The Olive and Olive Oil value chain in Albania Rr. Leke Dukagjini, No. 11/1, Kati 4, A. 2 Tirana, Albania Tel: 042 225237 ; Fax: 042 225237 Email: [email protected] Website: http://www.dsaconsult.com ` THE OLIVE AND OLIVE OIL VALUE CHAIN IN ALBANIA Authors: Luciano Leonetti, Drini Imami, Andi Stefanllari, Edvin Zhllima Tirana May 2009 The Olive and Olive Oil value chain in Albania TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................. 1 METHODOLOGY .......................................................................................................................... 4 1. PRODUCTION AND FOOD BALANCE .................................................................................. 5 1.1 PRODUCTION DYNAMICS ......................................................................................................... 5 1.1.1 production and food balance overview ........................................................................... 5 1.1.2 Evaluation of available statistics ..................................................................................... 6 1.2 STRUCTURE OF PRODUCTION ................................................................................................... 7 2. PROCESSING AND DISTRIBUTION .................................................................................... 10 2.1 STRUCTURE OF PROCESSING (ACTORS AND FIGURES) ............................................................ 10 2.1.1 Structure of the industry................................................................................................ 10 2.1.2 Categories of olive processors and business practices and trends in olives processing 11 2.1.3 Procurement of olives and product policy .................................................................... 16 2.2 DISTRIBUTION ....................................................................................................................... 17 2.2.1 Main characteristics and flows in the olive oil and table olives distribution system ... 17 2.2.2 The main distribution channels of olive oil and table olives ........................................ 17 3. COST, PRICE AND MARGIN ANALYSIS ............................................................................ 21 3.1 OLIVE PRODUCTION COSTS .......................................................................................... 21 3.2 OLIVE OIL PROCESSING AND RELEVANT MARK UP ................................................................. 26 3.2.1 Processing cost .............................................................................................................. 26 3.22 Evolution of factory gate olive oil prices and oil mills mark up ................................... 28 3.3 DISTRIBUTION MARK UP AND RETAIL PRICES ......................................................................... 29 3.3.1 Evolution of prices and margins in distribution. ........................................................... 29 3.3.2 Distribution margins of main Albanian brands ............................................................. 30 4. INTERNATIONAL TRADE ................................................................................................. 34 5 CONSUMER PREFERENCES .................................................................................................. 35 5.1 CONSUMERS’ SEGMENTS AND KEY PREFERENCE FACTORS .................................................... 35 5.2 IMPLICATIONS OF CONSUMERS’ PROFILES AND SET OF PREFERENCES ON SECTOR POLICIES ... 37 6 SUPPORT BY THE GOVERNMENT FOR THE SECTOR ..................................................... 37 6.1 SUBSIDIES ............................................................................................................................. 37 6.2 MARKET INFORMATION SYSTEM ........................................................................................... 39 7. FUTURE PRODUCTION AND INVESTMENT SCENARIOS .............................................. 39 i The Olive and Olive Oil value chain in Albania 7.1 PLANNED EXPANSION OF THE PRODUCTION BASE AND EXPECTED SCENARIOS OF SUPPLY AND DEMAND ...................................................................................................................................... 39 7.2 INVESTMENT COSTS RELATED TO EXPANDING PRODUCTION BASE ......................................... 42 8 FINDINGS OF THE ANALYSIS AND SWOT APPRAISAL ................................................. 43 8.1 THE DOMESTIC SUPPLY: A GROWING SECTOR WITH UNRESOLVED CONSTRAINTS ................... 43 8.1.1 Development perspectives and constraints factors in olive oil production ................... 44 8.1.2 Development perspectives and constraints factors in table olives production and processing .............................................................................................................................. 47 8.1.3 Rapid changes in the competitive environment ............................................................ 48 8.2 EVOLUTION OF DEMAND AND MAIN FACTORS DRIVING CONSUMER PREFERENCE .................. 50 8.3 SWOT MATRIX .................................................................................................................... 51 8.4 CONCLUSIONS ....................................................................................................................... 