Mail From California

We received a couple of e-mails this week which might be of interest to our readers.

First, from the renowned agricultural school, University of California-Davis:

The UC Davis Olive Center is partnering with the CIA Greystone to put on this 3-day conference which will feature tastings, cooking demos, and panels on nutrition, culinary uses, labeling and marketing of olive oils that exceed the IOC standards for extra virgin. I have attached an informational brochure to this email, and the following link will take you to the conference site where you can view the agenda, presenter list, and registration info. I hope this is useful for you and your blog followers!

The website announcing this very interesting, professionally-oriented event can be found here and the full PDF brochure here

Also, the Gazette only provides support for commercial enterprises that we think have some intrinsic worth. The following sites from the California Olive Ranch, one directed towards cooking professionals, and the the other to consumers, make the grade in that regard.

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Change at Grupo SOS

The fallout from the collapse of Grupo SOS' stock price on the Bolsa de Madrid, in March, has reached its logical conclusion. CEO Jesús Salazar and his brother, company vice-president Jaime, have been deposed from their positions by the board of directors of the world's dominant olive oil bottler.

Aside from the 60% downward revaluation of the company by the markets, the other event leading up to this decision is the matter of a 212 million euro loan made by the company, in late 2008, to an investment vehicle owned by the Salazar brothers, purportedly for the purpose of facilitating the entry of an Arab sovereign investment fund into SOS. According to a report in Expansión, the loan was not submitted to the board for approval until February 27th of this year, at a meeting in which six board members, representing about 20% of the company's capital, refused to assent to the operation. This was followed by a reunion with members of the banking syndicate that financed the purchase of Bertolli. Banco Popular, Rabobank, RBS and Intesa apparently had their doubts also. Since then, two of the dissenting directors have asked the mercantile court to annul the operation and the new regime has asked KPMG to conduct an audit of the suspect operation.

As for the 41 million shares put up as collateral by the Salazar brothers, they were worth about 450 million euros at the end of 2008. Currently, the stock market values them at 170 million.

The general take is that the money was to be used to keep SOS' stock floating at unrealistically high levels on the exchange, as someone had evidently been doing in the past. Presumably, the normal financial channels were no longer interested in funding that game.

Elevated to the post of CEO has been Vicente Sos, representative of the rice marketing family that gives the corporation its name.

Readers might note that the olive oil cash and futures charts are not updated, although the tables are. This is due to a computer problem which we hope to resolve shortly.

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Photographs Of The Olive Oil World

A Turkish reader has forwarded a Powerpoint file of the results of the Zeytindostu 1st International Photography Competition, devoted entirely to olive oil.

Readers can download this excellent presentation here. It is well worth a look.

The IOOC Is Wrong

The principal webpage of the olive oil futures market, the MFAO, runs a news feed from Oleo Digital. Among the items currently displayed are the latest IOOC production-consumption estimates for 2009.

The Council notes that the surface dedicated, worldwide, to the cultivation of olives continues to increase - primarily in South Africa, Australia and South America. Currently, the are 10.5 million hectares dedicated to this crop. The article goes on state that production this year will reach some 2,866,500 metric tons, 9 percent higher than last year.

As for consumption, the IOOC seems to not understand at all the economic environment in which we currently find ourselves. Stating that there is no lack of demand for olive oil among the world's consumers, they go on to say that there will be a very slight production shortfall this year. A production shortfall! This outlook, if anyone had failed to notice, is not confirmed by the 30% drop in the price of olive oil in the last year. As one friend, an exporter of large quantities of Spanish pomace oil, wrote us about the United States:

Business in the U.S is going down and seed oils so cheap.... a disaster almost.

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Crisis Management

Aside from today's blockage of Jaén's main highway by members of the Unión de Pequeños Agricultores in a probably futile attempt to force the large chain stores to stop putting downward pressure on olive oil producer prices, the big non-news event of the week is that the Junta de Andalucía will be attempting to pressure the European Union to block all imports of non-EU olive oil. Their reasoning is that preventing the entry of waht was 59,000 metric tons - amounting to about 5% of Spanish production - last year will do for prices what a 200,000 ton harvest shortfall this year, due to bad weather, has not. Neither of the above constitutes a viable plan of action when faced with a prolonged, worldwide economic downturn. What would be interesting, although an impossible dream, would be some sort of movement towards considering ground water a common resource, accompanied by the provision of the financial means to use it, rather than some treasure that goes to the parties with cojones to go and take it. As we said, in 21st century Andalucía that is just a fantasy.

