As 2012 draws to a close, it is apparent that the worldwide market for vanilla beans has finally started to recover after more than 6 years of oversupply and price stagnation. We are hopeful the recovery will be long term and sustained in order to reverse the current trend of diminishing production and quality. Unsustainable prices and weak demand have pushed many prominent producers of vanilla such as Indonesia and India out of the market. As a result , Madagascar is the dominate global vanilla producer once again; however, if the trend of higher prices continues over the long term, we believe vanilla production from secondary origins will eventuallyrecover. Although we are quite convinced the “buyers” market of the past 6 years is over, the exact course of the immediate future is difficult to plot. Prices for vanilla beans in Madagascar have increased by as much as 50% over the last 6 months and demand remains strong. Despite what may seem like a drastic increase, historically speaking, vanilla prices are still very low. Farmers, Collectors and Exporters alike are emboldened and they will drive the market going forward. Our outlook for the producing markets is as follows.

Indonesia and Papua New Guinea

For several years now vanilla production in Indonesia has fluctuated between 100 and 150mt well below historic levels of the past. Although higher grade vanilla can still be found, the majority of production is focused on early picks (EP quality) and grade 3 type. There is a stubborn carry over inventory already several years old in the hands of speculators that remains unsold, however from all reports the qualities are very poor. In the short term we do not expect any changes in vanilla production from Indonesia.

In fact we feel that world vanilla prices would have to increase furtherfor a sustained period of time before Indonesian farmers return to the market. The commitment to farm vanilla and risks involved are too great in terms of time and costto simply jump back in at the first signs of recovery. Furthermore many vanilla farmers have increased their plantings of more lucrative crops such as coffee, cloves and pepper. Therefore we do not anticipate any significant change for Indonesian vanilla production for 2013.

The situation is Papua New Guinea is far worse with production at near zero levels for several years now. However since vanilla farming is less structured than in other growing areas most vanilla vines remain planted and in good health. PNG conceivably could be back in the market relatively quickly however the impact would be felt mostly in the food service and gourmet market as industrial demand for PNG vanilla has always been very limited.

Uganda

Higher prices for vanilla will help production in Uganda in our opinion. The Ugandan vanilla market has suffered terribly over the past five years as many buyers returned to Madagascar vanilla when Uganda could no longer discount their prices. Further aggravating the market in Uganda was an attempt by a major flavor manufacturer to stimulate the vanilla trade in Uganda by way of a well-intentioned(but ill- advised subsidy in our opinion) given by a Danish governmental organization similar to USAID called Danida. Traditional curing practices were abandoned in favor of a more industrialized approach which negatively impacted both the quality and quantity of the Ugandan vanilla crop. This created a virtual monopoly over the market which thankfully seems to be finally coming to an end with the advent of higher prices. This will allow famers more options when it comes to selling their vanilla.

It will take some time before Uganda can reclaim its rightful share of the world wide vanilla market. Nevertheless we expect to see improved production in 2013 with volume possibly reaching 140 – 150mt from both crops.

Madagascar

The 2011 crop finished with a flurry of buying in the 1st and 2nd quarter of 2012 leaving a gap in supply by mid-2012. This resulted in early season speculation on prices in the 3rd quarter as the 2012 crop came to market. The market has continued to rise since. There are several factors in play here:

• Surplus inventories have diminished and there is strong pent up demand in the market.
• The weather was very poor in the Sava region in August and September which has slowed the evolution of the 2012 crop and impacted flowering for 2013.
• A large percentage of the crop has been put under vacuum pack. This year we estimate over 60%. This practice is having a major impact on several facets in the market.
• Initial flowering for the 2013 crop has been weak although secondary flowering appears much stronger.
• There is more liquidity in the market than in previous seasons.
• Crop will probably come in on the lighter side of estimates, or around 1400 – 1500mt.
• Many Exporters, Importers and even end users are in “low inventory” positions.
• Madagascar has virtually no global competition for its vanilla.

