VANILLA MARKET UPDATE – JUNE 2021
As the world slowly emerges from the grip of COVID-19, we believe the global vanilla market will be impacted positively. Demand for industrial grade vanilla should remain strong with far more competitive prices and continued improvement in quality. We also expect a strong recovery in the demand for black/gourmet vanilla as the devasted foodservice and leisure industries recover. Production in most vanilla growing regions will continue to be robust. Although prices have fallen dramatically in the past 12 months, the recent uptick in demand has helped to stabilize the market. We are cautiously optimistic that at least in the short term we will not experience the drastic price declines we saw after the last vanilla crisis ended in 2004.
The government of Madagascar instituted a minimum export price of USD 250.00/kg for the 2020 vanilla crop which began exporting September 15th 2020. Initially this caused a lot of confusion in the global vanilla trade because some origins took this to be the actual market price. Competing regions like Uganda and Papua New Guinea set their prices far too high as a result. It took some time before vanilla exporters outside of Madagascar realized that the “real” market price for Madagascar vanilla was in fact far less then what they had assumed given the government fixed export price. Madagascar, being by far the world’s largest producer of vanilla, usually sets the tone for other markets to follow. Although the official price from Madagascar was announced at USD 250.00/kg the actual average export price across all grades was closer to half of that.
The government of Madagascar has confirmed they will continue in their efforts to control the price of vanilla while ignoring the actual market by once again setting a minimum export price of USD 250.00/kg for the 2021 crop. This makes for an extremely closed and inequitable vanilla market that favors certain companies and disadvantages others. Price fixing and favoritism in the guise of helping the vanilla farmers tarnishes the reputation of the Madagascar vanilla trade in our opinion.
Herewith is our most up to date opinions and expectations for the major vanilla growing regions for the upcoming months.
Papua New Guinea – holding gains
PNG continues to solidify its position as the 2nd most productive vanilla region of the world, with both Tahitensis and Planifolia types of vanilla beans offered. PNG industrial vanilla is now readily accepted in North American, Europe and Australian markets.
Major industrial users are now incorporating PNG vanilla in their formulations. The demand for Black/Gourmet PNG vanilla should also continue to rebound. Although PNG vanilla prices were actually higher than Madagascar’s at the beginning of the season, they have since adjusted to their normal levels. Quality can still be an issue but it is improving quickly. There are significant quantities of PNG vanilla smuggled across the border to Indonesia where buying interest favors gourmet or black vanilla, which is lacking in Indonesia. If there is one major weakness for this origin, in our opinion it is accessibility. Airline links are expensive and limited and sea shipments are a logistical challenge. In our opinion, there are still not enough vanilla exporters on the ground who are ‘export capable’ in terms of logistics and quality control when larger quantities are required. We do expect production in PNG to easily exceed 300mt in 2021.
Indonesia – standing firm
Contrary to what we indicated in our last report, Indonesian vanilla prices did not eventually fall below Madagascar. For the most part the lower grade vanilla from Indonesia was sold at higher levels than the comparable grade from Madagascar. Given the smaller production and the unique flavor and fragrance profile, Indonesian vanilla need not necessarily be discounted to Madagascar vanilla. Furthermore, Indonesian industrial grade vanilla is the preferred type for blending with PNG extraction grade. Given that the Indonesian vanilla market is free and open, unlike Madagascar, exporters operate with much more flexibility and can hold stocks much longer if the market price is not deemed attractive enough. We do expect increased production from Indonesia in 2021 but as usual the focus will be on the lower industrial grades. Most gourmet offerings of black or gourmet vanilla from Indonesia will likely be of PNG origin.
Uganda – coming back
Ugandan vanilla production should increase in 2021 and quality should continue improving. More and more industrial end users are finally realizing how important it is to have a vanilla producing country that offers a comparable and sometimes even superior product to Madagascar. Ugandan vanilla production suffered tremendously during the last vanilla crisis with poor yields and abysmal qualities.
We believe Uganda has turned the corner in this regard and with the combined support of local government initiatives and the flavor industry, we expect Ugandan production from the two annual harvests to increase significantly in the years ahead. In 2021 production may finally exceed 100mt for the first time in years.
Comoros – in neutral
Although the Comoros produces an excellent quality of bourbon vanilla, there are several obstacles ahead for this growing region. With worldwide vanilla prices now about 80% below the highs of just a few years ago it will be more of a challenge for the Comoros to be competitive. A Euro priced vanilla market, a limited amount of shipping options and onerous government taxes all serve as impediments to competitive prices. The Comoros seems to be stuck in a production rut of 35 – 50mt annually. Although much vanilla was planted during the crisis from 2016 – 2019 we have yet to see any significant uptick in production. We may see this in 2021, but if the international prices fall any further it remains to be seen if the Comoros will be able to compete with Madagascar over the long term.
Madagascar – tightening the screws
The quality of the 2020 Madagascar crop was once again improved in terms of yield and vanillin contents over the previous season and the total harvest probably exceeded 2000mt. Since the beginning of 2021 demand has picked up considerably, accelerating noticeably in the past few months. Given the higher average vanilla contents the grade 2 and 3 vanillas were very popular with industrial buyers this past season. So much so that in order to reduce inventories, for fear of being overstocked at the end of the season, collectors blended the grade 1 long vanilla beans with the lower grades. This boosted the quality significantly. Subsequently, when demand from Grade 1 surged in March, probably because buyers felt that prices would fall no further, collectors actually had to pull the grade 1 beans manually from these lower grade lots. At the outset of the crop demand was very weak for gourmet/black vanilla as a result of the devasted food service and tourist trade from COVID. Subsequently, most vanilla was dried down to industrial grade. Now with the food service industry in full recovery mode, most of the black vanilla inventory in Madagascar has been exhausted.
