Water Shortage In Andalucía

The print edition of Diaro Jaén reports that the administrator of the Guadalquivir River watershed, the Confederación Hidrográfica del Guadalquivir, has suspended all rights to irrigation at least until its next strategy meeting, several months away. Behind this decision is the fear that, if the 50 percent rain shortfall registered since th eend of Spetember continues, there will not be sufficient drinking water for the cities and towns that rely on the organizations dams and reservoirs. A look at the monthly statistics provided by farmers' union, ASAJA, reveals that, in the province of Jaén, the system's 14 installations are currently at only 20 percent of capacity with individual sites as low as 6.52 percent. The list is presented on the left.

Change At The MFAO

As the olive oil futures market continues to suffer the consequences of a very fluid and stable spot trade, this reflected in the continued low, even negligible, volume transacted, it was revealed to the Gazette yesterday that the MFAO's director-general, Ana Fernández Arimany, had resigned her post for personal reasons - this decision having taken effect immediately. So far, this event has not been communicated on the MFAO website except in the sense that the 'Executive Team' page now lists no one occupying the position of Chief Executive Officer.

To say the least, we are surprised by what has transpired, impressed as we were with Ms. Fernandez' sense of dedication and commitment to the enterprise when we had the privilege of interviewing her for sister publication Olive Gazette Interviews. We believe that her absence will be felt at the MFAO.

As for who will be her replacement, rumours overheard by this writer suggest that those under consideration include current employees of one or the other exchange market makers.

2nd Edition of Anatolive

A regular reader has been kind enough to inform us of the upcoming 2nd edition of Anatolive, the Turkish olive and olive oil trade fair. To be celebrated from the 17th through the 19th of April at the Istanbul Expo Center, the event currently lists about 80 confirmed participants from 22 countries. Those wishing more information can find it, in English or Turkish, at www.anatolive.org.

An Unusual Equilibrium

Confirming a sentiment that this writer has heard in private conversation, the Gazette has received a number of comments expressing wonder at the resilience of producer prices in a period which sees the most supply coming on to the market. Although it does not go against this publication's general opinion, made on a variety of occasions and which can be found under the 'Producer Prices' label, one would expect to see at least some downward pressure at the mills. But none of that. EVOO is trading in the middle of the 2.60 to 2.70€/kilo range in place since early November, virgin 0.8% is going at the high end for the period and in a fairly noticeable uptrend and virgin lampante is firm at 2.50. There is little sign of the 'out the door at any price' that typifies the co-ops at this time of year. Nor does there, surprisingly, seem to be much resistance from buyers, volumes, once posted up-to-date by PoolRed, seem to be at acceptable levels. The exception to this would be the olive oil futures market, MFAO, which does not appear to be negotiating amounts commensurate with the time of year. In reality, we do not have a clear idea as to why any of the above is true, but we are willing to throw a couple of ideas up for consideration.

First, as one reader noted in a comment to the previous post, the recent, abrupt rise in the price of other vegetable oils (sunflower up 30% in Spain this year) makes olive oil relatively more affordable in the consumer's shopping basket, relieving the pressure on bottlers' margins.

Second, there is the distinct possibility that the fairly generalized modernization of Spanish presses over the last few years has been accompanied by an increase in storage capacity, reducing the need to move the oil out at harvest time.

Third, it may also be the case that real demand is an unknown, particularly in the United States. It has been remarked to this writer on a number of occasions that suppliers in that country have generally been able to dispose of all the olive oil they could get their hands on - indicating in an anecdotal fashion that consumption was growing faster than actual imports. That the arithmetic behind this requires that adulterated olive oil make its way to the American market is obvious. However, the avalanche of negative press reports concerning this issue in 2007 (not to mention the imminent involvement of the USDA in the matter) may, in fact, be converting this consumption into demand for the real thing.

On the negative side, by the way, would be the apparent arrival of an economic recession (which, if we are to judge by the Fed's almost panicky reaction to problems in the credit markets, might turn out to be deeper than expected). Downturns of this type wreak havoc on the, among others, the restaurant industry, falling as they do under the heading of 'discretionary spending'. Under this scenario one could also expect a certain amount of unpredictability on the foreign exchange markets. But we make no predictions here...

