In recent months, the price of olive oil in Spain has experienced a notable increase, generating concern among both consumers and experts in the food sector. This phenomenon has triggered a series of investigations and analyzes aimed at understanding the causes behind this abrupt increase and the possible short- and long-term implications.
The rise in the price of olive oil is not an isolated event; In fact, food prices in general have increased by 9%. However, the case of oil is particular, with an increase of 6% in just one month and an astonishing 50% so far this year, accumulating an increase of almost 75% in the last 12 months.
Although the cost of food in general is increasing at a more moderate rate, the price of olive oil has skyrocketed, increasing sevenfold compared to other increases in agricultural sectors. In the last 12 months, cereals have experienced an increase of close to 8%, legumes and vegetables 12%, rice 16%, while oil has registered an increase of 73.5%.
According to the Weekly Situation Report of the Ministry of Agriculture, Fisheries and Food, the cost of olive oil has increased steadily over the last 16 months, becoming 39% more expensive than a year ago.
However, the question remains: why is this rise so pronounced and what are its fundamental causes?
In 2020, olive oil prices experienced a marked decline, mainly influenced by the COVID-19 pandemic. Restrictions on mobility and international trade affected the supply chain, generating logistical problems and delays in distribution. These challenges directly impacted prices by affecting product availability in certain markets. Although it would be logical to think that prices tend to increase when supply is reduced, in this case various factors came together that pushed prices down.
One of them was the change in consumption patterns. With confinement measures and the increase in teleworking, consumer preferences changed. There was an increase in demand for packaged foods, while demand for fresh products, such as olive oil, decreased. This reduction in demand contributed to the decrease in prices.
Added to this is the closure of restaurants and hotels due to restrictions, which resulted in lower demand for oil. These establishments, which are key consumers of olive oil, closed their doors, thus contributing to the drop in prices.
Finally, global economic uncertainty led consumers to adopt a more cautious stance in their spending, affecting demand for premium products, including olive oil. This set of factors outlined a complex panorama that significantly affected the price dynamics of this product.
The war in Ukraine has driven a significant increase in the prices of key raw materials for olive cultivation and oil production, such as fertilizers, electricity and diesel. This increase is attributed to the interruption of supplies and geopolitical tensions, representing an additional challenge for the olive oil industry as it faces higher costs and external pressures.
Although fertilizer prices have started to decline, challenges remain in terms of affordability and availability. The escalation peaked in early 2022 due to supply disruptions caused by the war.
The price of electricity in Spain has experienced a marked increase in recent years, generating concern among consumers. Initially, during the pandemic, the cost of electricity fell to €34/MWh, but since then it has maintained a constant upward trend. This increase in Spain is attributed to several factors that are impacting the country's electricity market, including the war in Ukraine, which affects part of the gas pipeline infrastructure that supplies Europe, the natural gas crisis, the decrease in hydroelectric production and global geopolitical uncertainty.
In addition, taxes are also having a significant impact on the electricity bill, representing more than 40%. Although the electricity tax, taxing the production of electrical energy, has experienced a decrease in recent years, it has not translated into a price reduction in the final bill. This is due to the increase in wholesale market prices, with special emphasis on 2022.
The manufacture of synthetic fertilizers is based on the use of natural gas, whose price increase has directly impacted the cost of the final product. The natural gas crisis, characterized by a general increase in gas prices worldwide, has been a key factor that has influenced the escalation of oil prices, especially in Spain, due to its dependence on external gas supplies. . This interconnection between fertilizer production and rising natural gas prices has contributed to economic tensions in the supply chain and has directly impacted the cost of oil production.
Drought emerges as a primary factor in the increase in olive oil prices. Spain, a world leader in the production and export of this product, has faced unfavorable weather conditions that have had a negative impact on the olive harvest. The significant decrease in rainfall has led to a considerable reduction in olive production. With dwindling supply and steady demand, prices have seen a rise.
Since 2021, drought periods have increased, beginning one of the most extreme droughts recorded to date. This phenomenon has led to a drastic decrease in olive oil production, reaching half of usual levels and configuring the worst harvest since 1996.
The lack of rainfall, combined with the impact of climate change and the increase in electrical energy costs, has generated the following reality: in 2019, the cost of producing 1 liter of olive oil was €2.5/kg , while in 2022, production costs rose to €6.67/kg (three times more than in 2019). These factors are mainly responsible for the price of olive oil having gone from €1.9/kg in 2020 to €8.1/kg in August 2023.
Although the drought has affected the cultivation of all fruit and vegetable products, the price of olive oil has experienced a more pronounced increase than that of other products. In this scenario, the value chain plays a crucial role in understanding price dynamics.
The olive oil value chain covers four key phases: production, oil mill, bottling and distribution. In the first stage, the farmer is in charge of growing the olives. These are then taken to the oil mill, where they are transformed into oil. The oil obtained is then bottled to finally be distributed in stores and supermarkets.
In the 2021 campaign, prior to the price increase, the cost structure in the olive oil sector was distributed as follows:
In the following diagram, it is highlighted that the highest cost falls on the production of olives, where farmers obtained 6 cents per kilo produced. On the contrary, the bottling phase, which encompasses the marketing and management of oil brands, was the most profitable. However, in the last stage of the chain, distributors recorded a loss of 23 cents per kilo of olive oil that year. The key question is: why would the large supermarket chains be willing to absorb that loss?
The answer lies in the fact that olive oils are used as an "attractive product", serving to attract consumers to the point of sale. Once there, they seek to compensate for this loss of money by purchasing other products. Although selling at a loss is not generally prohibited in Spain, there are specific regulations that systematically prohibit this practice when it negatively affects competition in the market.
Currently, the evolution of the price of olive oil is marked by uncertainty, and it is clear that high prices will persist as long as the drought in Spain continues.
Farmers warn that the price of olive oil will show no signs of declining, at least until May 2024. Furthermore, they stress that, in the absence of a significant increase in rainfall, there is a possibility that it will remain elevated until 2025.
Added to this situation is the increase in production costs experienced in recent years. For producers, collection, pruning, fertilizing and other activities maintain a constant cost, whether in a good or bad harvest. In addition, the increase in input prices has contributed to the cost per kilo in the last two campaigns being higher than in previous years. This set of factors paints a challenging scenario for the olive oil industry, with climate uncertainty and cost increases directly influencing price dynamics.
The current price increase in olive oil in Spain is presented as a complex phenomenon, where drought and its consequences on production play a very important role. Steady demand and declining supply, compounded by adverse weather conditions, are seen as significant factors contributing to the upward trend in prices.
However, this situation raises the need for more exhaustive research that analyzes the supply chain and the behavior of supermarkets. The increase in profit margins and the possibility of irregular practices in the marketing of olive oil must be addressed in greater depth to fully understand their impact on final prices for consumers.
Comparison with other foods reveals a marked difference, where olive oil experiences a disproportionate increase in price compared to similar products. This discrepancy highlights the particularity of the challenges facing the olive oil market and underscores the need for a more detailed evaluation of the specific factors contributing to this trend.