Psychological Warfare – Spring 2015
When one looks at the olive oil market, we usually do not think about all the psychological battles that occur in real time and real space. From the domestic industry’s story line; the importers’ version of the story line – all being broadcast to convince consumers the best possible value for their expenditure in the olive oil category. Suppliers trying to convince consumers on what is real, or perceived to be real, versus factual and scientific arguments that exist. Where does one draw the best conclusion and get complete information from?
Well it is no different than buying the BULK oil from all over the globe. Let’s assume for this discussion that quality is acceptable from all countries. We have our definitive views on quality standards – let’s just talk about the nature of the purchase and what goes into getting a price – terms – shipment period.
Let’s tackle the easy one, TERMS – in a short year with many third countries (outside EU) being the main source for U.S. imports, the supplier needs to be 100% certain that they get paid for the shipments. The importer needs to be certain that the quality of the shipment is within their specifications. Advantage SUPPLIER as this year – supplier can dictate these terms and conditions as overall supply is limited and will continue to be limited for some time. Our greatest challenge will be to estimate when NEW CROP expectations draw into the psyche of the market. Last year, BUYERS dictated payment terms and conditions.
An overlooked aspect of purchasing is the shipment period of the offers. This is a critical matter in making purchasing decisions. In the 2015 market place – US consumers of bulk oil want to buy out as far as possible. Olive Oil suppliers of bulk olive oil only really want to sell for prompt shipment as prices this year have only advanced each day/week for the most part. It wasn’t until recently that you have seen some softness (besides the Currency) in offers for some items. Here is where the psychology of the market dynamics starts to take shape. Importers can only sell out futures as far as storage and financial consideration will allow. As stated, suppliers from Third World countries to date are only selling for prompt or two week lead time sailings. We will get into this later, but as long as the perception is that olive oil carry over into ¹2016 crop will be less than 300k tons, sellers will keep to offering only for prompt shipment. The crunch time for both parties will be, IF and WHEN the possibility of a 300 k carryover will be viable. You can also throw in what the possibility of new crop production will be … but that will be later towards end May/June. So this dynamic plays into pricing. Do I sell? Do I wait to sell? So far inventory has not built up in Tunisia, so the easy answer is that they wait. If inventory does start piling up this will be an important factor in shipment period possibilities and also of course pricing. Currently no supplier wants or has to SELL before they know the cost of the oil/storage/financing. So it has been quite easy as other options are not readily available to negotiate.
This leads to the ALL important and Omni present pricing factor. After one calculates their readiness to sell, all the above factors come into play. It is not a simple math equation of cost of production. For US buyers it than comes down to being able to trust the quality you are buying, being able to store the quality you are buying UNLESS all your contracts are for prompt shipment and of course finance the necessary inventory to give your customers bought out as far as possible based on your open positions.
So you see topics like domestic consumption in Spain? Retail prices for olive oil in Spain? Importation of olive oil into Spain that effect the carry over. When will Tunisia be done harvesting (soon)? What will the quality of third country oil be especially on EV? Will the oil and stable once the hotter months are upon us.
All important questions that need to be looked at to make an informed olive oil buying decision. Some hard facts, but more to the psychology of the market.
¹Spanish Numbers were released today… Consumption and Exports fell to 100 k and imports were 15 k for February.
WORLDWIDE FINANCIAL CRISIS
Europe continues to muddle along with some bright forecasts and the always present Greek Debt problem. It seems that IF the Greek Debt is the only hurdle, Europe is a lot closer to a recovery. However, if there are other debt issues that need to be addressed, the European economy will suffer greatly for years to come. It is my hope that the majority of the issues are under control so it does not blow up the already very fragile economic situation.
Here in the U.S., unemployment as it is measured is under control. Our biggest concern is the wages that most of these incoming jobs are paying. Congress has not been able to address that or pretty much anything else since the New Year. Recently they have gotten involved in the foreign policy in a big way. Hopefully they will look at trying to find ways to create more and better paying jobs, or help / incent companies to do so. Obviously immigration and infrastructure issues have to be solved in the very near future. I am not optimistic about those important issues being resolved during the next 2 years.
COSTING BY PRODUCT – BUYING RECOMMENDATION
EXTRA VIRGIN – Probably the most difficult time we have had since 1989, and actually it is a lot harder as the options of several different countries are not there. Especially from the Mediterranean. So keeping the profile somewhat consistent, making sure the quality is best we can source, making sure the EV is stable as we head into the hotter months.
One really needs to have material on the books as far out as your olive oil supplier will allow. This is no secret as discussed; the issue is the lack of long term shipment periods limit to what your supplier will be able to do.
So the second quarter can be covered, as March turns into April, one should be able to get firm prices for end July – maybe even August.
That is where the rubber meets the road. What to do for mid-August until new crop. My recommendation is you always are to have some coverage for that period if available, as market is unsettled. Better to have and average DOWN, than not to have and buy as market rises.
REFINED / PURE – After indications that refined would continue to follow EV pricing, refined has made a little split from EV prices, and softened some from January and February trends. Here it is wise to buy 60 days out and keep an eye if the market becomes firm again and then expand that position.
POMACE – This item became a big issue in late January and into February. The momentum of the price increases seems to have stopped. This probably took the biggest jump percentage wise vs. the other qualities. It does not appear Third World countries will be able to aid in lowering costs, but when available it will be less expensive than Spanish or Italian production. My recommendation is to have full coverage for 60 days, and partial coverage for into 90 days.
*****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
A huge saving grace has been the strength of the dollar. It has kept big increases in the raw material costs way down. This helps and hurts. It helps in the sense that landed costs will be lower for the U.S. buyer. The bad news is it inflates what the raw material is really doing, and keeps the demand at higher level than it might be if EURO was stable.
The important question to ask is WHEN, and IF, will this slide cease? Someone much smarter than me will have to comment on that question.
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