VANILLA MARKET REPORT NO 50 – FEBRUARY 2017
As the 2016/17 vanilla campaign in Madagascar draws to a close, the state of the global vanilla market has deteriorated to levels unimaginable just a few short years ago. Prices have reached and will almost certainly eclipse the highs of 2003, crop sizes have fallen woefully short of expectations and the overall quality of vanilla beans has fallen dramatically. Almost all of the speculative vanilla being warehoused around the world (at some point probably over 2500mt) has for the most part been sold and as a result the market has lost an all-important buffer. Most of these stocks were liquidated before prices exceeded 100.00/kg. Only the Indonesian vanilla dealers had the will to wait until recently before selling their stocks, some of which dated back 8, 9 or even 10 years. This probably saved the market from further collapse
This report will attempt to put some reason behind the current situation and at the same time dispel with the usual conspiracy theories which tend to pop up when the market meanders through a crisis such as it did from 2001 – 2004. As it is early in the year it will be very difficult to project crop sizes for 2017. Flowering has been quite strong for 2017 indicating a good size crop. However, most of the flowering was late which means minimizing early picking, a practically impossible task under current market conditions. As we have seen from 2016, projections are rendered utterly useless when there is rampant quick curing and early picking of the vanilla beans which was the case in Madagascar. As Madagascar vanilla production drives the world market we will start our analysis here.
The Path to 500.00/kg vanilla.
At the beginning of 2016 vanilla prices from Madagascar were hovering in the 200 – 250 dollar per kg range and all expectations were for a significantly larger crop in 2016 than in 2015. Most buyers had come to terms with prices which still represented a significant increase from the 2015 crop. Given the recent changes of policy of several global food manufacturers, the demand for natural vanilla beans in flavoring formulations has been robust.
Some flavor companies feared that despite the anticipated increase in vanilla production in Madagascar there would be a shortfall, in particular because production from other origins, such as Indonesia, Uganda and India was not keeping pace. Others felt that if Madagascar was able to meet the original projections of 1800 – 2200mt (of vanilla beans) for the 2016 crop, worldwide demand would be sated and prices would remain relatively stable.
At the beginning of the 2016 vanilla harvest (April – July) prices for green vanilla were in step with the prices of cured vanilla at the end of the previous campaign, somewhere around the USD 30.00/kg level. In the previous two seasons we had already seen the growing impact of quick curing and green vanilla extraction on the green campaign. Namely the increased pressure on green vanilla prices as the harvest progressed. Several years ago a major German flavor house had already set up a plant to extract green vanilla beans just south of Sambava.
Sensing a competitive disadvantage, other flavor houses, namely three of the largest global players, encouraged their suppliers in Madagascar to set up quick curing facilities in order to accelerate the harvesting and curing process of the vanilla. Quick curing is nothing new in the vanilla industry but it has become decidedly more sophisticated.
Today there are several vanilla exporters in Madagascar who have the capacity to quick cure but not all possess the skill or knowledge to do so effectively, so results are very mixed.
As a direct result of the advent of quick curing on a larger scale, combined with the green extraction previously mentioned, the pricing pressure on green vanilla at the outset of the 2016 harvest was intense and unrelenting. By the time the green campaign finished the price of green vanilla had exceeded USD 80.00/kg. Furthermore, a large percentage of the green vanilla was harvested too early resulting in an immature crop over all. This had a devastating impact on curing ratios which under ideal conditions would be 5 – 5.5 kg of green vanilla for 1 kg of cured. Most vanilla professionals on the ground in Madagascar today would concur that the 2016 curing ratios were more in the range of 7.5 – 8kg of green for one kg of cured. As a result we can easily see how an expected crop of 1800 – 2000mt was reduced to one that was probably no larger than 1200mt for 2016.
The Quick Curing Effect.
We believe that approximately 300 – 400mt of vanilla beans were removed from the crop as a result of green vanilla extraction and quick curing before the campaign for cured or dried vanilla began by the 4th quarter of 2016. As a result vanilla offerings were much less than anticipated. Export prices started close to USD 400.00/kg and continued on an upward trend to present where levels have now broached the 500.00/kg level.
Unlike the previous crisis where crop sizes were very small and there was a genuine shortage, this time around it is all about crop yields and this is where quick curing is having a devastating impact in our opinion.
One can understand why certain flavor companies find quick curing to be attractive under current market conditions. The harvested green beans are cured and available for export in a matter of weeks as opposed to months. The end users receive their raw materials faster and at a lower cost than their competitors giving them a tremendous advantage in the marketplace. The vanilla exporter is paid very quickly as opposed to having their capital at risk and tied up for months when the vanilla is cured by traditional methods. On paper this may sound like progress but the reality is that quick curing poses a major threat to the vanilla industry as we know it.
Under current market conditions the flavor houses who demand quick curing vanilla are advancing tens of millions of dollars on the ground in Madagascar well in advance of the harvest to ensure they get the material they need. This creates undue pressure during the green campaign and encourages farmers to pick their beans early.
At today’s price levels allowing green vanilla to reach optimal maturity is practically impossible. Thousands of people are forced to literally live amongst the vanilla plantations in order to minimize theft. Today the theft of green vanilla is out of control in the Sava. The local governments have no resources to help vanilla farming families with protective measures. Extraordinarily high vanilla prices encourage corruption and even when perpetrators are caught there is rarely any punishment to discourage others. This is truly a tragic consequence of extreme vanilla prices.
Only the larger exporters in Madagascar can afford the costs associated with setting up and running a quick curing operation thus consolidating the vast majority of exports amongst just a few exporters. This makes it very difficult for smaller exporters to gain a foothold going forward.
