13-MOE Lebanon SEA Olive Oil Sector

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Integrated Impact Assessment Integrated Impact Assessment of the Association Agreement on the Olive Oilof the Association Agreement on the Olive Oil

Sector in LebanonSector in Lebanon

Ministry of Economy and Trade

IntegratedIntegrated AssessmentAssessment and Planning for and Planning for SustainableSustainable DevelopmentDevelopment

OMAN 2006

Scope of the Project


The project aims to undertake an integrated assessment of the trade component of the Association Agreement (AA), with particular emphasis on key economic, social and environmental factors

1995 2002 2003 2004

Association Agreement

signed, ratifiedby Lebanese Parliament

2005

BarcelonaConference

Interim Agreement went into effect

EU Enlargement& European

Neighbourhood Policy (ENP)

To launch negotiations on Action Plan for ENP

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Scope of the Project (2)


The olive oil sector was chosen as a pilot product based upon a set of criteria:

1- Strategic linkage with the EU (Association Agreement/ENP) : The EU and Lebanon have a strong business, investment, and cultural relationship. And, under both the European Neighborhood Policy (ENP) and the AA, negotiations are expected regarding the bilateral agricultural policy

2- Social implications : 57% of all farmers are involved in the olive oil sector (23% of total crop output in Lebanon), but olive orchards are located in Lebanese poorest rural areas and across the country with v. high youth migration.

3- Environmental implications : Wastewater effluents (vegetable water) disturbing natural ecosystems (esp. river ecosystems), and unsustainable agricultural practices.

4-… and a cooperative private sector / NGO community

Overview of the Olive Oil Sector


• Production fluctuates from year to year creating an irregular supply flow to sustain a level of export and domestic consumption • The percentage of extra virgin oil in Lebanon (11%) is low compared to int’l practices (Spain 40% and in certain parts of France over 90%).• Few labs are capable of certifying olive oil in accordance withinternational standards & proper enforcement regulations are lacking

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Overview of the Olive Oil Sector (2)


• Under Association Agreement, Lebanon can export duty-free up to 1,000 tons of olive oil while levying a 70% tariff rate (no change) on EU exports.

• Among the main derivatives of the olive oil production processwith potential return: soap and compost

• Olive oil processing, as it stands, is a source of pollution; esp. wastewater

Overview of Lebanese Olive Oil Sector (3)

• Olive oil processing, as it stands, is a source of pollution: e.g., pomace , wastewater

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Overview of the Olive Oil Sector (4)


Hasbani River before vegetable water out-fall

Hasbani River at point after vegetable water out-fallExtremely high BOD is proving detrimental to flora and fauna in river ecosystems

Olive Oil Production Chain : Key Bottlenecks


1- Olive Harvesting

• Inefficient pruning practices

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Olive Oil Production Chain : Key Bottlenecks (2)


• Lack of separation between hand picked, and fallen olives.

• Absence of leave stripping and olive washing prior to milling



• Plastic bags commonly used as opposed to open crates (affectingquality)

• Lack of time management in storage and processing stages partlydue to a lack of co-ordination between farmers and millers.

• Mills hygienic condition often not up to standards

• No differentiation is made between olive oil categories at mills (therefore no proper price differentiation), insufficient certified laboratories

2- Olive Milling

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• Oil storage conditions

•Wastewater and pomace management :



Olive oil marketing

• Limited knowledge of the external market potential and foreignlabeling requirements and standards.

• Potential for targeting niche markets (extra virgin olive oil with proper regional identity supports higher prices) not yet realized.

• Variations in exportable supply from year to year

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Olive Oil Sector Inter-Linkages

Economic

EnvironmentSocial

Agricultural practicesInput costsPricesProductivity Trade

Migration Income of farmerHealth conditions

Land usageBiodiversity impactPlanningPollution (water, air, soil)

Policy Scenarios


SCENARIO 2

Quality Improvement Scenario

Package of incentives to improve quality and exports of extra virgin olive oil to the EU (fully taking advantage of the AA)

SCENARIO 1

Baseline Scenario

Lebanon can export duty-free up to 1,000 tons of olive oil (but not being taken advantage of), and still imposes 70% tariff rate on EU exports

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Integrated Assessment: Scenario 1- Economic Status


• Economic Impacts of the AA for the olive oil sector as it stands (scenario I) are minimal-the increase in exports is mainly attributed to the depreciation of euro against the dollar.

