A Different Kind of Oil

Olive Oil has become quite a popular product for many households in Europe and North America. It is reported that olive oil consumption has increased by 100% in North America and by 37% in Southern Europe over the past decade. The issue with olive oil is not its popularity but the extensive black market now surrounding it.  Currently the average price for 100% Italian Extra Virgin Olive Oil (500ml) is around £4.45 taking into account Tesco, Waitrose, Sainsbury’s, and the Cooperative. Olive oil is one of the most expensive varieties of oil used for cooking, as it has claimed health benefits, and has become popularised with Mediterranean food.

The black market for olive oil is not something new, throughout history it has often been easily replicated with the use of lard. There is even mafias’ setup on the selling of olive oil, such as the case of Domenico Ribatti, who was sentenced to 13 years in prison during the 90s for dealing ‘faked’ olive oil. Tom Mueller has written both an extensive article on the New Yorker about the ins and outs of olive oil fraud, and has even written a book which is part investigation in the name of: Extra Virginity: The Sublime and Scandalous World of Olive Oil. This black market is particularly attractive, because if caught the sentencing for fraud with foodstuffs is almost negligible in comparison to that of drugs.

Mueller however notes that it is the sheer scale of fraud that is undercutting the honest producers and the artisan oil developers to the point that they either have to join the rest and commit to the fraudulent oil, or risk failing as a business. Current figures are suggesting that Italy sells three times as much olive oil as it produces. Up until 2001 as long as olive oil was bottled in Italy, under EU law it could be sold as Italian Olive Oil, now laws have changed, but this does not alter the fact that some mass producers that are selling the artisan extra virgin olive oil, are not actually using true olive oil production methods. This is a consequence of the economies of scale of brands such as Bertolli and Berio as they are able to use substitutes and mediocre oil to create their “extra-virgin” products, this has two consequences. Firstly, consumers no longer know the taste of true extra-virgin olive oil, and thus if tasting the real product they are unlikely to identify it. Secondly, the Italian farmers who developing true extra virgin olive oil products won’t have a market.

The issue here can be marginally placed on the product itself. Unlike other foodstuffs or oils, olive oil is unique in that to be classified as extra-virgin is a purely subjective view. There are traits that oil should meet to be legally classified as extra-virgin, but through the marketing power of the bigger companies such as Nestle, or Bertolli they effectively have changed the expectation of extra-virgin oil. One of the common fraud methods is the use of hazelnut oil, and deodorizing it with olive essence. It can be chemically proven when an olive oil is not olive oil, but the current scale of fraudulent operations means that recalling each olive oil for testing is out of question.

Flavio Zaramella was a notable producer of olive oil, and now heads an individual tasting panel. Through this panel they are able to clarify the true qualities of oils, and whether they can be considered as extra-virgin.  The issue is that his panel for example has lost its E.U. accreditation due to budget cuts for the International Olive Oil Council. Furthermore, Italian authorities do not perform these tests before oil is exported or sold, and testing becomes even more unlikely once it’s on the market.

The main issue here is that the small producers are undercut by the larger producers using substitutes to make cheaper oil, but through market power and branding maintain a high price for an ultimately mislabelled product. It is suggested that around 70% of olive oil that is labelled as extra-virgin is fraudulent. In the United States the FDA has only begun chemical testing last year, and it has become increasingly difficult to identify fake olive oils through chemical testing as there are new substituting methods being used.

Does this ultimately hurt consumers? Or is it simply inappropriate to be sold a mislabelled product; even though the majority of people cannot tell the difference? Well considering there are currently EU subsidies supporting the production of olive oil, it may be worth taking this matter into serious consideration. Even though there is considerable evidence of fraudulent olive oil, the EU maintains the subsidy. This is protecting a fraudulent industry, while still not helping the small Italian based producers. If the subsidies were removed, we may see an inflow of olive oil from Tunisia, Morocco, and Algeria. Currently the big European producers buy oil from the Middle East and North Africa, and go on to rebrand it. If the EU subsidies were removed, it may enable producers from these foreign countries to provide better olive oil at lower prices. Currently the subsidy in Europe is holding up an industry which has chosen to deceive its consumers, removing the subsidy may also reduce the size of the black market in olive oil.

Additionally, due to the subjective nature of viewing olive oil, it is necessary to introduce stricter guidelines in the production and labelling of the product, so consumers actually know what they are getting. It is clear that demand for olive oil is only increasing, as it become common in people’s diet. This growing demand has driven some producers to fraudulent methods and advertising claims, and in the interest of the consumer it is important to eradicate this market behaviour.

