VANILLA MARKET UPDATE – NOVEMBER 2021
The global market for vanilla continues on a tempered upswing in spite of the erratic nature of the COVID recovery. Most origins are reporting larger crops, improved yields and better over-all quality as less buying pressure allows green vanilla beans to fully mature. The demand for industrial grade vanilla remains strong, however, most major buyers are still reluctant to commit over the long term as sentiment on prices remains bearish. Demand for gourmet or black vanilla, destined for the food service and hospitality trade, continues to recover but is still far from pre-pandemic levels.
Madagascar continues to try and implement a minimum export price policy for vanilla, and has greatly reduced the number of licensed vanilla exporters. Prices for green and bulk (vrac) vanilla beans fell year over year but the minimum export price remains at USD 250.00/kg. In view of the lower prices during the harvest season many felt the minimum price would be reduced, but sadly this was not the case and Madagascar holding firm at USD 250.00/kg.
The trend towards clean labeling is gaining traction in the food industry. Ongoing legal action and claims against food manufacturers who allegedly misrepresent the origin of the natural vanilla flavoring used in their products continues with some significant success. Attempts to declare natural vanillin as a natural vanilla flavor (which is illegal according to FDA regulations) continue to be challenged. One or two high profile legal victories could go a long way to improving overall demand for vanilla beans which has been stagnant for decades despite the proliferation of vanilla flavored food products throughout all sectors of the food industry.
Herewith are our most up to date opinions and expectations for the major vanilla growing regions in the near-term.
Papua New Guinea
Although PNG vanilla production has expanded significantly and qualities have improved, the vanilla does not enjoy the wide market acceptance we believe is warranted. There are limited large scale industrial buyers and too few active exporters who are capable of moving material to international markets. PNG faces huge logistical hurdles made worse by COVID. Air freight space is limited and there are few options for shipping by sea freight. Air freight costs to North America are well in excess of USD 20.00/kg. Although the industrial demand for PNG vanilla grows somewhat slowly, the origin depends primarily on the food service sector for the bulk of its sales.
Although it is difficult to estimate, a sizable portion of the PNG vanilla crop, which we feel is about 300mt, goes to Indonesia for furtherance to other buyers and end users. Finally, this may very well be the most effective conduit for PNG vanilla to reach global markets. When buying direct from PNG quality can still be challenging and inconsistent as technical expertise on the ground is limited to a few exporters whereas Indonesia has a long history of growing and curing vanilla beans.
Indonesia
Given its unique profile, Indonesian vanilla has held up well against a backdrop of falling prices out of Madagascar. Many exporters now carry PNG vanilla, offered as Tahitensis and Planifolia, allowing them to offer two unique flavor profiles that buyers can choose from. During the last crisis from 2015 – 2018, many buyers increased their exposure to Indonesian vanilla and in many cases have not gone back to Madagascar. This has allowed the prices for Indonesian vanilla to stabilize and, in the case of some industrial grades, increase from previous lows. Quality remains very consistent relative to the grade being offered. We expect Indonesian vanilla production to continue rising, probably eclipsing levels attained in 2020 and rising further again in 2022. The worldwide supply chain crisis has impacted Indonesia dramatically pushing up air and sea freight costs by several fold, and doubling or even tripling lead times for shipping.
Uganda
Of all the major producing regions for vanilla, we believe that Uganda has shown the most significant improvement in terms of quality over the past few seasons – which is welcome news for those seeking an alternative to Madagascar. Vanilla production from two annual harvests is increasing rapidly. Neighboring Tanzania, which has been producing a similar bourbon type vanilla for a number of years, is poised to add to this production. When allowed to mature, properly cured vanilla beans from Uganda can yield vanillin levels as high or higher than any other vanilla origin. Uganda has multiple growing regions and we believe production exceeded 100mt in 2021 and could double in 2022. It is still unclear how much more vanilla Tanzania will add but it is expected to be significant. Both regions have free and fair vanilla markets. We expect more buyers to turn their attention to these origins to help mitigate the constraints caused by the fixed vanilla price policy of Madagascar.