Death By Success

The lead article in January's Jaén-province edition of ASAJA, the magazine edited and distributed by the provincial chapter of the Spanish farmers' union of the same name, is entitled, 'How Can We Avoid Killing The Olive Industry With Success?', and touches on one of the Gazette's long term preoccupations - the phenomenal increment in the acreage devoted to this tree and its effects on the viablity of this industry, say, ten years into the future. Olive trees are being planted anywhere in the world that the soil and climate will support them. In Andalucía, every winter sees vast expanses of wheat fields suddenly become dotted with holes and then olive saplings connected with irrigation hose. Aside from this, we hear projections of Turkey increasing its production of olive oil sevenfold over the next fifteen years and stories of multi-thousand hectare extensions of semi-desert in Peru being transformed by Australian entrepreneurs, all this not to mention land being set aside in Texas and China and the very rapid growth of the industry in Egypt.

The article, which is an appeal to the industry to stop the squabbling between producers and bottlers and finally form a common marketing association, itself predicts that what is currently a 'normal' annual world production of 2.8 million metric tons of olive oil will suddenly become 3.4 million by 2012 and 4 million by 2017. Worse, the writer claims that this figure would represent an overproduction of 300,000 tons ten years from now, using current estimates of demand.

Estimates aside (and in complete agreement with his admonition to the industry), the real unknown in this equation is that of consumption. Press reports earlier this month, for example, of progress in the negotiation of a free trade agreement between the European Union and India and predictions, for what they are worth, of a signing ceremony next year might throw a wrench into ASAJA's guess. Consider the effect that the removal of a 50 percent tariff might have in this immense, and every day more wealthy, market.

How The Game is Played

The reader should know that the Gazette does not know with certainty if any given bid or offer on any given day has been placed by either of the MFAO market-makers, but offers the following examples believing that what he describes occurs with regularity on the olive oil futures market.

We have no idea how many readers of the Gazette actually use the olive oil futures market, the MFAO, as a business tool - but we will work on the assumption that the number rounds out to close to zero. Despite this, and assuming that one day this might change, we are giving out a free lesson in the how that market functions - or fails to, as the case may be. Today's entry will centre on the exchange market-makers.

The market-makers are commercial traders that have taken on the role of price setters. In the case of the MFAO, the market-maker on the sell side is growers' macro-cooperative, Hojiblanca, and, on the buy, bottler SOS-Cuétara. It is fairly easy to see the logic here. Hojiblanca is, by nature, a bulk seller of olive oil and SOS, a bulk buyer. Between the two, the opening bid-ask spread is posted, the latter, of course, looking to buy at a lower price than the former is willing to sell for. The agreement these two have with the exchange, and for which they are rewarded with reduced commissions on all their trades, is to open with, and attempt to maintain, a 4 cent spread on the front month contract along with a widening figure the more distant into the future the deliveries. Typically, one sees the farthest out starting the day with 8 cents of difference.

In theory, imagining a day like today in which the March 08 contract opened at 2.50€ bid and 2.54€ ask, both probably placed by the respective market-makers, other buyers and sellers would come in with bids and offers both in between and outside of these figures, and the first trade might take place at, say 2.52. But no. What does take place on a daily basis is that other interested parties line up their trades behind these first, like children hiding behind their mothers' skirts, and no business takes place until one or the other opening numbers is hit. In the case of this morning, someone went directly for the 2.54 offer and took out the 25,000 kilos in one fell swoop. Apparently, however, this party did not think this an interesting enough price to actually bid for, say, 50 contracts (or 26, even), which would have left a bid on the board that reflected the actual market. Instead, the table was left without an offer, and the bid remained at 2.50.

The reaction to this was, although not unusual, interesting. The sell side was left uncovered for a considerable length of time before soemone, possibly but not certainly Hojiblanca, came back with an offer of 2.58 - which was not immediately reacted to with a new, raised opposing bid - leaving the March contract with an 8 cent spread. Now, when the May offer of 2.58 was also nailed, the other typical response came into play - later month sell prices were removed and replaced 2 cents higher. All this happens, to be sure, on the other side when sellers are moving the market.