52 9.1 MAIN FACTORS FOR DEVELOPMENT ...................................................................................... 52 9.2 RECOMMENDATIONS AND OUTLINE FOR A SECTOR DEVELOPMENT INITIATIVE ...................... 57 ii The Olive and Olive Oil value chain in Albania EXECUTIVE SUMMARY The olive and olive oil sector is an important segment of Albanian primary production and agroindustry. Primary production of olives accounts for approximately 16% of total fruit output in value, including grapes. The number of planted trees exceeds 5 m and is rapidly increasing, as a response to sustained demand, good prices and government subsidies for expanding the production base. Official data on olive oil production show an output ranging between 6,400 Mt in bad harvest years and 11,900 Mt in good harvest years. There is a structural production deficit of approximately 1,000 Mt per year, mostly covered by imports of bottled olive oil from Italy and other EU countries. Main production areas of olives for olive oil are Fier, Vlora and the area between Elbasani and Tirana. In these areas, 90% to 95% of cultivars are for olive oil production. Demand of table olives is also growing. Considering also olives from olive oil cultivars processed as table olives, about 15% to 20% of total production of olives is processed/used as table olives. There is also a structural deficit of table olives, mainly covered by imports from Greece. Production of table olives is concentrated in Berat, where it is estimated that more than 90% of olive trees belong to the table olive variety Kokerrmadh. Processing industry is specialized: with the exception of a medium-sized producer in Berat, all the other industries are producing either table olives or olive oil. Official data for 2009 show 108 enterprises processing all edible oils, including olive oil. Some larger enterprises have more than one oil mill and some oil mills are not registered. The estimate number of working oil mills score about 150 units. About 16 enterprises are processing table olives. Olive oil industry can be divided in four main clusters, namely: i) small localized oil mills, representing the majority of enterprises, mostly providing to farmers the service of processing olives into olive oil, against a fee. They also produce for themselves some olive oil; ii) small modern producers; this is the most qualitative group of processors, producing high quality olive oil that they sell with their own brand; these oil mills also get a share of revenues from fees for processing farmers’ olives; iii) medium-sized processors, mostly processing olives for themselves and selling olive oil in bulk to bottlers and; iv) industrial producers and bottlers, whose main business is to buy olive oil in bulk and bottle the product. Some of them are also producing part of the olive oil they bottle. Equipment of oil mills is generally less than 15 years old, including many second hand lines, therefore from the technical point of view the lines are mostly not obsolete. Premises, especially of smaller mills are generally not in good conditions and do not comply with EU standards. A particularly critical aspect is environmental management, as there is not even a regulatory framework for management of wastes and effluents. There are two categories of table olives processors: i) producers of table olives in retail packaging (6 to 7 enterprises, included semi-informal ones) and, ii) producers of table olives in bulk (about 10 enterprises). The specialization is not related to the size: one of the two largest producers makes both table olives in retail and bulk package and the other only in bulk. Distribution is still mostly based on traditional channels: many consumer buy directly from farmers, in the oil mills or from corner shops; sales of non-bottled olive oil in traditional retailing are also common. However, the share of bottled olive oil is rapidly growing and the rapid growth of supermarket chains after 2006 is sensibly changing the distribution patterns. 1 The Olive and Olive Oil value chain in Albania The analysis of costs, mark-ups and margins shows an unusual share of value remaining at production level. This situation is going to change with the strengthening of larger industrial bottlers and the consolidation in the distribution sector. Margins are particularly high in olive production (well over 100%), even if total revenue per farm and per ha is very low, as most producers try to minimize cash costs and the size of farms is quite small. Demand of olive oil and table olives is increasing, in parallel with revenues growth and urbanization. Consumption per capita is becoming more homogeneous throughout the country, while in the past was extremely high in production areas and near to zero in non-production areas and also some segmentation is emerging, with the price being no more the only factor of choice for the new emerging middle-class. Consumers strongly prefer domestic production, but do not trust domestic industrial producers; as a result, imported bottled olive oil covers a large share of the highest market segment. Also in this case, the development of supermarket chains is rapidly changing the competitive environment, with the largest domestic producers are marketing out smaller enterprises, even the most qualitative ones. Even if the sector is expanding and domestic