Although we see a possibility of a short term pull back in the price of black or gourmet vanilla, red vanilla, or what is known in the trade as “type U.S.” is short in supply and herein lies the danger.

We believe even if Madagascar produced a bumper crop in 2013 we doubt it would be enough to satisfy over all global demand.Another challenge for buyers stemming from the 2012 crop will be quality. The phenomena of vacuum packing is now affecting the majority of the crop and we are hopeful this practice will diminish with higher prices in the future. As we have mentioned in previous reports, vacuum packing fresh vanilla is a way to try and keep the vanilla at the required moisture levels so that a greater percentage of beans can be sold as Gourmet/Black/European type vanilla. All of these qualities command a significantly higher price than standard extraction grades although the spread is smaller this season than in previous. With a majority of vanilla now being vacuum packed, sometimes as little as 2 weeks after being harvested, the dynamic of the curing and processing has changed.Exporters have no choice but to muddle through the vacuum packed lots to try and determine the best qualities. This involves much more drying and processing on their parts. Enormous amounts of additional time and resources are required on the part of the exporter in order to properly classify vacuum packed vanilla as it is received only “partially cured”. This increases costs and slows the evolution of the market to a crawl. Even at the end of the process qualities are not up to standard, with lower than normal vanillin contents, particularly with regard to the Grade 1 whole (non-split) extraction grade beans.
Finally, with respect to the 2013 crop it appears the later stages of flowering have been much more productive than earlier in September and October. Although a positive sign, it does signify a late crop for 2013 and with that comes early picking and more quality issues. In our opinion it is very unlikely the crop size for 2013 will exceed 2012.

Conclusion

Although many challenges remain within the vanilla trade we are hopeful the current price recovery will take hold over the long term. We believe in order to improve qualities and increase production a sustainedrecovery is required. Even at current price levels vanilla is still very reasonable and we see little risk in covering requirements as far forward as possible. From a sustainability standpoint, it is a fact that the higher prices are benefiting vanilla famers directly. This is welcome news to those in the industry (including our company) who felt that vanilla prices had fallen to dangerously low levels. So low in fact that vanilla farmers could not provide for their families.

We believe a long term bullish trend is the only path to better quality at origin, in particular Madagascar. It is also essential to the recovery of other vanilla producing regions. With time buyers would once again have a variety of vanilla origins and qualities to choose from while at the same time reducing their dependence on Madagascar.

AUST & HACHMANN (CANADA) LTD/LTEE
December 30, 2012

The post December 2012 appeared first on Aust&Hachmann.

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

The post December 2011 appeared first on Aust&Hachmann.

Over the past 6 months we have seen some very significant changes in the global vanilla trade. Years of chronic weakness in demand and stagnant prices seem to be finally giving way to a new reality. In the peripheral origins such as Indonesia and Mexico supplies are tight and prices are moving up. The real question is how the Madagascar market will evolve going forward. There is still a strong argument to be made for the status quo. For many years now predictions of an imminent rise in vanilla prices have repeatedly been made, and to date those predictions have proven utterly wrong. However this year there is already considerable change in the secondary growing regions. This is where we start our analysis.

Indonesia & Papua New Guinea

High quality vanilla beans from both of these origins are practically non-existent today and the total combined crop will unlikely exceed 125mt. About 50mt from PNG and incredibly only about 75mt from Indonesia who continue to focus on the lower end of the market.

So far the strategy has proven to be quite effective, at least in the short term. Currently low grade industrial Indonesian vanilla beans sell at a 30% plus premium to the best Madagascar industrial grade beans due to their unique flavor profile. Going into 2012 we do not see Indonesian production increasing substantially.

Papua New Guinea vanilla production has been very weak the past few years and will not exceed 50mt in 2011. Furthermore quality has been reduced to one grade……poor! We do not see this market having any impact on global vanilla production at least through the end of 2012.

