Case Study in Supply and Demand: Why Olive Oil, Good for the Body, is Becoming Hard on the Pocket Book

This case study is also available in sideshow format. You can paste it into your lectures, use it as an in-class quiz, or assign it to your students as an on-line exercise.

It seems there almost nothing bad about olive oil. It is delicious, of course, and if you are a connoisseur, you can get as much pleasure from a fine bottle of olive oil as from a premium Brunello di Montalcino. A  high content of monosaturated fats makes olive oil among the most heart-healthy of all cooking oils. It’s great for your skin, too. Wrangler has introduced a line of olive-oil infused jeans designed to moisturize the wearer’s legs. While researching this post, I learned that you can even shave with olive oil. No kidding.

In fact, the only bad thing about olive oil is that the price is going up, and fast. As the following chart shows, futures prices have risen 75 percent since mid-2012. Observers expect the increase to show up in retail prices soon. So what’s behind the spike in olive oil prices?


Supply

There is little doubt about what is happening on the supply side of the market: The weather in Spain, the world’s largest producer, was unusually bad last year. In the spring, an unexpected frost damaged the trees just as they were blossoming. Summer brought a prolonged drought. By December, which should be the height of the 2012/13 harvest, the Spanish crop was coming in at just 44 percent of the year before.

The harvest has been better elsewhere, but as the next chart shows, Spain so dominates the world market that no one else can really make up the loss. Tunisia is trying. The fifth largest producer and fourth largest exporter, its production is expected to rise by 27 percent in the 2012-13 season. California will also have a good year. Growers there hope to reach 3 percent of world output this year, up from the 1 percent or less reported by the FAO for 2011. But none of that is going to go far in replacing the hundreds of thousands of tons of lost Spanish production.



Demand

Homer called it “liquid gold.” Greeks are still the largest per-capita consumers, going through an astonishing two liters a month for every man, woman, and child. Italian and Spanish consumers each lap up about half of that. Lately, though, Southern Europeans are tightening their belts, and even staples like olive oil are taking a hit. Over all, European consumption is down.

Meanwhile, health consciousness and the growing popularity of European foods are boosting consumption elsewhere.  U.S. consumers are set to increase their olive oil purchases by 9 percent this year. Despite the best efforts of California producers to supply the domestic market, that will mean a big increase in imports.

China is becoming a factor in the market, too. Starting from a base of almost nothing, Chinese olive oil imports have been rising at a furious pace. They increased by 38 percent last year alone. One report out of China boldly predicts that country will soon become the world’s biggest consumer. The popularity of olive oil is on the rise in Brazil and Russia, too.
On balance, growth of new markets is expected at least to balance out depressed European demand. That means there will be no relief in sight from the demand side of the market.

The Bottom Line

If you’re an olive-oil lover, you’ll just have to dip into your savings this year if you want to keep dipping your focaccia in the good stuff. After that, the market may return to normal. If you look ever so closely at the first chart in this post, you can see that futures prices for March 2014 maturities are well below those for March of 2013. Also, the preceding 2011/12 harvest was very abundant, so the current spike in prices starts from an unusually low base. If this year’s Spanish frost and drought are aberrations, and not signs of some longer climate trend, output should bounce back for the world’s largest producer. Meanwhile, even one year of high prices will give a boost to hopeful growers in Tunisia, California, and other countries where production has not yet reached its potential. Consumers can hope that for oilive oil, as for most everything else, what goes up must come down.

Thanks to Sarunas Merkliopas, who served as research associate for this post. This analysis, without the sideshow, was originally posted to Ed Dolan's Econ Blog at Economonitor

US Adds 157,000 Jobs in January; 2012 Job Gains Revised Upward

The US economy added 157,000 payroll jobs in January. Job gains for 2012 were revised upward by 324,000. Follow this link to view or download a classroom-ready slideshow with charts of the latest jobs data

The following commentary on the jobs data was previously posted to Ed Dolan's Econ Blog at Economonitor.com
  
Strong Job Growth and Upward Revisions Contrast Sharply with Reported GDP Decrease

Wednesday’s data release from the Bureau of Economic Analysis surprised us with a reported decrease of 0.1 percent in GDP for Q4 2012. Now, just two days later, a report from the Bureau of Labor Statistics shows robust job growth throughout the last quarter and continuing into January. The two offer sharply contrasting indications of the strength of the economy in the last three months of the year.

The payroll jobs data from the survey of business establishments are subject to both monthly and annual revisions. Monthly revisions reflect the fact that when the numbers are first released, early in the following month, not all firms have submitted their payroll information. As more firms report in, data for the previous month and the month before that are revised. In addition, the data are subject to an annual benchmarking process based on unemployment insurance records. The BLS releases data based on the new benchmarks each January, including revisions of monthly jobs figures for the entire previous year. The following chart shows both the previously reported and the revised data. For all of 2012, the economy added 2,170,000 nonfarm payroll jobs, 324,000 more than previously reported. The revised job gain for Q4 was 603,000. That was more than the quarterly average for the year and 150,000 higher than previously reported. In short, the payroll jobs numbers suggest that the economy was strengthening, not weakening, in the last quarter. >>>Read the full commentary

 

US GDP Shrinks 0.1 % in Q4 2012

US GDP unexpectedly decreased by 0.1 percent in Q4 2012. Follow this link to view or download a classroom-ready slideshow with charts and explanations of the latest GDP numbers.

The following commentary on the GDP report was previously posted to Ed Dolan's Econ Blog at Economonitor.com 

US GDP Shrinks in Q4. How to Interpret the Bad News?

Wednesday’s data release from the Bureau of Economic Analysis surprised us with a reported decrease of 0.1 percent in GDP for Q4 2012. Now, just two days later, a report from the Bureau of Labor Statistics shows robust job growth throughout the last quarter and continuing into January. The two offer sharply contrasting indications of the strength of the economy in the last three months of the year.