industry is consolidating, there are several constraints to the competitiveness of domestic production, the main being: i) the high production cost and farm gate price of raw olives; ii) the extremely high oscillation of output from one year to another, reflected in oscillation of prices, which is related to the lack of investments for increasing and stabilizing productivity of trees iii) the low quality of a large share of olives and olive oil, mostly due to improper harvesting practices and logistics; and iv) insufficient controls against fiscal and commercial frauds, resulting in lower trust of consumers in domestic production, distort competition against formalized producers and slows down the process of consolidation of the industry. As a whole, there is a concrete risk that the strengthening of the downstream part of the value chain (bottlers and supermarket chains) will lead to increasing imports of cheap olive oil in bulk in bad harvest years and in increasing share of imported products, in parallel with the expansion of supermarket chains. The key issue is the low productivity per tree and the high oscillation of yields from one year to another. Both factors are not improving in the years; the driver for output growth is only the increasing number of trees; this situation is due to small size of plots, lack of agronomic services, few investments in in-farm irrigation and unrealistic expectations of farmers about revenues and sale prices. This last aspect is also related to the high percentage of olive oil directly sold from producers to final consumers, as many farmers try to keep the olive oil for direct sale when prices of olives for processing drop, and on the other hand, many consumer are more confident about the quality, when they buy the olive oil directly from producers. This situation is creating a dangerous gap between domestic and international prices: the general trend of international prices of olive oil is decreasing, in spite of a spark in 2005 and 2006. The wholesale international price of extra-virgin olive oil (in Italy, Greece and Spain) is now corresponding to the farm gate price in Albania of two kg of raw olives for processing, making the situation not sustainable in the long term. 2 The Olive and Olive Oil value chain in Albania The Government is undertaking an extremely ambitious policy for expanding the production base, targeting a fivefold increase of the total number of olive trees, i.e. up to 25 m trees. For this purpose, most subsidies provided from 2007 to the agricultures sector from the State (scoring about 10 m Euro in 2008) are addressed to the olive and olive oil value chain. Focusing investments in increasing yields (production per tree), stabilizing output from one year to another and improving harvesting and pest management practices would be at present a more cost/effective option for ensuring a sustainable development of the sector. Priority actions include: i) improvement of value chain governance tools, including harmonization of laws to EC acquis, ii) increased technical assistance to farmers to increase productivity and stabilize output; iii) support to value chain operators for facilitating access to services, iv) supporting establishment and strengthening of farmers’ associations and cooperatives and; v) Optimize the use of effluents and by-product in olive oil industry, to mitigate environmental impact of olive oil production and increase profitability in olive oil processing. 3 The Olive and Olive Oil value chain in Albania METHODOLOGY This study is based on data and information collected in 2009, within the framework of the FAO TCPF initiative “Formulation of a Technical Assistance Project in Support of Albania’s Olive Oil Sector”. The study is based on primary data, collected through interviews with value chain operators, donor organizations and policy makers and on secondary data, taken from national and international statistics. Monthly data were used when available and appropriate. We also referred to literature and publications on olive and olive oil production in Albania. During the FAO project “Agriculture Production Project in Albania” a panel of representative shops in seven cities was established, to monitor structure of competition and retail prices of olive oil and wine. As part of the sector analysis exercise, the panel was updated and relevant data collected. In addition, there has been carried out a consumer preference survey, using the latent choice method, clustering consumers according to product attributes and socio-economic background. Data have been analyzed to assess market size, price, production and international trade developments. 