Recommended read:

Extra Virginity: The Sublime and Scandalous World of Olive Oil

By Tom Mueller

Is it the End of the British Breakfast?

Now I wanted to start this with a clever pun about jam or marmalade and the British Breakfast. Alas, I have yet to find one, but this story is arguably humorous enough in itself. I awoke this morning to a story on the BBC about a vote in parliament that will take place on deciding the minimum sugar content of jam and marmalade. If trivial micromanagement is a phrase that comes to your mind, I agree. I was arguing with myself over whether this was the government simply making a non-issue an issue, or if there was a genuine problem which required the government to spend time taking this into consideration.

Well according to Tessa Munt “it is the end of the British Breakfast as we know it” (let me quickly moan about her choice of calling it the British Breakfast, even the globally it is known as English Breakfast – Twining’s even have a tea named after it); now this is possibly a little farfetched. Now let me just establish what is going to happen in regards to this law passing through, British manufacturers will be able to reduce the amount of sugar in jams and other preservatives. It was set at 60% now to be lowered to 50% providing a slimmer version of British Jam. Now Tessa Munt has lamented that this will change the nature of British jam reducing its uniqueness and also making it more comparable to French jam.

Here is where things become more trivial, a DEFRA (Department for Environment, Food & Rural Affairs) spokesman stated:

“Reducing the minimum sugar content in jam from 60% to 50% will help British producers – large and small – to trade more easily across the world, boosting our economy and allowing jam-lovers everywhere to enjoy delicious British jam.”

Now there is a big claim here that reducing sugar content will somehow make British jam a more competitive export, and as such will “boost” the economy. Now I see the possible argument that by the use of less sugar, producers will reduce the cost of production by some extent as in place of the sugar is likely to be cheaper substitute preservatives. The question is to what extent will this happen, changing the sugar content in jam and marmalade effects how runny or set the jam is, but ultimately it has been stated that this new minimum will have an almost unnoticeable effect.

I have attempted to find statistics, but I have not come across any data considering the size of the jam and marmalade export market. I am sure it has some significance as there are the royalty approved “Tiptree”, but gut instinct doubts a considerable effect on the foreign market, as it is doubtful that due to this change British jam will no longer be as British. I think if the government is already going to waste time on the non-issue of these foodstuffs it may as well look at the decline of marmalade, and the rise of peanut butter, matching spending at £56 million.

I hope this topic won’t be hotly debated in the commons, if anything it’s a great argument against government intervention, just let the producers decide, and the consumers demand what they want. In my opinion it could not be simpler.

The Dismal Science?

Whether you have opened The Economist (of October 19^th), The Financial Times Weekend Edition (of October 20^th), or even The Guardian (online), there seems to be a problem. There has been a quite thorough beating of social science, at least with opinion. The Financial Times Weekend magazine dedicated itself to looking at physics, and while containing the more abstract concepts that have recently been developed, it also looked at the current state of “science”. The foundation of science is our use of empiricism, providing evidence in which to prove a hypothesis, the use of regression to examine the relationships between variables, and questioning our own answers. This is how ‘we do’ science.

The FT notes that at the turn of the 21^st century there were claims that the century of breakthrough in physics was over, and now in its place we would see a revolution in biology pertaining to our understanding of biotechnology and genetics. This revolution hasn’t seemed to have happened yet, at least that is my belief. If anything physics has maintained its place as the breakthrough science, just earlier this month Peter Higgs and Francois Englert won the Nobel Prize for their contribution to our understanding of the Higgs Boson – a key step in understanding how mass is created and possibly the absence of it. It is obviously difficult to compare the sciences, and argue for which one is making the most ‘progress’. I am obviously biased because I take physics as a subject, and it has been a personal love of mine. However, maybe a bit of physics in economics would not hurt. By this I mean physicists are often attracted to explaining what seems to just be phenomena, the obvious is given simple and straightforward explanations, but it is the extraordinary that demands their attention.

This consideration of the natural sciences brings me onto the social sciences, and what the underlying theme was behind the FT, Economist, and the Guardian. Are the social sciences really sciences? Or are they just for lack of better wording social studies. Economics has become infamous as a result of the financial crisis, at the time we lacked explanation, our models failed to predict the crisis, and we have not really flourished in resolving it – whatever the growth figures suggest. The economist looked at a behavioural study completed in the early 90s known as the Mere-exposure effect; recent re-trials of the experiment have resulted in data that does not support the original hypothesis. Here lies the issue with social science, us. We have known this since the beginning; it’s not really an original thought: In economics we usually lament that consumers are not always rational, we make decisions on innate emotions which “don’t make sense”. So how can we actually make dependable models?