In other news, the European Commission has approved legislation that makes it obligatory to state the national origin of bottled olive oil. Labels must, as of July 1st, state the nation from which proceed the contents. This can be in the form of one country (be it part of the EU, or not) or blends of either/or EU oils or others. Insisted on for some time primarily by Italian producers, this publication thinks this provides an opportunity for other countries. Given that few consumers still trust Italian bottlers not to put whatever suits them inside and that, for reasons of price, there is no incentive for a Spanish producer, say, to blend olive oil from other origins (after all, for all the money spent on improving the quality of Jaén's olive oil it still remains the cheapest on the market), the public can be assured that the product will be what the label states. That, however, would require a concerted marketing effort - and we suspect there might now be some local opposition to any publicity program that attempted to capitalize on Italy's sorry reputation.

The other bit of silliness proposed to confront the crisis was Friday's public forum in which various experts from within and without the industry once again told Jaén's olive growers that they must make efforts to commercialize their product better. Citing the usual line that improving quality is fundamental, no one apparently has taken note that many millions of euros have already been spent, and hundreds of public forums organized over the last several years, to promote this pursuit to almost no avail.

Our suggestion, met with cries of 'traitor' and the like whenever aired in public, is that, in the present economic climate, whoever drops out of the overcrowded extra virgin quality game and gets in the stores first with the now permitted blends of olive and other vegetable oils will triumph. And who has the least to lose by trying it out? The province that produces 20% of the world's 'green gold', only to sell it at the lowest price in the market.

Rather than quote producer prices, which the reader can see in the right sidebar, we've decided to instead report what 'price year' we are in. Currently, that would be 2001 - in which eight years, for example, the legislated day rate for farm labour has risen about 65%. The only economically intelligent strategy for the owner of a traditional plantation under these circumstances is to not spend anything on fertilizer, pruning, insecticides or herbicides - and then not pick the crop come autumn.

That plan would have made this writer about 3,000 euros had he implemented it last March.

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Chart Two

This chart shows the weekly Madrid stock exchange price of dominant olive oil bottler, Grupo SOS, since its initial public offering in May of 2005. The very long bar on the right hand side of the image represents the 56.9% of its value that it has lost this week (not to mention the 80% since July).

The cause of this disaster was the release of 2008 results which, in the minds of investors, call into doubt the ability of the company to service its 900 million euros of debt - much of which was assumed in order to purchase at a very high price the Bertolli brand from Unilever and permitting it to put a stranglehold on olive oil pricing. What we can almost certainly expect to see next, instead of government aid going to ruined growers, is the Junta de Andalucía coming to the financial rescue of its favourite son. One doubts they can afford to do both under the current circumstances.

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Chart One

Courtesy of Interest Rates.org, the chart on the left shows the progress of Turkish lira/U.S. dollar exchange over the last three months. Since the end of 2008, the lira has declined about 15%, giving the producers of this year's 150,000 metric ton Turkish crop a tremendous marketing advantage over their eurozone peers. Note that this reverses the trend of the several years that the lira was the target currency of yen- and Swiss franc-funded carry trades which, combined with a certain documented stubborness on the part of Turkish producers, had put that country at relative disadvantage to its competitors.

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ASAJA Attacks

This month's edition of the members' magazine published by agricultural union, ASAJA, devotes a great deal of ink to criticizing the non-existent policy and outright incompetence of the Junta de Andalucía, at least as far as they affect the lives of olive growers. Speaking specifically about the province of Jaén, over three articles and seven pages the following points stand out:

1). The olive industry accounts for 20% of the province's gross domestic product;

2). At current prices, 40% of the province's olive plantations are not profitable;

3). The regional government has provided no leadership in effecting the modernization of older plantations that are, at the best of times, at the margin of profitability;

4). There has been no initiative whatsoever in the matter of rationalizing the use of and access to irrigation water, fundamental if Jaén's growers are to compete with intensive plantations;

5). The continued existence, and growth, of administrative encumbrances, such as the three years (during which time the money has been in the Junta's accounts, we might add) that 12,000 of the province's olive growers have been awaiting approval and distribution of their European Union subsidies. Apparently, anyone whose subsidy underwent a change in title from 1999 to 2005 is having this problem - such as my neighbour who, on retirement, transferred his rights to his wife. Three years without a cent;

Added to this list, but the responsibility of the national government, is the 17% increase in social security payments for day workers with the added bonus that the money has to be paid for days on which they do not work for reasons of weather, or whatever. The only way to avoid this new requirement is to unregister workers on days they are off, and re-register them when work resumes - involving the usual standing in line and waiting when one would be out putting in his hours along with the employees.

