Read this newspaper report on the launch of an olive oil futures market and decide if these statements are true or false.
Spain launches first olive oil futures market
A Spanish company has set up the first olive oil futures exchange, in a bid to turn olive oil into a big player in the international investment market.
The exchange, created by the Andalusian firm MFAO, is currently being used by olive growers, but hopes to attract foreign speculative investors into what is becoming a very popular commodity.
Although big Wall Street investors currently trade in agricultural derivatives such as coffee, wheat and soybeans, it remains to be seen if they will be persuaded to speculate in European olive oil.
Recent pronouncements by the American Food and Drug Administration on the health benefits of daily olive oil consumption have raised hopes that American investment funds will soon be keen to add olive oil to their portfolios.
Spain is the world’s top olive oil producer, accounting for 40% of the world’s olive oil production. Italy is the next biggest producer, but also buys between 300 and 400 million tonnes of Spanish olive oil a year. MFAO hopes Italian companies will soon start trading on the exchange.
Olive oil prices are notoriously volatile. In the year before the exchange opened, they varied from just over 1,750 euros a tonne to over 2,550 euros, with an average daily volatility of two percent. This volatility gives a strong incentive to olive oil producers to buy futures as a means of hedging against price fluctuations.
Since the exchange opened, prices have stayed towards the top end of the range, and volatility has decreased, although it is too early to say if futures have had an impact on the overall market.
Trading on the exchange has so far been lower than predicted, with just 10,000 one-tonne contracts changing hands. However, the exchange was launched at the end of an olive oil season, and trading is expected to pick up when the next olive harvest starts.
MFAO is confident that their exchange will not go the same way as the Spanish citrus fruits futures market, which was set up in 1995 and abandoned a few years later.
The product being traded is not the one for sale in supermarkets, but an oil that will be further refined. This oil has no flavour or smell, and bottlers add virgin olive oil to make a product which has the characteristics of a particular type of olive.
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