Moreover, why do we rely upon models that were developed over half a century ago to still attempt to predict, or change our economic situation? Can we allow ourselves to have mainstream economics? Clearly we thought that we need not worry about economic policy or research that would help when in economic crisis at the turn of the century, as that is what defined the 20^th century, The Great Depression, The World Wars, etc. The respective crises had led to economists of the calibre of Galbraith, Keynes, Friedman, and Hayek all to consider how economies truly function. Thus we had an age of macroeconomic consideration, and the development of models which we have used up to this day. Aditya Chakrabortty from the Guardian says that those theories which have made up mainstream economics, has led to the current generation of economics to be in denial, and not consider the fact that we may have changed. Clearly this represents a problem, as the models haven’t changed.

The natural sciences are able to prove and disprove hypotheses, on the other hand social sciences especially economics lately only seem to be able to provide an opinion. When looking at economic courses at universities it is clear that maths is essential in part for microeconomics and statistical analysis. Alongside this you have the expected neoclassical and Keynesian theories. To some extent, this teaching of economics has not resulted in the desired results. There is a generation of economists who are making use or at least referring to models which by now possibly don’t actually provide an accurate observation of market, consumer, and supplier behaviour. Charkrabortty in his article states that economics should be a “magpie” subject, being taught with history, politics, and philosophy. I quickly noticed that this is how it was once done, all one has to do is look back to Adam Smith, David Hume, or David Ricardo. They were men of many traits and abilities, notably philosophy and history.

I believe to move economics into the 21^st century we must recognise the plurality of the subject. When considering any model we often make note of the assumptions we place, when we apply these models to the real world it is necessary to remove these assumption and this can be achieved with the involvement of philosophy, politics, and history to provide at least a context to our decisions. We still as a society can become baffled with what should be simple, straightforward, “proven” economics by now. One simply has to look at the debate around HS2 in Britain. Keynesian economics suggest that we are stimulating aggregate demand to induce growth in the economy, monetarist theory would suggest that this wouldn’t work in the long run. The truth of the matter is we don’t know, here the monetarist theory is more easily defended as one can consider all the towns that will be passed by, or land that will have to be committed to the transportation. So there is debate, and we struggle to have an authoritative stance, as just yesterday the benefits of HS2 have been “lowered”.

We are at a key point in science and economics. We have the emergence of big data, which may actually enable us to predict current trends, and bring statistical analysis to a whole new scale. To do this, economics in my opinion needs to start behaving like the natural sciences in that we continually question what has been to some extent proven. Up until now we have been too comfortable with theories that ‘seem’ to work, there may be more room now for unorthodox economics, or at least involving more breadth in the base education of the subject. Look at any economics course at university and the stress is placed upon mathematics, for what is ultimately as we have established a behavioural subject, and that the Nobel Prize in economics this year further cemented as a variety of behavioural finance. The question now is how we incorporate effectively all the aspects of an ultimately extremely wide subject? It is time to either introduce more of the scientific method, or accept like history that there is a strong element of a subjective view, and how successful in a sense the subject is depends on how we view it.

For a bit of further reading check out:

http://www.theguardian.com/commentisfree/2013/oct/28/mainstream-economics-denial-world-changed

http://www.economist.com/news/leaders/21588069-scientific-research-has-changed-world-now-it-needs-change-itself-how-science-goes-wrong?fb_ref=activity

If you read anything read this article:

http://www.ft.com/cms/s/2/8461f5e6-35f5-11e3-952b-00144feab7de.html#axzz2jEkVT9iu

Exchange Rates: Float or Fixed?

Throughout history countries have adopted both fixed and floating exchange rate systems, usually depending upon the condition of the domestic economy. The value of a currency was traditionally based on a fixed system of gold, which was known as the gold standard. However, due to the limitations incurred by the gold standard such as a restriction on growth through the lack of monetary expansion, free floating systems were adopted. Currently, most developed countries maintain a managed float system which combines aspects of a fixed rate with those of the floating rate.

