VANILLA MARKET REPORT NO 48 – MARCH 2016
In the 5 short months since our last market report the global vanilla trade has fallen into “crisis” mode not too dissimilar to “2002/2003” – the year before prices for extraction grade Madagascar Vanilla Beans surpassed USD 500.00/kg. As the last lots from the 2015 Madagascar season come to market, prices have almost tripled in a year. Extraction grade vanilla bean buyers not covered for 2016 find themselves at the mercy of the market; however, this landscape may change considerably in 2016 as vanilla production in all growing regions is set to rise considerably.
Madagascar’s grip on the market, while still formidable, is loosening as new vanilla plantations start to bear fruit. This will become even more apparent in 2016 and possibly glaring in 2017. In the meantime the current market is practically void of any supply as the 2015 Madagascar crop came up very short on both quality and quantity. If not for supplies from Indonesia, Papua New Guinea and India and, to a lesser extent Uganda, the market would be in an even more precarious situation. Although conspiracy theories abound, we do not see anything other than the laws of supply and demand affecting the current market with respect to price. Quality is an entirely different narrative.
First a very brief look at other growing regions…..
Uganda
Ugandan vanilla was a big disappointment in 2015 with lower yields and poor quality. The prognosis for 2016 is not much better in terms of volume, estimated somewhere between 100 – 125mt from both crops. Quality will depend on harvest and curing times and we are not optimistic. There is no structure to the Ugandan Vanilla Market, and, with each exporter comes a different quality. In our opinion Uganda has not responded quickly enough to the turnaround in the vanilla market over the past 3 years. It remains to be seen if this origin will ever become an impact supplier to the global vanilla trade. Unless there is a more organized effort on the ground to support the vanilla trade, we expect that India will soon surpass Uganda to become the number 3 producer of vanilla worldwide behind Indonesia and Madagascar.
India
The Indian vanilla market will still be a “work in progress” with minimal real local production…well below 100mt. However these numbers will be distorted by the ongoing trade of semi-cured Madagascar vanilla being exported to India for finishing. This practice has been going on for several years and we believe it encourages the vacuum packing of slightly cured green vanilla which is widely practiced throughout the vanilla region in Madagascar. In our opinion, India is gaining expertise in the curing of vanilla at the expense of Madagascar while waiting for their own home grown vanilla vines to start producing in earnest. This is expected in 2017. Although India will not make a significant contribution to world-wide vanilla production in 2016, they will continue to exert influence through their activities in Madagascar and quest for partnerships in advance of anticipated increased production. If their vanilla program is well executed and maintained India could quickly become a force in the Vanilla trade.
Indonesia
Indonesia was a very pleasant surprise in 2015. Over 300mt were imported into the USA and we must assume other tonnage made its way to Europe and China. This is significantly more vanilla than we projected in our last report. It is common to hear that a good portion of this was old stocks held since the days of the price collapse in 2004 – 2005 but we are very skeptical this is the only reason for the increase. Vanilla prices have been increasing for 3 years now and Indonesia, like other origins, has taken notice. It is very difficult to project the production of Indonesian in 2016. Another factor which distorts the numbers is the export of PNG vanilla from Indonesia which has increased over the past year. Nevertheless, we do expect Indonesia to be a significant producer of vanilla in 2016 contributing several hundred metric tons.
Papua New Guinea
Although PNG is not a major producer of extraction grade vanilla beans, one cannot ignore the impact they have on the vanilla trade. Although production probably did not exceed 100mt in 2015, we do expect it to push pass those levels in 2016. Vanilla from Papua New Guinea was a major factor in the food service and retail trade during the last crisis from 2002 – 2004 and again we see this quality making major inroads in the trade in both Europe and North America.
With its unique flavor and fragrance profile PNG vanilla has taken gourmet market share (Black Vanilla Beans) from Madagascar and will continue to do so in 2016. Demand for PNG extraction grade vanilla is still very limited due to the uncertainty of long term supply.
Specialty Origins
Mexico, French Polynesia, The Comoros and Tonga will all continue producing limited quantities of vanilla in 2016 but we doubt that the 4 regions combined will produce 100mt.
Madagascar
We estimate that Madagascar produced somewhere between 1300 and 1500mt of mostly substandard vanilla in 2015. Exporters who were involved at the outset curing green vanilla were better able to control quality resulting in some reasonable lots; however, over all the crop was a huge disappointment especially when pricing is factored in. Early picking and the practice of vacuum packing uncured vanilla to sell at a later date were the two biggest contributors to the poor crop. It has all become too predictable in Madagascar. With a kilo of green vanilla beans selling for about a week’s average wages last season and perhaps double this year the temptation to steal, in one of the world’s poorest countries is simply too great. Rather than going against the odds and trying to hold off until the vanilla is mature, beans are harvested prematurely, dried under the sun for a few days and put under vacuum pack to be sold at a later date. This process guarantees poor unstable vanilla which was in fact much of the 2015 crop. With demand so strong eventually even the “dead” vanilla which is what emerges from the vacuum packages months down the line comes to market and is sold.
