Terra Incognita: Drowning in olive oil... prices

Earlier this week it was reported that olive oil producers in Israel had successfully lobbied the Finance Ministry not to lower import duties on olive oil. In a fascinating report in The Marker, Zvi Zrahiya and Ora Cohen noted that Israel’s olive oil industry was actually demanding that tariffs be increased on foreign oil. The reason: Olive oil from other countries is cheaper than its Israeli cousin.

The public should be outraged. This is yet another example of how a local industry that is bloated, ineffective, and used to government support has become another burden to the consumer, fleecing us of our ability to buy a normal household item at reasonable cost. They talk about supporting the Israeli economy, but the real support for the economy will come when the government deregulates the system, stops protecting the olive oil producers, and forces them to compete with their more industrious European and Middle Eastern competitors.

The olive tree is a symbol of Mediterranean culture and diet. Mentioned in the Bible, it is a part of the fabric of the land of Israel. Yet massive consumption of olive oil is a relatively new phenomenon. In Israel, olive oil consumption increased six times between 1990 and 2003. By contrast it only doubled in the US.

According to a 2007 paper, in the same period production of olive oil in Israel increased 19 times (from 230 to 4,530 tons). Per capita consumption in Israel is about 2.5 quarts per year. By contrast the average Greek is chugging down 26 quarts a year, which is about two bottles of olive oil a month.

Israel is a small country, and it is not one of the main producers of olive oil. Spain, with 6 million acres of olive trees, produces around 984,000 tons of oil a year, 40 percent of the world’s total. Italy and Greece come in second and third, producing 24% and 17%, respectively.

Israel makes only 4,520 tons of olive oil a year.

Some countries that produce olive oil, like Italy, also consume a great deal of it. Israel is in this position. Yet the country does export some oil, specifically to the US, where 64% of its oil exports are directed. By contrast only 120 tons (21%) of olive oil are exported to the EU (Tunisia exports 98,000 tons of olive oil to EU).

Israeli olive oil gained some attention in 2010 when it won several gold medals at a competition in Jerusalem in 2010. Suffice it to say, however, most connoisseurs still would not search out the Israeli product.

As olive oil production and consumption have increased and the market has become more globalized, the economics of it have also come in for the regular pattern of gluts and contractions. For instance, the price of olive oil has fallen precipitously from $5,800 a ton in 2006 to $2,900 a ton in 2012. That means that major producers of olive oil, like Spain, face a crises at time when they least need more economic problems. But most of those reading this column who shop in Israeli supermarkets may be wondering why the price has not dropped a shekel since 2006; if anything, according to a Jerusalem Institute for Market Studies study, the prices have increased 8%.

In 2011 the Israeli olive oil producer and importer Zeita petitioned Israel’s High Court of Justice against the price gauging guidelines of the Finance, Agriculture and Industry, Trade and Labor Ministries. According to an article in Yediot Aharonot, Zeita said the three ministries’ “conduct was in violation of the anti-trust laws and was promoting an artificial price hike, rendering olive oil prices in Israel among the highest in the world.” Pause. Repeat: among the highest in the world.

The company claimed that while Europeans were paying about $5 for a liter of the product, and Americans were paying $6.80, Israelis were forced to fork over $12 for a product made in their own backyard. That was last year – surely things are better today? Depending on the olive oil one buys at an Israeli supermarket, it will run you between four and six shekels per 100 ml.

Supersol brand virgin olive oil is NIS 4.80, while the Yad Mordechai (a division of Strauss) equivalent is NIS 5.15 for 100ml. At the UK chain Tesco one pays about NIS 2 for 100ml of Napolina Extra Virgin olive oil. The Eroski supermarket chain in Spain, according to The Financial Times, sells it for only 60 agorot (or about 1.99 Euros a litre). Thus Israelis are still paying among the highest prices in the world for olive oil.

How is that possible, when the country primarily consumes olive oil made in Israel? And why don’t Israelis have access to the cheaper Spanish and Italian, let alone Tunisian, oils? Imported oil makes up only 20% of the Israeli market because it is subjected to heavy taxes. The Plants Production and Marketing Board, a government regulatory monster, in collaboration with the ministries, sets price targets for the product. It keeps the taxes and prices high to encourage the Israeli industry. And now, the local olive oil mafia has not gotten enough money from the imprisoned Israeli consumer, but is lobbying for higher duties on imports and more financial assistance.

According to Zvika Cohen, the senior deputy director general of the Agriculture Ministry, “The local sector must be given assistance.” Maayan Nesher of the Finance Ministry told Haaretz that “the duty on olive oil is relatively high. The Agricultural Ministry already provides support for Israeli brands.”

There are some people who are under the illusion that supporting local products is good because it provides jobs for people in Israel. This “national champion” view of the economy misses a central point. Local products deserve support when they are better quality and are undercut by foreign competition which pays workers less and makes an inferior product. This is where Americans have a point when they are angry about cheap Chinese imports.

But Israel isn’t competing with third-world countries that pay workers low wages. Rather, Israel is a secondworld country that pays its agricultural workers low wages and competes with first-world countries, like Spain. And Israel produces a product that is either equal or inferior to the Spanish product.

Therefore the Israeli olive oil lobbyists use the government to artificially crush competition and deny the consumer the ability to choose. If the consumer could go to the store and choose between paying NIS 15 for Spanish, Italian or Greek olive oil or NIS 40 for Israeli olive oil, the local industry would be out of business in a matter of months.

Make no mistake: Israeli olive oil producers deserve to have to compete for their business. Is there a reason they can’t put out a product that is as cheap as Europeans create with the same resources and higher paid workers? Is there a reason that they alone, among the world’s olive oil producers, make a product twice as expensive as anyone else's? Israelis should put the local industry on notice.

They should consider buying Spanish olive oil imported by Israelis, even at the increased prices. They should buy olive oil from Druze or Arab villages. They should do whatever it takes for the local producers like Yad Mordechai and the financial (ir)regulators like the Plants Production and Marketing Board to realize that arbitrarily setting high prices isn’t helping anyone – not the local manufacturer, the worker or the consumer. Instead they are creating a classic third-world monopoly that is worthless and non-competitive.