Comoros
Although the quality remains consistently high, vanilla production from the Comoros is stagnating. Like Papua New Guinea, the Comoros suffers from inaccessibility and limited air freight options. At 35-40mt, the Comoros will not make a significant contribution to worldwide vanilla production in 2021. This is a shame as theirs is truly an authentic bourbon vanilla and readily accepted by the market as such. We feel the government set a very high minimum price for green vanilla and as a result, post-harvest, vanilla from the Comoros is not competitive with Madagascar. Thus far only a fraction of the crop has been sold. Government taxes further hamper any prospects for increased production in 2022.
Madagascar
Madagascar has now enjoyed back-to-back bumper vanilla crops yielding approximately 2000mt in 2020 and probably closer to 2300mt in 2021. Quality remains very good although a greater percentage of shorter vanilla beans are expected this season, probably due to an over pollination of flowers. Although demand for industrial vanilla has been strong throughout the pandemic, overall demand for vanilla beans has not returned to pre-pandemic levels as the tourism and hospitality sectors languish in recovery mode. Carry over stock from 2020 was at least 300mt and we expect that figure to be much higher for the 2021 crop. Although too early to predict, it would be entirely normal for the 2022 Madagascar vanilla crop yield to be slightly lower given that overworked vanilla vines from 2020 and 2021 will need a season to recover. The large carry over stock could help minimize a potential shortfall in production should that occur in 2022. In summary, there is an abundant supply of good quality Madagascar vanilla beans at reasonable prices available for the global market. It would seem like the perfect moment for Madagascar to reassert its position as the world’s dominant supplier of quality vanilla beans and expand its share of the market. Especially in view of the years from 2015 – 2018 when quality was very poor and prices extremely high. Unfortunately, in our opinion the everchanging regulations governing the export of vanilla from Madagascar are proving to be extremely counter-productive. For nearly 2 years Madagascar has been trying to implement a minimum export price for vanilla beans initially set at USD 350.00/kg and revised late last year to USD 250.00/kg. The idea behind this initiative was to force each exporter to repatriate into local currency the dollar amount per kg within 90 days of having exported.
It is important to remember that both of these prices were far greater than the actual cost to the exporter. The government has also attempted to set a minimum price on the ground between exporters and farmers. Thus far it has been ignored and is extremely difficult to enforce given the vast number of farmers and the enormous, largely rural territory they encompass. In the lead up to the opening of the 2021 campaign it was hoped that the minimum export price would be reduced from USD 250.00 to USD 200.00/kg or even USD 150.00/kg. This would have more accurately reflected the actual cost on the ground and would have been more manageable for exporters. Unfortunately, this did not transpire. In addition, the granting of export licenses has been slashed reducing the country’s export capacity for vanilla. Most recently there is talk of implementing an export tax of USD 4.00/kg on vanilla beans retroactive to September 15th when exports officially began. If enacted this will prove very burdensome for exporters who have already exported a sizeable quantity of vanilla beans. Can they realistically be expected to ask their customers for further payment after prices have already been agreed upon and contracted?
Not surprisingly these policies have proven to be extremely unpopular with buyers and most exporters, save for a few fortunate ones. In the case of Madagascar vanilla exporters who enjoy a partnership/joint venture relationship with a foreign entity, it would appear local laws allow for the export of declared profits and dividends in foreign currency. In other words, if the exporter ships vanilla at USD 250.00/kg to their partners in Europe or North America they will realize a tremendous profit locally given that their cost for the vanilla is only a fraction of USD 250.00/kg. These benefits can later be exported at the end of their fiscal year as dividends and/or profits thus helping their partners mitigate their costs. Of course, there are local taxes to pay on these gains but the net results are still far below the impact of a USD 250.00/kg minimum export price.
Even more impressive is the competitive advantage enjoyed by a company who manufactures vanilla extracts or flavorings locally. For example, Symrise, a major international flavor house based in Germany, is one such company who apparently produces vanilla extracts and flavoring compounds locally in Madagascar. These flavor products can be exported freely without being impacted in any way by the minimum export price of USD 250.00/kg for vanilla beans.
