October 2013

Vanilla Market Report no.42

As the 2013 Madagascar vanilla crop comes to market there are some dramatic changes taking place in the global vanilla arena. Prices have stabilized somewhat but demand remains strong while supplies remain stubbornly tight. Vanilla output in secondary markets such as India and Uganda is not increasing as fast as expected. Questionable labeling practices for consumer products continue unabated. However, an initiative to publish a document within the trade in order to properly clarify the rules and regulations governing said practices many finally be coming to fruition. Although “sustainability “ continues to be buzz word in the industry certain companies in Madagascar are practicing the exact opposite by “quick curing” green vanilla or even more odiously, extracting green vanilla immediately after harvest. On a more positive note legitimate elections are finally scheduled to take place in Madagascar at the end of October after 5 years of political paralysis, thus freeing up millions of dollars of aid money and eventually normalizing relations with Madagascar and most other western countries. The following is a brief update on the major vanilla producing areas.

Vanilla Producing Countries other than Madagascar
As Madagascar currently produces about 85% of the world’s vanilla we will not dwell too much on alternative vanilla regions as very little has changed since our last report of May 2013. Ugandan vanilla production will unlikely exceed 75mt in 2013, most of it being very unstable and poor quality. Initially we projected a strong recovery for 2014 but the Ugandan vanilla industry has been slow to react to the new realities and only now are we starting to see efforts being made to increase vine plantings and yields. A very optimistic prediction for 2014 vanilla production would be 150mt but at this point we are doubtful this number will be attained.
India and Indonesia seem to be taking a ‘wait and see attitude’ before expanding on their vanilla production. We have seen more availability in small quantities from India and somewhat larger from Indonesia but in the case of the latter, much of this is old production that was being held pending the recovery of prices. We believe that Indonesian vanilla production will continue to recover going forward but we are pessimistic about the short term prospects from India. We believe several years of sustained prices are yet required for these regions to have any major impact on global vanilla production. The current market seems more attractive from an Indonesian standpoint and we expect production in 2014 to finally surpass 100mt.Unfortunately, we don’t believe combined vanilla production from India and Indonesia will exceed 125mt – 150mt for 2013.

Madagascar and Comoros
We are maintaining our initial estimates for Madagascar vanilla production at between 1300 – 1500mt for 2013 which is more or less then same volume that was produced in 2012. Quality issues will persist but already early in the campaign we are seeing a lot of resistance to the vacuum packed vanilla which dominated the market in 2012 and wreaked havoc on overall quality. Early test results on industrial grade beans are showing improved vanillin contents but are still below normal levels….at least on the longer first grade beans. Unfortunately there is a significant amount of immature vanilla in the mix this year which will negatively impact quality. Demand is steady on the ground but there is sufficient choice for buyers to refuse lots that are too humid and insist that they be further dried. As long as the market remains stable we feel there is a fairly good chance that qualities will improve somewhat over 2012. They certainly cannot get much worse.

Although prices on the ground have increased marginally over 2012 they are not at levels that many had predicted…at least not yet. Projections of higher prices were a direct result of the prices paid for green beans at the beginning of the campaign. Today these prices seem quite high when compared to the current prices we are seeing for Vrac or bulk vanilla. Although the market could still change in the months to come as was the case in 2012, it would seem that those who avoided the green bean campaign to focus on the current bulk campaign will enjoy far more advantageous yields.
There is another very important factor that is keeping the market under control and that is the flowering for the 2014 crop. Flowering started very strongly in early September and it has not let up since. Furthermore, weather conditions have been very favorable for flowering with a sufficient mix of sun and rain. If this trend continues through to the end of the year we could conceivably see a very large crop in 2014. Although cyclone season has yet to begin we feel this risk has severely diminished over the past 10 years as a significant amount of vanilla production has move inland away from the coast where cyclones cause the most damage. This is not to say that a large destructive cyclone could not impact the crop. It could happen, but the exposure has been greatly reduced in our opinion. Therefore given the early rosy outlook for 2014 many buyers are hesitating…especially those who are still holding speculative inventory from 2012.
Speculation has always been a bad word in the industry and today the estimates for unsold speculative inventory range somewhere between 500 and 1500mt. Perhaps the speculators are being judged too harshly as their holdings provide a hedge against prices spiraling out of control.
Vanilla, in a raw material form, cannot be held indefinitely like many other commodities as quality will degrade over time. In the case of those who speculated form 2006- 2008 today they really have little choice but to move their material before quality and moisture degrade any more than they already have.

Conclusion
The recovery in the vanilla market will continue to the end of 2013 and probably most of 2014. Prices are finally coming back to what we believe are sustainable levels over the long term. Many end users are a little shell shocked at the rapid ascent of prices over the past 18 months, after all they have more than tripled since bottoming out. The reality is that we are just now coming into a price range which is not only more sustainable but will encourage vanilla production in Madagascar and other vanilla growing regions around the world. The trade often refers to the 2001 – 2004 period as the ‘vanilla crisis’ when prices for vanilla beans reached over 500.00/kg. For the people of Madagascar who make their living on vanilla, their vanilla crisis was 2007 – 2011 when prices hovered or even went below 20.00/kg. Thankfully today we are far removed from both of these realities. In our opinion buyers should continue to cover as much and as far as their needs warrant. However given the prospects of a large and possibly early crop in 2014 they may want to consider pairing down their long term coverage going into 2015.
The real challenge facing the vanilla industry in Madagascar today is confronting the foreign entities who seem to want to impose their technological prowess on the local vanilla industry in order to make the growing and curing of vanilla more cost efficient and therefore more profitable for themselves. In this case we are referring specifically to the extraction of green vanilla which at least one major flavor house practices on the ground in Madagascar while others watch very carefully.

Simply put, by eliminating the proper curing and drying of vanilla by traditional methods you are also eliminating the vast majority of the employment generated by the vanilla industry in Madagascar. We are talking about tens of thousands of jobs in a country where employment is a precious and rare commodity. Furthermore if one multi-national flavor house succeeds others will most certainly follow. Currently the export of green vanilla is forbidden under law in Madagascar. With a new government soon to be elected we are hopeful that local vanilla companies and vanilla dealers lobby the government to expand on this law by forbidding the extraction of green vanilla as well. What is even more beguiling is the fact that the same companies who practice green vanilla bean extraction or the “quick” curing of green vanilla often support various initiatives to show their concerns for sustainability issues. As an example one such initiative, which is now floating around the industry is called the Sustainable Vanilla Initiative or SVI – Code of Conduct. This particular initiative cites all sorts of problems such as child labor, forced labor, forced evictions, human trafficking environmental degradation to name a few, which to the best of our knowledge do not occur on any significant scale within the vanilla industry in Madagascar. Yet at the same time the initiative says nothing about respecting the traditional growing and curing methods for vanilla which is essential to protecting the vast economic benefits vanilla farming produces in the Sava. Sustainability is very general term, which regrettably can be used as much to advance a cooperate agenda as it can to effectively assist and support the communities intended.

Aust & Hachmann (Canada) Ltd

October 2013