The extremely unsustainable practice of quick curing of green vanilla was kept to a minimum in 2020 and we hope for the same in 2021. We believe this practice must be discouraged and eventually eliminated in order to protect the integrity of Madagascar vanilla qualities.
It is easy to see why the government of Madagascar finds it politically expedient to continue with their strategy of a fixed minimum export price for vanilla that is about double the actual market price on the ground. Only exporters who have the financial means are able to make up the difference between their selling price and the minimum export price of 250.00/kg in order to meet their repatriation obligations. As an example, if an exporter were to sell a quantity of 40-50mt of vanilla beans, given that the true average export price was closer to 125.00/kg this past season, they would need millions of dollars of extra capital to make up the difference between the actual selling price and official export price. Then an outlet would have to be found for all of the additional local currency accumulated through repatriation. This is certainly possible for larger exporters who have vast local operations and other businesses on the ground but it is not sustainable in the long run. When exporters fall behind on their repatriation obligations, they are blocked from exporting vanilla. From on outsider’s point of view this policy may appear to be successful, given the healthy export numbers for the 2020 crop and the fact that the major vanilla exporters had little choice but to bring in funds they are holding offshore. One could argue this was beneficial for the Madagascar economy. The policy has also helped to avert, or at least put off, a collapse in vanilla prices locally.
As was the case at this point last year, the government is also trying to impose a minimum price for green vanilla of Ariary 75,000 (about USD 20.00). This is a pure act of futility in our opinion as the green vanilla market cannot be controlled…thankfully. However, it does help the government promote their vanilla policy as being beneficial to farmers. If this government policy continues, we believe many medium size and smaller exporters will be forced out of the market. When vanilla exporters are not active, they risk having their export licenses revoked. It will be very interesting to see how many export licenses are issued for the upcoming 2021 crop. We believe there may be an effort to drive out medium and smaller exporters from the vanilla trade.
Foreign companies who have joint ventures in Madagascar are easily able to manage the minimum export price as they can make up the difference by declaring locally earned profits which can then be sent back to their home countries in foreign currency according to local tax laws.
It is no surprise that the largest vanilla exporter by far for the 2020 crop is major German based flavor house with just such a joint venture type operation in Madagascar.
It is not beyond reason to fear the that the government is trying to achieve full control of the vanilla market by imposing a fixed minimum price and impeding the ability of many exporters to function freely. Allegedly there is a powerful trading company in Tamatave, with no prior experience in the vanilla trade that sits on hundreds of tons of unsold 2020 inventory, waiting, or at least hoping that the prices for vanilla are ultimately forced higher by the government policies. If true, we simply cannot see how this type of pure speculative activity on a large scale benefits the vanilla market.
In our last report we felt that Madagascar would have a large unsold surplus from the 2020 crop, however, a quicker than expected recovery from the COVID crisis is changing our outlook. Over the past months there has been a surge in demand for vanilla, mostly in North America with the EU likely soon to follow. As a result, we do not expect a large carry over of vanilla stock from 2020. However, 2021 is gearing up to be another large crop in Madagascar which could easily exceed 2000mt. A shortfall in supply is extremely unlikely.
The last export date for the 2020 vanilla crop, originally scheduled for May 31st has been extended to June 30th.
Conclusion
A positive aspect of interventionalist policies of the Madagascar government was that they effectively halted the decline in vanilla prices which began a few years back. Demand for vanilla had collapsed due to record high prices and poor quality. Industrial demand for vanilla has now mostly recovered and we expect food service (black/gourmet vanilla) to soon follow. Ideally if the market could stabilize at current levels, price sustainability could be within reach. Crop yields in all origins and qualities are expected to continue improving. The COVID vaccines are arriving slowly at origin and this will hopefully accelerate over the coming months. More companies are adopting a proper sustainability program that actually provides tangible results and not just pretty pictures for the company website. One could point to many positives that are evolving withing the vanilla trade but obstacles remain.
Despite some successes with the class action lawsuits against food manufacturers who are allegedly mislabeling and fraudulently declaring their vanilla ingredients, the practice is still rampant.
This is a huge impediment to increasing worldwide demand for vanilla which is essential to long term sustainability within the industry. Demand for vanilla beans has been stagnant for decades despite the explosion in popularity for the flavor. There are still for too many food manufacturers, large and small, who simply disregard the laws and regulations concerning natural vanilla flavors and how they are declared and displayed as ingredients on their respective food products. Natural flavor from vanilla beans imparts a “premium” aspect to the product that consumers will pay extra for. This does not go unnoticed by manufacturers. Some of the previously mentioned class action lawsuits, were dismissed by judges who felt it was not reasonable to expect the consumer to know or care about the differences between natural vanilla flavor from vanilla beans or the same flavor originating from chemical or synthetic sources. We could not disagree more with this opinion.
The continued attempts by the government of Madagascar to control and manipulate the market for vanilla are of great concern to us as it opens the door to favoritism and corruption and completely distorts the realities of the global market trade. The government knows full well that Madagascar has a dominant position in the vanilla market and we feel this should be protected rather than exploited. The last time the government controlled the Madagascar vanilla trade through fixed pricing and controlled exports they almost lost their top position in the trade to Indonesia.
In spite of this, we are cautiously optimistic for the short to medium term in the vanilla trade for several reasons. The global economic recovery from COVID first and foremost. With improving qualities and sustainable prices, demand will continue to grow. Increased vanilla production will satisfy demand sufficiently. There will be less incentive for food manufacturers to ignore labeling laws for pure vanilla as legal pressures mount. Demand for quick cured vanilla or green vanilla extraction will hopefully be eliminated. These are all positive signs that should benefit the vanilla growing regions of the world going forward.
Aust & Hachmann (Canada) Ltd
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