Uganda

The vanilla market in Uganda has changed dramatically over the past few years. Production is stagnant at around 125 to 150mt, qualities are very inconsistent. A few years ago a joint venture between several parties including the Danish Government, a major Ugandan vanilla exporter and a Danish Flavor House resulted in the consolidation of the local vanilla trade. Thanks to a generous subsidy, a premium over the regular market price is offered to vanilla farmers who deliver their beans to a designated exporter. This has resulted in the group having a virtual monopoly over the Ugandan vanilla trade. On the surface it seems like a good deal, the farmers are guaranteed a premium price, the exporter controls the local market and the flavor house, now Swiss based, has a guaranteed secure supply line for its vanilla.

We also understand that sizeable capital investments were made to support this project. It is difficult to criticize something that brings investment and stability to the Ugandan vanilla market. However, we have serious doubts about how this arrangement will benefit Ugandan Vanilla over the long term. Certainly their exposure and presence on the international vanilla market has been severely diminished as a result.

Many previous end users of Ugandan vanilla have had no choice but to give up either due to a lack of supply, poor quality or an uncompetitive price.

Mexico & French Polynesia

Although Mexican vanilla production rarely exceeds 50mt it still retains a loyal following in both the food service and industrial trade. The 2010 crop was very small and this year’s crop is predicted to be less than 10mt as a result of a severe drought. Prospects do not look much better for 2012. Yet today industrial grade Mexican vanilla has already reached 100.00/kg. Just like Indonesian low grade beans, Mexican vanilla has its own unique characteristics and market value.

Vanilla from French Polynesia enjoys the same type of reputation and with the diminished presence of PNG gourmet vanilla demand and prices for Tahitian vanilla are on the upswing. Prices will easily exceed 200.00/kg for first grade beans this year. Again production will be down over last year and is unlikely to exceed 25mt.

Madagascar

Today Madagascar is again far and away the world’s dominant vanilla supplier. The production from all of the other vanilla origins combined would barely reach 20% of the 2011 crop in Madagascar which we estimate at around 2000mt.

Quality will improve over 2010 and early analytical tests are showing markedly higher vanillin content. As the bulk buying season goes into full swing prices for first quality extraction grade beans remain more or less at the levels they were at the end of the 2010 season.

We see a lot of farmers and collectors vacuum packing vanilla to slow the drying process early in the campaign. There will be far greater demand for black beans than usual this year and vacuum packing will, temporarily at least, keep black vanilla from turning red. It also allows for the vanilla to be held for longer periods of time. Unfortunately vanilla does not respond well to the environment of a vacuum when packed too fresh or not fully cured. Interestingly, this tendency to vacuum pack did not exist 10 years ago and today it is practiced throughout the Sava region. So extensively in fact that locally there is currently a shortage of Vacuum pack bags. We expect many collectors and farmers are preparing to hold part of their stocks in anticipation, or hope, of improved prices in the near term.

We also expect industrial demand for Madagascar vanilla to be stronger this year, again as a direct result of the short fall from other origins. Although still very early, the expectations for 2012 are in line with 2011, namely another good size crop.

Conclusion

In summary we feel that worldwide demand for vanilla will be met by the current production estimates, but only just. This of course is based on the widely accepted but very difficult to prove global consumption number of 2500mt. Surplus vanilla inventories whether speculative or simply unsold have played a large role in keeping prices under control. It is common knowledge that almost 600mt of Industrial grade Madagascar vanilla beans from a speculative play now more than 3 years old still sits in a Northern European warehouse. This vanilla is now under control of the Rado Banking Group. In spite of this we believe the overall surplus of vanilla has shrunk considerably over the last few years and at one time was probably well over 2000mt.

Several current initiatives publicizing the facts behind vanilla labeling regulations and standards of identity for the food manufacturing industry, in particular dairy, seem, at the very least to be raising awareness over this contentious issue. There can been little doubt that the misrepresentation and mislabeling of natural vanilla products in the food industry is costing the markets hundreds of tons of industrial grade vanilla beans. A reversal of this disturbing trend will go a long way to stabilizing vanilla markets over the long term.

