VANILLA MARKET UPDATE – NOVEMBER 2020
While the ongoing global pandemic continues unabated, so does the fall in vanilla bean prices from all producing regions. An unexpected increase in demand for industrial grade vanilla at the onset of the virus has been at least partially offset by the devastation to the food service and tourism sectors where most black or gourmet vanilla is sold. If not for retail and online sales, the market for black vanilla might have collapsed entirely. This is not insignificant. We estimate that gourmet or black vanilla represents around 20% of the worldwide vanilla trade. At the onset of 2020, prices for vanilla were falling quite quickly. However, the effect of COVID-19 on food supply temporarily arrested the decline. Today, with new larger crops coming to market from Indonesia, Madagascar, Uganda and the Comoros the price decline has resumed in earnest. It is a very simple case of supply outstripping demand. The onset of COVID-19 was simply a “speed bump” in the downward trajectory of global vanilla prices.
As we reluctantly warned in our last report, and much to our disappointment, the government of Madagascar has once again ordered by decree a minimum export price of USD 250.00 per kg of vanilla from the 2020 crop. This is far above the current market price. As was the case earlier this year when the minimum export price was set at USD 350.00/kg, the number is completely arbitrary with no reference to the grade or quality. This has sowed confusion throughout the vanilla world and forced many buyers to step back from taking any major positions.
Obviously, the Madagascar government is taking a much more interventionist approach to managing the vanilla trade and as a company who’s in support of a free and open market for vanilla, we are discouraged by these actions. The reality is that a handful of major industrial buyers drive the worldwide vanilla trade and we do not believe they will be cowed into buying vanilla almost 50% above the actual market value. Major competing producing origins such as Papua New Guinea, Indonesia and Uganda are all free and open vanilla markets. The current market scenario forces international vanilla buyers to seriously consider alternative sources and options for their vanilla needs.
Herewith are our most up- to- date expectations for the major vanilla growing regions.
Papua New Guinea – gaining ground
Vanilla from PNG continues to gain increased acceptance in the industrial extract market. PNG has been aggressively discounting their industrial grade beans and drying down black/gourmet vanilla stocks to industrial moisture levels. There was little choice given the catastrophic effects of the virus on the gourmet/black vanilla market where PNG enjoys significant market share. PNG has taken full advantage of the confusion caused by Madagascar’s minimum export price policy to try and gain further market share. Green vanilla is now only harvested at full maturity and quality has improved significantly. We expect to see less PNG vanilla being offered from Indonesia as lower prices and abundant supply make smuggling options far less attractive. We feel this is good news for PNG vanilla and are still expecting a minimum of 250 mt added to the global market in 2020, in addition to carry over stock which may be significant.
Indonesia – slow to react
Indonesia have not responded as aggressively to the new market reality in terms of their vanilla prices. Perhaps they were influenced by the Madagascar minimum price of USD 250.00/kg being announced. We believe they have now realized it had nothing to do with the actual export price being offered on the ground in Madagascar. Recently we have seen lower grade Indonesian vanilla beans offered at higher prices than superior quality stock from Madagascar. This is a sign of a dysfunctional vanilla market. Exporters are slow to adjust their prices to the actual market, and as a result, vanilla exports are not moving as expected thus far. Indonesian exporters still offer PNG vanilla but we already see this practice diminishing with the softening of the market. This year, Indonesian vanilla quality, like other origins, has improved over the previous year. We are revising our production estimate for 2020 upwards from 200mt to 250 – 300mt. Indonesian exporters will be watching developments in Madagascar very closely as they hope to accelerate exports of vanilla from current levels.
Uganda – quality finally prevails
Through a combination of government action, lack of market pressure and full vanilla bean maturity, (in regards to the current crop), Ugandan vanilla is on par with Madagascar vanilla in terms of quality for the first time in many years. Production from two crops is still relatively small, (around 100mt) but we expect that to grow in 2021. Keeping green vanilla on the vines until fully mature has made a huge difference and we see the vanillin content on the higher- grade vanilla, approaching 2.0% in recent testing.
As was the case with Indonesia, Uganda looked to Madagascar for pricing guidance at the beginning of the campaign but were quicker to adjust their offerings downwards once it became apparent that the USD 250.00/kg coming out of Madagascar had little to do with the actual export price. If Uganda can maintain a consistent quality going forward, they will provide an attractive alternative to Madagascar. Uganda offers multiples regions where vanilla is grown and two harvests each year. Production can be quickly ramped up if required.
The Comoros – there is no plan
Even though it was apparent from the onset of the harvest of green vanilla in the North of Madagascar this past May that vanilla prices would be drastically lower this year, the Comoros harvest which was starting at the same time, evolved differently. Green vanilla prices were about 30-50% higher than in Madagascar. The sudden, recent strength of the Euro against the U.S. dollar will further complicate matters for The Comoros, in our opinion. We can only surmise that the Comoros also took their cues from the Madagascar vanilla market and the government decree of a minimum export price of USD 250.00/kg. Now they are saddled with a much higher cost base than Madagascar. Early vanillin testing shows an even better quality than Madagascar, but it is unlikely buyers will be willing to pay a large premium in return. Production, which has still not increased significantly despite the recent high prices of vanilla, will still be well below 100mt. It remains to be seen if the Comoros will be able to continue to persist in the global vanilla trade in the face of a potentially protracted period of increased production and lower prices.
