A project to turn "waste" spuds into a nutritious puree for sale to hospitals, nursing homes and retailers could earn about $26 million for the South Australian potato industry.

Potatoes South Australia is working on the project with researchers from the University of Adelaide after receiving a $100,000 grant from the State Government.

Between 20 and 30 per cent of the potato harvest in the state falls below supermarket standards for shape, size and appearance each year.

Potatoes South Australia chief executive Robbie Davis said those potatoes could become a valuable asset for primary producers instead of being sold cheaply or fed to cattle.

"The outcome of the research project will be pureed potatoes. So a pure, nutritious premium product and we're going to target two ends of the market — niche paediatric and niche geriatric segments," Ms Davies said.

The state grows on average 385,000 tonnes of potatoes, which contributes to $440 million to the state's gross food revenue.

Ms Davis said the group had estimated about 75,000 tonnes of spuds were wasted each year, which was potentially worth about $26 million at the farm gate.

"We have a responsibility to do something about this enormous cost to the industry and the economy, particularly as the fresh sector is in decline and margins are tight.

"This research will also reinforce the repositioning of the potato as a highly nutritious, affordable, versatile and desirable food source."

"Waste" potatoes will be processed with skins on where possible to maintain optimum nutrient profile in the end product.

She said if the research, which was also being funded by industry, could also become a sought-after export product.

The university's FOODPlus Research Centre will formulate the products' recipes and conduct commercial trials.