Vanilla Market Report no. 40

As we have indicated in our most recent reports, the worldwide slump in the vanilla bean market,almost 6 years old, may finally be coming to an end. In fact we believe we are already in a “bull” market for vanilla beans and the real question is how the market evolves in the months and years to come. The focus of our report, as always, is on Madagascar, where the 2012 crop is expected to be abundant and healthy. Notwithstanding this fact,most of the other vanilla growing regions are in dire straitsin terms of vanilla production.

Indonesia, India and Papua New Guinea

As little as 6 years ago these 3 regions were producing 600 – 700mt of vanilla beans combined. In 2012 the total will probably not exceed more than 200 – 250mt with India and Indonesia splitting the volume and Papua New Guinea contributing next to nothing. Production in these areas has declined severely and for the most part growers are focusing on the lower grade beans. Although India and Indonesia have the ability to reverse production relatively quickly we doubt this will happen before there is a sustained recovery in the market. Recently vanilla has been a very poor investment for the famers, collectors and exporters of this region and in our opinion it will take more than a 10 or 20% increase in prices to prompt them to return to managing their vanilla plantations. Therefore our short term outlook for these regions is quite negative in particular for high grade industrial and gourmet vanilla beans.

Uganda

Although Uganda production seems to have stabilized, we expect about 100 – 125mt for 2012, the market is still controlled by one international buyer and herein lays the problem.
This company maintains a stranglehold on virtually all vanilla production due to a generous Danish subsidy. Farmers and exporters who wish to work independently of the program cannot compete on the global vanilla market without the benefit of the subsidy. Therefore production has stagnated and qualities have fallen as subsidized farmers become complacent. The Ugandan market has been virtually monopolized for the past 3 years,however, if vanilla prices rise globally, this may restore some competitive balance giving Ugandan vanilla vendors a choice as to whom they can sell their vanilla.

Mexico

Although Mexican vanilla production has virtually no impact on the global market it is worth noting that the 2012 crop is an absolute catastrophe with production at 5-10% of normal levels due mostly to severe drought. Some news organizations, including the Daily Telegraph and The Huffington Post to name just a few,have recently erroneously cited Mexico as a major supplier to the world’s vanilla market. This has led to numerous other articles over the internet evoking scenarios of an imminent crisis in the vanilla trade. Although obviously false to anybody in the industry, the story further highlights the dependency of the current vanilla tradeon one market, in this case Madagascar, not Mexico.

Madagascar

We believe that the 2011 Madagascar crop produced between 1600 – 1800mt of vanilla beans with more than half the crop already exported. Overall quality has been reasonable, in particular for low grade cuts and short beans as well as hi grade splits. However black and red whole beans have been disappointing in terms of quality and in our opinion this is a direct result of the excessive vacuum packing of whole vanilla beans in the early stages of the curing process.This practice is designed to increase the percentage of black beans which are almost double the price of red beans on the current market. Unfortunately, vacuum packing vanilla before it is fully cured results in a less stable vanilla with lower vanillin and ahigher moisture content as well as an unpleasant odor profile.

The 2012 vanilla crop is evolving nicely in Madagascar with ideal growing conditions prevailing so far. This should result in a bumper crop with production easily matching 2011 numbers or perhaps even increasing in most regions. We expect the upswing in price we have seen over the past few months to hold at the very least though to the 4th quarter. At this point, demand will determine the course of prices. We believe local vendors and exporters are not under pressure to sell as other commodities such as cloves and coffee have increased market liquidity. We expect exporters and dealers alike to increase their position on vanilla throughout 2012.

On a political note, Madagascar remains very much on edge as the current unofficial administration of Andry Rajoelina clings to power while exiled ex-president Marc Ravalomanana attempts to return to the country where he still enjoys considerable support. Former British Ambassador to Madagascar from 2001 – 2004 , Mr. Brian Donaldson, currently patron of the Madagascar Development Fund or MDF (www.maddevfund.co.uk ), fears real potential for civil unrest in the weeks and months ahead . “The population is growing increasingly frustrated with the seemingly endless flow of stories of incompetence and corruption at every level of government” says Mr. Donaldson.

Conclusion

We continue to urge vanilla buyers to maintain as long a position as possible on the majority of their industrial vanilla needs. The market has proven several times over the past 6 years that prices will more than likely not fall below current levels. Any downside risk is minimal and the reality is that even if vanilla prices doubled over night they would still be historically inexpensive in our opinion. The fact that Madagascar is once again the world’s dominant vanilla supplier leaves the market dangerously exposed. Vanilla bean imports are falling into the U.S. and there is every indication that older inventories of vanilla beans are diminishing as well. Consumption is also poised to rebound after stagnating for many years. New emerging markets for vanilla products such as China and Brazil will begin to have an impact.

Natural vanillin products will continue to play a major role in the market as many end users consider using these products as a substitute for flavors and extracts originating from natural vanilla beans.

In many cases, such as the ice cream industry, this practice is a violation of FDA labeling laws and essentially illegal as we have mentioned in the past. New efforts to make the industry more sensitive to these regulations and the ever increasing consumer awareness towards ingredients may convince manufacturers to avoid taking this route in their formulation strategies. We have no doubt that hundreds of tones of vanilla bean trade are lost each year as a result of the usage of natural vanillin.

We believe the global vanilla market is slowly moving towards a new reality. In a perfect world prices would gradually rise over time allowing other producing countries to re-enter the trade and thus restore some competitive balance to the market. Unfortunately, this scenario although preferable, is unlikely. Vanilla prices have been too low for too long so there is a real danger of price spikes in the market at the slightest provocation. We would advise buyers entering the market in the next 6 months , or at least until the evolution of the 2012 crop is clear, to exercise extreme caution.

There will be minimal amounts of new vanilla coming to the market in the short term and exporters in Madagascar are likely to hold their positions until a clearer picture emerges for 2012.

Thank you.

AUST & HACHMANN (CANADA) LTD/LTEE
December 30, 2011