If you buy commodity oils, sometimes understanding the pricing and how it is structured is a sigh of relief. It’s based off the CBOT, which is public information you can check to understand how your costs are changing and why.
The olive oil market historically hasn’t been so easy. That’s because it’s not really a commodity oil, but in the bulk world it often works as such. Let me explain.
How The Olive Oil "Commodity" Market Works
If you buy olive oil from a boutique location or small farm, you’re going to pay a pretty penny and get some wonderful, delicious olive oil. All of the pricing you get from them will be unique to the location and will be based off the subjective view of how high the producer thinks their quality is.
In the bulk world (for those manufacturers that are buying many totes and truckloads of olive oil) the pricing can seem a bit arbitrary and hard to track. That’s because many people don’t know that many olive oil producers and growers now work off of “pool red” pricing, which is the standardized record of the average costs of bulk olive oils from growers and producers in Spain.
Why Spain? Spain produces upwards of 50% of the olive oil in the world, so they are the “price driver” for olive oils. Want to learn more about this? Read Why Spain’s Olive Production Affects Olive Oil Prices Worldwide.
This allows the whole world to see what the market looks like for olive oil in the country that is driving the price. This pricing record can sometimes function as a “CBOT” or baseline that producer will work off of globally.
How This Affects Sourcing Strategies In Different Countries Of Origin
Not too long ago, if the market was high in Spain because they had a terrible crop year, one could source oils from a different country — elsewhere in the Mediterranean or even in South America — and get much better pricing. After all, not every country was having a terrible crop year, so their pricing wasn’t affected.
However, producers in these countries soon learned that they were leaving money on the table: there wasn’t anywhere else large suppliers could buy olive oil at such a lower price, so they could charge more and be equivalent of the current market price in Spain.
These producers in smaller countries soon switched over to Pool Red pricing, which means that they function off the market average prices in Spain, no matter what their crops look like.
On the flip side, if the smaller producers’ crop year is terrible and Spain is doing great, they still try to stay within the Pool Red market averages. After all, if they produce very little oil and their prices are high, everyone will opt to buy from Spain who has ample supply and low prices, and they will sell nothing.
Therefore, this record keeping tool has essentially become a new pricing structure in the olive oil market. It helps producers around the world build out their “going market rate”, which is all based on global supply and demand.
In effect, it also levels out the pricing plane so that you can no longer go to another country to get much lower pricing. If Spain is low on oil, you can expect prices around the world to be higher!
How Pool Red Functions Like The CBOT
As you can see from the above, Pool Red functions very similar to the CBOT, but for olive oil. It’s an average price that functions like the board — the “going rate” for Extra Virgin, Refined and Pomace Olive Oil.
On top of that, anyone in the US has to factor in the “basis”: the additional costs of the suppliers that provide the oil to them, the packaging, the freight to the US, and then the freight to their own docks.
For this reason, don’t look at Pool Red pricing and expect that’s what you should pay — use the graphs to understand what the market is doing over time and how it’s fluctuating.
Topics: Harvest/Commodity Market, Olive Oil
