VANILLA MARKET UPDATE – NOVEMBER 2019
As we approach the end of 2019 it has become abundantly clear the global vanilla market is now officially a buyer’s market for the first time in more than 4 seasons. Production is now ramping up in all origins and is expected to accelerate further in 2020. We are seeing varying degrees of price erosion. While quite significant in secondary regions, like Indonesia and Papua New Guinea thus far in Madagascar the reductions have been more tempered. The anticipated collapse of vanilla prices has yet to materialize and we see little chance of such an eventuality in the near term. However, pressure on prices will continue and at current levels, even a five percent drop can represent $15.00 – $20.00/kg. Quite significant on a multi mt purchase. It is apparent that industrial buyers have been minimizing their initial purchases from the 2019 Madagascar vanilla campaign which officially opened for export on October 15th. It is only normal that buyers want to maximize their exposure to any potential short- term price advantage. As a consequence, we believe that most major industrial buyers have yet to initiate coverage for the bulk of their 2020 requirements.
Much to our pleasant surprise and contrary to what we initially projected in our May report, the quality of the 2019 Madagascar crop is quite good and on par with 2018. Weather conditions were optimum for green vanilla maturation and in most areas outside of the Sava, theft and early picking were kept to a minimum. Current prices may not be as low as some expected but given the quality available in 2019 we are about 1/3 lower than the peak price of USD $600.00/kg. The price drop in other origins like Indonesia and Papua New Guinea is more in the range of 40-50% from the highs. We expect a major restructuring of global vanilla beans prices and supply in 2020.
Herewith is our opinion on what could evolve over the coming months in the various vanilla growing regions.
Papua New Guinea – do or die
Gourmet black vanilla from Papua New Guinea (tahitensis type) has taken significant market share from the traditional retail and food service quality usually supplied by Madagascar and the surrounding bourbon islands.
As the prices fall it will be a challenge for PNG to hang on to their market gains as was the case at the end of the last supply crisis in 2004. Quality has been inconsistent and the country has allowed Indonesia to capture much production for their own export market. In our opinion this contributes to huge variations in the quality and finish of the final product.
We have found PNG vanilla purchased at origin of a much more consistent quality and profile than PNG vanilla finished outside of the country. Unfortunately, there are only a handful of exporters who are capable of exporting reasonable volumes of quality product. Extraction grade PNG (tahitensis type) has gained further market acceptance, especially for the ground vanilla sector but lags far behind black gourmet quality vanilla in terms of global demand. In order to remain relevant in the vanilla market we believe Papua New Guinea must raise their standards of quality and improve sorting, preparation and packing methods for vanilla beans. This is an area that may produce 250mt in 2020. With the market in decline it will not be enough just to discount prices. Quality must improve as well.
Indonesia – taking no chances
Vanilla production in Indonesia is on the rise but the focus remains on the lower grade extraction qualities where Indonesia enjoys a niche market for their EP and regular cut qualities. This type of quality is quickly processed at origin and turned over. Exporters are not interested in building inventory in a falling market. Vanilla is being aggressively discounted and has already fallen 50% off the highs. Most of the high-grade offerings, in particular black/gourmet quality are for vanilla that has originated in PNG. We are hopeful that the practice of importing semi-cured vanilla from Papua New Guinea and then finishing and exporting from Indonesia becomes less attractive for exporters in the new market reality. We believe that Indonesia is on track to produce at least 200mt of vanilla in 2020.
Uganda – still lagging
The vanilla market in Uganda remains a challenge for buyers. Government assistance to help the industry in terms of crop management and quality control has had little impact thus far. Consistent high-quality vanilla remains elusive with far too much early picking of green beans occurring. There are rumors of green vanilla being exported for curing elsewhere, possibly India. If true it would be a blow to efforts trying to better manage the vanilla crop. Some preparers (through a disciplined approach of buying mature green vanilla and proper curing techniques) have been able to produce a quality of vanilla on par with Madagascar, something we have not seen for many years. Unfortunately, this is the exception to the rule.
