VANILLA MARKET REPORT NO. 47 – OCTOBER 2015
As the Madagascar 2015 vanilla crop comes to market an all too familiar scenario is beginning to unfold. As expected the crop is both below average in terms of both size and quality. In fact the quality is expected to be as bad or possibly worse than 2013. There are many reasons for this which we will address later in the report. As troubling as the expected abysmal quality may be it is the rampant upward trajectory of prices which is causing the most immediate concern. Alternative vanilla regions are continuing to show signs of recovery but we doubt this will impact the short or even medium term market. We will briefly touch on these regions before dealing with Madagascar.
Uganda
Uganda continues to trudge along but we still doubt that the 2014 crops will yield much more than 60-75mt. Ugandan exporters and farmers have been slow to react to the more favorable pricing and there have been huge problems with quality over the past year. The upcoming crop, which should export by March/April, is showing promise. However Uganda exporters are fully aware of what is going on in Madagascar and prices are not far behind. Nevertheless, we encourage buyers to consider Ugandan vanilla whenever the opportunity arises. Uganda is one of the few alternative origins that can provide hi- vanillin bourbon type vanilla beans
Indonesia
Things are picking up in Indonesia. Many speculative lots that had been sitting for years have now found buyers. Indonesian vendors can be remarkably patient when waiting for what they feel is the most opportune price to sell their vanilla. Importations of Indonesian vanilla into the U.S. market were at almost 185mt through the first 8 months of 2015. This would suggest that production is recovering quickly however we are quite certain much of this vanilla was borne from other crop years. Nevertheless Indonesian production will rise in 2016 and will consist mostly of lower grade vanillas.
India
India continues to move forward with a major campaign to increase vanilla production started already several years ago. Although we still do not expect a major impact in 2016 in terms of volume which will probably not exceed 100mt, in the years following we could see that number exceed 200 – 250mt.
It will be interesting to see if the market holds at current levels before the larger projected crops of 2018 and onwards come to market. There are two looming questions as far as Indian vanilla is concerned. 1) Can India maintain a consistent quality over the larger volumes it wants to produce? 2) When the vanilla market crashes as it most certainly will, will India have the competitive ability and fortitude to follow Madagascar when prices swing back to lower levels? If the answers to these two questions are in the affirmative it will go a long way to establishing India as a serious long term producer/supplier of vanilla beans. We believe we are still at least a year or two away from being able to answer these questions
Papua New Guinea.
The exporters of PNG are ratcheting up their efforts to bring more PNG vanilla to the international market and the impact is being felt already, in particular at the food service level. Although PNG still produces both Tahitensis and Planifolia qualities of vanilla, the former is much preferred by the market. We expect to see a significant increase in vanilla production in PNG for 2016, possibly up to 150mt.
Mexico and French Polynesia
It is unlikely that the combined production from these two “fringe” regions of the vanilla world will exceed 25mt. There is not much to add to what we already stated in our previous vanilla report, #46 from April 2015.
Madagascar
Madagascar currently dominates and by default controls the world wide vanilla trade. As was indicated in our previous report (April 2015) the prognosis for the 2015 crop was not good. Today, with the 2015 crop harvested and coming to market we can confirm that even our most pessimistic expectations have been surpassed. As expected the crop will be small. Probably between 1100 and 1300mt of dried material, the quality, almost certainly, will be very sub-standard and possibly even worse than 2013, which was one of the worst quality crops on record.
Demand in the market was very strong throughout 2015 and by mid-year when it became obvious that it would not abate, many exporters simply stopped offering knowing full well their remaining inventory would appreciate in value considerably.
This put tremendous pressure on the market as buyers who had not fulfilled their requirements for 2015 were caught off guard and simply ratcheted up their efforts to find vanilla. Green bean prices for 2015 started very high and farmers had no choice but to harvest as soon as possible in order to avoid seeing their crops stolen. With virtually no vanilla being offered on the market pressure continued to rise throughout the summer months. Many major buyers visited Madagascar in August and September, thinking perhaps they would get a jump on the market but this only inflamed the situation as it clearly showed a dire need which exporters gleefully observed.
In order to preserve weight and hold out for the best possible price most farmers and collectors have vacuum packed their vanilla in a semi-cured state and left the final drying and curing process for the exporters. This will have a profoundly negative impact on quality and price. We can expect very low vanillin contents and very unstable vanilla, especially for gourmet and European grades. Exporters will only be able to determine their costs after they have dried down their vanilla. We expect this crop to evolve at an excruciatingly slow pace with the bulk of offers coming only in early 2016.
