If you’re gearing up for a contract in the near future, here’s the internal steps you’ll need to take to prepare.
The first important step to do before all else is to do an internal needs review. This process will allow you to gather the facts for your organization, and understand what packaging, oils, and volumes you’ve used in the past to give yourself a baseline.
Answer the following questions, and pull information out of your ERP system whenever possible.
If you are buying olive oil for a new product, you’ll want to pull together any sales projections or growth that will play a part in your decision.
Of course, because new items and product lines are often “unknown” in terms of their success (and therefore how much of each ingredient you’re going to need), many companies don’t do contracts for new products and simply buy off the spot market until more is known and the needs are more secure.
Once you have all of your own information pulled together, work with your supplier to do a review of the current market situation. This applies to olive oil, but also if you are contracting commodity items on the CBOT, the situation is very similar.
Is global production of olive oil high or low this year? This is a much discussed and often predicted topic. You can usually get a gauge for how the next harvest will be a month or two before it begins or right as it starts — you’ll hear a lot before that but it’s often unreliable. Even in a good market, the things you’ll usually hear in advance are along the lines of “everything looks good, but we’re still waiting on weather”. This is because it is vital to have rain before the harvest actually begins in full scale. Without rain, harvest is often delayed or prices go up.
The best thing to do is to get multiple updates throughout the fall to stay on top of the market. That is, if you are planning on signing a contract in congruence with the timing of the harvest.
In most times, contracts are available out into the future for olive oil. In some extreme cases, however, sometimes olive oil contracts are suspended out into the future — especially in times of very low production, high prices, or right before the harvest begins.
Make sure to ask if contracts are actually available. Chances are that it will be a “sit and wait” situation. If contracts are ever not available, you may need to wait to contract a few months later when/if the market has calmed down a bit.
Depending on when you want to sign a contract, you
may have a few factors to think about. Harvest time for olive oil is usually November - February in the Mediterranean.
Ask yourself the following questions:
Let’s pretend that your volumes were 500,000 Lbs. last year. Next year, you expect to need 700,000 Lbs. How much do you book?
If you don’t book the full volume, you could be put in a place where you need to buy later on the spot market after prices have gone up. Of course, something wild could have happened and prices could have gone down too.
What if you book all of your needs that you expect to need this next year, and a customer pulls out? You’re still responsible to take the inventory that you’ve contracted, so it could put you in a touch place.
There’s a lot that goes into this strategy, so ask yourself the following questions:
Before you lock in a contract for a particular type and packaging of oil, consider any cost savings that might be available to you (before it’s too late!) Some suppliers will let you swap packaging mid-contract but others won’t. Don't forget — they also reserved the packaging for you, not just the oil.
No matter who you buy from, now — before you contract — is the perfect time to review better packaging options.
The general rule is — bigger packaging, the more you can save. That isn’t always true given the higher cost of drums in recent years. Totes are almost always going to be your cheapest option, but consider both the drums and the 35 Lb. Containers if totes are going to be unwieldy in your facility.
Whatever you do, make sure that you choose something that still fluidly connects to your production line — whether thats a manual production line where your team pours out of boxes, or if you have your totes hooked up to an automatic pump or gravity feed.