Vanilla report 29
The slump in the vanilla market, now almost 3 years old, shows no signs of abating with many large crops Due in the last quarter of 2006. Although the rapid drop in vanilla prices came as no surprise to most people in the industry, the continued sluggishness has surprised some. The assumption was by now most end users, in particular those from the industrial sector, would be happily buying vanilla again. As the market currently reflects, that has not been the case. As increases of production from most vanilla growing regions continue to add hundreds and hundreds of tones of vanilla to an already saturated market, prices are under enormous pressure to continue yielding to buyer’s demands. For those expecting any type of spike in vanilla prices, at least for the short term, in the opinion of this company, they will be disappointed. Despite all of the rhetoric, we do not believe that prices have fallen low enough to curtail production in the major growing regions. This will probably still take several seasons years unless there is an intervention or catastrophic occurrence in the Madagascar vanilla market, still the world’s most dominant producer of vanilla beans. The following are our projections for the major growing areas.
Madagascar
All signs are still pointing towards a large crop this year with estimates of size ranging from 1400 – 1800 mt. Production in Madagascar is still rising due mostly to the effects of the new plantations put into place from 2000 – 2003. This has offset the lull in production that normally would have taken place by now due to cyclical occurrences such as vine fatigue.
Although our initial expectations were that quality would improve over last year this is no longer the case. Quality will be somewhat of a challenge for Madagascar this year due to unusually long periods of rain during the critical curing stage. This by no means is a declaration that quality will be poor; however there will be some consequences due to the weather conditions. Already we are expecting a far greater percentage of short beans than in 2005, although there will be sufficient long vanilla. Furthermore, we are anticipating less black or prime vanilla than initially predicted. Optimal curing conditions are required to ensure a good percentage of black vanilla and this has not been the case thus far. Phenol will also continue to be a factor, not only from carry over stock but also from certain lots of vanilla, which have sufficient curing time in the sun due to excessive rain fall.
Politically, Madagascar seems stable with presidential elections due in early December. There has been little in the way of natural catastrophes that have affected the vanilla crop save for the excess of rain already mentioned. In view of this we expect prices in Madagascar to be lower at the begining of the 2006 crop when compared to the end of 2005. Prices could open about 25% lower than last year but the potential exists for prices to go even lower as the season progresses. As usual, everything will depend on the industrial sector’s appetite for extraction grade beans, particularly in the U.S. market.
Uganda
Uganda is another region where vanilla production has risen considerably over the past few seasons. We expect production in 2006 to come in just under 200 mt. Uganda continues to produce a very high quality planifolia vanilla giving many buyers an alternative to Madagascar for both gourmet and extraction grade vanilla beans. Prices remain well discounted against Madagascar and we expect that trend to continue even in a falling market. Over 80 mt of Ugandan Vanilla have been imported into the U.S. market through the first 6 months of 2006. This proves that more and more end users are finding room for Ugandan Vanilla in their formulations.
The quality from the winter 2006 crop was somewhat disappointing with vanillin contents dropping off somewhat but we expect a much better quality from the summer crop which will be exported starting in October 2006. Pricing in all likelihood will have to fall well below $20.00/kg to remain competitive.
Indonesia/Papua New Guinea
As we have previously mentioned, we believe these two regions, because of their geographical location, will see their respective vanilla trades become more and more entwined. PNG has the capacity and Indonesia has the expertise and the experience. Indonesia can also help PNG improve their techniques for growing and curing planifolia vanilla. There are many natural synergies between these two growing regions and as long as the market remains soft we believe exporters will work closely together.
Both PNG and Indonesia are responsible for over 170 mt of vanilla beans entering the U.S. market through the first 6 months of 2006. This figure in our opinion is impressive considering that the vast majority of the 127 mt contributed by Indonesia were cuts or low-grade extraction beans. Obviously PNG vanilla is starting to find a home in the U.S. market beyond the gourmet and foodservice sectors where their quality is already well established and accepted, particularly in Europe.
We feel that over all production in Indonesia will continue to be low by historical standards but this will be more than offset by the increased production in PNG. We feel both of these regions combined will contribute about 350 – 400 mt of vanilla in 2006 and possibly more in 2007.
Other Origins
Quality has recovered well in the Mexican market but production numbers are low and we expect them to stay that way. Mexico will have a difficult time, as they will be forced to sell their vanilla at about double the Madagascar prices in order to cover costs. This will be a very difficult task in the industrial sector, less so in the gourmet and foodservice sector where Mexico still enjoys a fine reputation. If the market remains in a long-term slump, which is entirely possible, the survival of the Mexican vanilla trade will be threatened in our opinion.
There have been many predictions for a boom in vanilla production in India for the last few years but we have not seen that materialize. There were even predictions for several hundred mt in 2006 but with only 43 mt imported into the U.S. market through the first 6 months, Indian vanilla exporters must be disappointed. India has yet to experience a sustained downtrend in the vanilla trade. We feel it will be a great challenge for Indian Vanilla to gain further market share under current conditions.
With the exception of French Polynesia, who will always have a robust tourist market for their vanilla, other fringe growing areas, like Tonga, and The Comoros islands will find it very difficult in the years ahead if market conditions remain unchanged.
Summary
It would be very easy to advise a buyer that now is the time to take advantage of low prices and start making long-term commitments. After all, as the market shrinks, the price risk on the down side shrinks as well. Given the fact that vanilla was $500.00/kg three years ago, now as it approaches $20.00/kg one wonders if it can go lower. Unfortunately, in our opinion, the ugly answer is yes. With worldwide production probably exceeding 2500 mt and plenty of carry over stock still in the market from previous years, consumption must still rise in order to flush out the excess inventory. Of course we refer to “industrial” consumption. If buyers decide that now is in fact the right time to begin taking long term positions on their vanilla requirements, even only 50% of requirements, this would have a positive impact on consumption. We could even see prices stabilizing in 2007. On the other hand if industrial buyers continue to purchase on a short term or spot basis, prices may still take several years to recover. In our opinion, we would recommend that buyers consider covering a portion of their long-term requirements as a hedge or insurance. Madagascar still has the potential to surprise both politically (this is an election year) and environmentally (still a very active cyclone region).
AUST & HACHMANN (CANADA) LTD/LTEE
September 1, 2006
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