**7. Economic issues behind olive oil processing industry**

According to the results of the studies that have been undertaken for the olive oil industry indicated that olive oil production is privately profitable. The Private Cost Ratio has been measured and the coefficient was evaluated at 0,703, meaning that this production is profitable for the private enterprises. Still according to these results indicate that Albania has not a comparative advantage in olive oil producing industry in the production year 2008-2009. The calculations resulted in DRC = 2.2. This means, it is not socially desirable to produce and expand olive oil production in Albania, as the use of domestic factors is not efficient in economic terms. Comparing the two values of the above ratios, in current situation, olive oil production can be appreciated as competitive within the country with private prices, but it cannot be appreciated as competitive with social prices.

A sensitivity analysis was done to see how the DRC ratio reacts to different changes in different parameters of the model. Changes were done in the parameters like world market prices of olives and olive oil, exchange rate and labor force price. As a result of the sensitivity analysis it was seen that the olive oil production is very sensitive to changes in input (olives) and output (olive oil) prices of the world market and also to changes in the exchange rate. But it is not sensitive towards changes in the labor force prices. The major determinants of the Albanian olive oil comparative advantage are the favorable world price of olive oil, the exchange rate and the price of olives as input factors for the olive oil manufacturing. The explored values of private profitability and the DRC suggest that that olive oil production is privately and socially profitable, however two important conclusions are to be emphasized particularly: firstly, the private profitability is higher than the social profitability, and secondly, social profitability is largely depended on the situation at the international market.

Due to the changes in the sensitivity analysis it can be seen that a reduction on the olives as input in the olive oil industry, the domestic resource cost ratio enters in the interval values in which we can say that olive oil production is competitive in Albania. In this stage there is need of state policy intervention in order to help the olive oil producers for having lower prices of inputs. Policies like subsidies of the prices of inputs are suggested in this case.

In recent years, Albania has seen a rapid evolution in its citizens' consumption behaviors and life styles due to economic growth, improvement in the standard of living, fast urbanization and trade liberalization within the country. One consequence of this has been the gradual segmentation of the food and beverages market, similar to what has been seen in other transitioning countries (Berisha and Mara, 2005: WB, 2007). The transition from a centrally planned socialist economy to a market oriented economy has also given rise to an urban middle-income class of consumers. Another important study on olive oil consumer preferences conducted in Tirana/Albania 2010 has resulted with some other result on the olive oil (Chan Halbrendt et al, 2010). According to this study 6 consumers' segments and profiles were identified, based on set of preferences and willingness to pay. The fact that it is now

At present, imports cover about 10% of market-based demand, but imports from the highly competitive Mediterranean producers could lead to an increase in market share of imported olive oils in the next years. Increasing domestic demand, years of relatively lower productivity and a general scarce competitiveness of the Albanian products are among the

According to the results of the studies that have been undertaken for the olive oil industry indicated that olive oil production is privately profitable. The Private Cost Ratio has been measured and the coefficient was evaluated at 0,703, meaning that this production is profitable for the private enterprises. Still according to these results indicate that Albania has not a comparative advantage in olive oil producing industry in the production year 2008-2009. The calculations resulted in DRC = 2.2. This means, it is not socially desirable to produce and expand olive oil production in Albania, as the use of domestic factors is not efficient in economic terms. Comparing the two values of the above ratios, in current situation, olive oil production can be appreciated as competitive within the country with

A sensitivity analysis was done to see how the DRC ratio reacts to different changes in different parameters of the model. Changes were done in the parameters like world market prices of olives and olive oil, exchange rate and labor force price. As a result of the sensitivity analysis it was seen that the olive oil production is very sensitive to changes in input (olives) and output (olive oil) prices of the world market and also to changes in the exchange rate. But it is not sensitive towards changes in the labor force prices. The major determinants of the Albanian olive oil comparative advantage are the favorable world price of olive oil, the exchange rate and the price of olives as input factors for the olive oil manufacturing. The explored values of private profitability and the DRC suggest that that olive oil production is privately and socially profitable, however two important conclusions are to be emphasized particularly: firstly, the private profitability is higher than the social profitability, and secondly,

main factors that caused such a situation.

**7. Economic issues behind olive oil processing industry** 

private prices, but it cannot be appreciated as competitive with social prices.

social profitability is largely depended on the situation at the international market.

Due to the changes in the sensitivity analysis it can be seen that a reduction on the olives as input in the olive oil industry, the domestic resource cost ratio enters in the interval values in which we can say that olive oil production is competitive in Albania. In this stage there is need of state policy intervention in order to help the olive oil producers for having lower prices of inputs. Policies like subsidies of the prices of inputs are suggested in this case.

In recent years, Albania has seen a rapid evolution in its citizens' consumption behaviors and life styles due to economic growth, improvement in the standard of living, fast urbanization and trade liberalization within the country. One consequence of this has been the gradual segmentation of the food and beverages market, similar to what has been seen in other transitioning countries (Berisha and Mara, 2005: WB, 2007). The transition from a centrally planned socialist economy to a market oriented economy has also given rise to an urban middle-income class of consumers. Another important study on olive oil consumer preferences conducted in Tirana/Albania 2010 has resulted with some other result on the olive oil (Chan Halbrendt et al, 2010). According to this study 6 consumers' segments and profiles were identified, based on set of preferences and willingness to pay. The fact that it is now possible to clearly identify several segments of consumers marks a milestone in the process of evolution of agri-food marketing, with major consequences on development policies. Origin is a key choice factor for 82% of respondents, in three out of six consumers' segments.

The confidence on quality and safety of domestic product is low. This conclusion emerges from the analysis of several factors: i) imports are growing notwithstanding the consumers' preference for Albanian olive oil; ii) consumers have little confidence on reliability of domestic industrial producers and controls made by competent authorities, so they prefer to buy olive oil directly from trusted farmers, or from the oil mills or to buy imported products; iii) during the analysis there was a scarce correspondence between low income and preference for low prices, as high prices are considered one of the few reliable proxies for quality.

The majority of purchased olive oil is still traded as not bottled product, being sourced either directly from farmers and oil mills or as by quantity in traditional shops. 44% of the interviewed consumers in Tirana confirm that they buy directly from farmer and olive oil mill respectively. This percentage should be much higher in smaller cities or rural areas characterized by olive and olive oil production and consumption. When considering also self-consumption of farmers in production areas, it is possible to conclude that most probably, more than 70% of the olive oil consumed in the country is sold as a non-bottled product and is subject to little quality control.

Under the current extensive inefficient conditions in which the olive culture is cultivated in Albania, there is however a profitability for farmers to produce. This profitability and comparative advantage can be improved if the olive culture is cultivated more intensively. If the farmers are sure that the processing industry will act as a reliable market for their products, they will increase the production. On the other hand the increased olive cultivation will provide more raw materials for the processing industry, assuring its functioning with full capacity. The better utilisation of existing capacities in processing industry will allow favouring from the low of economies of scale and at the end effect result in lower production cost.