The most recent Ugandan crop now being exported was a mixed bag of qualities at relatively high cost. The government has recently postponed harvest of the new crop to January 15th. If this holds, it will go a long way to assuring better quality, albeit for a relatively small crop to start 2020. With the Madagascar crop barely underway thus far, we expect buyer’s interest to be muted unless prices come down considerably. Despite the trend in other origins, we do not expect Ugandan vanilla production to rise in 2020.
Comoros
The bourbon vanilla produced in The Comoros in 2019 is of a very good quality with average vanillin contents usually superior than Madagascar’s based on what we have tested thus far. However, crop size is still below 100mt and we may see that eclipsed in 2020 as plantations have been expanded. Prices have come down from 2018 and the weakening Euro has helped as well. The two exporters who have dominated the market for years are yielding to newer more aggressive younger companies. The Comoros is the only bourbon vanilla producing origin who consistently equal or surpass Madagascar in terms of quality. We expect this region to remain competitive and relevant to the vanilla market for years to come.
Madagascar
As mentioned earlier the biggest surprise thus far from the 2019 crop is the unexpectedly better quality of the vanilla. We had incorrectly assumed an immature crop with the usual rampant early picking and theft of green vanilla. Combined with the late flowering we expected an adverse impact on quality. Although there are pockets of poor quality, (some limited theft and harvesting of immature vanilla did occur, mostly at the early stages of the campaign) we can safely say the overall quality is as good as 2018. Prices in Madagascar have continued to fall but perhaps not as much as many had anticipated. The market on the ground remains very quiet as most buyers sit on the sidelines hoping for further price softening. Exporters who work with organic or fair-trade vanilla had no choice but to actively engage in the green campaign to comply with traceability requirements. Some exporters also purchased quite aggressively whether for quick curing green vanilla or because they were pre-financed and were not risking their own funds. Some simply felt buying green would yield a more favorable cost. When the green campaign started in the north prices were inexplicably bid up to 220,000 Ariary per kg or about USD $62.00/kg. The “vrac” or bulk vanilla campaign is now underway and costs are considerably lower. Those who were active during the green campaign now find themselves with a higher cost base for their vanilla.
They may have no choice but to average down their costs through further buying which is very risky in the context of the current market. Had the early buyers of green vanilla not bid up prices we feel the current offered price for vanilla would in fact be lower.
We have always maintained that two of the primary catalysts of the most recent crisis were the heavy financing of certain exporters by certain major industrial players and the continued industrial demand for quick cured vanilla and green vanilla for extraction. In this regard we have recently been made aware of a facility that has been set up in the conveniently isolated town of Antsoihy in the north that will be used primarily for quick curing exclusively for one major industrial buyer. This is discouraging because as we have pointed out on numerous occasion the practice of quick curing vanilla is extremely detrimental for the communities who produce vanilla by eliminating almost all of the invaluable employment opportunities offered when vanilla is cured by traditional methods. Quick curing green vanilla also contributes to the speculative inflation of green vanilla prices, encourages the theft and early picking of green vanilla and adversely affects the overall quality of any one crop. In our opinion quick curing green vanilla or green vanilla bean extraction runs contrary to any notion of sustainable purchasing practices. A quick curing facility in the north where the green campaign usually opens about 2 months prior to the rest of Madagascar could potentially wield undue influence on the evolution of green vanilla prices in any future crop. We are of the opinion that the practice of quick curing vanilla should be banned outright or at the very least contained. This would go a long way towards improving quality and stabilizing the market over the long term.
The 2019 crop yield is most definitely less than 2018 but by how much is really just a guess at this point. We expect it will come in at around 1100 – 1200mt which along with other growing regions should be plenty to satisfy global demand which has been devastated over the past 4 years.
Flowering for the 2020 crop is very strong and if the 2020 crop reaches its full potential, crop yield in Madagascar could hit 2000mt. It is very important to point out that we are at least 6 months out from even a preliminary estimate for the 2020 crop with any semblance of accuracy.