Exporters who cure green vanilla can control part of the problem but they still cannot escape an immature crop. 2016 is projected to be a moderately large crop in Madagascar with estimates ranging from 2000 – 2400mt however much will depend on crop maturity. There have already been disheartening reports of early picking from the Nosy Be area in the North. Most vanilla professionals agree that the one single change that could have the most dramatic and beneficial impact on the Madagascar vanilla market would be to enforce the picking dates for green vanilla.
A coalition of vanilla exporters and government officials, with the blessing of the Minster of Commerce, have recently formed a vanilla platform to deal with the challenges facing the Madagascar Vanilla market. Critical issues such as early harvesting, vacuum packing partially cured vanilla, quick curing green vanilla using ovens and the extraction of green vanilla beans on site in Madagascar are being addressed. On the surface this is a very positive development. In fact at the conclusion of one of the first meetings in early March in Antananarivo a decree was issued banning the trade of green vanilla in the Sava area and virtually outlawing the practice of vacuum packing vanilla. Severe sanctions including the immediate destruction of any green vanilla seized were cited. Although this could be construed as a very positive development, how these regulations will be enforced in a region as large and as isolated as the Sava, remains to be seen. This week exporters advised the Vanilla Platform of some traders from India who are currently in the vanilla region buying immature vacuum packed vanilla from the 2016 crop for export to India for further curing and finishing. This could be a critical test to see if the Vanilla Platform actually has the authority to enforce their decree and everybody is watching closely. The next critical meeting is set to take place in early May in the Sava area involving all significant vanilla exporters. However in our opinion if the quality of the 2016 crop is to be saved immediate steps must be taken.
Conclusion
As a vanilla buyer, over the past 3 seasons, navigating the market has been a particularly arduous task. Yet it is the buyers themselves who will determine the course of the market in 2016 and beyond. A disciplined approach is essential but for companies whose core activities require a constant supply of natural vanilla beans this is easier said than done. As the green vanilla bean season approaches in Madagascar buyers will be lobbied to participate earlier in order to secure an adequate supply. Usually this means advancing capital as early as May or June to exporters who are loathed to use their own funds when the downward exposure is so great. At the very least they want to mitigate their risk which is completely understandable. Flavor companies who have fallen short this past season will be especially vulnerable to this approach. In our opinion any outside financing of the green vanilla bean campaign will only increase the severity of the price collapse when it comes and we believe this could be before the end of the year or early in 2017.
This is a very different vanilla crisis than 2001 – 2004. Back then crop sizes were half or even less than what they are today. With a large crop coming financing green vanilla bears no advantage neither in terms of price or availability. There are several examples of previous crops when early buyers of green beans artificially inflated the market only to have it collapse during the bulk vanilla season (Aug – Oct) when supplies overwhelmed available capital. We believe the market is primed once again for such an occurrence if there is aggressive financing of the green campaign.
Another key difference is the vanilla flavor market itself which has diversified out of necessity thanks in large part to the previous crisis. Aside from the usual synthetic vanilla flavors available on the market there are also a variety of natural vanilla flavors and compounds that do not originate from vanilla beans that give extract users options that did not exist 15 years ago. It has become obvious to anybody within the industry that the laws designed to curtail or control the use of such flavors are dated and virtually unenforceable. Although these products may not be ideal for all applications they can certainly help a small or medium size company weather the storm of irrational vanilla prices and quality while risking little in terms of sanctions or penalties.
The recent emergence of a locally based platform involving both government and vanilla officials is a very encouraging development in our opinion. The current Minister of Commerce, Mr. Henri Rabesala, is enthusiastically supporting the initiative and there are already reports of small lots of prematurely picked green vanilla being destroyed to act as a deterrent to others. It is the first such initiative we have seen since the quota system was eliminated almost 25 years ago. We feel that any solutions to the problems that have plagued the Madagascar vanilla industry must be home grown. The issue of quality must be addressed first and foremost otherwise the value of the Madagascar brand of vanilla will be greatly diminished. The market will decide what a fair price is for Madagascar vanilla as it does for any other commodity. It is too easy to blame the usual suspects (speculators, unscrupulous exporters, money launderers, etc.). The simple fact is vanilla beans remain a critical ingredient to the flavor and fragrance industry and to a much lesser extent the food service and retail trade. When supplies are short prices go up. Where prices go in the short term will depend on how the industrial buyers position themselves in the months to come.
We would still make the same recommendations we did in our previous report of October 2015 except we would add to avoid at all costs participating in any financing of the green campaign from May – August.
Unfortunately the issue of sustainability often gets ignored when prices increase dramatically and vanilla availability is scarce. After all vanilla farmers, contrary to myths still perpetuated in the industry today, are the greatest beneficiaries of higher vanilla prices. That is the reality of an open and free vanilla market. Sustainability or socially responsible behavior for Aust & Hachmann (Canada) extends beyond the vanilla itself to the hundreds of small communities of the Sava where vanilla farmers and vanilla workers and their families live. For over 15 years we have been supported and sponsored a number of projects on the ground in the Sava. We have never tied our support to our vanilla procurement program. We encourage you to visit our web site http://www.austhachcanada.com/about-2/ not only to see what we have accomplished to date but also how you can help.
Aust & Hachmann (Canada) Ltd
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