Olive oil

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Olive oil production across southern Europe has taken a plunge in recent years due to drought conditions

The Spanish tax authorities are set to approve the temporary reduction of the value-added tax for olive oil to 0% from 1 July.

The move from Spain’s Ministry of Finance comes as the world’s largest olive oil producer has been battling skyrocketing prices due to consecutive years of extreme drought.

It follows a VAT reduction last year from 10% to 5%.

Olive oil will also join a group of so-called essential goods such as bread, fruit & veg and eggs, which permanently enjoy a super reduced VAT of 4% under normal conditions.

According to data from the National Statistics Institute (INE), olive oil was 68.1% more expensive in April than a year earlier, with a cumulative increase of 204.8% since January 2021.

However, the Spanish government’s decision to slash VAT pushed up wholesale extra virgin olive oil prices “immediately” after the announcement, as the appetite for cheaper olive oil among buyers increased “as expected”, said Walter Zanre, MD of Filippo Berio, one of the UK’s largest buyers of Spanish olive oil.

Spanish extra virgin olive oil prices jumped 3% from 23 to 24 June, from €7,740/tonne to €7,967/tonne.

“It may only be a small saving, but the expectation is that the news will increase demand,” among shoppers, he said.

Zanre warned “the supply situation in Spain remains very finely balanced with olive oil stocks forecast to run out before the new season oils become available”, with higher demand increasing the chances of shortages before the next harvest begins in October.

“The market is extremely volatile – no one wants to carry forward oil stocks into new harvest time, but they also want to sell current stock holding at high levels due to the shortage.”

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The Spanish tax authorities have not yet determined whether the 0% VAT reduction will last for three or six months – similarly to energy taxes, whose discount is being gradually lifted, depending on how wholesale pricing develops.

European olive oil markets have been under immense pressure over the past couple of years, as extreme heat has significantly affected harvests and pushed up prices around the world.

Spanish olive oil production alone slumped from 1.5 million tonnes in 2021/2022 to around 660,000 tonnes in the 2022/2023 season, according to International Olive Council data.

Other major supplying countries including Italy, Greece and Portugal, have also seen output slump since 2021, contributing to a strained global market.

This has propelled prices in the UK to record highs – the most recent figures from the Office for National Statistics showed that the average price of olive oil was still rising and was now £8.04 a bottle, up 39% from £5.78 at the same time last year.

But favourable weather conditions across the Mediterranean in recent weeks gave suppliers some hope for the upcoming harvest – and for prices to alleviate in the medium term.

“With the prospect of a good crop coming there will be downward pressure on pricing,” Zanre said. “However, I don’t envisage anything significant happening until September.”