Private Storage

It is two years since the olive oil market last saw private storage activated, and the 26% overnight increase in the price of oil that accompanied its activation. With the market in its current state, producers complaining and lobbying about the low price of olive oil it is important to understand what this practice is and how it can affect the market.

What is private storage? When the market faces a serious disturbance, an example of which is when prices fall below a certain level, the European Commission can grant permission for private storage. In the case of olive oil, this requires the opening of a tender. Operators will propose to store certain quantities of extra virgin or virgin olive oil for 180 days and will ask for compensation/aid of a pre determined amount of per tonne and per day. The best offers will be accepted and payments will be made at the end of the storage period.  However, the most attractive feature of this practice is that is drives up the price of oil instantly.

Earlier this year the Spanish agrarian organization COAG released figures showing that olive growers across Spain have recorded €1.9 billion of losses, with €1.5 billion of these coming from the world’s main producing region of Andalusia.  COAG has called for and continues to call for the implementation of private storage, which it believes is the only instrument that will allow an immediate recovery in prices and a respite from low prices for its members.

This is important because currently Spain is the world’s leading producer of quality olive oil, with five million acres under cultivation, populated by an estimated 215 million olive trees. This accounts for approximately 27% of the world’s olive production acreage. Spain has an average annual production of between 600,000 and 1,000,000 metric tons of olive oil, of which 300,000 metric tons is exported. Within Spain by far the largest domestic production area is Andalucía, which accounts for 75% of the Spanish production. In short, the majority of oil that comes into this country comes from Spain and it is for this reason that we need to focus on the problems that currently exist and the struggle for power between producers and purchasers.

The average price of oil in Spain this year has moved to within a few cents of the price at which the threshold for private storage will be activated. Spain’s main agrarian organizations are talking of organizing petitions and protests to highlight the gravity of the problem and add weight to the Spanish Government’s efforts in Brussels. COAG’s Rafael Civantos said bulk storage was their only hope. “We think it is the only thing that can raise prices.” COAG argues that the market price of oil is well below the average cost of oil production, which has led to considerable and unsustainable losses by Spanish producers. However, the market for olive oil is strong, Spain has experienced strong export led growth but this has not led to an increase in price. The Spanish producers feel that the current threshold price for the activation of private storage needs to be adjusted to more accurately reflect the current reality of production costs and adjust system operations.

Despite Spain’s lobbying,  The European Commission has yet to grant permission for private storage, and, in my opinion, it is unlikely to. The main point of difference is that The Commission sees the current market conditions differently to COAG, and argues that the market and the leverage of large-scale distributors is the root of Spain’s low olive oil price and this does not constitute a market disturbance. Whilst prices are low they have not dropped to the threshold for intervention.