Olive oil prices set to rise sharply after Andalusia drought

Anticipation of poor harvest in the autumn of 2014  pushed up wholesale price from €2.40 to €2.70 per kg over just a  few weeks.  

Hold the bruschetta: olive oil prices are expected to rise sharply after a prolonged drought in the world’s biggest producing region in southern Spain, at the same time as a blight has hit the crop in Puglia, Italy‘s main olive-growing area.

While there is still time for rain to save the day in Andalusia, as harvesting takes place from October to January depending on the olive variety and location, without better weather soon this year’s crop is predicted to be 40% down on the bumper 1.77 million-tonne harvest of 2013-14.

“Not even the most optimistic are predicting a million tonnes,” said David Erice of Spain’s Small Farmers Union. “We’re expecting something closer to 2012, when production was around 700,000 tonnes.”

Spain produces 50% of the world’s olive oil, with 73% of that coming from the province of Andalusia in the south and 16% from Catalonia in the north-east. In 2013 olive oil exports from Andalusia were worth €1.5bn (£1.1bn).

The drought isn’t the only problem. Bumper harvests leave the trees exhausted, said Erice, and they produce far fewer olives the following year.

Anticipation of a poor harvest means that in the wholesale market, where it is priced per kg, virgin olive oil has already risen from €2.40 to €2.70 per kg over the past few weeks, according to Infaoliva, the Spanish olive oil federation. The drought in 2012 led to a 13% price rise.

Prices are predicted to rise by as much as €0.50c a litre – although extra virgin olive oil retails in supermarkets at around €3.00 a litre in Spain and is a popular loss leader in supermarket wars, to the detriment of producers who in recent years have complained that supermarkets have pushed the price down to below the cost of production. Some analysts predict that supermarkets will absorb any price hike in order to maintain their competitive edge.

Virgin olive oil futures for September are at their highest level since June 2013, and some suppliers say that speculators are contributing to the rise in futures prices by capitalising on the uncertainty caused by the drought. The bets they are making are driving prices higher.

There are also claims that some producers are withholding stock in anticipation of selling at a higher price later in the year. However, for all but the biggest producers the olive oil business has become a no-win proposition. If the harvest is good, the price slumps; a poor harvest means selling much less for only slightly more.

The oil is exported principally to France, Portugal and Italy. Italy often repackages Spanish oil as “estate bottled”, giving consumers the impression that it is an Italian product. Italy is the second largest producer after Spain, accounting for 15% of world production, with Greece producing 13%.

This year Spain has overtaken Italy as the market leader in olive oil in the US and Japan. Worldwide demand for “liquid gold” has risen by 60% over the past 20 years, driven by increased demand in China, the US, Canada and Australia.

Olive oil has been left off the list of agricultural products embargoed by Russia in its ongoing spat with the European Union. “If Russia had included it in the list of banned products it would have been a great setback,” says Rafael Picó of Asoliva, the oil exporters’ association.

Data on world and EU olive market

While it is drought that threatens the Spanish harvest, in the southern Italian olive-growing region of Puglia the trees have been afflicted by the bacteria Xylella fastidiosa.

“There is no cure. The only solution is to burn the infected trees to stop the bacteria spreading quickly,” Raffaele Piano, a local grower, said. “Prices will rise by 30% to 40% but quality will not be affected,” he said.

While harvests in other major producing countries such as Greece and Turkey are expected to be at average levels this year, they will not be able to make up for the shortfall in Spanish production, and price rises seem inevitable.

This is an article from the Guardian Financial section Tuesday 26 August 2014.  It can also be found on Guardian online at http://www.theguardian.com/business/2014/aug/25/olive-oil-prices-rise-andalusia-spain-drought-poor-harvest

A useful website for world olive oil from which the above data is compiled on production and consumption is:

http://www.internationaloliveoil.org/estaticos/view/131-world-olive-oil-figures

Answer the following three questions. Questions 1 and 2 each carry a mark of 30% and question 3 carries a mark of 40%.

• Using the data to support your answer, in your own words briefly describe the market for olive oil
• With the help of properly annotated diagrams, explain the statement “for all but the biggest producers the olive oil business has become a no-win proposition. If the harvest is good, the price slumps; a poor harvest means selling much less for only slightly more”.
• With the aid of diagrams and with reference to the text and data and further information available at the time of writing –  examine the likely causes of the expected rise in olive oil prices over the coming year

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