This writer/grower could add his own complaints, but will desist.


Producer Prices

After showing brief signs of life in mid-January, producer prices are once again moving down to decade lows. The current PoolRed quote has EVOO at 2.03€/kg, virgin at 1.96€ and lampante crossing at 1.86€. Because of the averaging lag in the calculation of these figures, today's 3 to 7 cent tanking of MFAO futures would be a better indication of the situation. March delivery is currently 1.83€ per kilo.

Note also that cash volumes have been remarkably low for the time of year. In what should be the busiest season of the year, recent trade has been below 4,000 tons a day - as opposed to the 12,000 one might expect. Attribute this, in part (as ASAJA points out), to the increasing pre-selling of production to large bottlers at an average price to be determined at year end. But we also suspect that there is a 'buyers strike' taking place. Or was it a coincidence that sales dropped off, and have stayed low since, on the one day that the co-ops decided to close their doors in protest over low prices?

What is yet to be seen is what effect the continued lowering of estimates of the total crop will have. The problem is that the continuous rain has prevented harvesting from taking place. Around here, tomorrow will be the first day in nearly four weeks that olive wills have been picked. Add to this the high winds that have blown almost 100% of the remaining crop on to the ground and we may see final olive oil production a couple of hundred thousand tons below original expectations.

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Unity In Hard Times

A headline in today's El Ideal reads (loosely translated): 'Blank cheque from the junta to promote the union of Jaén's olive industry'. To make this more comprehensible to the non-Spanish reader, the 'junta' refers to the Andalusian regional government and 'promote the union' to financial assistance it will be offering to the province's co-operative olive millers to unify their sales and marketing in order to combat the disastrous descent in prices experienced over the last several months. In other words, Seville is promoting the formation of a cartel in the hope that it will eliminate the ruinous price competition between far too many small, often unsophisticated, operators that results when panic sets in.

How times have changed. Only two years ago, Andalucía's second most powerful politician, consejero de la presidencia Gaspar Zarrías, was stumping throughout the province attempting to sell individual growers on the benefits of abandonning the co-ops and signing on to SOS's plan to corner production before it got to the commonly-owned mills. But, it is now a serious enough political issue to force the government to change teams. With prices so low as to make many traditional plantations (this writer's included) unprofitable, the situation threatens the junta's ability to continue to deliver the economic gains of the past and, in the process, to prevent the abandonment of the country and the emigration from the small towns that provide so much of its electoral support.

In theory it is a good idea, but whether it will function as planned is another matter. Local and parochial interests, despite the number of mills that might sign on to the program, may take precedence. A good example would be the difficulty OPEC has in forcing member states to adhere to petroleum quotas. In any regard, if the problem is rapidly increasing production facing stagnant increase in demand because of the current economic situation, we are speaking of something beyond the control of anyone.

Currently, PoolRed reports cash extra virgin at 1.92€/kg, virgin olive oil at 1.88 and lampante at 1.76 - this last figure on extremely low volume and in no way confirmed by the 1.85 recent January crosses on the MFAO. Speaking of volume, the spot market is fairly quiet given the time of year. This is probably attributable to the refusal of many co-ops to sell at current prices and is clearly of benefit to the futures market, which has been very active of late.

As an aside, the effects of the crisis in banking are being felt, in a small way, by olive growers. At this time of year, regional savings banks (the cajas de ahorros), to attract new business, always offer very cheap loans against delivered crop. Often in the range of 1 percent, this year they are generally at the 2.5 percent level. Naturally, they are also valuing the crop at lower levels for this purpose. Two years ago, we were loaned over 20,000€ against a 55,000 kilo (of olives) crop. Last week, the 44,000 kilos we had taken to the mill got us 13,000€.

Readers should not be surprised if total Spanish production comes in at the low end of the expected range - 1,100,000 tons, say. The crop is not nearly as big as it looks on the tree.

