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By Don Griego on

It has been since March since our last communication. In that issue, the crop was still being harvested. Who would know that in July…the market would have completely turned around and encountered a large increase in cost?  So as far as we can tell, there are four factors in WHY the increase was so large and so quick to the market and hold it, than once again in August take another spike. Even on weekly basis prices do not seem to softening (no particular order).

1) RAIN – or the lack thereof. Since the end of the harvest, no significant rain fall has occurred. Although the olive tree is the “camel” of agricultural products, it still needs rain at strategic times in order to recover from previous crop. The trees were stressed from the HISTORIC crop, and are in need of water in order to have even an average crop in SPAIN. Third countries – however will have large crops – the QUESTION is, will that production be enough to replace the fall in the Spanish harvest?

2) NO PLACE TO GO BUT SPAIN – this was an important aspect of the large increases and the spikes in the market taking hold. Most other countries did not have enough of a crop to be EXPORTERS to other countries. Italy and Greece had disastrous crops. Tunisia and Turkey – two medium players with a presence in the US market – did not have any appreciable amounts to export. We are not sure if Turkey even exported any BULK oil to the US this past season. Their production will be quite high this year – again the question is, will it be enough to replace what Spain will lose?

3) EXPORTS AND CONSUMPTION FIGURES – This sort of ties into point number 2. Spain’s consumption and exports usually run around 100/110 thousand tons per month. This crop year they are running close to 130/140 thousand tons per month all the way through end of August. Although, August numbers are not FIRM yet, we are sure they will continue strong.  The important fact in local consumption is that supermarket shelf prices for 1 liter Extra Virgin (authentic EV) is about the same price as BULK ex works costs. One would have to add on the cost of transportation, packaging, packing costs, retail and producer’s mark up.  So a slowdown in local consumption in Italy or Spain is NOT going to happen before new crop, or at least supermarket prices on the shelf reflect the true replacement cost of the oil. EXPORTS, on the other hand, will have to slow at some point, as the current offerings will not stimulate the kind of volumes that will keep the figures in the 130/140 k range. HOWEVER, understand, much of the oil being shipped is at prices before the SPIKE in the market. Contracts for three months, starting in July, are in effect, and maybe into September, the exports numbers may not fall off.

4) SPECULATORS – People and sources that I am very close to, do NOT believe that speculators played much of a role in the spikes in the market. I fundamentally disagree with that conclusion. We maybe just have a difference in defining what a speculator IS. No, this is not a BILL CLINTONISM. Trying to define the meaning of IS? But there is no doubt – at least in my head – that large Italian and Spanish producers deliberately paid 150 Euro per ton OVER market in July to get the FIRE started. If one thinks about it, IF they played their cards correctly, paying the 150 Euro per ton more, was a small risk in igniting the market to even higher levels. The only risk they had was IF the market would retreat below the elevated price level they paid. Obviously it did not. Since the market spiked so quickly, normal buying (which had been hand to mouth) put additional flame to the market, making even the first to jump the market players even in a better position. Position this with the points above and you had a WILD FIRE of price increases still taking place today.  Were the speculators the MAJOR reason for the spike in the market? We cannot for certain make that claim, but they definitely LIT the fire, and that brings us back the important question, WHEN WILL IT RAIN?

What to do?
Probably the hardest question at this time and place based on the market and forecasts for new crop. Math tells us there is plenty of refined oil left in Spain, it is not so clear on EV, but we are assuming there is quantities available – depending on what the consumption/export numbers are for the rest of the year.  IF you need oil for prompt shipment, you will have no other choice but to bite the bullet and order from this overpriced – heavily stressed – market. That is really not that a hard a decision. The real strategic decision is when/how much to purchase to last you till new crop OR before price softens a bit (which may not happen). This whole discussion goes to the material fact, that if olive oil is an important part of your business, or you have customers counting on you to have olive oil available. One needs to have a plan of action in place which includes having a percentage of inventory/purchase orders always on the books that you can use to average or leverage your sales. Buying when you need on the shortest lead time can be effective, but as this market (I was wrong) clearly defines, markets can change rapidly with many factors other than supply and demand taking a major place in the prices of items in the marketplace.

