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Growth challenges for olives

WA’S big commercial olive groves are on a roll. They produced their first significant harvest this year and several producers won awards for their prized extra virgin olive oil.

The size of the harvest is tipped to explode over the next few years as trees mature, and producers will need more than awards at the Perth Royal Show to secure long-term success.

WA presently has 184 olive groves, according to the West Australian Olive Council, and about 1.1 million trees. About three-quarters of the trees were planted in just the past three years.

Most of the growth can be attributed to a handful of ‘corporate’ olive groves, mostly in the Moore River region north of Perth.

The region’s biggest grove has been established by Australian Stock Exchange-listed Olea Australis, whose directors include Gus Simpson and Ian Middlemas, well-known deal-makers in Perth’s corporate finance scene.

Accounting firm Barrington Partners had a hand in two other big projects, with Larenta Olives funded by public investors and Guilderton Olives funded by a syndicate of about 10 private investors.

Koorian Olives is another investor-driven project, founded and managed by the Moltoni group. The Moltoni family also owns half the land.

Two prominent WA families, the Fini and the Tana families, have established their own olive groves in the Moore River region.

Frankland River Olive Company chose the Mt Barker region, where the cooler climate resembles Tuscany in northern Italy, to establish the State’s biggest olive grove.

The industry’s rapid growth in WA has been matched in other States.

The total number of olive trees across Australia is about 7,000,000, according to the Rural Industries Research and Development Corporation (RIRDC).

One of the key issues facing the industry is the extent to which production will expand.

An even bigger issue is where the increased production will be sold, and at what price.

Domestic consumption is growing at about 9 per cent a year, providing a growing market for local producers.

However, Australian production will rapidly outstrip the local market.

National production in 2010 could be between 40,000 and 50,000 tonnes of oil, according to the RIRDC, which is double current domestic consumption.

“This, together with the strong competition within the local industry and with the EU on both domestic and export growth markets, ensures that there will be a great deal of downward pressure on prices,” it said.

“The challenge for Australian producers is more difficult when one considers the fragmentation of the industry in geographical, agripolitical and production terms.”

Frankland River Olive Company managing director David Carr believes production growth will be much less than generally expected.

“Their study is technically flawed,” Mr Carr said. “They have assumed that all trees go from the nursery to full production.”

He said the natural mortality of fruit trees, and the need for many growers to thin their groves as the trees matured, would substantially reduce the total number of trees in full production.

He expects annual olive oil production in 2010 will be about 25,000 tonnes.

An added complication is that investor interest in olive groves seems to be saturated, so the RIRDC’s assumption that WA will have 1.6 million olive trees may also be flawed. 

Current growth in WA is coming from just two privately funded projects – Kailis Organic Olive Groves, which intends to plant 80,000 trees at Preston Valley in the South West, and a new 51,000-tree grove near Gingin funded by private investors.

Several other groups are hoping to expand, with Larenta Olives and Koorian Olives both aiming to plant a further 200 hectares.

However they are battling to attract support from investors or financial planners, who enjoy the big sales commissions paid by competing tree farming projects.

“We’re still working on it but market conditions and other factors have prevented us from going ahead with stage two,’ said Rob Moltoni, managing director of Moltoni Agricultural, which runs Koorian.

Keith Platel, a director of Premium Olive Managers, which runs Larenta, said olive projects needed substantial up-front investment in areas such as soil preparation, irrigation and bores before going to investors.

“You need cash reserves to do this before you sell the first grove,” Mr Platel said.

He added that discussions were currently under way with potential foreign investors, which could kick start expansion of the project.

The funding pressure on the industry has also affected Olea Australis, which sought to raise $3.1 million through a rights issue early this year but attracted just $1.1 million.

Olea subsequently raised $2.0 million through a placement to high net worth clients of Montagu Stockbrokers.

In order to complete the placement, Olea cut the price of the capital raising by half, to five cents per share, and included a two-for-one issue of free options.

Notwithstanding the uncertainty about future production levels, local growers agree that the industry must look offshore for its long-term health.

“We definitely need to look at export markets”, said Frankland’s David Carr.

He expects North America, the United Kingdom and Japan will provide the best prospects, since they are large, prosperous markets and big importers.

In contrast, Europe is serviced by growers in Mediterranean countries such as Spain, Italy and Greece, who benefit from large government subsidies.

The key product for local producers is extra virgin olive oil (EVOO), which is a relatively small portion of the world market but is growing rapidly and attracts premium pricing.

“There will always be demand for good quality extra virgin olive oil,” Larenta Olives managing director Trevor Coward said.

Montagu Stockbrokers’ Peter Strachan, who recently prepared a research report on Olea Australis, believes increased exports of EVOO provide the industry with a big opportunity.

“Demand for EVOO in the US, UK and Japan has been rising strongly, presenting strong markets for Australian exports,” Mr Strachan said.

On the flipside, he sees low-priced imports as a major threat to the industry.

“Olea must work to maintain its wholesale pricing at $11 to $22 per litre compared with imported EVOO, which has a much lower retail price point at around $12 to $15 per litre for an inferior and blended product,” he told WA Business News.

“Producers will need to educate the market to distinguish between Spanish and Italian ‘EVOO’ and the local, pure EVOO in order to maintain high prices for their product.”

Local producers have been working hard to establish premium, high-quality brands.

Most producers can brandish awards they have picked up in the past year or two, though the plethora of awards may serve to devalue their worth.

Frankland’s David Carr said premium brands were an important part of the market, but he wanted to see high quality EVOO accepted as an everyday product.

To support this goal, Frankland has launched a second brand with a lower price than its established, premium Jingilli label.

Olea Australis is pursuing a similar strategy.

It is marketing its Dandaragan Brand olive oil nationally and internationally and is developing a new brand of extra virgin olive oil for sale through massmarket supermarket chains.

It is also looking to make bulk sales of extra virgin olive oil to buyers in the Northern Hemisphere seeking counter-seasonal supplies.

Mr Carr said the industry needed to retain a strict focus on quality, which was the key selling point for Australian producers.

For instance, he said the industry needed to maintain strict scrutiny of award winning oils, to ensure the product in the shops was the same product that won the award.

“If we don’t have that transparency it will show the world that we aren’t serious about producing quality product. We need to get that in place early.”

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