Throughout August and the first part of September there has been a lot of rain in the vanilla regions which has hampered curing efforts and also the flowering for the 2016 crop. Flowering for 2016 started strong enough in the 2nd half of August but waned with the heavy rains resulting in many flowers falling off the vines before being pollinated. The weather has since improved and we have had reports of many new buds appearing on vanilla vines. We believe we are still at least 4-6 weeks away before a reasonable projection can be made for the 2016 vanilla crop. With prices spiraling out of control, even the most optimistic projections are tempered by the fact that the vanilla market in Madagascar has once again descended into an orgy of chaos and greed. This was the case in 2001 – 2004 when quality standards plummeted, businesses failed and innocent people on the ground were killed because of the enormous amount of cash in circulation as this was the only way to effectively secure their purchases.
The issue of the insecticide Permethrin, which plagued the organic campaign in 2014, will more than likely still be present in 2015. We expect very low volumes of authentic certified organic material from the 2015 crop. The current market makes it very difficult for exporters to take control of the curing process which is essential in order reduce the chances of contamination.
With higher prices we fear that the issue of sustainability and responsible sourcing will be neglected as buyers focus on more pressing needs. Contrary to the popular myth which is perpetuated throughout the industry Madagascar vanilla farmers do receive a substantial share of the windfall that accompany higher prices. One has to wonder what the fair trade agencies would classify as a “fair” price for vanilla in 2015 with green beans trading between 10.00 – 18.00/kg this past season and cured vanilla pushing towards USD150.00/kg. As we have said in the past we do not believe that responsible sourcing should have anything to do with the seasonal price of vanilla. For any companies interested in a different approach, please refer to our website www.austhachcanada.com and click on social responsibility.
Conclusion
Is it too easy to simply blame vanilla farmers or collectors or even exporters in Madagascar for what ails the vanilla market. We have heard it all before….speculation, early picking, vacuum packing, money laundering, greed, etc. We believe any long term solution to the ongoing instability and volatility in the vanilla sector has to come from within, on the ground in Madagascar. What the vanilla industry in Madagascar fails to realize is how easily industrial users could switch to alternative flavoring options especially if labeling laws and standards of identity are revised or relaxed as many flavor manufacturers would welcome. Considering the nature of the vanilla market at origin there is a credible argument to be made in favor of such changes.
So why does the industry again find itself in the untenable position it is today? How is it possible that we are following the same path as we did in 2002 – 2004? Whether the new price of vanilla is USD 150.00/kg or 200.00/kg or even more is not really the issue. One could still argue that these prices represent fair value, but fair value for what exactly? It is very likely the 2015 Madagascar Vanilla crop will yield very poor quality unstable vanilla well below normal standards with very low vanillin contents and distorted aroma profiles. Yet the bulk of the industry, especially companies who rely heavily on their vanilla programs, will continue to buy. The same companies who fought for .25 – .50/kg discounts when vanilla was 20.00/kg a few years ago are now willing to pay up 10 times that amount for a far inferior product. How high the vanilla prices go will depend entirely on how much industrial buyers are willing to pay. The last crisis saw prices push well past USD 500.00/kg. We can only hope that common sense will prevail and that we will not return to such absurd and unsustainable levels.
So what does the average industrial end user of vanilla do in this market? A moderate size flavor house that normally uses 50mt of Madagascar vanilla will have to increase its procurement budget by almost USD 5 million for a far inferior quality product. In the face of such a stark reality the easiest and most effective solution would be to not buy at all…but that is not realistic for most end users. We would advise buyers to consider any of the following strategies:
“Buy the absolute minimum and as late as possible”!
“Buy lower qualities”!
“Buy from different origins”!
“Extend your vanilla formulations”!
“Bend the rules if need be”!
“Avoid any long term or contractual commitments”!
Anything that can be done to reduce the current demand for Madagascar would be helpful. The further the industry pushes up prices now the more catastrophic it will be when the market collapses.
It may seem counter-productive, that a company such as Aust & Hachmann (Canada) Ltd, who depend entirely on vanilla beans and vanilla bean by products to survive, would make such suggestions. However with the situation spinning out of control on the ground and Madagascar taking a very “short term approach” to the market, we feel desperate times require desperate measures. Although we oppose any type of interventionist action, we will appeal to the Ministry of Trade & Consumption (Ministre du Commerce et de la Consommation) – (http://www.commerce.gov.mg) – Mr. Henri Rabesahala – to encourage them to get more involved in the sector which is still one of the top foreign exchange earners for their beleaguered economy. We sincerely believe that minimal controls over the picking dates for green beans, curing methods and enforced minimal quality standards would go a long way to setting the Madagascar Vanilla Industry on the right path to ensure its long term survival.
Aust & Hachmann (Canada) Ltd
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