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Current Prospects

The chart on the left (courtesy exchange-rates.org) shows the volatile recent progress of the euro/dollar exchange rate - a subject of much concern to European exporters, the former being up over 10% in the last couple of weeks. The current drop in the dollar can be attributed to the interest rate policy being pursued in that country, with short rates being near 0% and 10 year at a record low 2.21%. The question is whether this can be expected to continue. There are many observers who thing that we are not about to see a resumption of the dollar bear market in the near future. Their argument is that, in the current economic climate, all central banks are going to have to do the same. The question, especially with regards to a very slow to react European Central Bank, is 'when?'.

As to whether there is any protection to be found for exporters against this volatility, the answer may be negative. The usual mehtods, which we outlined here, are probably too expensive to be considered at this point in time.

Despite the fact that rain and snow is delaying the harvest considerably in Andalucía (this writer had expected to start December 1st but has yet to put in a full day), producer prices continue to reflect a considerable oversupply of olive oil. In fact, they are approximately at the levels of January, 2004 when the record crop of that year made its way to the mills. We think that this exposes the crop to considerable weather risk, especially from wind, going forward.

We can only regret the error that millers made last winter when the general consensus was that prices were going to continue to rise. Their refusal to sell in quantity at the time left us with the huge inventories that were pushed out the door in recent months - and prices where they are now.

Readers should note that we have put up a live quote for the EUR/USD and a currency converter on the left hand sidebar.

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Three Weeks To Harvest

Prices are terrible, but our crop is huge. Between the quantity and the considerable money saved picking a large harvest, we might come out with a normal year.... depending, of course, on prices, weather, etcetera.

Click on the image to make it measure 1022 x 766 pixels.

Quality? At 2.20 A Kilo?

With olive oil producer prices now at levels not seen since December of 2003, we are sure alot of Spanish olivareros must be wondering what happened to all the economic benefits promised if Spain would only improve the quality of its product. At the current 2.20€/kilo bulk price for EVOO, there is no margin for doing anything but getting olives to the mill as cheaply as possible. Worse yet, the cooperatives, under pressure to turn over sufficient profits to their members, will be forced to behave in a like fashion.

The fact is, however, that the quality game may be over for the meantime, at least as far as Spain and many other Mediterranean producers are concerned. Consider first the notable decline in extra virgin retail sales here this year, accompanied by increases in those of plain virgin. The consumer, under current economic conditions, is not demanding quality. So why should the producer deliver it? In the United States, at the same time, it seems that importers are finding that oils produced by recent entrants to the business are both of better quality and cheaper than those from the Med. This is understandable, given that new olive groves in Australia (for example) were designed from the outset to lower the cost of production, without sacrificing quality at all. American buyers are finding that oils from the southern hemisphere are almost all uniformly excellent at a standard price, as opposed to case of the Spanish, where a premium has to be paid for an outstanding product.

Given that worldwide consumption can be expected to decline just as production is increasing, we believe that Spanish producers should be welcoming with open arms the new EU directives that permit the blending of olive oil with other types. They cannot compete on price/quality terms because of their antiquated groves, so anything that makes olive oil consumption more affordable to the consumer, without demanding the highest quality in the process, will be of certain benefit to the industry.

But price pressures will be coming from all sides this year. Lower demand is a certainty in the present economic climate. The enormous price setting power that Grupo SOS will have once their purchase of Bertolli is completed. And lastly, the very serious problems being caused by the international financial crisis. What we imagined to be the case in our last post has become a reality. Banks are refusing to honour letters of credit and is already seriously hampering international trade. And, at the same time, financial institutions are being very selective when it comes to extending operating credit lines to buyers, which affects commerce in general. A very bad environment - not made better by a fairly influential Spanish buyer being overheard at a recent event saying that 1.50€/kilo would be an appropriate price for olive oil in bulk.

Futures Price Correlation

In an October 20th interview published in Agrocope, the CEO of the olive oil futures market, José Luís Alonso, attributed this year's relatively scant volume on the MFAO to the stability of cash prices. His correct reasoning is that if there is no expectation of changes, there is no need to hedge sales or purchases into the future. We would, however, like to suggest another influential factor.

The chart on the left shows, from the top down, weekly olive oil cash prices as reported by PoolRed (on the bar chart, high is EVOO, low lampante and the close is virgin grade), then a 20-week average of the volume negotiated in the nearby MFAO contract, and followed by a graph showing the 10-week correlations between the front futures and cash virgin (in green) and cash EVOO.