The payroll jobs data from the survey of business establishments are subject to both monthly and annual revisions. Monthly revisions reflect the fact that when the numbers are first released, early in the following month, not all firms have submitted their payroll information. As more firms report in, data for the previous month and the month before that are revised. In addition, the data are subject to an annual benchmarking process based on unemployment insurance records. The BLS releases data based on the new benchmarks each January, including revisions of monthly jobs figures for the entire previous year. The following chart shows both the previously reported and the revised data. For all of 2012, the economy added 2,170,000 nonfarm payroll jobs, 324,000 more than previously reported. The revised job gain for Q4 was 603,000. That was more than the quarterly average for the year and 150,000 higher than previously reported. In short, the payroll jobs numbers suggest that the economy was strengthening, not weakening, in the last quarter. >>>Read More

Debt Sustainability, Growth, Interest Rates, and Inflation: Some Charts for Discussion and Some Inconvenient Truths for MMT

In a series of posts[1] [2] [3] [4] [5] over the last couple of months, fellow Economonitor blogger L. Randall Wray and I have been exploring the conditions under which the government’s debt can be said to be sustainable. Wray writes from the point of view of Modern Monetary Theory (MMT), while I adopt a more eclectic and skeptical approach.

A pivotal issue in our discussion turns out to be whether the central bank can or should hold the nominal rate of interest on government debt, R, below the rate of growth of nominal GDP, G. (We could frame the discussion in real terms instead by subtracting the rate of inflation, ΔP, from both sides; it makes no difference.) If R is held below G, then essentially any level of the government’s budget deficit is “mathematically sustainable,” a term we have been using to mean that the debt-to-GDP ratio does not grow without limit over time. On the other hand, if R exceeds G, the budget balance must show a primary surplus, on average over the business cycle, to achieve mathematical sustainability of the debt. (See the first of the posts referenced above for a detailed discussion of the conditions for mathematical sustainability.)

It seems well established that the the central bank can hold R down to any desired level, if it wants to, by buying a sufficient quantity of government securities. Barring legal restrictions like the debt ceiling, it could, if necessary, buy up all of the outstanding government debt in exchange for currency and bank reserves. Economists call this procedure “monetizing the debt.”

The “should” part of the question concerns whether the degree of monetization necessary to hold R below G would have undesirable inflationary side effects. True, when the economy is operating far below capacity and inflation is quiescent, as it has been these last few years, low interest rates and rapid money growth, backed by strong fiscal stimulus, may be just what the doctor ordered. You don’t have to subscribe to MMT to make that argument. Just read Paul Krugman. However, what happens when the economy approaches full employment and prices begin to rise? Is it still a good idea to hold R below G? That is where I become more skeptical. >>>Read more

Tax Incentives for Retirement Saving are not Working. Can we Find a Better Way? (Part 2)

In a previous post in this series, I criticized proposals to raise the eligibility age for Social Security and Medicare. It is already getting harder to save enough for a comfortable retirement; raising the eligibility age would just make it  still more difficult. In this installment, I turn to policies to encourage retirement saving, explaining why our current system is not working well and suggesting some alternatives.

Why should we make it easier to retire? Grasshoppers vs. Ants

We can start by asking why making it easy to retire should be an objective of public policy in the first place. The fable of the grasshopper and the ant is the lens through which many people view the issue. The ant works hard and saves carefully all summer, while the grasshopper sings and dances. When winter comes, the grasshopper begs for a handout. The fable portrays the ant as justified in shutting her door to him. Why should the government, as agent of the ant-like taxpayers that pay its bills, behave any differently toward grasshoppers who don’t have the self-discipline to save during their working years?

The most common response is to justify government support for retirement as a form of social insurance. Life is full of risks. For retirement saving, the relevant risks include spells of unemployment, health problems, the risk of losses or low returns on retirement savings, the risk of inflation, and last but not least, the risk of outliving one’s savings. When we take those risks into account, we understand that some people will reach retirement age without adequate savings not because they are grasshoppers, but because they are unlucky ants. Many of the risks that can thwart the best-laid plans for retirement savings are neither under the control of individuals nor privately insurable. Only the government is in a position to pool the risks broadly enough to guarantee a minimum level of retirement income for everyone. >>>Read More

Economic Effects of Raising the Eligibility Age for Social Security: Why We Shouldn't Make it Harder to Retire (Part 1)

Last week the Business Roundtable came out with a position paper entitled “Social Security Reform and Medicare Modernization Proposals.” Its centerpiece is an increase to 70 in the eligibility for Social Security and Medicare. According to Gary W. Loveman, Ph.D., Chairman, CEO & President, Caesars Entertainment Corporation, and Chair of the Roundtable’s Health and Retirement Committee, the purpose is to modernize the programs in view of “new demographic realities.”

Raising the eligibility age is a bad idea. It is based on the false premise that, since Americans are healthier and living longer, they can and should assume greater individual responsibility for their retirement. Unfortunately, the reality is that for all but the wealthiest Americans, self-financed retirement is becoming harder, not easier. A higher eligibility age would only make it still more difficult.  >>>Read more of Part 1. Then read Part 2 here

CPI Unchanged in December; Five-Year Inflation Rate Hits 45-Year Low

Economists are sometimes accused, and justly so, of trying to read too much into the latest monthly wiggle in every data series that they watch. To counter that tendency, we can start the discussion of today’s release of inflation data with a longer-term view. Instead of looking at monthly CPI data, let’s look at five-year averages. As the following chart shows, 5-year inflation has fallen to an annual rate of just 1.9 percent, its lowest since the Vietnam War started heating things up in the 1960s.



>>>Read more