What's wrong with this modus operandi? First, it is placing to much onus on the market-makers who, because of their commitment to maintain minimum spreads, may not be offering or bidding what they think is a desirable price. Over the course of a year, they must not see their agreement with the MFAO as costing them money, or one day they might decide to not renew. Second, the almost total refusal of participants to negotiate inside the spread removes an important tool from the hedger's (or investor's) kit - the stop order. This, for the uninitiated, would be a buy or sell order that gets triggered at the best available bid or offer once a real trade takes place at a predetermined price. In this morning's example, a stop sell placed at 2.54 would have been converted into a market order, and executed at the best available price - in this far from extreme case, 2.50. A stop buy would have found no offer, leaving him or her at the mercy of the market maker who typically has access to that information. Keep in mind that, assuming the normal lot size of 25 contracts, each 1 cent difference is worth 250 euros. The worst case this writer has seen reached 14 cents as the market bought up everything up to 2.34, leaving 2.38 as the only offer and no one, despite the strong upward movement displayed in the session would come in ahead of the 2.24 bid that someone, possibly SOS, had opened the day with. Apparently, and understandably, the party that had placed this order had no intention of changing it in a slow, midsummer market. A stop sell for 25 contracts, in this case, would have cost its owner 2,750 euros on execution!

The two MFAO market-makers clearly get tired of assuming all the risk here and, on a regular basis, wait a considerable time before adapting to executed trades. They did, after all, not get into this to merely trade their own account, or act as brokers for frightened or too-comfortable buyers and sellers whilst hampered by a contractual restraint on the prices they are willing to pay or accept.

Behind all this, of course, is that users of the MFAO are still treating it as another cash market, rather than a hedging utility, and there are insufficient speculators to really give it any grease. But, if any of our readers are, or one day become involved, they should keep in mind that you don't win a football game standing around waiting for the ball to come to you.

The Squeeze On Turkish Exporters

As a recipient of European Union olive oil subsidies, this writer might be advised to not throw stones at his own roof. On the other hand, he also fancies himself to be a commentator able (occasionally and with some success) to view matters in this industry in a less parochial fashion than might be expected from a small grower in this outpost in the province of Jaén. The case in point for this entry would be the almost total failure of the most recent round of W.T.O. negotiations to resolve the issue of O.E.C.D. country agricultural subsidies and their opressive effects on less-developed economies. A recent series of e-mails with a Turkish friend of the Gazette shed some light on how this issue affects olive oil producers in that adjacent Mediterranean country.

Apparently, in what has now turned into an annual autumn/winter ritual, Turkish exporters of olive oil have recently been denied permission to import oil from the E.U. in order to fulfill their commitments and maintain their market share in the face of what is, effectively, a price boycott on the part of that country's producers. Specifically, Turkish growers will not sell olive oil at less than an approximately 30 eurocent per kilo premium to world prices - a figure that more or less corresponds to the E.U. subsidy - and domestic consumption is not sufficient to pick up more than a small portion of the proceeds of a good year. In the case of 2007-2008, there remain about 70,000 metric tons (half the crop) from last year so, even with the 50 percent reduction in production due to this year's drought, there are still on hand supplies that are more than double domestic demand. But the growers will not budge.

Our immediate reaction to this news was that growers were being merely greedy, benefiting, as they are, from vastly reduced labour costs. In fact, it seems that the day rate for pickers there is about one-third of the 50 euros that is current in the province of Jaén. Calculating this out on the basis of our own costs, we found that the difference was uncannily similar to our E.U. subsidy. The response to our remark that Turkish growers were being subsidized by labour rates was that the olive groves of that country produce, on average, about half the oil per hectare of their Spanish counterparts - an excellent argument, knowing that the 40 percent reduction in our own crop this year resulted in a 50 percent increase in our per kilo harvest costs. The fact is that if a harvester hooks a shaker on to a limb for ten seconds, he will bring down most of the fruit. Be there 3 kilos of olives or 6, it basically costs the same.

The result has been that growers in Turkey are waiting for the price to come to them, a strategy that is not without merit given current market conditions. But those paying for this are people in the export business who cannot, without having supplies at world prices now, even maintain market share let alone grow. The wellbeing of Turkish exporters, however, may not be foremost in the thoughts of producers, there being lots of Italian bottlers willing to purchase when prices come into line. Of course, the fact that half of what is available is over a year old may, if the current trend towards enforcing quality standards remains intact, force sellers to consider a lower price - none of this to mention that some foresee Turkish production rising to 350,000 metric tons in coming years as new plantations begin to be productive.

Further background on this issue can be found at The Turkish Daily News. Readers clicking through might take note of the national custom of tying 'the butler to a tree' in order to initiate the olive harvest. The current writer considers himself forewarned.