Marketing Order / ITC Report / Farm Bill / California Olive Oil Commission / Australian Olive Oil Association

The COOC got a hearing in front of the Californian Department of Agriculture.  We are not sure when the results of that hearing will be finalized. At stake are the standards of all olive oil categories, including ones that Californian does not currently produce at all, or at least on a significant basis. Having two standards for a global product used worldwide based on a production area that accounts for about .2 % of the world’s production, and 2 % of the US consumption, does not make sense to me, but I learned a long time ago, when things get into politicians hands – anything can happen. The funny part to me at least, is that the “Californian” argument is being controlled by a large Spanish concern who is owner in one of the larger Californian producers, and a failed Australian strategy, including the possibility of an Australian firm buying another large California producer.

In the meantime, the NAOOA continues to try and promote olive oil from all producers. Highlighting the positive attributes of the product.  NAOOA continues taking samples of all  segments in the market place to have product tested for authenticity.  The permanent injunction was the first step in going after several more bad actors in the market place.  We will continue this vigilance in 2015 and beyond.

Worldwide Financial Crisis

Russian invasion still dominates the headlines. In spite of large economic sanctions, it appears V. Putin wants to regain some of the old USSR territories. Obviously the sanctions have not deterred Russia from being very aggressive militarily in this pursuit. Why do I get the feeling that OIL is at the root of this problem? It seems to be the root of much of the horrific stuff going in the Mid-East. In both places, either the dependence on these areas for oil and multinational investment/involvement seems to dictate responses, or should I phrase it as lack of responses.

The European economy keeps plugging along at a slow pace. Finally, the dollar seems like a better safe haven than the EURO.

Costing by Product – Buying Recommendation

EXTRA VIRGIN:  You really should have some type of position of some percentage until new crop is upon us. Of course, if you are not covered and need to buy, my suggestion would be light in purchasing until you see multiple offers in the market place, and suppliers actually looking for orders. At present, that has not occurred and will be a good indicator of market starting to relax. The number of offers is an indicator that shippers are back from their holiday breaks, and are trying to understand remaining inventory vs. new crop possibilities.

ORGANIC EXTRA VIRGIN:  Last March, our recommendation was to have been covered at a high level. We are hoping you followed the one prediction I actually got right. Prices have NOT gone up as much as conventional, and the strengthening of the dollar will make things a little more palatable if you are still short. If you need ORGANIC EV, one should buy all you need until the end of the year.

REFINED:  Well, I was completely wrong on this projection.  Looking at the math on this item, it would be easy to question why this item spiked even more than EV. Supplies are good, new crop should not be an issue. Yet, this pushed higher than anyone would have expected.  If you need for prompt, you will have to bite the bullet. Hopefully that will NOT be the case, a serious discussion on planning if you need oil before new crop for October/November (before new crop). One must look for indicators that the flow of oil is loosening… and try to get to a cost that you are comfortable with.

POMACE:  Like all items, pomace prices spiked as well. More to follow the trend than anything else. There is enough raw material available; there are more refiners at present than in the past. It would have been good to have covered your needs till new crop. But like ORG EV…the EURO and the modest increase should not hurt your costing positions that much.

*****All these suggestions are based on a stable Euro**** we have instruments in place to keep the currency stable with the flexibility to take advantage of a stronger dollar.

Currency Facts – Euro Update

April May June July August
Average 1.380 1.374 1.360 1.355 1.334
High 1.390 1.399 1.367 1.370 1.344
Low 1.362 1.3585 1.350 1.340 1.315

Trend continues to favor the US dollar. How long will the momentum last? As with all commodities, a balanced program is necessary for keeping the market from running away from you.

AMD Update

We would like to announce the hiring of two new employees.  Tom White has joined our team as a Salesman who will specialize in the sale of specialty oils and olive oil. Also, we hired Bonnie Jamieson as our full charge bookkeeper.  She will be responsible for our payables and her ability to review vendor costs and find savings both for vendors and AMD.

Donald Griego

AMD Oil Sales LLC