19TH JANUARY 2016
What's happening in the olive oil market?
Spain controls the olive oil inventory and sets the price in the increasingly global olive oil market. Whilst the 2013/14 crop broke all records, driving down prices, increasing domestic consumption and delivering historic levels of exports, the 2014/15 crop will see a very different trading year.
This season’s crop is the worst for 8 years, and is the result of a very challenging growing season. What could have gone wrong has gone wrong, the oil fields saw harsh winter frosts, followed by a severe summer drought both of which have combined to severely reduce this year’s Spanish olive crop. The poor crop in Spain was not helped by high temperatures in October and rain during the start of the harvest, which has been responsible for a decrease in the quality of the oils harvested, with a lower percentage of the total crop being classified as extra virgin than in normal years.
So not only do we have a reduction in the total crop we have an even smaller percentage of extra virgin and this had had a large impact on the price of both Extra Virgin and Organic Extra Virgin olives oils. Whilst the final figures are not in yet, estimates put the figure at somewhere around 800,000 mt, a1,000,000mt less than the year before. The story of 2015 will be that of severe supply side shortage, and these shortages are being compounded by the usual speculators being very active in the market and sellers sitting on stocks believing the price will continue to rise.
Due to the large 2013/14 crop there was a carry-over at the start of the harvest of approximately 400,000mt, but this has been reduced by very strong November and December sales, which at the price levels seen in December caught the market by surprise. At the current price level demand will reduce, as it did in 2012/13 after a very poor crop led to a sharp increase in the price of olive oil.
At the present time it would seem that Spanish sellers would rather sit on the oil in the hope that prices will continue to rise, it is worth noting that this approach did not work in 2012/13, and prices reduced in April and continued to fall for the rest of the year. Whilst the price of Spanish oil continues to increase the major packers are scouring the olive growing region in search of cheaper sources of supply. Much has been made of this year’s Tunisian crop, but it is almost impossible to get it out of Tunisia and into the EU without paying cost prohibitive import duties.
Therefore, this oil is most likely to replace Spanish oil as the oil of choice in a number of price sensitive markets outside of the EU, and in the short term will have little effect on the market price.
Early signs are that the Chinese and Indian markets are as sensitive to these price rises as the European market, and North African and Turkish factories are reporting record numbers of enquiries for their inventory.
The higher prices of olives oil will effect demand, as will the reduction in the price of alternatives to olive oil, such as rapeseed oil. The 2008 economic crisis opened the eyes of Mediterranean consumers to cheaper substitutes, and this trend is amplified in years when the price of olive oil is especially high, like it was in 2012/13 and the same should happen this year. Furthermore, good growing conditions elsewhere has seen bumper harvests of oilseed crops and this has been accompanied by price decreases.
The price of soya oil, palm oil, sunflower oil and rapeseed oil have all decreased and as such consumers are able to source cheaper alternatives, and this should lead to a significant reduction in the demand for olive oils in the European market. Historically the market for olive oil has been Eurocentric, but this is changing and the market is steadily becoming increasingly global. However, we do not know how robust global demand will be when faced with a year of high prices.
What does this mean for the UK? Prices will be high for the first half of 2015, the only way in which this will change is if the initial crop signs for next year are positive and sales are slow. When we last saw these market conditions prices started to reduce in April, as continued to fall for the rest of the year. So the advice is cover yourself until April, longer if the price is good and wait to see what the market’s reaction to the next season’s crop forecast and this year’s export figures.