4 The Olive and Olive Oil value chain in Albania 1. PRODUCTION AND FOOD BALANCE 1.1 PRODUCTION DYNAMICS 1.1.1 Production and food balance overview Official statistics provided by MAFCP provide information about number of trees (total and in production), olive production (without distinguishing between destinations or variety of trees), output (see Table 1.1) and structure of the olive oil industry and an estimate of the olive oil produced on behalf of farmers. Table 1.1: Key statistics on olive production base Statistic items 2004 2005 2006 2007 2008 Olive trees 000 4,092 4,264 4,497 4,715 5,011 Olive trees in production 000 3,429 3,488 3,603 3,728 4,179 Total output Mt 58,700 30,160 40,195 28,120 56,200 Production per tree kg 30.2 8.6 11.2 7.0 15.8 Olive oil retained by farmers No data No data 4,756 2,570 6,274 Mt Olive oil from oil industries 4,036 3,454 8,985 3,879 5,634 Mt Source: MAFCP statistical yearbook In qualitative terms, data are consistent with the opinion of all the interviewed stakeholders, considering olive growing and olive oil production as a food chain with good perspective. The trend of increasing the olive trees stock is now consolidated with approximately 5% of the total stock increasing each year. After a peak in 2004, production in the years 2005-2007 has been low in spite of the increasing production base; this was due to adverse climatic conditions and to the natural oscillation of production of olive trees among the years, not mitigated by appropriate agronomic practices and irrigation. After having reached a new peak in 2008, provisional 2009 data show another year of low output. Albanian domestic production of olive oil meets 4/5 of the domestic demand while imports are significant and much higher than exports, leading to a trade deficit of more than 1,000 tons in some years (Table 1.2). 5 The Olive and Olive Oil value chain in Albania Table 1.2: Olive oil supply and demand balance (Mt) Category 2000 2003 2004 2005 2006 2007 2008 Production 1,857 4,036 3,454 8,985 3,879 5,634 Import 585.7 1,363 1,110 905 841 930 1,075 Export 2 16 54 26 4 Deficit 1,108 889 787 904 1,071 Supply (production – exports + imports) 5,144.4 4,343.5 9,772.5 4,783 6,705 Share import/supply 21.7% 20.8% 8.6% 19% 16% Share export/production 0.5% 0.5% 0.6% 0.7% 0% Source: MAFCP Statistic Sector 1.1.2 Evaluation of available statistics Considering data from field surveys, official data on production seems underestimated. Several factors contribute to underestimation found in official statistics: 1. The average output for tree should be higher than indicated in statistics. A survey conducted on 100 olive growers by FAO in Novosele in 2006 (1) showed an average yield of 19.5 kg per tree; MAFCP data for District of Vlora in 2006 show an average estimate production of 12 kg per tree. The interviews made with farmers in 2008 (2), again in Novosele and in the South-Western Coast, show that average yields in the area of Novosele are consistent with those ones in South West coast (production area between Dhermi and Qeparo) and that farmers estimate they get more than 15 kg/tree even in bad years. Data from more intensive cultivations (i.e. with lower output per tree) in Italian areas with comparable land structure show outputs ranging between 15 and 40 kg per year. Statistically recorded outputs seem realistically near to the quantity of output available for commercial purposes (i.e. excluding product retained for self-consumption). 2. Consistency of data from different sources is not ensured. There is no consistency between oscillation of data of olive production, olive oil production and olive oil imports. In particular: i) high reduction of olive production in year 2005, was associated with not that high reduction of olive oil production (imports are also reduced, but that is also due to considerable increase of import price); ii) in year 2006, the very high increase in olive oil production (more than 2.5 times the previous year output) was not associated with the same increase of olive production; iii) in 2007, the strong decrease of production of both olives and olive oil (more than 1/3 and 1/2 respectively) was not associated with that drastic olive oil import increase, despite the fact that average import olive oil prices were lower than in the previous 2 years and that retailers did not report a drastic reduction of demand. Chart 1.1 below depicts the above described data consistency issues. 1 FAO project GCP/ALB/005/ITA “Agricultural Production Support in Albania” Baseline survey of olive growers’ associations, December 2006 2 USAID project “Agriculture Competitiveness in Albania” Olive oil value chain analysis 6 The Olive and Olive Oil value chain in Albania Chart 1.1 Official data on domestic production of olives and olive oil and olive oil imports 2000-2008 Source: MAFCP Statistic Sector 3. Farmers’ self consumption and stocks are heavily under-estimated and are acting as a buffer, compensating product oscillation. In years of high prices farmers keep less olives and olive oil for themselves, so that additional, informal production “emerges” in final markets and is not recorded in official statistics. 4. No comprehensive surveys of self-consumption of olive growing families and estimate of informal trades have been performed so far. The quantity of both table olives and olive oil consumed by rural families in production areas and the amount of table olives and olive oil product arriving to urban markets through totally informal channels is quite substantial. As a conclusion, considering a production base of approximately 4 millions trees, the estimated production of olives ranges between 48,000 Mt in bad years and 80,000 Mt in good years. 1.2 STRUCTURE OF PRODUCTION About 90% of production is concentrated in five regions (Berat, Elbasan, Fier, Tirane and Vlore), while the four other olive producing regions (Durres, Gjirokaster, Lezha and Shkoder) supply lower quantities. Table 1.3 below shows the distribution of production by district in 2006 and 2008. 7