Notable, at first glance, is that volume negotiated has dropped to levels not seen since 2005. But more interesting, in the eyes of a commercial seeking to guarantee prices for EVOO and virgin, would be the notable breakdown in the correlation between lampante futures prices and those of the two publicly marketable grades. Thought, we believe, to have been calculated at 0.65 by the exchange - a perfectly acceptable figure for hedging purposes, since January of this year this statistic has spent no less than 16 weeks below zero in the case of extra virgin, and 14 weeks in negative territory when speaking of virgin olive oil. For the uninitiated, this all means that hedging procedures entered into at that time, rather than being financially neutral, had resulted in either losses or gains, unexpected for those that entered into them.

Neither outcome is acceptable. Take, for example, the case of an EVOO buyer going long lampante contracts to guarantee prices a couple of months out. He or she may end up making money if the breakdown in correlation was result of extra virgin dropping in price whilst the latter went up - money made on the futures contract and a better deal found in cash. The problem is, of course, that the other party may have made the opposite trade, and lost on the same two counts. The perfect case in point would be the 17 cent drop in EVOO cash since mid-May compared with the 7 cents given up by the futures contract in the same period. That hedge would have cost the seller a net 10 cents a kilo - to be subtracted from already abysmal spot prices.

As an aside, in the spot market, producers continued to be squeezed out of their overstocks of extra virgin with the new harvest looming. At a reported 2.23€/kilo this morning, the price difference between EVOO and both virgin and lampante is less than 4 cents.

*Readers may click on the chart to see it in larger size.

An International Window Of Opportunity?

Exporters of olive oil to the United States are finding some joy, despite current circumstances, in the recent strength of the American dollar. The four charts on the left, covering the period since mid-summer, show the euro and the Turkish lira at 85% of their maxima, the Argentine peso at 93% and the Aussie dollar at an astounding 66% of its summer price. Although, in the case of Australia, the worldwide economic slowdown is taking its toll on that country's resource-based economy, the strength in the other currencies is purely a result of short term risk aversion on the part of central banks as they pile into U.S. treasuries in the face of uncertainty surrounding the viability of the global financial system in its present form. American buyers of olive oil, and exporters to that country, should consider the likelihood that this trend might reverse violent whenever calm returns to financial markets. The proper strategy, in the case that we are correct, would be to do a larger proportion of their business early in the year and while the crisis is still raging - especially if producer prices continue at current low levels into the Spanish harvest, beginning in December.

On another line, among the difficulties that might present themselves to the olive oil business is the possibility that the letter-of-credit system might fail to function properly. Specifically, that would mean that sellers would be reluctant to deal on any but a cash basis out of the same fears concerning bank solvency that have caused the interbank market to sieze up. Under circumstances like this, cash is king. Those that have it and use it are the big winners.

To the extent that PoolRed figures indicate, the millers, primarily co-ops, have capitulated. First it was in virgin grade. Now it has extended to EVOO as they empty the tanks in anticipation of the new crop. Extra virgin is reported to be crossing at about 2.26€/kilo, the lowest price since October 2004.

The reader should keep in mind that this is the personal assessment of the author of the blog. He considers it reasonable, but it carries no guarantees whatsover.

*All charts courtesy exchange-rates.org.

Record Inventories In Spain

The statistical pages from the Agencia para el Aceite de Oliva reports that olive oil inventories in Spain, as of the end of August, stood at a record 528,500 metric tons - approximately 40 thousand higher than they were in the same month of the record crop year 2004, the first year for which this figure is kept. Without knowing the stocks on hand in October 2003, it is worth noting that the 2007-08 crop saw about about 180,000 less olive oil produced in this country than four years prior. In November of 2004, season's spot prices bottomed out at 2.30€, 2.17€ and 2.13€ for the three grades quoted. This is four or five cents lower than current for lampante and virgin, and approximately where we are now in the case of EVOO. On the other hand, that was heading into a crop that produced less than one million tons, as opposed to the 1.2 million expected this year, not to mention in an environment of rapidly increasing consumption worldwide - which is certainly not the circumstance at present.

Seeing as virgin grade seems to be currently being dumped on the market at low prices, whilst exta virgin sales continue to remain stalled, we imagine that there might not be much upside for this latter category.

*Grapic courtesy AAO. Click on it to make it bigger.