The usual price graphs on the right-hand side of the page have not been appearing for the last couple of days. That would appear to be due to a malfunction of the server where they are stored - in this case, Telefónica de España.

More Silliness

As we sort through the various news feeds and such from which we get much of our material for the Gazette, we occasionally come across an item in which the well-documented health benefits of consuming olive oil are claimed to be revealed as lies. The most recent comes from an American website dedicated to the sale of dietary plans, books and supplements under the trade name of Nutrient Rich. It seems that following this company's programs, and buying their products, will assist the consumer in achieving 'success', however ill-defined that goal may be.

In the Nutrient Rich blog entry linked to above, we find a contributor by name of Gerald Pugliese posting a You Tube video (posted at the end of this entry) which, by his assessment, further dispels 'the olive oil myth'. In it, a man by the name of Jeff Novick, holding the impressively long, if undefined, list of professional credentials of MS, RD, LD and LN, proceeds, over a five full minutes, to ridicule, heckle and publicly demean a slightly obese woman who is said to be his cousin for her use of what had been sold to her as a 'zero calorie' olive cooking oil. The video, in all its bad taste, is in fact a complaint against U.S. labelling regulations that allow such claims to be made if worded in a certain way, with a subtext that confirms Mr. Novick's antipathy towards olive oil. This attitude seems to be shared by the promotor of Nutrient Rich, one Joel Furhman, M.D., who is quoted as saying that olive oil is not a 'whole', but a 'processed' food. Of course, if he is referring to the 3 percent of olive oil that is classified as pomace, he is correct. But to claim that exracting by centrifuge the oil content of olives is 'processing' is equivalent to saying the same about orange juice because the peel is not included.

A search through the trail of confirming 'experts' behind this misinformation reveals that all are in the business of selling diets to the American public. Aside from Dr. Fuhrman's being a purveyor of dietary supplements, Mr. Novick is affiliated with a commercial enterprise known as The Pritikin Longevity Center and Spa which seems to be some sort of 'wellness' resort located in Florida. Not to come right out and say that this enterprise might be a fat farm, one suspects, given the fame of its creator, that weight loss would be one of the more achievable, and desired, goals of a stay at that centre and that the health benefits of any given food, in this case olive oil, might be secondary to the achievement of that aim. After all, that is how they make their money.

The originating poster of this item, Gerald Pugliese, is a paid writer in the employ of one of Dr. Fuhrman's other efforts, Disease Proof.

Solvent-free Pomace Oil

Researcher Valentina Ruiz of the Consejo Superior de Investigaciones Científicas in Sevilla (mentioned here before) is reported to have developed a novel method of extracting aceite de orujo, or pomace oil, which enhances its health benefits while minimizing the possible side effects of its normal chemical processing. The December 28th online edition of Diario de Sevilla reports that Ms. Ruiz has succeeded in separating the olive oil remaining in the pulp following the first pressing in a centrifuge, avoiding entirely the use of solvents and high temperatures in the process.

Pomace oil contains higher level of triterpenes than virgin. According to reports, these compounds, which control the permeability of the skin of the olive, are thought to be beneficial in reducing the risk of cardiovascular disease and appear to have the capacity to slow the growth of the astrocytoma type of brain tumour.

The first commercial shipments of aceite de repaso will apparently be available within four months.

Volatility, Anyone?

In the wake of last week's notable price surge of around 20 cents for some lampante futures contracts, it seems the sellers have returned with enough of a New Year's hangover to want to rid themselves of all reponsibilities and worries forever - especially those associated with olive oil. Action on the MFAO this morning decidedly favoured the bid making, in the process, any offers associated with last week's 2.66€ look, at best, out of touch with any known reality. March and May deliveries took the brunt of this sudden panic cum glee on the part of producers, each losing 14 cents on the day whilst cash continued to creep upward - though still well off December's highs. Of course, PoolRed will not yet be including many of today's spot market transactions and we will have to wait out a couple of sessions to see the 'real world' activity behind today's radical about face in the futures. In any regard, we continue to be bullish on prices and expect corrections to be shallow and short lived. Then again, if the rain predicted for today and tomorrow in Andalucía (the first in many weeks in this very dry autumn/winter) turns into significant amounts, the lure for the co-operatives of holding olive oil into a bad 2008-09 crop will begin to lose some of its luster.