Olive & Oil 15/11/2014

The variables that influence supply and demand do not reveal significance in the case of olive oil

The aim of the study by Valentina Sabbatini is to estimate the equation of supply for olive oil in Italy

Olive oil is at the base of the Mediterranean diet since the past. In fact 80% of the production of olive oil is concentrated in the European Union. The major producers are: Spain, Italy and Greece. In these countries olive oil represents not only a resource for rural economics, but it is also an important part of the cultural and environmental heritage. In some regions of these countries, olive oil is the most important agricultural activity, in terms of employment and percentage of cultivated area. Other producers, outside the European Union, are also facing the Mediterranean, namely Tunisia, Turkey, Syria and Morocco. Minority units are produced in the American continent, Australia and Japan.
Spain is the country with the highest number of olive trees (more than 300 million), and is nowadays the world's leading olive and olive oil producer and exporter. Italy is the second European producer; two-thirds of the production is represented by extra-virgin olive oil with 40 PDO and PGI (Protected Designation of Origin and Protected Geographical Indication), widespread over the whole national territory. Greece devotes 60% of its cultivated land to olive growing. It is the world's top producer of black olives and has more varieties of olives than any other country.

The traditional consumer countries coincide with the producing countries of the Mediterranean basin. There are countries that over time saw coming within their borders conspicuous colonies of emigrant producing countries, and those that only recently have moved closer to the Mediterranean diet and knowledge of the health qualities of olive oil.
For example, the United States, more so than others has a positive trend in world consumption. In ten years, its consumption has increased from 170 to 277 thousand tons, remaining the largest market among nontraditional consumers, after Italy.
Despite the global economics- financial crisis, the international trade in olive oil seems to be in good health.

First of all, Valentina Sabbatini, Tuscia University, starts with the analysis of the variables that can explain the equations of the olive oil supply in Italy. The estimation sample is for the years 1983 – 2007, for taking into account all possible shocks in the olive oil market, and to understand the change in the value, and the possible causes.
An initial analysis reveals that not all the variables affect the supply of olive oil, so we decided to eliminate them. In particular the variables: price of olive, price of harvester and stock of the plant. 

Researcher found that the price of crude oil doesn’t affect the supply of olive oil. Several reasons can explain this phenomenon. The price of the olives, and of the machines are not able to influence the supply of olive oil, because Italian firms are small (the average firm is about 3 ha) and family-run. Also in many regions of Italy, farmers continue to harvest the olives by using traditional methods to preserve the flavor of the oil and respect the traditions of the territory. We must consider that the income of farmers is supported by the European Community through incentives provided by CAP (Common Agricultural Policy), which protect small farms.
Comparing the trends related to the production of olive oil with the other variables including dummy variables to take into account the shocks of the market, and using lag for seasonality, the results do not change.
Seasonality refers to the biological cycle of the plant, which in the case of the olive tree, is about two years.

Regarding the production of olive oil the estimated periodicity of a cycle for perennial plants is about 6 years. This is confirmed from the regression analysis of this study which
shows a cycle of 5 years. In fact, to have significant data production the date with 5 lags must be used.
For calculating the elasticity of supply, for the logarithmic equation, reasearcher can consider the coefficient α. In this case, the elasticity of supply with respect to the price is 0.07 < 1 so it is inelastic, as expected. If the price of olive oil increases by 10%, the quantity supplied increases only by 0.07 €. It is technically and economically possible to reduce the supply of perennials after planting. Usually Italian firms for the production of olive oil are small and do not have the necessary capital to invest in long-term improvements and introduce new
technologies for the olive harvest.

The production of olive oil, one of the most important resources in the economy of Italy and the Mediterranean basin, is a complex reality. This work, through the analysis of the variables that influence supply and demand, has shown that the classical variables usually used in the agricultural sector do not reveal significance in the case of olive oil.

In the future, it will be interesting to extend this work, with the support of other variables. For the analysis of supply, it will be important to see the impact of European policies. As
shown, in fact, the producers would not be able to produce without these subsidies, and the next reform in agricultural policies must take account of this. This fact is aggravated by the inelasticity of supply, as mentioned earlier due to a lack of business investment, which does not allow farmers to enlarge the size of the company and buy modern equipment for harvesting olives. If the market dynamics show in recent years (since 2007) a slight price recovery origin of the product, the future is not so rosy, because of competition from
incomers like Spain, Tunisia and Greece (Bernini Cari, Sassi, 2008), able to produce at lower costs. It is then a case of directing the Italian olive oil towards quality.


di T N