Vanilla report 31
As new vanilla crops materialize from the major growing regions of the world, the much-predicted recovery of prices has yet to materialize. The market for vanilla beans, be it industrial or gourmet is still heavily saturated with inventory at all levels despite some drop in production in certain origins. Vendors face enormous challenges at many levels and in the last 6 months the rapidly weakening US dollar poses the greatest of all. Since the U.S. market is by far the greatest consumer of vanilla beans (evidenced by the fact that given current import statistics over 2200 mt of vanilla will be imported in 2007) vendors have no choice but to continue working in dollars for the most part.
Madagascar
In 2007 Madagascar has enjoyed yet another very healthy crop with approximately 1500 mt of material expected. Aside from some low-grade lots due to the cyclones earlier in the year, most of which are already being exported or blended, the quality appears to be excellent. The much-predicted spike in prices has not yet materialized, as buyers remain cautious. Yes there is a big difference in the purchasing power of the dollar when compared to last season but to date pricing has been ambiguous at best. Many exporters were out of the gate early in the green campaign, convinced prices would rise, but this sentiment has not carried over to the Vrac trade, which is currently underway. This is probably due to the fact that major industrial buyers are well covered and are in no rush to engage them. How well covered is a critical question that can only be answered in theory.
It is obvious that there is a lot of inventory at all levels of the trade, be it liquid (extract) or solid (beans). The fact of the matter is that market conditions are excellent for accumulating inventory. Nobody wants to be caught on the wrong end of a price spike or a sudden tightening of supply. Although we feel it is far too early, many people are already predicting a smaller crop in 2008. Although this is entirely possible, even if the crop size comes in below 1000 mt, we still feel there should be more than enough material to satisfy demand. What people tend to forget, especially in Madagascar, is that since the crisis 5 years ago, production was ratcheted up not only in Madagascar but other origins as well. These origins account for almost 40% of imports into the U.S.
If we assume for a moment that the majority of vanilla users are well-stocked, production numbers don’t bode well for vendors. With 1500 mt predicted for 2007, even if 2008 comes in at the low end of the scale say 1000 mt, in addition we estimate that there is at least 500 mt of Madagascar vanilla being held in warehouse in the U.S., Canada and Europe. That means 3000 mt of material from Madagascar alone available to the market over the next 15 months or so. More than enough in our opinion.
It is true that current pricing on the ground in Madagascar suggest significantly higher prices this year over last given current exchange rates, but we feel part of this is due to a calculated risk being taken by exporters. The next few months are going to be critical in determining if they are right or not.
The fact is if exporters are financing their purchases at high interest rate levels (over 15% in Madagascar) they cannot afford to sit on their inventory indefinitely. If more buyers, who we feel are well covered, decide to wait until 08 before making any major commitments, this will put enormous pressure on prices in our opinion. Therefore we do expect prices to begin on the high side in Madagascar, maybe one or two dollars higher than last season, however we still have doubts if the necessary price momentum can be maintained going forward. As it is a buyers market, they will dictate where prices are going, regardless of exchange rates or any other factor that may be indirectly affecting the market.
Uganda
Ugandan vanilla farmers are under tremendous pressure as it becomes more and more difficult for them to sell their production despite ever improving qualities and competitive pricing. Despite the fact Uganda prices are usually at least 15 – 20% cheaper than Madagascar since they do not enjoy the universal acceptance in the market, there has been very significant carry over in the past few crops. The summer harvest, which is coming to market, now again looks like excellent quality. However, there are some pockets of concern due to the heavy rains over the summer so buyers should select their lots carefully.
There is also a sudden proliferation of Organic Vanilla coming out of Ugandan, which is contributing to price depressions in this sector as well.
We maintain that production from Uganda will be well over 200 mt for the entire 2007 period but this will more than likely diminish in 2008. Many exporters are not set up to carry stocks for an indefinite period of time and we feel there is a consolidation coming to this market in the near future. Many small players will be eliminated altogether or forced to join larger operations.
Conclusion
As we have maintained throughout this period of depressed pricing and abundant supply buyers should not hesitate to cover their requirements going forward as possible and adding on whatever surplus they can afford or that their vendors are willing to commit to. By any standard vanilla prices are very low and qualities are very good. This helps in case for long term storage is required. We still see buyers who will balk at what are historically record low prices in the hopes they save $1.00/kg if they wait a few more weeks or months. We cannot help but be reminded of the vendors in 2002 who did not want to sell their vanilla at $500.00/kg because they felt they may get $550.00/kg or 600.00kg if they waited. When this current depression in prices ends, as it most certainly will, buyers may have to wait a very long time indeed before these opportunities arise again.
AUST & HACHMANN (CANADA) LTD/LTEE
November 30, 2007
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