Spain Closes the Books on a Drought Hit Olive Oil Year

Spain’s olive oil agency has presented its account of the 2005/06 season, the drought and frost year that pushed prices to levels nobody in the trade had seen for that long. The report covers production, exports, imports and the home market. Here is what the year actually did, and what it left behind.

The year in one line

The Agencia para el Aceite de Oliva, the body that collects the movement figures for Spanish oil, set out the 2005/06 campaign this week. Its own summary of the season is that it was marked by weather adversity, which is a polite way of describing what happened to the trees.

The crop fell roughly 35 percent against the previous year, something like 350,000 tons of oil that never reached a tank, after a dry run of seasons and cold spells that damaged trees outright. In a country that presses a large share of the world’s olive oil, a shortfall on that scale does not stay inside Spain. It became the world price.

What the shortage did to prices

Prices in Spain rose 37.2 percent in the twelve months to February 2006, and 6.8 percent in January and February alone. Olive oil was the biggest riser of any packaged food in the Spanish shopping basket that winter. Across the Community, prices for extra virgin, virgin and lampante oil ran 33 to 46 percent above the threshold level at which Brussels is allowed to act, and they stayed above that trigger from September 2005 onward.

Two consequences followed, and both are in the record. The Commission suspended the monthly ceiling on duty free imports of Tunisian oil from May to October, to keep supply moving. And northern member states, led by Sweden, asked Brussels to cut the import duty or open an extra quota, arguing that consumers and food manufacturers were carrying the cost.

Inside Spain the argument was rougher. The farm organization COAG pointed out that prices had sat below 3 euros a kilo until August 2005, when the first estimates of a small harvest appeared, and that packers had built stocks of more than 120,000 tons against an average of about 100,000 tons in recent years. Its conclusion was that the growers, who sell into a concentrated buying trade, were not the ones setting the price. Its proposal was a strategic stock of oil, on the grounds that the existing private storage scheme only switches on when prices at origin are already on the floor and therefore does nothing in a year like this one.

The bill the consumer paid

The number that should worry the Spanish trade is not the price, it is the demand. The agriculture ministry said in the spring that domestic olive oil consumption had fallen 31 percent over three months, and tied it directly to the price. That is the quiet risk in every shortage: shoppers who move to sunflower oil do not necessarily move back when the harvest recovers.

• A short crop lifts the price, which lifts the grower’s income only if there is fruit to sell.
• The processing and bottling trade holds stock, and stock is worth more in a rising market than oil is.
• The household simply buys less, or buys something else, and that habit outlasts the drought.

Spain’s answer over the past decade has been to plant more, and to plant differently, with irrigated and high density groves spreading across ground that used to carry something else. Olive orchards have been proliferating for years now, and those trees will eventually dampen exactly the kind of swing the 2005/06 campaign produced. Eventually is the operative word, because an olive tree does not care about a marketing year.

Sources

• Infoagro, “Presentados los datos de la campana de aceite de oliva 2005/2006” (December 5, 2006)
• FoodNavigator, “Spain records high olive oil prices” (March 9, 2006)
• Council of the European Union, note from the Swedish delegation on the olive oil market, 9410/06 (May 16, 2006)
• Infoagro, COAG proposes a strategic olive oil stock (May 5, 2006)