Similar to last year's summer, Europe is yet again facing intense heat waves and scorching high temperatures – the highest so far this year. While climate change and El Niño are to blame for the extreme temperatures, low rainfall is the reason for the severe drought in Southern Europe. Spain has been hit hard, with one-third of the country dealing with below-average rainfall for 36 consecutive months. The alarming water scarcity is affecting the agriculture sector, leading to failing crop harvests, particularly olives.
Producing half of the world's supply of olive oil, Spain has a significant influence on global olive oil prices since it is the leading producer and exporter. Since Jun-20, prices have risen due to increasing production costs and growing demand. High-interest rates and inflation increased fertilizer and energy costs, and the global shortage of sunflower oil after the invasion of Ukraine drove demand higher. However, the recent production decline has made global olive oil prices spike to new levels. According to the International Monetary Fund, export prices of global extra virgin olive oil were 6,269 USD per metric ton (mt) at the end of April, breaking the 26-year record in 1996 when it was traded at 6,225 per mt. According to Tridge, Spain’s olive oil was traded at 8.99 USD/kg on June 17, a 12.2% month-on-month (MoM) increase.
Although olive trees are known for their resistance to high temperatures, low soil moisture from prolonged drought means they drop their unripe fruits early. Damaged olive trees during the blossoming period have contributed to the low production of olive oils. According to Spain’s Ministry of Agriculture, Fisheries, and Food, Spain has only produced 680,000 tons of olive oil. This is significantly lower than their average production of 1.5 million tons, Spain’s lowest yield since 2012 to 2013. According to the Spanish Union of Small Farmers (UPA), exports are therefore expected to decrease from 800,000 to 600,000 tons and imports to increase from 151,000 tons to 200,000 tons.
Although the much-anticipated rain fell in June, the showers were insufficient to reverse the drought’s effects and to allow the harvest to recover. However, the scant rain created a breeding ground for olive fruit flies, bringing new challenges to the farmers. Although measures have been taken to counteract the flies, the hardest-hitting region saw 4.6% of their olives damaged.
Future of Spanish Olive Oil
Further concerns exist about the increasing low-quality and fraudulent olive oil entering the market. The Spanish Agency for Food Safety and Nutrition alerted the public to be on the lookout for fraudulent olive oil as the Directorate-General for Public Health banned 70,000 liters of olive oil that were mixed with substances unfit for human consumption.
While Spain’s poor performance is driving prices, it is also allowing other lesser-known market players to shine. Despite lower crop yields, Tunisia has seen an increase in its export revenues, going up 36.9% year-to-date (YTD) at the end of May, with 45% exported to Spain. Jordan, a small player in the market, saw increased demand despite their premium prices. However, Spain buying up most of Lebanon’s olive oil supply in early July is concerning locals about their own supply shortage.
Rainfall is necessary for Spain’s harvest to improve next year. However, adverse weather is expected to continue as a new heat wave coming from North Africa is forecasted to hit the country at the end of July, pushing Spain's temperature up to 45 degrees Celsius. It is unlikely that the autumn harvest will produce new olive oil until November. In addition, with the consumption rate, shortages may be seen in autumn as last year’s supply will be out by September. Therefore, a rise in olive oil prices is expected to trend upwards, and the dire situation could push smaller producers in Spain out of the business.