Theoretically, Symrise could buy directly from the farmers at a fractional price relative to USD 250.00/kg, produce an extract or flavoring and export it with no additional cost other than freight. This could be further blended with vanilla extracts made in Europe from vanilla beans that have the cost benefit of the joint venture relationship mentioned previously. All apparently perfectly legal and benefit of the joint venture relationship mentioned previously. It is therefore no surprise that Symrise was the leading exporter of vanilla beans from Madagascar last season and will probably be again this season. In our opinion, the minimum export price policy creates a very uneven playing field for international buyers favoring a handful of companies while disadvantaging most others. We fail to comprehend how this will help Madagascar increase its global market share for vanilla over the long run. The policy’s potential to increase favored entities share of the Madagascar vanilla market is clear.
The last time Madagascar attempted a fixed price policy for vanilla was in the eighties and nineties when the minimum export price was set at USD 74.00/kg. At the time only 1st grade extraction beans and gourmet beans were allowed to be exported. Short beans and cuts were stored in government- controlled warehouses and were supposed to be destroyed. Only a small handful of exporters existed supplying an equally small and exclusive group of importers, which included Aust & Hachmann in Hamburg. At the time worldwide vanilla demand was far less than it is today. Direct purchasing by flavor companies was unheard of. In our opinion, the policy ended in disaster for Madagascar. Farmers were barely paid USD 1.00/kg for green beans during this period. Much of the lower quality vanilla held back was exported through unofficial back door channels. The fixed price policy seemingly allowed Indonesia to emerge as a major vanilla exporter, even briefly surpassing Madagascar as the number one supplier of vanilla beans globally. International buyers were unwilling to work with a fixed vanilla price with few options for their vanilla requirements and were forced to look for other supply partners. We believe Madagascar is once again underestimating the capacities of other vanilla growing regions where production is already increasing significantly. Most international buyers support free and fair markets, not those that are heavily fixed to favor a few. We see many similarities between today’s vanilla policies and those of the USD 74.00/kg fixed price era which ended with an oversupply of vanilla and prices pushed to unsustainably low levels. Nobody in this business wants to see vanilla prices at USD 20.00/kg as they were not so long ago. We can understand why any government would want to protect a key source of revenue and employment for their country. Unfortunately, we are fearful that current policies will drive users away from this origin or motivate them to switch to natural vanillin flavors which do not use vanilla beans. There is already a big problem with the misrepresentation of natural vanilla flavor in the food industry and the fixed price policy at USD 250.00/kg will only encourage others to follow this course. The argument that the price of USD 250.00/kg helps the farmers rings a little hollow when Fair Trade International considers a fair price for vanilla beans at less than USD 100.00/kg.
Conclusion
Putting aside the manipulative polices governing the local vanilla trade in Madagascar, we can conclusively state that the global vanilla trade is healthy and thriving. All major growing regions are experiencing increased yields and improving qualities. Prices are at sustainable levels satisfying all players in the supply chain from farmers to end users. Assuming that demand remains constant and continues to grow as the world emerges from the constraints of COVID, we could be entering a golden era in the vanilla trade. The demand for organic and Fairtrade vanilla continues to grow adding more value and traceability. The fight to protect the authenticity of natural vanilla flavor continues to play out in the courts and, despite some setbacks, progress is being made on this front. A recent front- page article in the Wall Street Journal covering the subject has thrust fraudulent vanilla flavoring into the mainstream media. As we have always maintained, curbing the misrepresentation of natural vanilla flavor in the food industry would have a significant positive impact on worldwide consumption. The demand for quick cured vanilla has dropped considerably given the abundant supply and improved qualities of vanilla. However, some major international companies continue to support this type of curing which runs counter to any notion of sustainability, depriving vanilla communities of much needed employment.
Our outlook for vanilla in 2022 is generally optimistic both in terms of supply and quality. Buyers would be well advised not to assume that prices will continue their downward trend. After all, prices have fallen almost 80% from their highs north of USD 600.00/kg. Prices should remain relatively stable over the short to medium term. Buyers should be wary about waiting too long to cover their short and medium term requirements. The unpredictability of Madagascar vanilla policy should not be taken lightly. It casts a very dark shadow on what is generally a very positive outlook for the global vanilla trade.
Aust & Hachmann (Canada) Ltd
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