As the 2012 crop in Madagascar slowly comes into focus we believe the current trend will continue. Over the past four years the bottom of the vanilla market was tested several times and for the most part that is exactly where the price has remained.

Consequently we see nothing to lose and possible enormous savings if buyers are able to engage in long term commitments with their suppliers. We would continue to recommend covering vanilla requirements as far out into the future as possible.

In other words prices for Madagascar industrial grade vanilla beans are still dirt cheap, historically speaking. We believe the spread between an over supplied market and a short market shrinks each season. With the outer edges of the market already turning it is just a question of time before Madagascar feels the pinch!

AUST & HACHMANN (CANADA) LTD/LTEE
October 26, 2011

The post October 2011 appeared first on Aust&Hachmann.

Despite signs of recovery in certain sectors, the overall global market for vanilla beans remains stubbornly weak. As previously indicated, declining production in areas outside of Madagascar are starting to have an impact on availability, in particular with regard to gourmet or prime quality vanilla beans. However, large carry over inventory positions for industrial grade vanilla beans combined with a lack of clarity with regard to US labeling laws continues to drag on the industrial sector. As always we will start our analysis with Madagascar who is still more than ever the world’s largest producer of vanilla beans.

Madagascar

In 2010 Madagascar was responsible for 72% of all vanilla beans imported into the U.S. and probably well over 85% in Europe and 95% in Japan. The continued low prices of the past four years has helped Madagascar reconsolidate its grip on the market and they remains the world’s dominant supplier of vanilla beans. In our estimation the 2010 crop produced between 1200 – 1400mt of vanilla. Since early 2011 approximately 700mt of vanilla beans have been exported from Madagascar.

In our estimation approx. 1000mt remain in the warehouses of various exporters throughout the Sava region. It is important to remember that there was significant carry over inventory from the 2009 crop which will inflate the export figures for 2011. We anticipate a much smaller carry over from the 2010 crop.

The quality from the 2010 crop is inferior to 2009 which is in line with expectations. We have conducted extensive vanillin testing and results suggest decreases of 10 – 20% on average. As we pointed out in previous reports, the 2010 crop flowered very late and as a result was somewhat immature with many regions picking far too early. Vanillin content is maximized only in the last weeks of green vanilla maturation. Even though cured vanilla from 2010 may appear normal with respect to size and aroma profile vanillin contents are still lacking. Looking ahead to 2011 we expect a slightly larger crop than 2010, albeit with a higher percentage of shorter beans due mainly to excessive flower pollination early in the campaign. The exact opposite of what happened in the previous crop. It is still too early to predict the quality for the 2011 crop however early indications are for improved quality. Finally, we believe that current market conditions favor the possibility of real supply problems for gourmet or black vanilla in the next 6-12 months as there is little support inventory for this quality.

Uganda

Just over 150mt of Ugandan vanilla was imported into the US market in 2010. Like Madagascar there was significant carry over inventory to deal with. In 2011 we expect that Uganda will have a difficult time producing even 150mt of vanilla beans. Carry over inventory will inflate figures somewhat; however again – as is the case in Madagascar – these inventories are diminishing.
The Ugandan market has also come under the influence of a Danish organization called DANIDA or The Danish international Development Agency who have been supporting a subsidy program for Ugandan vanilla. Despite the underlying good intentions this is not necessarily having the desired effect as it gives some exporters a big advantage when buying green vanilla from farmers. Subsidized buyers are paying a higher than normal market price thus forcing non-subsidized exporters out. It is not clear how long the subsidy will last but for the time being the Ugandan market is in turmoil. One exporter is dominating the market, qualities are diminishing and farmers are under the incorrect assumption that the market is recovering. Supporting this argument is the fact that current Ugandan prices for vanilla on the ground are higher than Madagascar’s. The actual average declared price on US imports from 2010 was higher on a per kilo basis for Ugandan vanilla than it was for Madagascar vanilla. Historically Madagascar vanilla has always commanded a premium price over Ugandan vanilla.