Quick cured vanilla results in one universal grade of vanilla with a tremendous variation of quality depending on who is doing the quick curing and the levels of bean maturity. When done correctly the vanillin contents can be attractive but the profile is very different than vanilla cured by traditional methods. If the market continues to move towards more quick cured product it will become increasingly difficult to find traditional gourmet (black) vanilla, red splits, European grades or classical cuts. In effect, quick curing commoditizes vanilla into one grade. Such a process would be unthinkable for products like wine or whisky, industries based in developed countries.
In summary quick curing degrades vanilla quality, consolidates the market to favor a few, puts undue pressure on the green campaign, has a very negative social aspect (to follow) and serves only as an instrument to control the process from an external standpoint at the detriment to local communities throughout the Sava region of Madagascar.
The Sustainability Aspect
The quick curing and green extraction of vanilla is somewhat of a “dirty” little secret of the industry. You will not see any mention of these processes on the web sites of the companies who support the practice. Fair Trade and Rain Forest Alliance certified vanilla are certainly worthy causes and in many cases are touted by the same companies who want to show they are practicing ethical and sustainable sourcing. However, the reality is that all combined they account for only a fraction of the vanilla which is produced by Madagascar and have no impact on the evolution of the green market. On the other hand the quick curing and extraction of green vanilla now probably account for somewhere between 25 – 30% of the overall crop and unless some actions are taken to contain these practices, demand will continue to grow in the context of current market conditions. More importantly there is a potentially devastating social impact on the hundreds of villages throughout the North East of Madagascar.
The traditional methods for curing vanilla, which have been used for generations, create tens of thousands of jobs for members of these communities. The sorting, drying, manipulation and grading of vanilla, a process that can take up to 6 months for the best qualities of vanilla, all become an afterthought with quick curing and green vanilla extraction.
As we all know Madagascar is one of the poorest countries on the planet and employment, especially in a noble industry like the vanilla trade, has a massive impact on the quality of life for the people of these vanilla communities. Many industrial players have poured millions of dollars into the practice of quick curing and green vanilla extraction while at the same time supporting initiatives such as the SVI or Sustainable Vanilla Initiative. These type of “two tiered” agenda makes it extremely difficult to effectively address these problems going forward.
Alternative Sourcing
Indonesian Vanilla provided an important cushion to the vanilla market through 2016 probably contributing over 500mt to the world wide trade. (Over 425mt in the US alone). Unfortunately the vast majority of these inventories were from previous crops, some dating back almost 10 years. We are of the opinion that most of these stocks have been sold off and we are very doubtful that real vanilla production in Indonesia will make up the difference. Uganda is struggling with quality and production is still mired below 100mt.
Although expectations from India have been high the past few years, vanilla production has simply not materialized. We see Indian exporters offering more vanilla from other origins than India itself. This may change in 2017 but it is still too early to determine.
Only Papua New Guinea has emerged as a viable alternative to Madagascar but this applies mostly to the retail and food service sector as extractors are very slow to embrace this quality for industrial vanilla formulations. Production is expected to be quite significant in 2017.
In summary, although still early in the year, we do not expect much relief from any of the alternative growing regions for vanilla in 2017. Under current market conditions these origins also face big challenges as far as vanilla quality is concerned. As everybody in the industry is aware, as vanilla prices skyrocket, quality in turn plummets.
The Blame Game
As the market continues to deteriorate and prices escalate towards unsustainable levels, we see the usual conspiracy theories being trotted out as way of explanation. Many put the blame squarely at the feet of the Malgache people, be it the farmers, collectors, exporters are even government officials. Price speculation, poor quality control and the withholding or stocking of vanilla are just some of the grievances. This is entirely unjust and disrespectful in our opinion.
Vanilla farmers, collectors and exporters are well within their rights to hold their inventories in order to maximize their profits. Although we may not agree with this strategy blaming it for the condition of the current market is simply untrue. The market endured years of extremely low prices so when opportunities arise there are those who may choose to profit. In fact if not for the speculation made by some U.S. and European based companies from 2008 to 2012 and even earlier from Indonesian vanilla exporters one could argue the condition of the current vanilla market could be much worse. The catalyst for the last crisis from 2000 – 2004 may have been Cyclone Hudah but this time we are convinced it was the advent of the extraction and quick curing of green vanilla.
Strategy?
It is very difficult to predict when the current vanilla crisis will end. What is the price point that will erode demand to the point where it no longer exceeds supply? How will the quick curing and green vanilla extraction handicap vanilla yields and production numbers in Madagascar in 2017? Will alternative vanilla origins be able to increase production in 2017? How many end users will attempt to finance their vanilla purchases in advance in order to secure supply?
How many end users of extracts will reformulate away from natural vanilla flavors originating from vanilla beans?
The answers to these questions are critical when trying to devise a strategy for 2017. Unfortunately it is very difficult to assess at this early stage of the year. Trying to guess when prices will fall is a dangerous proposition for companies, such as our own, who are wholly or for the most part dependent on the supply of natural vanilla beans. The predictions by some of an imminent price decline in early 2017 have not come to pass leaving some companies stranded in terms of vanilla supply for the balance of the year.
Companies and individual buyers must assess the risk reward ratios they are willing to accept. Some larger companies will take current conditions as an opportunity to expand their market share at the expense of smaller entities that will simply refuse to expose themselves. When the market collapse comes, as it most certainly will, those with the least amount of unsold and uncommitted vanilla inventory will fare best.
Aust & Hachmann (Canada) Ltd/Ltee.
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