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A hidden hand in EVOO

Everyone knows the current situation of economic uncertainty in which we find ourselves immersed, which affects both our business fabric and the family environment. One of the most obvious reflections of this complex situation can be observed in a product that is essential in our culinary consumption habits such as EVOO (extra virgin olive oil).

The evolution of its price at origin (that sold in bulk by oil mills and cooperatives) has maintained an upward trend since the 2.020 campaign, having almost doubled its price from that year until the end of 2.022. We can find many causes to explain this evolution, but what is truly amazing has been the bullish rally in its “price” throughout 2.023, which has led it to reach levels never seen before.

There are multiple factors that have influenced this price escalation, most of them related to the theory of supply and demand that Alfred Marschall already prophesied in the XNUMXth century (almost everything has already been invented):

  • Climatological: for 3 consecutive years there have been adverse conditions during the flowering season due to high temperatures, as well as a drastic decrease in rainfall levels, which have caused a significant decrease in production. The advance knowledge on the part of the suppliers of the expectations of a low harvest for the following year generates the process of stockpiling product that is not offered to the market, causing the consequent increase in prices.
  • Increase in production costs, mainly energy, whose reflection in the final price is immediate.
  • The impact of the war in Ukraine, which in addition to other consequences has led to a significant decrease in the supply of sunflower oil, which has generated an increase in its price until it reaches levels close to olive oil, fueling demand for the latter, given its best quality for most uses.
  • Consumption habits have made EVOO a product with inelastic demand, so, at least until the beginning of 2.023, its demand has not been seriously affected by the escalation of prices.

Although all these conditions seem to justify the evolution of the price in recent years, it is more difficult to understand what happened throughout 2.023, where in week 37 (the period prior to the start of the harvest), the price at origin has from €3,96/Kg in 2.022 to €8,52/Kg in 2.023 (+ 215,15%).

If we try to justify this evolution by climatological factors, analyzing the rainfall in the province of Jaén (main producing province) in the last 5 years, it remains within a stable trend within low levels, although it has already continued over time. lasts 3 periods. Its impact on production capacity and consequently on the final price of the product is direct, although if we look at the evolution of prices, the increase experienced in 2.023 does not seem to be due exclusively to this condition.

On the other hand, the continued increase in price is causing a gradual change in consumer habits, going from being a basic necessity product to one that we could consider almost luxury (on some shelves there are already packaging with safety sheets), for example. which demand is tending to be more elastic and consequently causing a decrease in prices.

Production costs throughout 2.023 have been maintained, so their impact on the final price should not exceed the evolution of the CPI.

The basis for this exponential rise in prices seems to be due more to purely speculative maneuvers than to the market conditions themselves. So it seems that not everything was invented and the invisible hand that moves the market and benefits society as a whole, which Adam Smith predicted in The Wealth of Nations, seems to have become the hidden hand that manipulates the market to wealth of a few.

However, we must always be alert and try to benefit from the differentiating factors that the market offers us, since, if part of the surplus supply of EVOO in our morning toast happens to be deposited on our impeccable shirt, we must do so. ignore this circumstance, and consider that it is a luxury that must be exhibited, and if someone notices the stain we must warn them "be careful, it is an extra virgin."

Emilio Sanchez Bullejos
Partner EUDITA GRANADA

 

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