The new government of Madagascar seems to be taking a far more pro-active stance when it comes to vanilla. Most exporters respected the opening date of October 15th. Now, in an attempt to protect the 2020 crop from early picking and theft, March 31st 2020 has been declared as the last export date for any vanilla that has not been registered with the government. This is 3 months earlier than last year and thus far the declaration has not been altered. We believe it is unlikely the government will stick to this date given the state of the market
Today there are over 200 licensed exporters of vanilla in Madagascar. Some with head offices based in Dubai and India. Others who export only a few hundred kgs at a time and have no facilities in the vanilla regions. There is pressure on the government to reduce the number of export licenses for vanilla and set a minimum quantity for any exports as another way to better control production and quality.
Over the past 2 seasons we have seen the emergence of a new classification of quality for vanilla in Madagascar. This is a blend of traditional cuts, and short and long beans into what is being referred to as “loose beans” or grade 2. This type of blend allows the exporters to move all of their qualities simultaneously thus reducing the risk of having too much expensive high-grade beans at the end of the season as was the case at the end of the 2018 crop. Many industrial buyers appreciate this quality because it is less expensive and yields more or less the same levels of vanillin that the high-grade vanilla did from 2015 – 2017. The consistency of the quality depends entirely on the consistency of the mix however and the variances can sometimes be great from one lot to the next. As prices fall, we are not convinced this particular quality is here to stay, but it is very prevalent for the 2019 crop.
Other Origins – no news
Remarkably, despite very favorable conditions over the last 4 years we have no information that would lead us to believe that vanilla production in Mexico, French Polynesia or even India will rebound anytime in the near future.
Conclusion
With the collapse of demand for vanilla, it is not difficult to see a path to over supply in the global vanilla market in the near future and a subsequent collapse in prices. However, we would caution against such an assumption given the variables of the vanilla trade. Although it took some time for industrial demand to recover after the last crisis came to an end in 2004, today the global demand and consumption for vanilla is far more entrenched. As was the case during the last crisis many end users of natural vanilla flavors either reduced their usage, altered their formulations or in some cases bent the rules governing the application of natural vanilla flavoring and ingredient declarations on finished consumer products. Even after the vanilla prices collapsed in 2004 many manufacturers continued this practice. This is easily evidenced by the current stratospheric pricing and insatiable demand for exhausted or extracted vanilla, (essentially a waste product), in the market today.
For decades now adding spent ground vanilla and or vanilla seeds, neither of which impart any flavor whatsoever, to a finished product, has been the preferred method for deceiving consumers into believing the product they just paid a premium for contains natural flavor originating from vanilla beans. This tactic is one of many which are used in the food industry connected to products advertised as flavored with natural vanilla. A quick Google search will show several recent class-action lawsuits being initiated against major food manufacturers of some very high-profile premium food products who are suspected of engaging in exactly such activity. Just the exposure or better yet a highly publicized judgement in favor of the plaintiff could be very beneficial to the natural vanilla market.
We expect vendors at origin to try and drive up moisture contents for vanilla beans from typical levels for respective grades in order to increase weight to offset price erosion. Buyers should insist that norms for moisture be respected across all qualities in order to ensure consistent stable quality.
We maintain our conviction for covering vanilla requirements prudently over short periods of time and for supporting alternative regions other than Madagascar as much as possible. At the end of the last crisis after vanilla prices collapsed and stagnated for years buyers lost interest in other producing regions such as Uganda, Indonesia and Papua New Guinea. Subsequently these areas lost interest in vanilla production and by default handed worldwide market dominance back to Madagascar. This set the stage for the most recent crisis which has now finally come to an end. Let’s hope that history does not repeat itself….again.
Aust & Hachmann (Canada) Ltd
“A word about sustainability”
We are heavily engaged in ethical and sustainable business practices in both Madagascar and our local community here in Montreal. In conjunction with the Madagascar Development Fund, MDF, we have completed the construction of 4 primary schools and one health clinic thus far. This is just one of the several organizations and initiatives we have financed over the past 20 years. We are proud of our extensive portfolio of sustainability initiatives but prefer not to crowd our report with details. However, we do feel companies should be transparent about such efforts in this day and age. In keeping with this aim, we invite you to visit our social responsibility page for more details concerning Aust & Hachmann’s contributions. – austhachcanada.com/socialresponsibility
Recent Comments