Thursday, September 28, 2023

The European packaging industry under pressure

The decision by Italian companies to suspend sales it appears to be a justified defensive move

In the past few days, two traditionally strong and well-established Italian companies in the food sector have temporarily suspended the sales of their olive oils, branded and private labels as well, due to uncertainties surrounding upcoming market developments. There are indications that the number of companies taking this action may have increased to 4-5 or even more.

This impact has reverberated throughout the olive oil-producing Mediterranean, as the packaging industry grapples with similar issues.

The prolonged drought in Spain has had far-reaching consequences, resulting in an unexpectedly low production of 680 thousand tons this year, approximately half of the normal Spanish production. This situation poses an even greater challenge for the upcoming marketing period of 2023/24, which will commence with insufficient stocks and is highly likely to face low production levels.

The reduced supply has triggered a rise in producer prices. It is worth noting that the price of extra virgin olive oil in Spain was less than €2 during the summer of 2020 and it has currently surpassed €6. Hence, the primary uncertainty revolves around the scarcity of supply, leading to high prices. Furthermore, it is important to highlight that the costs associated with packaging, energy, and transportation have been escalating rapidly.

On the other end of the value chain, despite efforts to absorb or postpone increases in raw material prices, these costs eventually find their way to the shelves of distribution chains. Consequently, consumers, already burdened by high inflation eroding their purchasing power, have witnessed a steady increase in olive oil prices in recent months.

Simultaneously, the effects of the war in Ukraine have gradually subsided, resulting in sunflower and corn oil prices returning to their previous levels. As a consequence, olive oil is becoming less competitive and experiencing a decline in consumption volumes, estimated at around 20 to 30%.

Against this backdrop, the decision by Italian companies to suspend sales it appears to be a justified defensive move. It aims to minimize losses not only due to the increase in the prices they pay for olive oil but also due to the prices they sell it, while simultaneously by seeking a challenging renegotiation with retail chains. However, an intriguing legal question emerges concerning the force majeure clauses in contracts.

The disruption of the value chain equilibrium raises economic as well as ethical concerns. For several years, producer prices have been squeezed to abnormally low levels, excluding from the market the majority of small and medium-sized farms, which form the backbone of the industry. Consequently, we have been witnessing instances of abandonment, particularly in marginal olive groves.

These are complex agricultural policy issues with no straightforward solutions. Those familiar with the history of the Common Agricultural Policy will recall that “tools” such as the intervention price, subsidy networks, and contract stockage were once in place, particularly in the olive sector. These measures have been abolished, leaving the industry vulnerable during market crises such as the one currently experienced.

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