INTERIM VANILLA REPORT #49 – AUGUST 2016

 

Although we are several months ahead of the normal date for the issuance of our vanilla market report, the current state of the Madagascar vanilla market leaves us no choice but to issue an update to try and make sense of the madness which is occurring on the ground in the world’s most important vanilla region. We will follow up with a more comprehensive report sometime in the 4th quarter when a more accurate assessment can be made.  This report will deal exclusively with Madagascar and touch on, Indonesia and Papua New Guinea. These 3 origins are responsible for approximately 95% of the vanilla bean production in 2016.

As we mentioned in our last report the key question in advance of the 2016 crop was how buyers would react in advance of the green vanilla market thus influencing prices and quality as the market evolved. Today the green vanilla market is coming to an end and unfortunately the worst case scenario has become a reality.  Prices for green vanilla started out more or less at the same levels as what the prices for cured vanilla from the 2015 ended.  Today with the green vanilla market coming to an end we are seeing prices in excess of USD 80.00/kg for green beans. With a poor curing ratio of  6 -7kg of green for one kilo of cured vanilla due to an abundance of immature beans we can assume that in 2016 we will possibly eclipse the prices of the last major vanilla crisis from 2001 – 2004 when levels surpassed USD 500.00/kg. On the ground in Madagascar it is a total speculative frenzy where prices for vanilla are increasing on a daily basis.  Attempts to regulate quality and vacuum packing have been brushed aside in the rush to take advantage of what seems to be a market with no limits. When a kilo of vanilla has a value equal to about 6 months’ salary for the average Malgache it is not hard to see why total chaos is consuming the market.

This news has reached other active growing regions and we now see similar activity in Indonesia and Papua New Guinea where prices have also risen dramatically in the past few months. Unlike the previous crisis news travels quickly in 2016 and vanilla vendors from all origins are quick to take advantage of the situation which is completely understandable.  Although it is still very early in the crop evolution (the bulk or “vrac” season has just started to get underway) we can assume that the 2016 Madagascar vanilla crop will be both unsustainably expensive and substandard in terms of quality, surpassing even the most pessimistic projections of just a few months ago.

Things could change in the months ahead but we are doubtful any relief will occur before 2017 because we have now reached the stage where it is in the interest of certain companies who have already committed to this market  that prices remain high…at least in the short term. We are seeing many downward revisions of the 2016 crop size in Madagascar which was originally estimated to be about 2000 – 2400mt. Now many exporters talk about a crop no larger than 1300 – 1500mt.  Recently we have read a vanilla market report issued by a major European vanilla company assuming the global demand for vanilla will remain constant at approximately 3000mt. This number is used to conclude that the market will be short by at least 700 – 800mt. We simply cannot agree with either of these assumptions. We are already seeing a major drop in consumption at the retail and institutional levels and soon industrial end users will follow.  It is a certainty that global demand will fall from 3000mt and suggesting anything else is simply naïve in our opinion.  Furthermore, even though curing ratios may be poor a downward crop revision of almost 1000mt this late in the season simply does not make sense.

Only now are extractors starting to inform their clients about what type of costs they can expect from the upcoming season. In less than three years we have seen the price of vanilla increase by almost 1500%. Less than 3 years ago first grade extraction beans sold for less than USD 30.00/kg. As was the case during the last crisis we expect that industrial demand for natural vanilla flavor from vanilla beans will plummet once the reality of the situation sinks in. Food manufacturers have more choice than ever when looking for a natural vanilla flavor not made from vanilla beans. We do not believe the market is sustainable at these price levels. We are also of the opinion that Indonesia and Papua New Guinea will play important roles in helping to alleviate some of the pressure and provide certain sectors of the market a more competitive option.  Although we are constantly seeing low estimates for vanilla production from Indonesia,   import statistics into the USA are contradicting this. Over 300mt of vanilla were imported into the U.S. in 2015 from Indonesia and through June 2016 over 200mt.  These numbers do not include E.U. imports or any other origin such as China who are traditional buyers for Indonesian vanilla. We also expect Papua New Guinea to add at least 150 – 200mt of vanilla beans to overall production in 2016.

So how did we get to where we are today?  Every vanilla crisis has a catalyst, the last one started with a cyclone (Hudah) and everything that followed simply exacerbated the situation, short crops, rampant speculation, a lack of viable flavor alternatives, etc.  This time around we believe the catalyst was man made rather than a product of Mother Nature. Please remember that the following is strictly our opinion and should not be construed as definitive in any sense. Others may disagree.

We believe that the primary catalyst for the most recent crisis has been the actions of certain major flavor companies, based in Germany, Switzerland and the U.S.  These companies were extremely aggressive at the very outset of the green vanilla campaign advancing large sums of capital to their respective suppliers in Madagascar. In itself this type of activity is not so unusual; when prices are at these levels exporters are loath to risk their own capital. However the real issue, and we have talked about this in several of our previous reports, is the emerging trends of “quick curing” green vanilla and the “extraction” of green vanilla beans.  These companies have encouraged certain vanilla exporters to install sophisticated ovens for the drying of green vanilla as a way to bypass traditional curing methods.  This allows for a cheaper cost base in a rising vanilla market, quicker access to finished raw material and eliminates the middle person, in this case the Malgache Vanilla Worker. The rationale behind the extraction of green vanilla is more or less the same.  Take control of vanilla production as quickly as possible while maximizing profit margins and market share. In both cases the product end result is very different than what traditional vanilla curing methods produce and vastly inferior in many ways. These processes serve to commoditize vanilla into one industrial category with accelerated availability and as little local labor involvement and time lag as possible.  We believe if these qualities become the norm in Madagascar it will spell disaster for the tens of thousands of vanilla families who depend on vanilla for their lively hoods.  In a perfect world the Madagascar government would step in and put an immediate stop to these practices. However as we have seen in the past when initiatives to improve or protect the vanilla industry in Madagascar are attempted, the resources are simply not there. We believe these companies have taken full advantage of the vulnerabilities and weaknesses which exist throughout the Madagascar Vanilla Sector.  Profit, market share and market control are put well in advance of the better interests of the average vanilla worker on the ground.

Quick curing or extracting green vanilla are not new technologies but we believe that the 2016 crop is the first to be so heavily impacted by these practices as more companies push their suppliers on the ground to comply. Naturally the larger capital rich companies go first when taking these types of risks as the return on investment could be very handsome indeed and shareholders will be pleased. However these same shareholders will pay the price should there ever be a consumer backlash against what could only be described as exploitive business practices which in our opinion take advantage of some of the most vulnerable people on the planet.

(The irony is that these same companies constantly promote themselves as responsible corporate citizens practicing sustainability through their fair trade and rainforest alliance programs amongst others. Sadly these programs represent just a fraction of their overall vanilla purchases.)

In our opinion there was no logical reason for vanilla prices to rise to the levels we see in the market today.  Prices had risen substantially from 2013 – 2015 which we feel were justified by short supplies and greater demand.  The pressure we see on the market today is more the result of corporate anxiety and greed than anything else. We firmly believe that without the advent of quick curing and the extraction of green vanilla beans the market would not be experiencing the chaos it is today. The sooner the market correction the better for those who still believe in high quality traditionally cured Madagascar Vanilla Beans accessible to all sectors of the global vanilla market.

 

Aust & Hachmann (Canada) Ltd