The Great Potato Bust

Most Americans have never heard of Jack Richard Simplot. But they know of his product and doubtless have eaten it. As the "Idaho potato king," as well as the nation's largest supplier and processor of potatoes, Simplot funnels millions of ready-cut spuds to McDonald's, which turns them into millions of French fries to go with its quick-food goodies. But Simplot has a reputation as a wheeler-dealer in his favorite commodity, and last week he found himself entangled in the biggest potato-futures default in the 104 years of the New York Mercantile Exchange.

Even by the standards of the often rowdy commodities market, the potato bust was bizarre. It resulted in 50 million Ibs. of potatoes, worth $4.2 million, not being delivered on schedule, sending almost 1,000 potato-futures contracts into default. That in turn promised to touch off scores of lawsuits and an investigation by Government regulators.

Short Sellers. On May 7, trading in the May Maine potato-futures contract expired after a 15-month term, leaving the unprecedented number of 1,911 contracts unsettled. That meant that owners of contracts to deliver potatoes were still obligated to fulfill their promise. When the final delivery deadline set by the exchange arrived early last week, 997 contracts were still not settled, and none of the 50,000-lb. car lots of potatoes that each contract represents had been shipped from Maine to New York City for distribution.

Simplot will not say how many of those defaulted contracts were his; he claims not to keep close track of numbers. But he and a fellow potato titan, P.J. Taggeras of Othello, Wash., are believed to own all of them. The Mercantile Exchange has already begun moving against the clearinghouses used by the spudmen. Exchange President Richard Levine said the houses would be liable for the cost of the potatoes and required to pay fines for not abiding by the default rules of the exchange. Presumably, the firms will try to get the money from their defaulting clients.

Simplot professes to be surprised by all the fuss. "There's nothing to get excited about," he told TIME Correspondent Eileen Shields. "I think it will all work out." How could a market professional like Simplot, at 67 a veteran of half a century in the potato business, get drawn into such a mess? The biggest factor was the volatility of the May potato-futures contract. From a low of $5.92 per 100 Ibs. of potatoes in February 1975, when trading in the May contract began, the price zoomed to almost $20, dropped back to $8, went up again to about $17, then fell to $8.70 on the day trading expired.

The upward swings attracted the short sellers--speculators who hope to make money when the market goes down. With the exception of people in the business, like Simplot, short sellers seldom see potatoes or even own them, nor do they care to. Their object is to sell contracts to deliver potatoes in the future, then buy back those contracts at a lower price before the delivery date. The difference is their profit. A contract to deliver sold at $16 will yield a profit of $10 (less commissions) if bought later at $6. In commodities trading, the "shorts" are ranged against the "longs" --individuals and companies who buy and hold contracts in hopes that their market value will rise.

Simplot concedes that he was "sucked in" by the market's upswings and sold a lot of contracts in the $19 and $16 range. Says he: "They got things up awfully high. I never sold at such high prices before." He bought back some of the contracts as the market declined, making a profit. But he did not try to make any big purchases until the May 7 expiration, hoping the price would decline even more. On that day, he made an offer of $8, but contract trading stopped at $8.70.

He then began to scramble for potatoes, which he knew he would have to deliver by last week. With offers of cash and his own stock of potatoes, he managed to settle some of his contracts. For the rest, he sent agents to Maine's Aroostock County, heart of the state's potato business, to try to round up spuds from farmers with cash offers of $6.50 to $8. There were a few takers, but most of the Maine farmers balked because they had received other offers as high as $15 from export agents--some of the longs, who were trying to force Simplot into paying a higher price to get out of his contracts.

At week's end Simplot was huddling with exchange officials and telephoning Harold Collins, head of an upstate New York produce company and a major holder of unfulfilled contracts, to see if a compromise price could be worked out. Simplot offered Collins $10 to buy back his contracts, but Collins wanted $12.50. If they cannot agree, the exchange will decide a fair price for them and thus settle by fiat the great potato battle of 1976.

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