Quality Differentiation as a Strategy for the Viability of Traditional Olive Farming in Trás-os-Montes Region

Despite special quality of the olive oil of Trás-os-Montes (TM), producers fail to create niche market and raise price commensurate with the high cost. Some local manufacturers made some attempts to establish special brands for their oil and the association of the local producers (AOTAD) made the required efforts to bring the product of the region under PDO, designated as Azeite de Trás-os-Montes DOP. Only a small part of the marketed product is sold under PDO (4%) and a fraction of which is sold under some brand till date. The cost structure of olive oil depends on multiple factors - the type of production system (traditional or intensive), plant variety, inclination of plots and productivity, among others. The harvesting cost in general represents more than 50 percent of the total costs. The massive increase of production with the use of intensive farming at lower unit cost in other regions has pulled down the overall market price making traditional farms unviable. For the modern super intensive farm unit cost is only one fourth of that of traditional farm. The issue is not of protecting an unviable traditional system from the competition of an intensive system, but of the realisation of the true value of a product that the market mechanism fails to accomplish. This kind of problem of adverse selection due incomplete/ asymmetric information in the market is often interpreted in terms of the ‘lemon effect’ or ‘Gresham’s Law’. It states that in the case of buyer failing to discriminate between the products of different qualities at the time of purchase, the producers of higher quality products cannot charge a premium price. Under these circumstances, if the cost of high quality product exceeds that of low quality product, the producers of the former cannot sustain in the market. This is precisely what happens with the good quality high cost olive oil of TM against the competition of the low quality low cost olive oil of some other places. As an exotic high quality product its characteristics must be described in most visible and attractive forms and search its niche market globally.