper published recently by the Interactive European Network for Industrial Crops and their Applications (IENICA), it was noted that current development of oil crops in Belgium is limited to the relatively small production of oilseed rape (5,000 to 10,000 hectares producing 7,000 to 15,000 tons of oil). Less than 200 hectares are dedicated to linseed cultivation.

“Surfaces devoted to non-food oil crops broadly reflect the set aside rates in the Common Agriculture Policy (CAP) frame,” stated the report. “There is no direct link between agricultural production and the real industrial needs.”

The paper continued: “Future development of non-food vegetable oils is largely linked to environmental awareness and incitements to replace mineral oils...In an open market, European vegetable oils are in competition with foreign oils. The ability of facing that competition depends on agricultural capability to produce suitable oils at a low price (i.e. high yields), precise and optimal input use, on-farm and post-harvest effectiveness. European agriculture has the right to take part in, and profit from, quantitative and qualitative advances in plant breeding, including those linked to GMO.”

Good Herb Supply, Except Garlic

Parsley is the top-selling herb supplied by Herbafrost to customers in Europe and beyond. From soups and sandwiches to pizza and pasta, it livens up flavor to savor.

When it comes to availability of frozen herbs, the supply is generally “quite steady,” Peter van Asten, managing director of Hulshout, Belgium-headquartered Herbafrost told QFFI. “Unfortunately,” he added, “there is a lot of price pressure coming from buyers, which is perhaps being influenced by what is going on in the vegetable market.”

One item that is not in abundance, however, is garlic.

“Prices have quadrupled since last March, and quotes from those who still have stocks are going up daily. I don’t know when it will stop,” said Van Asten. “Anything that is available is being sold to the fresh market.”

What is the reason for the price surge? According to analysis from Morgan Stanley, it is a combination of rising domestic demand at a time when harvests were sharply curtailed in the eastern region of China’s Shandong Province, which generally supplies the global market with up to three-quarters of its requirements.

An article in the Nanfang Daily reported that the run on stocks began earlier this year as consumers snapped up garlic cloves for use as a traditional Chinese medicine that is said to guard against contraction of the feared H1N1 influenza strain, which killed more than 300 people in the PRC during 2009.

There was apparently much less inventory in China to start with, noted Van Asten. Farmers, who fetched poor returns for the efforts in 2008, were said to have slashed garlic plantation by 50% last year. The diminished harvest was speculated on by astute buyers keen to cash in on rapidly advancing prices.

So, it stands to reason that the use of garlic as an ingredient in frozen food products will be reduced in the year ahead. But everything else that typically flavors pizza, ready meals and side dishes should be utilized as usual.

Will the shortage of garlic prompt farmers in Europe to plant more Allium sativum var. sativum bulbs in 2010?

Actually, there already exists a good deal of garlic production in France and Spain, but it mainly goes into the fresh market.

“Garlic grows in Belgium too, but to obtain the kind of quality product needed for the frozen market it has to be hand peeled. This is expensive to do in Europe, which is why China dominates production,” explained Van Asten. “If prices continue to climb, who knows, maybe a mechanical peeling solution will be found.”

Parsley remains the top seller for Herbafrost, followed by basil and oregano. In recent years the use of basil among frozen food produces has steadily increased, and supply has kept up with demand.

Herbafrost, which operates a processing plant in Vladso (West Flanders) as well as its flagship factor in Hulshout, offers a diversified range of 47 kinds of IQF herbs that includes savory, sage, rosemary, thyme, dill and diced chives.

The company cultivates sweet basil, as well as purple and Thai varieties, in the Antwerpian Campine region of Belgium. They are increasingly specified by industrial food producers and chefs who want to accentuate the flavor and aromatic qualities of the ready meals, soups and sauces that they prepare.

Purple basil, a member of the mint family and native to India, has a flavor profile described as “heightened in intensity” in comparison with sweet basil. The purple color comes from anthocyanins, which are said to have a lot of beneficial attributes.

Asked to offer a business outlook for the coming year, Van Asten commented: “Even at a time of economic crisis, people will still eat ready meals and pizza, and we will make sure that producers have the herbs needed to deliver the good taste that consumers expect to enjoy.”

Scelta and the Mushroom Scene

As in the potato field, mushroom suppliers have been popping up all over the place lately – and with them overcapacity has flooded the market.

“Two years ago, when there was a shortage, the Chinese began producing more and more,” Jan Klerken, managing director of Scelta Mushrooms BV, told Quick Frozen Foods International. “The result is there now is excessive inventory in coldstores, which is cause for unease among those holding stock – some of whom are eager to drop prices to generate needed turnover.”

So, does this development mean that farmers in the PRC, who supply at least one-third of the global supply of mushrooms, will reduce production in 2010? Maybe.

“I foresee a shortage coming by the Spring, which will be accompanied with rising prices in April or May,” said Klerken. “This is not good for market stability.”

Scelta guards against volatile swings in the commodity mushroom market as best as it can by catering to buyers of value-added specialty items used in soups, as pizza toppings, ready meal components and other convenience food applications. Innovative new products are regularly introduced, and the company continues to diversify its range.

“Our only sustainable competitive advantage comes from out-innovating the competition,” said the managing director.

The son of a mushroom farmer who began tilling Holland’s rich soil during the 1960’s, Klerken grew up around the business. Since 1977, step by step, he has built an organization with global reach that offers IQF, preserved, semi-preserved and value-added mushrooms, as well as mushroom flavorings and vegetables. On average, it handles approximately two billion mushrooms per annum that are consumed in over 80 countries.

In 2008, returning to the exact location in Venlo where his father started cultivating edible fungi more than four decades earlier, Klerken inaugurated the Scelta Institute. There a spacious, aesthetically pleasing headquarters was designed and constructed not only to serve as the company’s head office, but also to function as a research and development facility, test kitchen, restaurant and bar-equipped conference hall.

Much of what Scelta sells is grown in Holland, a country which ranks as the world’s third largest producer and Europe’s No. 1 exporter of mushrooms. In addition to its primary sourcing center in Venlo, the company procures raw material from other fertile growing areas in the nation.

Processing takes place at four locations: Kesteren, where frozen mushrooms and bean sprouts are packaged for distribution under the Champi’mer brand; Horst, where preserved and semi-preserved items are produced under the Comé Mushrooms label; Belfeld, where powder and liquid mushroom flavorings are made for industrial customers under the Scelta Blanchaud Concentrates banner; and Yerseke, where value-added breaded and pre-fried mushrooms and vegetables are packed for distribution via the Scelta Products brand.

Not far from Yerseke, which is situated in the southwestern part of The Netherlands that is famous for mussel aquaculture, an onion ring factory was recently acquired. Among items produced there are Fronions, a fried onion product made for industrial users as well as foodservice and retail operators.

Now in joint development among Scelta’s R&D department, chefs and a regional agriculture school in Den Bosch, is a brand new product called Fingerfoodballs. Eleven recipes will soon debut, some of which feature an enrobed rice base accented with flavorful vegetable, fruit and dairy ingredients ranging from spinach and mozzarella cheese to mushrooms and red beet.

“As we support the local VVV-Venlo football team, which plays in the Dutch National League, the initial idea was to create something special that could be enjoyed during and after matches,” said the managing director. “But then we thought, why shouldn’t these healthy products be available to a wider clientele?”

Scelta then passed the Fingerfoodballs rollout game plan to a Holland-based sports marketing company. Watch for the kick-off this Spring.