Planting Into a $7 Tailwind
This piece is scheduled to run in the Capital Press in Summer 2006An article in the August 27, 2006 San Francisco Chronicle painted a rosy picture of the market for super high-density olives in California. The article, which can be found online at SfGate.Com, focused largely on the growth of the industry in terms of the acres super high-density plantings and the volume of oil produced in the state. The super high-density system uses tighter plantings and mechanized pruning and harvesting to achieve its economies of scale. However, while both the number of planted acres and the total number of gallons produced are increasing at dramatic rates, the jury is still out on whether or not California producers can compete in the world market in a “normal” year, that is a year when there is not a shortage of olive oil.
The global olive oil market is currently in the midst of a “perfect storm” where unprecedented demand, a shortfall in supply, and the disparity between the Euro and the Dollar have combined to vault the price of olive oil to near historic highs. In 2003, when both the Dollar and the olive oil supply were stronger, one could buy a truckload of bulk olive oil for $9 per gallon delivered to the port of Oakland, California. Today, only the most well-connected buyers could buy the same load delivered for $15-$18.
Spain is the largest producer of olive oil in the world and the Spanish crop has been short for the past two years as a result of a drought. A large Spanish crop in the next few years will again depress pricing. Thus, it is not much of a stretch to say that today’s prices, which are roughly double what they were in 2003, and about 40% over 2004’s price of $11/gallon, which was then considered “high, are an anomaly. One of the most poignant facts in the Chronicle article was that the California Olive Ranch, the largest producer of olive oil in the United States, is paying its growers $9/gallon, roughly the landed cost for oil in 2003.
The fact of the matter is that the California olive oil industry is enjoying a $4-$7/gallon tailwind. As is always the case with new tree crop fads, the only folks guaranteed to make money on super high-density olives are the nurseries. Producers in Australia, Chile, and Argentina have also begun to make serious commitments to super high-density olives. I have competed against the Australians in the international sales arena and I can say definitively that their price floor is lower than any Californian producers. This is because the Australian government stands firmly behind their olive oil industry and is not above subsidizing them in creative ways.
My advice to farmers who are considering planting super high-density olives is simple: proceed with caution. Although, California olive oil may enjoy a slight premium over other olive oils of the world, I would be surprised if that premium was more than 10%-12%. When I was a kid, Emus were going to revolutionize the meat industry and kiwis were only inches away from becoming the staple of the American diet. Sometimes, even the smartest, most well-intentioned people are wrong.
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posted by Brian J. Kenny @ 4:11 PM
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