Indonesia and Papua New Guinea

Unfortunately the story changes little for these two regions in 2011. Papua New Guinea vanilla production is practically non-existent with sparse quantities of very poor quality extraction grade beans available. Those who chose to speculate with PNG vanilla are now forced to dump inventories which have begun to deteriorate. We do not expect more than 50mt of vanilla from this region in 2011. In 2010 just over 200mt of vanilla from Indonesia was imported into the U.S. This figure is somewhat surprising given that most people, including ourselves, predicted a total production of less than 200mt for this region. There is however a plausible explanation. Indonesia is one of the most speculative regions when it comes to vanilla. We are aware of some exporters who have been waiting in excess of 4 years for the market to recover so that they can sell their holdings. For the most part these positions have failed and now, as in PNG, many exporters are now liquidating their positions. We believe actual production in 2011 will not exceed 150mt for Indonesia with the vast majority of vanilla being classified as low grade beans.

Mexico and French Polynesia

The two boutique markets of the vanilla world continue to survive thanks mostly to very loyal followings within the food service and restaurant industry.

However industrial demand does still exist, albeit on a very small scale, for both origins. These two factors have allowed these origins to survive despite the severe adversities faced by the industry. That being said production has still been crimped as not all end users are prepared to pay the vast premiums commanded for vanilla from Mexico or Tahiti. In the case of Mexico we estimate production in the 30 – 40mt range for 2011 while Tahitian vanilla production will probably not exceed 25mt.

Conclusion

The vanilla market, driven by the weak demand for industrial grade vanilla beans remains mired in a slump. The consequences of this unnaturally extended period of weakness are now starting to become apparent in the market place. Outside of Madagascar vanilla production and quality are falling rapidly. The upper end of the market is again completely dominated by Madagascar while the market for lower grade vanillas is over supplied with prices at unsustainable levels. Even at that, over all qualities continue to degrade and Madagascar is not immune to this phenomena. There is simply not enough money in the current price of vanilla to support the intensive handling which is required to ensure a minimum standard of quality. In the growing and curing process critical steps are being skipped or ignored, cycles are being shortened, and materials are not replaced when they should be. For the vanilla farmer, collector, and exporter it has come down to a question of survival.

Why the industrial vanilla market does not recover continues to elicit intense debate throughout the industry. In our opinion the answer is quite obvious. Whether intentional or not, there seems to be a lot of confusion and misinterpretation when it comes to the FDA regulations reference 21 CFR 169 covering vanilla labeling and standards of identity. This has resulted in a profusion of food products identified as natural vanilla but flavored with ingredients not originating from vanilla beans. Some manufacturers of natural vanillin even advertise that their products meet FDA regulations, and we quote, “without any degree of uncertainty or interpretation” as if there is a need to reassure doubting clients. We are of the opinion that any ingredients used to naturally flavor a food product labeled as vanilla must be made with vanilla beans. A manufacturer is always to free to substitute using a natural flavored alternative ingredient however by doing so, in our opinion; they forfeit the right to call said product natural vanilla product. Doing so would, again in our opinion, be highly deceptive to the consumer and very possibly a direct violation of current FDA labeling regulations. The lack of clarity with regard to labeling and standards of identity in the vanilla trade has been a contentious issue for decades.

However since the vanilla crisis from 2000 – 2004, we believe the practice of substituting has become commonplace within the industry; so much so that we believe several hundreds of tons of industrial vanilla beans are being eliminated from the market each year. In 2010 a total of 1781mt of vanilla beans were imported from all origins into the U.S. market. This is actually 100mt less per year than the 3 year average from 1996 – 1998 which was 1887mt per year. Does anybody actually believe that there are less naturally flavored vanilla food products on the market today than there was 12 – 15 years ago? With vanilla prices at historical lows for the past 5 years there is only one plausible explanation for the absence of recovery.

