Vanilla report no. 36
One year ago, we projected an imminent end to the ongoing slump in the vanilla market. Six months ago we reiterated our stance and encouraged buyers to consider taking long and aggressive positions with regard to their requirements for vanilla. After all, faced with declining production at all origins, a supposed catastrophic vine disease and political uncertainty in Madagascar, how much longer could prices remain so low? …Obviously longer than originally anticipated. What happened?? Or more specifically what did not happen? If we take into consideration the ever growing popularity of natural vanilla usage and if we analyze the most recent import statistics, in our opinion only one conclusion is possible. First we would like to quickly review our assessments of the major growing areas for vanilla before presenting our hypothesis in greater detail.
Madagascar
As was the case in 2008 the 2009 crop has yielded much more than originally projected. We now believe the 2009 crop could have reached as high as 2400mt well above most initial predictions. Prices in Aug/Sept of 2009 started very low but quickly moved up in Oct/Nov as the early flowering stages in the vanilla plantations produced very low yields. For a few months many predicted a very short 2010 crop and a mild buying rush ensued pushing up prices. By early 2010 it was obvious that an unusually strong late flowering on the ground was going to improve initial projections for the 2010 crop dramatically.
Buyers pulled back and prices have been falling slowly ever since. We now believe the 2010 Madagascar crop will yield at least 1500mt or possibly more. This is already 50% higher than most initial estimates. However, given the very late flowering of the majority of the crop and the likelihood that harvesting will be no later than July, there is a higher risk than usual of more immature vanilla. The political situation in Madagascar is still very tenuous and will probably remain so until elections are held, hopefully before year end. For the most part, the vanilla market has not been adversely affected. The attempt to implement a minimum pricing decree of 27.00 on the 2009 crop failed miserably and only served to aggravate fears of a return to a controlled market.
Our position on vine disease in Madagascar remains unchanged. Vine disease has always been a part of vanilla cultivation. Our partners in Madagascar have always maintained that the disease is present but does not pose a major threat to short term production. This could change, but to date we have yet to see any compelling evidence to suggest otherwise.
Uganda
Over the past two years Uganda has been responsible for over 50% of the imports of vanilla beans from origins other than Madagascar into the U.S. market as larger end users are supporting the use of this excellent alternative to Madagascar vanilla. Unfortunately Ugandan vanilla is sold at a slight discount to Madagascar. This will make it difficult for Uganda to maintain current production levels as farmers become disinterested.
We see 2010 production in Uganda between 150 and 200mt and would be very surprised if last year’s numbers are equaled. Quality issues remain a concern in Uganda as farmers and exporters find it difficult to maintain strict standards throughout the curing process while working with an ever shrinking revenue base.
Indonesia and Papua New Guinea
Production in both regions remains low with new vanilla from Papua New Guinea practically non-existent. Indonesian Grade 3 and Cut qualities continue to enjoy steady support within the industrial market. Given the technical superiority of Madagascar vanilla it does give an idea of how soft the market really is for high grade vanilla beans when low grade Indonesian Vanilla beans are sold at a premium to the former.
We do not see production from both areas combined exceeding 150mt in 2010. In the context of the current market scenario, we feel the short to medium term prospects for PNG vanilla, at least at the industrial level, are very poor. Higher grade vanillas from Indonesia will also face weak demand and Indonesian vanilla farmers will more than likely continue focusing on the lower end of the market where they are not threatened.
India and other origins
Indian vanilla production, like most areas has dropped considerably over the past few seasons. We estimate 2009 crop size to have been no larger than 200mt and this could fall further in 2010.
Despite having made strong inroads in all sectors of the market, the lack of price recovery has put significant pressure on the local vanilla farmers. Fortunately there exists a small local market in India for natural vanilla products, and this should help preserve the industry. Mexico and Tahiti continue to survive under the vanilla radar due mostly to the demand within the local tourism industry and very specific and limited high end formulations in the flavor and fragrance industry. This will increase prospects for survival over the long term however we doubt that either origin will see production exceed 50mt in 2010.
Conclusion
Despite the plethora of new and existing vanilla products in the market that are supposedly derived from natural vanilla bean sources, consumption of vanilla beans by weight in the U.S. is less today than it was in 1998. Import data supports this fact. Yet the flavor and extract industry has indicated steady growth in premium and super premium naturally flavored vanilla products over this same period of time. In addition we have seen a huge increase in demand for exhausted or spent vanilla beans and vanilla seeds. This waste material is re-processed in several ways and in most cases the end results are the vanilla specs and vanilla seeds we see in so many vanilla flavored products. As many in the vanilla industry are already aware these additives do not impart the slightest flavor component to the end product and are designed for visual stimulation only. For the most part the specs and seeds are used in premium and super premium products. Theoretically an increase in the usage of these products should correlate with an increase in the usage of vanilla beans.
The assumption is the vanilla seeds and vanilla specks are being used to highlight the use of a natural flavor or extract derived from vanilla beans. Given the actual decline in the usage of vanilla beans this is obviously not the case.
In our opinion it is highly probable that the issue of labeling and ingredient declarations is one of the biggest contributing factors to the declining consumption of vanilla beans at the industrial level. More specifically, we refer to products labeled “natural vanilla” where flavors are not derived from vanilla beans. Of particular concern are the premium and super premium dairy and beverage products where we often see “natural flavor” on ingredient declarations replacing “natural vanilla extract”! Based on our understanding of U.S. labeling laws and standards of identity, we believe in many instances the term “natural vanilla” is being misrepresented. Before the vanilla crisis of 2000 – 2003 this practice seemed limited, however, extreme pricing brought on by the crisis forced many to reformulate. Some abandoned natural vanilla altogether while others tested the parameters of the labeling laws in order to control costs and supply. When the crisis abated, many of these revised formulations were kept in place. We believe when other manufacturers realized no efforts were being made to enforce existing labeling laws they too chose the same ingredient strategy. We assume the goal is to eliminate the dependency on what is seen as a high risk ingredient given the extremely unpleasant experience during the crisis when the price of vanilla increased by a factor of 25 over a short period to time.
We have no doubts that recent follies such as the attempt to impose a minimum export price on the 2009 crop in Madagascar , or massive positions taken on vanilla purely for speculative purposes has also influenced the decision making process for many manufacturers. Nobody wants to re-live the nightmare scenario of 2000 – 2003.
Nevertheless, we feel the practice of pushing the limits of labeling laws or even the intentional misinterpretation of said laws are having a very negative impact on the consumption of natural vanilla beans. We believe there is potential for the reputation of the industry to be seriously harmed in this regard. Ultimately it is the consumer who is being deceived and certain brands could see their reputations compromised. We can only estimate how many tones of vanilla these actions have taken off the market but it is certainly very significant. Given normal growth trends we would expect to see U.S. consumption for vanilla beans at far higher levels than current import figures are indicating.
For better or worse the plight of the vanilla farmer has become a sensitive subject in this difficult market. Even news articles based on pure fiction, such as was published on the online version of the Sunday Times on March 19th suggesting child exploitation on the vanilla farms of Madagascar, can create serious headaches for the image of the vanilla industry. Some believe more “Fair Trade” vanilla could be an answer. We believe a stricter enforcement and respect of existing labeling laws would be far more beneficial for the vanilla farmers over the long run.
AUST & HACHMANN (CANADA) LTD/LTEE
May 4, 2010
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