• Export to the EU represent a small portion of domestic production; minimal impact on price structure; thus far a range between 0.36 – 2.8% of total domestic production,

Scenario 1 – Social Impact


• Impact of the AA as it stands at the social level (unemployment/migration) is minimal;

• Poverty and migration are still predominant in areas where olive tree cultivation is mostly concentrated

• Official unemployment rates in Northern Lebanon, Southern Lebanon,Nabatieh and the Bekaa are 11.10, 7.40, 6.30, and 10.10 percent respectively (CAS 1998) and are the highest in the country (unofficial rates stand at almost twice as much respectively).

• The areas that are considered mostly rural in nature also have relatively much higher illiteracy rates.

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Scenario 1 – Environmental Impacts


• The current impact of the AA on the environment is minimal

• Lebanon uses about 5 Kg/hectare of pesticides in olive orchards, the world average is 2.9Kg/hectare

• Olives orchards form a part of a diverse land-use system (landscape feature) in Lebanon

• Vegetable wastewater high in BOD & COD, detrimental to river flora and fauna – where the river literally turns black

• Dry pomace used for indoor heating – a favourable substitute to wood and coal but a cause of indoor air pollution nevertheless.

No Data%

Sea%

Valley%River

%Sewer

%

Cess Pool%

Open Discharge

%

Irrigate%

Integrated Assessment: Scenario 2


Assumptions

1- Good agricultural practices (GAP) – including Integrated Pest Management (IMP)

2- Creating a sustainable regulatory framework and laboratories for certification

3- Better coordination between farmers and mill operators. 4- Olive oil office (to coordinate between all agents involved,

disseminate information and avoid duplications…)5- Upgrading mills and their working conditions6- Insure waste management

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Scenario 2- Economic Impact


Net economic benefits from assuming that the 1000 ton quotas was fully used in past year – a retrospective illustration

4,335,0302,165,0802,970,0003,224,000Net Benefits (in USD)

441000022600003,000,0003,250,000Revenue (in USD)

4410226030003250Price in EU (UDS/ton)

1000100010001000Exports (Quantity in tons)

Scenario 2

74,97094,92030,00026,000Revenue (in USD)

4410226030003250Price in EU ( USD/ton)

1742108Exports (Quantity in tons)

Scenario 1

2005 (Up to May)

200420032002YearExtra-Virgin Olive Oil

Scenario 2- Economic Impact (2)


• If the Lebanese industry were to reach international milling standards such as those in Spain (which has 40% of its oil output as extra virgin oil, at US$3,500 per metric ton (or US$3.50 per litre), improving Lebanese olive oil quality would entail increasing the amount of extra-virgin olive oil to over 10,000 metric tons (from 2840 metric tons).

• This potential increase in revenues totals more than US$26 million per year (totalling US$36 million for the sale of extra-virgin olive oil) – taking year 2002 as an example.

• Control on the origin and quality of the product as well as the quality would insure that local producers capture a larger share of domestic market as well as a higher price premium

• The higher revenues captured by producers as well as better methods of productions would insure a constant flow of supply, allowing for long term investments

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Scenario 2- Social Impact


• Benefits of the increased exports of premium olive oil are likely to be the following;

- Employment generation (more skilled labourers to apply proper pruning methods and milling operations) - More reliable safety net (sustaining olive oil production and revenues)- Aiding in curbing rural-urban migration- Stabilising rural age structure, - Increase of revenue for educational purposes.

Scenario 2 - Environmental Impacts


• Waste management reduces substantially water pollution, which leads to a conservation of biodiversity

• The proper use of pesticides/fertilisers would have a positive impact preserving quality of water sources and soil conservation

• Increase revenues and investment within the sector leads to environmental awareness

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Cost-Benefit Analysis of Scenario 2


1. Applying and disseminating good agricultural practices2. Applying Integrated Pest Management3. Yield Improvement/ On Farm Water Use Efficiency4. Harvesting, post harvesting and milling programming (optimizing

some key-phases in olive oil production by creating a quality-oriented approach)

5. Modernizing and Improvement of Mills 6. Quality modernization review and improvement (Good manufacturing

practices and HACCP) 7. Bottling Plants and Packaging Modernization8. Quality Control/Testing and Laboratory Facilities 9. National Marketing Facilitation and Promotion 10. By-Products development11. Olive oil office

Costs of following action plans adopted completely from Euro-Lebanese Centre For Industrial Modernization (ELCIM)

Cost-Benefit Analysis - Costs


30,421,656TOTAL (USD)

25,351,380TOTAL (EUROS)

1,702,717Olive oil Office11

1,419,718By-Product Development 10

168,050National marketing facilitation & promotion9

2,766,720Quality Control/Testing and Laboratory Facilities 8

814,662Bottling Plants and Packaging Modernization7

520,615Quality modernization review and improvement6

247,771Modernizing and Improvement of Mills5

2,444,993Harvesting/Post harvesting/milling programming4

3,675,229Yield Improvement/Water efficiency3

8,538,096IPM2

3,052,809GAP1

Cost (Euro)Cost Category

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Cost-Benefit Analysis - Benefits


• It would be assumed that the benefits would be incurred from Year 4 of commencing the action plans, and would span the total of 16 years (equal to the max time frame of action plans).

