Here’s why olive oil prices are likely to remain stubbornly high

Olive oil prices may have softened this year after a stellar 2015, but one analyst isn't expecting a sudden plunge with a series of factors helping to prop up the market.

Loraine Hudson, a market analyst at research firm Mintec, told CNBC Thursday that "tight stocks in the EU" will keep a floor under the commodity that's widely used in cooking.

Olive oil is one of the most volatile soft commodities, with prices being driven by supply. Last year, prices skyrocketed due to issues in Spain and Italy, the EU's two largest producers of the commodity.

Spain – Europe's largest olive oil producer – suffered from particularly dry weather causing a reduced harvest. Meanwhile in Italy, an infection killed many trees, forcing farmers to cut down and burn thousands of acres of potential crop.

"It's a very difficult times for the olive farmers, that's for sure," Hudson told CNBC. "Both of those facts had a massive effect on production last year."

She explained that in Italy last year prices went up to nearly 6 euros per kilo, compared to an average of around 3 euros per kilo. However, the market is now showing signs of reaching a balance. Hudson said that "there has been some demand rationalization, partly due to the supply shortage last year, but also because prices hit such a high."

Tuscan bread is topped with fresh olive oil for a taste during the harvesting of olives at the Castello La Leccia estate on in Castellina in Chianti (Siena), Italy
Franco Origlia | Getty Images
Tuscan bread is topped with fresh olive oil for a taste during the harvesting of olives at the Castello La Leccia estate on in Castellina in Chianti (Siena), Italy

Italy earthquake

The devastating earthquake suffered by Italy earlier this week may have a small effect on the country's production levels. Though the natural disaster occurred in central Italy, away from the olive grove-rich south, any farms in the area may be hampered in their production.

"Olives are harvested by shaking the tree, so as you can imagine, an earthquake has probably caused the olives to drop earlier," said Hudson, although she conceded that "it won't have a very big impact."

Though Spain is Europe's largest olive oil producer, goods from the second largest – Italy – trade at a premium of roughly 25 percent. Hudson attributes this to "economies of scale … because Spain produces so much more than Italy."

Emerging markets

With regards to emerging markets, Hudson said that China is the commodity's largest growth area for demand. Worldwide, the U.S. is the biggest importer of olive oil, and demand stateside is largely unaffected by the commodity's oscillating price.

When asked about production constraints, Hudson explained that olives "(are) dependent on a certain climate, which is why the Mediterranean is … perfect." In recent years, Tunisia has contested the production crowns of Spain and Italy, for example out-producing these countries in the season of 2014 and 2015.

"It's very much a supply driven market," Hudson said, as "obviously it's weather-based. If the weather is bad one year and you get poor production, there's not a lot we can do about that."

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