We believe that if the practice of replacing industrial vanilla beans as a flavor ingredient with other manufactured compounds continues uncontested the vanilla industries of Madagascar, Uganda and other origins along with the tens of thousands of vanilla famers and their families whose livelihood depends on this crop, will most certainly be devastated.

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

The post May 2011 appeared first on Aust&Hachmann.

On the surface it appears that little has changed with regard to the global vanilla market since we gave our last market report at the FEMA vanilla committee meeting in May 2010. Prices remain very low, supplies are abundant and demand, at least at the industrial level remains weak. This despite many predictions made by industry professionals, including ourselves, over the past 3 years warning of an imminent market rebound. There are many factors that make it very difficult to accurately predict exactly when the vanilla market will recover, and even the most seasoned industry professionals are unable to explain why the slump is seemingly unending. Perhaps we are being somewhat idealistic but we firmly believe the recovery is already under way and after a brief look at the markets we will explain why.

Madagascar

The harvest for the 2010 crop started in June and reports to date suggest a smaller and inferior quality vanilla crop than in 2009. There is a huge spread in crop size prediction at this early stage with a low of 800mt and a high of 1500mt being suggested so far. Either number is well off last year’s crop size which was probably closer to 2400mt.

Steady rains throughout July and August made curing of the green beans arduous.With very little sunshine available preparers were forced to store or even vacuum pack partially cured.
Vanillain order to wait for the required sunshine for drying.Although the weather has since improved we expect higher phenol levels than normal.Excess rainfalls, combined with a large percentage of immature vanilla, are the main reasons for this unpleasant phenomenon.
So far prices for industrial quality vanilla beans are still at record low levels; howeverprices for gourmet or prime vanilla beans have already spiked a little due primarily to an absence of gourmet vanilla from other origins such as Papua New Guineaand India.

The flowering for the 2011 vanilla crop in Madagascar, which is already in the very early stages, will be critical in its importance. If 2011 is also smaller than average this could signal the beginning of a series of smaller vanilla crops in Madagascar. This would not be unexpected given the general malaise that exists in the world wide vanilla trade.Years of neglect in the plantations, very little new vines being planted, and a general disinterest in vanilla, are all contributing factors towards the decline of vanilla production.

Uganda

The trend in Uganda is the same as Madagascar, diminishing production, smaller crops and declining quality. We do not expect the total production for 2010 to exceed 150mt. Despite this, prices in Uganda have firmed in the past few months. There is a major international flavor company who hasrecently taken a large position in the Ugandan vanilla market. As there is limited production, this has actually pushed green bean prices higher than in Madagascar. It is our understanding that a mitigating factor in this strategy stems from a Danish Government Aid.
Program for Uganda effectively subsidizing purchases. We do not expect production in Uganda to increase in the near term as farmers continue to switch to other more lucrative crops.

Papua New Guinea and Indonesia

Production in both of these areas has been devastated and it is unlikely that the 2 origins combined will produce more than 200mt of vanilla in 2010. Carry over stocks may boost these numbers but these inventories diminish in size and quality year over year. Furthermore both of these areas were at one time major producers of black or prime vanilla and today that production is practically non-existent. Hence the spike in interest we have seen for Madagascar prime/black vanilla over the last 6 months.

Given the strength and growth of the Indonesian economy we have to wonder how much longer they will continue to support vanilla production as a viable agricultural option. When the vanilla market recovers we expect to see most production in this region shift to Papua New Guinea or India.

India

Although not an area we specialize in we understand Indian vanilla production has been reduced to a level of between 100 – 150mt. Despite the presence of a local market for industrial vanilla, Indian production has not escaped the effects of continued depressed global demand. Furthermore, India has been severely affected by vine disease which has run rampant.
within plantations that were being intensively farmed. With time we believe Indian production will recover and will eventuallyrank second next to Madagascar.

