Exploring Cost Breakdowns — The International Market of Olive Oil

Spend Matters is pleased to present a guest post from Nick Peksa of Mintec Ltd..

Olive oil is promoted around the world by the IOC, an intergovernmental organization based in Madrid, Spain. The IOC tracks production, defines quality standards and monitors authenticity. It has over 30 member states, with more than 98 percent of the world's olives coming from IOC members. The USA, however, is not a member of the IOC, and as such the USDA does not legally recognize the IOC classifications. The USDA uses its own system (normally ignored in favor of the IOC), which it defined in 1948 before the IOC existed.

Breakdown of world olive oil production (tonnes, 2007/08crop year) Source: IOC

The Supply Chain Behind Olive Oil
The supply for olive oil is very straightforward: production, processing, packing, and distribution. I will not go into too much detail regarding production as this is probably too early in the supply chain for the majority of us. But below I have highlighted some of the key factors that should be investigated in greater detail.

  • Fertilization
  • Soil management
  • Irrigation of groves
  • Pruning of trees
  • Plant health treatment
  • Harvesting (hand picking)
  • Fruit haulage to the mill

Extraction Process
Oil production begins with transforming the olives into a paste. The paste is slowly churned or 'malaxed' in a mixer for 20-40 minutes. This allows the small oil droplets, which formed during the original pasting of the olives, to group, making it easier to separate the oil from the rest of the paste. The paste is heated to 27 degrees Celsius during this process. The amount of oil obtained is directly proportional to the temperature and mixing time. However, higher temperatures and a longer mixing period increase oxidation, which reduces shelf life. Modern processes use a layer of gas such as nitrogen or carbon dioxide over the olive paste. This greatly reduces oxidation, resulting in a higher yield without compromising the quality of the oil. Modern methods also use a decanter centrifuge to extract the oil. The leftover substance contains small amounts of oil and is known as pomace.

Classification
Olive oil is classified by the way it is produced, its chemistry and its flavour. The flavour and character of olive oil is determined by the exact type of tree, the soil, its position, how much sunshine it gets, and so on. In the past, not all the EU producer countries viewed this in the same way. Some countries would categorize virgin olive oil on the basis of low acidity alone, whereas others would also take organoleptic characteristics into account, in addition to acidity levels. In recent years, in order to improve olive oil quality, almost all producing countries adopt the same criteria for quality categorization.

Industrial grades

  • Virgin -- describes oil which has been produced physically, without the use of chemical treatment
  • Refined -- oil which has been chemically treated to reduce strong tastes and acid content
  • Pomace olive oil -- oil extracted from the pomace by means of chemical treatment and heat

In order to classify olive oil by taste, a panel of professional tasters taste it in a blind taste test. This is the organoleptic quality of the oil.

Retail grades

  • Extra-virgin olive oil (EVOO) -- oil obtained from the first pressing of the olives. It contains no more than 0.8% acidity and has superior taste. No refined oil can be present.
  • Virgin olive oil -- oil, which has an acidity of less than 2% and has a good taste. No refined oil can be present.
  • Olive oil -- a blend of virgin oil and refined virgin oil, with an acidity of 1% at most. It doesn't have a strong flavour.
  • Lampante oil -- oil which is not used for consumption. Mainly used in the industrial market.

Italy's goverment regulates the use of different protected designation of origin (PDO) labels for olive oil. PDOs are geographical indications defined in EU law to protect the names of regional foods. The law ensures that only products genuinely originating in that region can be sold with the name. The law came into force in 1992 to protect the reputation of genuine foods, and to eliminate the unfair competition and misleading of consumers by fake products, which may be of a lower quality and flavour. The regions of Aprutino, Brisighella, Abbruzzo, Chianti, Brindisi, Salernitane, Liguria and Sabina are among those given the PDO.

Olive Oil Market
Global starting stocks of olive oil are up 45% YOY with global production looks to be up 5% in the marketing year 11/12.The price of extra virgin olive oil in Milan (Italy) has fallen over 21% year on year. Price drops have been reported to be due mainly to increasing competition in the Italian market from the less expensive, plentiful Spanish olive oil supply.

Spain is the world's largest producer of olive oil, and is reported to have had a glut of output this year and last, which has caused stocks of Spanish olive oil to be high. The differential between the price of Italian and Spanish olive oil grew strongly in the middle of this year and Italy's imports of Spanish olive oil are significantly up year-on-year as a result. Italy's imports of Spanish olive oil are expected to grow by 42% in volume and 50% in value in 2011. The differential between the price of Italian and Spanish olive oil has narrowed markedly in recent months however as recent good harvests are reported to have improved the Italian domestic supply.

- Nick Peksa, Mintec Ltd.

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