Vanilla report no. 35
As the vanilla market works its way to the end of years of over-supply and depressed prices, we see many potentially disruptive trends emerging. Production is plummeting in regions outside Madagascar and there are a variety of factors in Madagascar itself that could have a profound effect on the market going forward. With global financial markets slowly recovering many of the liquidity constraints faced by buyers are slowly easing. It is our opinion that there is still a significant amount of vanilla coverage to be initiated for 2010 and early 2011. The following represents our current opinion on the world’s vanilla producing regions in order of importance.
Madagascar
Just as we issued our last report in October we were made aware of the now famous minimum pricing decree which was implemented in Madagascar and has been effective since August 1st 2009. Briefly, the decree states all vanilla, regardless of quality must be exported at a price no less than USD27.00/kg FOB. The decree also fixed minimum prices (in local currency) to be paid to farmers and collectors for green and semi-cured beans. Despite the opposition by a majority of vanilla exporters it was nevertheless adopted by the Government. The exporters who supported the decree claimed it was for the benefit and protection of vanilla farmers who have suffered enormously . Unfortunately, in our opinion, with the exception of the “vanilla famers suffering” nothing could have been further from the truth. Under the current scenario exporters are buying from vanilla farmers at market prices while importers and end-users are asked to pay a much higher minimum export price.
In our opinion, the parties supporting the decree are engaged in speculation and are simply trying to manipulate the market in their favor as they are unable to compete in a free market. We believe the goal is to block exports as long as possible while inexpensive vanilla is accumulated on the ground. To the best of our knowledge no exporters have respected the decree with regard to local prices. In fact over half the 2009 crop has already changed hands at prices significantly lower than last season (for the farmer). Naturally, it is up to the Malgache to decide (for them) how they want to protect the local vanilla industry. However, the fact the government ignored the wishes of the majority of vanilla exporters suggest a troublesome impartiality on their part.
When asked, our opinion has always been the same. We have never supported this decree or any other market intervention or manipulation. Our company owes its existence to a free and open vanilla market. The fact we share a similar name to the exporter in Madagascar who was the most aggressive in pushing for a fixed minimum. export price is unfortunate and has caused some confusion. We therefore feel compelled to reiterate our position formally.
It is possible that the 2009 vanilla crop in Madagascar will yield as much as 2000 MT. Quality will be as good as or even better than 2008. Pricing on the ground has increased but to date the effect has been negated by the continued weakness in the local currency. This is due to ongoing fragility of the political landscape. We believe this political instability will continue until full and formal elections are completed. In the meantime the exposure to possible civil unrest is very high.
So far the outlook for the 2010 vanilla crop is quite negative. The first of phase of flowering is over and by most accounts produced 50% fewer flowers than last year. The second phase, which is usually weaker, will be completed by the end of the year. The emerging consensus is that the 2010 vanilla crop will be significantly smaller than 2009. To what degree remains to be seen.
Finally, there is the Fusarium or vine disease issue. Always present in the vanilla plantations, the disease seems to have gained traction over the past few years and could be spreading. As farmers cut corners on plantation maintenance to save costs they inadvertently create a healthy environment for the disease to thrive. It is very difficult to try and ascertain exactly how badly production may be affected going forward. Plantations that are affected by this disease rarely recover. Older plantations are especially vulnerable. There are over 60,000 vanilla farmers in Madagascar covering tens of thousands of square kilometers. If the market recovers sooner than later we believe the disease can be contained.
Uganda
Ugandan vanilla production continues to suffer as a result of the depressed market and we doubt very much that the combined crops of 2009 will yield more than 150 mt. However, on a positive note, qualities for the winter and summer crops have been excellent with vanillin contents well above average. A high percentage of split vanilla beans are a key factor. There has been little buying pressure during the green campaigns and as a result beans are left on the vines until maximum maturity. Uganda also experienced an intense period of civil unrest this past summer. Although the government seems to be making sincere efforts to resolve the crisis, Uganda is also exposed to a higher level of political risk than usual.
We believe Uganda could end up being a net beneficiary of the Madagascar vanilla pricing decree as many buyers do not appreciate the interventionist tactics being used in Madagascar. Although this would be welcomed what is actually needed, at the very least, is a moderate recovery in prices. It is unlikely that production will recover until this happens. More farmers will turn away from this crop and 2010 production will decrease again in all likelihood.
Indonesia & Papua New Guinea Vanilla prospects in these regions are very bleak. Indonesian production, at one time well over 500 mt , is now somewhere between 100 – 150 mt. Furthermore, most of what is being produced is grade 3 or EP quality. We believe it will take much more than just a moderate recovery in prices for this market to recover. Market conditions over the past years have been very difficult for Indonesia as they are a slightly higher cost producing origin. Unfortunately there seems to be very little high grade vanilla available. The situation is far worse in Papua New Guinea where this year it is unlikely that production will exceed 50 mt and qualities will be very poor this year. Despite the advantage of being a very low cost producer of vanilla there simply is not enough incentive for farmers to continue planting and pollinating vanilla. The vanilla industry in PNG should survive in the long run and we expect that there will be a consolidation of sorts between Indonesia and PNG over the long run which will help. In our opinion PNG must be consistent in their grading methods for both industrial and food service vanilla if they are to gain significant market share.
India and other Regions
India was well on its way to becoming a major producer of vanilla with production exceeding over 400 mt just a few years ago. Unfortunately, this year we doubt the number will be half that amount. Fusarium or Vine disease has already had a major impact on Indian Vanilla Plantations due mainly to the intensive cultivation techniques. We expect this situation to be remedied as the Indian vanilla farmer becomes more experienced and adapts. It is important to keep in mind that India is a relative new comer to the vanilla world and this period represents the first time they have faced a prolonged depressed market. To their credit India is trying to protect and support their vanilla industry by developing the local market for finished vanilla products. Naturally, this will help to ensure long viability. In fact vanilla prices on the ground have already started to rise in reflecting a bullish sentiment.
Mexico and French Polynesia have both managed to maintain their respective “boutique” vanilla productions through very difficult times. Both areas will produce between 25 – 50 mt of vanilla beans this year. Given the similarity in profile to Madagascar Vanilla, we are still concerned about the long term feasibility of Mexican Vanilla if prices do not recover soon. Prices from both origins have dropped; Mexico somewhat, French Polynesia more significantly.
Summary
It is difficult for us to imagine why any buyer of vanilla would at least try to initiate maximum coverage given current market conditions. Prices are still at historical lows; production is falling in all regions and is more than likely to fall in Madagascar next year. Vine disease and Vine fatigue could cut production number drastically next year and political tensions exist in two major producing areas. As liquidity returns to the market we expect buying to accelerate towards the end of the year and into 2010. The big question everybody in this industry would like to know is how much of the vanilla already exported from origins is unsold? We know of over 700 MT sitting in a warehouse in Northern Europe waiting for higher prices. A pure speculative play unrelated to the flavor and fragrance industry but still about involving almost one third of the world’s annual vanilla consumption! How much more unsold vanilla exists in other parts of the world can only be estimated. Regardless, we feel these inventories may help protect buyers from any sudden violent prices increases as like we experienced from 2000 – 2003. However, we also know that normal less speculative inventories have already been correcting the imbalance that exists today between the supply and demand for industrial vanilla. Surely as the gap between supply and demand widens, regular inventories will be depleted. As a result we firmly believe the days of inexpensive vanilla are numbered.
AUST & HACHMANN (CANADA) LTD/LTEE
October 27, 2009
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