Summary

In our opinion worldwide production of vanilla will not attain 2000mt in 2010.Using the most conservative of estimates this would represent at least a 500mt shortfall. However,as mentioned, in spite of the continued growth of natural vanilla flavor in the food industry, we are not seeing the corresponding growth in consumption.We believe industrial vanilla bean consumption is being severely crimped by questionable flavoring and labeling practices occurring in the food manufacturing sector, in particular dairy. Typical examples ofwhat we are referring to would be:

• The correct application and interpretation for words suchas “natural vanilla”, “real vanilla” “real vanilla beans “ or “natural flavor” as declared on ingredient listing on labels of naturally flavored vanilla products.
• The improper usage of images of vanilla beans, vanilla flowers or the word “Madagascar” on product labels.
• The usage of exhausted vanilla, vanilla specks or vanilla seeds in products where no actual flavor originating from vanilla beans exists.

These are just a few examples of what we believe is an increasing willingness on the part of manufacturers to stretch the interpretations of existing labeling laws simply to facilitate the procurement process and reduce exposure to the risks associated with vanilla beans.
We are of the opinion that these practices are severely impeding the vanilla market’s ability to recover. The vanilla bean brand is being exploited and abused and the countries that produce vanilla, in particular Madagascar, lack the necessary resources to fight what is essentially an attack on one of their most important exports.In our opinion, in many cases, consumers are being duped into believing the products they are buying contain natural vanilla flavors coming from vanilla beans when in fact they do not.

Several initiatives are currently underway in order to determine how these practices may be affecting the industry. These include:

• Testing naturally flavored vanilla products to determine if in fact the flavor comes from vanilla beans.
• Generating publicity via the print media and internet to sensitize manufacturers and consumers concerning the legal definition of what constitutes a natural flavor and how this should be reflected on the ingredient label of any given natural vanilla product.
• Working with federal authorities to determine if any possible violations of U.S. labeling or standard of identity laws are occurring with regard to natural vanillaproducts.

We are of the firm belief that any vanilla products labeled “natural” must contain flavors derived only and exclusively from vanilla beans.

Although the labeling issue is not the only challenge that the vanilla industry has faced over the past 10 years, we believe it is one of the most serious. It is difficult to estimate how much the labeling issue affects vanilla consumption but one thing is certain, if the practice is not reigned in and properly regulated it will only get worse year after year further crippling the vanilla bean industry and hindering prospects for a long term sustainable recovery.In spite of this we feel declining vanilla bean production will eventually force the market upwards. This is already apparent in the black bean or gourmet market. Previously, we recommended that buyers of industrial grade vanilla beans cover their needs as far out into the future as possible; this recommendation remains intact.

AUST & HACHMANN (CANADA) LTD/LTEE
November 2, 2010

The post November 2010 appeared first on Aust&Hachmann.

One year ago, we projected an imminent end to the ongoing slump in the vanilla market. Six months ago we reiterated our stance and encouraged buyers to consider taking long and aggressive positions with regard to their requirements for vanilla. After all, faced with declining production at all origins, a supposed catastrophic vine disease and political uncertainty in Madagascar, how much longer could prices remain so low? …Obviously longer than originally anticipated. What happened?? Or more specifically what did not happen? If we take into consideration the ever growing popularity of natural vanilla usage and if we analyze the most recent import statistics, in our opinion only one conclusion is possible. First we would like to quickly review our assessments of the major growing areas for vanilla before presenting our hypothesis in greater detail.

Madagascar

As was the case in 2008 the 2009 crop has yielded much more than originally projected. We now believe the 2009 crop could have reached as high as 2400mt well above most initial predictions. Prices in Aug/Sept of 2009 started very low but quickly moved up in Oct/Nov as the early flowering stages in the vanilla plantations produced very low yields. For a few months many predicted a very short 2010 crop and a mild buying rush ensued pushing up prices. By early 2010 it was obvious that an unusually strong late flowering on the ground was going to improve initial projections for the 2010 crop dramatically.