• These benefits, (calculated to be USD26 million per year) are assumed to accrue if Lebanon follows the categories of olive oil production in Spain, and should therefore only be taken as an order of magnitude.

Potential net discounted benefits of Scenario 2 assumptions

154.8 USD Million 5%

210.63 USD Million3%

338 USD Million0%Discounted Benefits

26 USD Million/Year4-16Years

0 USD/Year1-3Years

Benefits

Scenario 2 – Cost-Benefit Ratio


• The benefit – cost ratio is 1:11 at 0% discount, 1:7 at 3% discount, and 1:5 at 5% discount.

• These values however should only be taken as an order of magnitude. The analysis was limited to the information and estimations present.

• The costs of treatment of vegetable wastewater were excluded however, yet concurrently excluded were the costs of environmental degradation due to the present lack of quantified information in this regard.

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Current Impact of Scenario 1 on Stakeholders


Policy impact is limited since only a small portion of total production is exported to the EU.

Winners :

• The few extra Virgin olive oil producers and traders.• Seasonal unskilled labour producing low-quality oil.

Losers :

• Consumers (no choice)• Communities using the wastewater (irrigation, tap water)

Potential Impact of Scenario 2 on Stakeholders


Policy impact is uncertain in short term but may be positive in medium to long-term with a shift towards premium oil and an increase in competitiveness

Winners : • Skilled labor• Extra virgin olive oil producers & traders• Communities directly affected by the wastewaterLosers :• Unskilled labor• Consumers (high prices)

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Long-Term Implications


Hypothesis 1 : Long term impact assuming no improvement in environmental indicators

Social

Economic

Increase in migration, gradual disappearance of olive oil farming community, and loss of income.

Negative impact on export, employment, and national welfare

Long-Term Implications (2)


Hypothesis 2: Long term impact assuming better environmental conditions

Social

Economic

- Provide vocational training - Improve health conditions (reduces exposure to unsafe and polluted waters)- Contain rural migration

- Sustain production - Increase economic efficiency- Increase exports

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Long-Term Implications (3)


Hypothesis 2: Long term impact assuming better social conditions

Environmental- Natural resource conservation- Better wastewater and solid waste management

Policy Scenarios


Economic Impact

+++Larger domestic market share (by locals)

++++Exports of extra virgin olive oil

+NoneEmployment

+NoneNational welfare

Scenario 2Scenario 1Indicators

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Policy Scenarios


Social Impact

+++Quality of life (health) of the farmer

++++(Agricultural) Know-how

+++Income of the farmer

++NoneMigration Reduction (from rural areas)

Scenario 2Scenario 1Social Indicators

Policy Scenarios


Environmental Impact

++NoneWaste water mngt

++NoneSolid waste mngt

Scenario 2Scenario 1Indicators

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Domestic Challenges


Ø Limited control on the source of olive oil (e.g., black market)Ø Few laboratories located in Beirut (testing is expensive) Ø No geographic indication for Lebanese oilØ Lack of data, and access to information is limited and centralized Ø Absence of awareness raising and marketing strategiesØ No leading role for the private sector

Recommandations


EU contribution:

• Remove EU subsidies and simplify regulations• Technical and financial assistance• Facilitate access to EU market through promotion of trade shows…

Lebanese Government contribution :• Upgrade and certify existing testing laboratories• Disseminate information and build database• Provide training and increase access to testing • Improve intra -ministerial coordination• Facilitate by-product management• Faciliate access to capital (micro-credit)

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Recommandations (2)


Private sector contribution:• Organise to achieve economies of scale• Disseminate information and proposals• Maintain competitive edge• Coordinate with NGOs and promote public- private partnership

NGOs contribution:• Raise awareness• Train farmers• Enhance intra-NGO networking• Disseminate information and coordinate with private sector • Facilitate public-private partnership

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13-MOE Lebanon SEA Olive Oil Sector

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