Madagascar – unstable and unpredictable
We can confirm that the 2020 Madagascar crop will yield significant tonnage, probably in the area of 1800mt, and will be of an even better quality than the 2019 crop. This can be attributed almost entirely to the maturity of the green vanilla beans as there was little buying pressure on farmers to harvest early and a diminished risk of theft as a result. We expect about half of the industrial grade beans to be split indicating maximum maturity. Flowering for the 2021 crop is already well under way and although many hurdles remain, it is possible Madagascar will have back to back bumper vanilla crops in 2020 and 2021.
As mentioned earlier the government has become much more actively involved in the vanilla sector imposing a minimum export price of USD 250.00/kg for the 2020 crop. More recently, taking action to block many licensed Madagascar vanilla exporters from shipping until their repatriation accounts are up to date. There exists a 90-day grace period for vanilla exporters to repatriate the foreign currency earnings after the vanilla in question has been exported. This goes back to the minimum export price set earlier this year at USD 350.00/kg for the remaining inventories of the 2019 crop. Our understanding is that when the arrears are payed the exporter in question will then be allowed to resume exporting vanilla. Since the export of the 2020 crop started September 15th, (one month earlier than usual), are we to expect similar actions by the 1st quarter of 2021 when the first exports of 2020 become due for repatriation?
It is critical to remember that the vanilla exporters are under no obligation to sell their vanilla at the current minimum price of USD 250.00/kg as long as the reparation of funds is respected. In our opinion, this gives a huge advantage to larger exporters who have access to sufficient foreign capital in order to make up the difference between the actual selling price for vanilla and the minimum export price set at USD 250.00/kg. If exporters have extensive operations in vanilla and/or other areas in Madagascar all the better as they can make use of the excess local currency (Ariary) they will be forced to accumulate through repatriation.
It remains to be seen if the government will maintain such a rigid approach to vanilla policy given the effects thus far. At the current pace of exports, we believe Madagascar will have a difficult time exporting 50-60% of the crop by the supposed export deadline currently set for May 31st 2021. As the bottleneck in vanilla increases, there will be further pressure on prices. Unrest in the Sava is bound to increase as unsold vanilla stocks rise unless the government intervenes. We are of the opinion that the government’s strategy has not yielded the desired benefits. Exports are sluggish and the Madagascar Ariary is at an all-time low putting further downward pressure on vanilla prices. Although we do not like the idea of price fixing, in our opinion, had a price that reflected the true current market value of vanilla been chosen, such as USD 175.00/kg as an example, the market would be far more advanced and active.
One of the benefits of the current vanilla environment is the fall in demand for quick cured vanilla. The tactical advantage of quick cured vanilla, a substandard and arguably non-traditional vanilla, has simply evaporated in the context of falling prices and abundant supply. This is good news for the vanilla communities of Madagascar. Perhaps the government will consider controlling or even eliminating this practice, along with the extraction of green vanilla beans. We believe this would not only benefit the vanilla communities of Madagascar by providing more jobs through traditional curing methods, it would also help keep quality levels high over the longer term.
Conclusion
Currently the market price for vanilla from Madagascar is between USD 50 – 100.00/kg below the official export price or about 60-75% below the highs of 2017-2018. We are now in the price range that many would argue is sustainable over the long term. However, this does not mean buyers will be returning in droves just yet. It took several years after the last vanilla crisis ended in 2004 for demand to recover. In light of the government actions in Madagascar, we do believe buyers will seek alternative sourcing even more aggressively, at least in the short term. We feel that exporters in Uganda, Indonesia and PNG are quickly realizing this and will attempt to capture as much market share as possible through aggressive pricing as their markets are unencumbered by export and price controls.
With natural vanilla flavor as popular as ever in a wide variety of food products around the world, it is difficult to understand why the overall demand for vanilla beans is actually less today than it was 20 years ago. Naturally the highly volatile nature of vanilla prices and quality plays a huge role but we do not believe we have seen the corresponding reduction in the availability of supposedly naturally flavored products to the consumer. There can be no doubt that food fraud and labelling deception exists on a large scale with regard to naturally flavored vanilla products throughout the food industry. This is evidenced by the unprecedented demand for exhausted vanilla beans and vanilla seeds from vanilla that has already been extracted and therefore no longer import any flavor benefit. Currently, it is possible to find certain qualities of vanilla beans that are actually less expensive than some of the exhausted vanilla and vanilla seeds, (both essentially waste by-products of vanilla extract production), being offered. Another sure sign of a dysfunctional vanilla market.
Something is very wrong with how the market defines natural vanilla flavoring and the emergence of dozens of class actions lawsuits in the U.S. against several prominent food manufacturers suggest just that. Some would dismiss these suits as nothing more than ambulance chasing but we have to wonder if food manufacturers are really willing to take such a risk now that vanilla prices have fallen dramatically. Each case must be judged on its own merits. We feel one successful and well publicized court action could provide a strong deterrent within the industry and go a long way to helping demand for vanilla beans recover to previous levels.
In the meantime, buyers can finally enjoy a long overdue respite from unsustainably high vanilla prices and substandard quality. We can understand buyer’s reluctance to make long term commitments given the room for further price declines in vanilla, However, there is still plenty of risk given the Madagascar government’s new approach and the fact that very little inventory of the new, significantly less expensive vanilla has actually been exported. We do believe that over the long term, barring drastic intervention or an unforeseen calamity, the vanilla market will have to fall further before stabilizing. In the meantime, we expect further volatility and unpredictability over the short term.
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