Free floating exchange rate is where the market forces of supply and demand determine a currency’s value relative to another currency. There are many advantages to the use of this system, as it supports trade and achieves accurate pricing of the currency as the market forces provide price signalling. Nevertheless, the free floating system ensures no government involvement, and this reduces the possibility of market failure. With the absence of government control it is unlikely that the currency will be held at an artificially achieved price which is either over or under valued. Through letting market forces clear the exchange market events such as Black Wednesday can be avoided. Black Wednesday was when the Sterling was pegged to the Deutschmark; there was market speculation that at this exchange rate that the Sterling was being over-valued. This led onto currency traders such as George Soros to undercut the currency by short selling. This had forced the Bank of England to unpeg the currency to allow market forces to clear the market and restore the sterling to a stable value. This exemplifies the danger of fixing the currency, and how this can be easily be avoided by simply letting supply and demand determine the value. This is limited in the fact that speculation can still occur, and developing countries may want to avoid free floating as foreign investors may “bet” either way on the currency and this has national repercussions.

A fixed exchange rate system is where the value of one currency is pegged onto the value of another currency or as mentioned gold; this is done in order to maintain the value of the currency within a given band. Two mechanisms may be used to keep the currency’s value within the band, and these take the form of interest rates and foreign reserves. In a free floating system the interest rate can be varied to any degree in the interest of pursuing monetary policy, whereas in a fixed system the interest rate is only manipulate to ensure the currency’s value stays within its respective band. If the interest rate were to be kept too high, the currency would attract foreign investment leading the currency to strengthen, while the opposite can occur if the interest rate were to be lowered. This means that the government has finite ability in manipulating in the currency for domestic reasons, restricting the pursuit of monetary policies. Furthermore, in order to control the value of a currency a central bank most hold sizeable foreign reserves. The central bank must be able to freely buy and sell the currency in question, and this requires access to foreign reserves. This introduces the possibility of government failure as it is difficult to know how much a foreign currency must be held, and the possible market repercussions of having a preferred reserve currency. In the free floating system these controls are not needed, reducing the possibility of government induced failure, and the free floating system also allows greater monetary flexibility.

The free floating exchange rate system provides an automatic readjustment for an economy’s balance of payments. When a country is running a trade deficit imports are exceeding exports, prompting leakages out of the economy without introducing some kind of injection. Furthermore, as the country maintains a high demand for imports this means that there is a considerable demand for foreign currency, prompting the domestic currency to be supplied. This eventually reaches the point where the domestic currency is supplied to the extent that there is downward pressure on the currency causing it to depreciate in value. This depreciation in value means that the relative price of exports abroad decreases, making them competitive in the foreign markets. It also leads to the relative price increase of imports, as now the domestic currency is less able to purchase foreign currency. This counteracts the trade deficit as now exports will exceed imports closing the trade deficit gap. This is all achieved through the market clearing forces, rather than government intervention which may misallocate resources in an attempt to control the balance of payments. However, this does lead to a cyclical effect where the currency will have stronger and weaker periods. The main limitation in the dependency of the automatic readjustment is that it depends on the type of imports, some developing countries may have staple goods (e.g. gasoline, water, etc.) as their imports, and regardless of currency change their exports may still not be attractive, thus the adjustment does not occur or does not occur to the same extent as it would for a developed country.

Fixed exchange rate systems do promote long run stability, which can be undermined if the market is left to determine the value of the currency. It is beneficial for developing countries to maintain a peg as it helps them plan for the long run, and they need dependable trade flows. As previously mentioned the imports undertaken by developing countries may be basic necessities, so a free floating system may destabilise their ability to import the essentials. With a fixed exchange rate the developing countries can make trade agreements that will be sustainable for a length of time, and ensure some kind of economic stability. Furthermore, there is the removal of administrative costs that are persistent with the free floating system, such as futures contracts, and other types of hedging. Through running a fixed system the currency can be protected from the fluctuations of free floating currencies, which also contributes to the long term planning of developing countries, and a degree of economic stability. One key advantage of the fixed system is that it encourages firms to maintain productive and allocative efficiency so that they can compete in international trade. When a currency is pegged it is difficult to depreciate its value to make exports more competitive, thus producers are driven to allocate their resources wisely and ensure efficiency in order to cut down operational and productive costs.

When comparing the two systems it is clear that a mix of the two is suitable for many developed countries, whereas a fixed rate system has more direct benefits to developing countries who aim for stable growth. In a managed float the two fixing mechanisms can be employed in order to manipulate the value of the currency, but as the currency remains unpegged the overriding market force is that of supply and demand so it is unlikely that the currency will be over or under valued even with the use of fixed system controls. The free floating system has quite considerable benefits, as it not only reduces government intervention but also provides the automatic adjustment of the balance of payments, and monetary flexibility which has become integral in a post financial crisis economic climate.