By Nigel Davies
MADRID (Reuters) - "An olive tree is like a camel, you don't have to give it much water, but when it's thirsty, it really has to drink," says olive oil producer Francisco Nuñez de Prado of the drought that could shrivel this year's harvest to half of last year's.
Nuñez de Prado's estate in the country's olive oil heart in Spain's sun drenched Andalucia is expected to suffer a sharp fall in harvest this year. His has been saved to some extent thanks to extensive irrigation, but other producers have seen not a single olive growing on their branches.
That has caused prices to spike, with consumers expected to pay more for the 'green gold' in coming months as supermarkets jack up prices.
"It's been a drought of biblical proportions, the worst since 1945, the 'year of hunger' for Spain," said Nuñez de Prado, adding rainfall where his farm is located in the shadows of the Sierra Madre mountains was the lowest since that year.
A lean harvest will be another blow for Spain, the euro zone's fourth largest economy, which replaced Greece, Ireland and Portugal earlier this year as the main threat to the survival of the euro currency project.
From 1943-1945 Spain suffered one of the worst droughts in its history. The drought after Spain exited a civil war in 1939 wrecked crops, dried the country's then limited reservoirs, and forced restrictions on electricity consumption.
Official data from Spain's meteorological institute shows this year has been the second driest in 60 years, after 1994. That has especially hit the arid south in Andalucia, which produces around 80 percent of the country's olive oil.
This week it has begun to rain heavily in Andalucia, but analysts say that consistent rainfall rather than two days of heavy downpours would be needed for the harvest to be much higher than currently forecast.
New irrigation systems and reservoirs in the country have alleviated the effect of the drought for some producers, but a harvest expected to be around 800,000 metric tonnes (881,849 tons), half of a bumper crop last year, has seen prices rocket by 50 percent since July.
The higher cost is providing limited comfort for producers.
Wholesale prices have nearly doubled to 2.4 euros a kilogram from around 1.6 euros ($2.06) in July, and edible oils analyst Oil World said they could well rise further in coming months in sharply reduced world production in 2012/2013.
Yet the International Olive Council noted the rise comes after two years when prices have held at low levels and the jump has merely brought prices back to 2009 levels.
"In certain areas of our olive groves we have trees that have not one olive growing. We're looking at production of about half of last year, so we're not sure if the price rise will cover our costs," Francisco Vañó, a director at the Castillo de Canena olive grove that has been in the family since 1780, said.
He said that this year several factors including a very cold winter, the drought, and the fact it was normal for a poor harvest to follow a good one as trees rested had combined to create a 'perfect storm' that could lead to bankruptcies among the smaller producers.
RISE TO HIT SHOPS EVENTUALLY
A poor harvest had also not allowed many providers to invest in systems such as better irrigation and pruning that would allow for a better crop next harvest. "That could mean that we see a bad harvest in 2013 and 2014 too," Vañó warned.
He said the harvest would undoubtedly aid other providers in main olive oil producing rivals Greece and Italy. His firm sells around 95 percent of its produce to bulk buyers and 5 percent as a premium product to high-end shops such as Harrod's in London.
But the silver lining for Spain was the fact that last year's bumper crop would provide a major cushion for losses felt this year. Spain exports around 800,000 tonnes of olive oil each year and has around 700,000 tonnes in stock, covering all its exports and domestic needs.
Supermarkets in Spain are yet to reflect the price rises, as producers struggle to convince retailers that costs have risen at their end. But prices will indeed rise both in and outside Spain with exports set to rise further this year.
"Prices are undoubtedly going to rise, but I don't think exporters will raise them a lot as they don't want to cut market growth. If we see a rise, say from 2 euros a liter to 3 euros at home, that would not be a bad thing for the sector either," said Joaquin Garcia-Romanillos, an analyst at Kepler Capital Markets.
He said retail prices under 2 euros per liter in Spain were below the cost of production so a rise would help producers.
Acesur, one of the largest producers in Spain based in Andalucia and known for its 'La Española' brand of olive oil, said the real problem now was trying to pass on the effect of the drought to supermarket chains and distributors.
"A steep rise is not good for the sector, because now trying to convince distributors and exporters that the product is a lot more expensive is going to be very difficult. That's the battle we have right now," said Acesur's head Gonzalo Guillen.
($1 = 0.7775 euros)
(Editing by Fiona Ortiz and James Jukwey)