Buyers pulled back and prices have been falling slowly ever since. We now believe the 2010 Madagascar crop will yield at least 1500mt or possibly more. This is already 50% higher than most initial estimates. However, given the very late flowering of the majority of the crop and the likelihood that harvesting will be no later than July, there is a higher risk than usual of more immature vanilla. The political situation in Madagascar is still very tenuous and will probably remain so until elections are held, hopefully before year end. For the most part, the vanilla market has not been adversely affected. The attempt to implement a minimum pricing decree of 27.00 on the 2009 crop failed miserably and only served to aggravate fears of a return to a controlled market.

Our position on vine disease in Madagascar remains unchanged. Vine disease has always been a part of vanilla cultivation. Our partners in Madagascar have always maintained that the disease is present but does not pose a major threat to short term production. This could change, but to date we have yet to see any compelling evidence to suggest otherwise.

Uganda

Over the past two years Uganda has been responsible for over 50% of the imports of vanilla beans from origins other than Madagascar into the U.S. market as larger end users are supporting the use of this excellent alternative to Madagascar vanilla. Unfortunately Ugandan vanilla is sold at a slight discount to Madagascar. This will make it difficult for Uganda to maintain current production levels as farmers become disinterested.

We see 2010 production in Uganda between 150 and 200mt and would be very surprised if last year’s numbers are equaled. Quality issues remain a concern in Uganda as farmers and exporters find it difficult to maintain strict standards throughout the curing process while working with an ever shrinking revenue base.

Indonesia and Papua New Guinea

Production in both regions remains low with new vanilla from Papua New Guinea practically non-existent. Indonesian Grade 3 and Cut qualities continue to enjoy steady support within the industrial market. Given the technical superiority of Madagascar vanilla it does give an idea of how soft the market really is for high grade vanilla beans when low grade Indonesian Vanilla beans are sold at a premium to the former.

We do not see production from both areas combined exceeding 150mt in 2010. In the context of the current market scenario, we feel the short to medium term prospects for PNG vanilla, at least at the industrial level, are very poor. Higher grade vanillas from Indonesia will also face weak demand and Indonesian vanilla farmers will more than likely continue focusing on the lower end of the market where they are not threatened.

India and other origins

Indian vanilla production, like most areas has dropped considerably over the past few seasons. We estimate 2009 crop size to have been no larger than 200mt and this could fall further in 2010.
Despite having made strong inroads in all sectors of the market, the lack of price recovery has put significant pressure on the local vanilla farmers. Fortunately there exists a small local market in India for natural vanilla products, and this should help preserve the industry. Mexico and Tahiti continue to survive under the vanilla radar due mostly to the demand within the local tourism industry and very specific and limited high end formulations in the flavor and fragrance industry. This will increase prospects for survival over the long term however we doubt that either origin will see production exceed 50mt in 2010.

Conclusion

Despite the plethora of new and existing vanilla products in the market that are supposedly derived from natural vanilla bean sources, consumption of vanilla beans by weight in the U.S. is less today than it was in 1998. Import data supports this fact. Yet the flavor and extract industry has indicated steady growth in premium and super premium naturally flavored vanilla products over this same period of time. In addition we have seen a huge increase in demand for exhausted or spent vanilla beans and vanilla seeds. This waste material is re-processed in several ways and in most cases the end results are the vanilla specs and vanilla seeds we see in so many vanilla flavored products. As many in the vanilla industry are already aware these additives do not impart the slightest flavor component to the end product and are designed for visual stimulation only. For the most part the specs and seeds are used in premium and super premium products. Theoretically an increase in the usage of these products should correlate with an increase in the usage of vanilla beans.

The assumption is the vanilla seeds and vanilla specks are being used to highlight the use of a natural flavor or extract derived from vanilla beans. Given the actual decline in the usage of vanilla beans this is obviously not the case.

In our opinion it is highly probable that the issue of labeling and ingredient declarations is one of the biggest contributing factors to the declining consumption of vanilla beans at the industrial level. More specifically, we refer to products labeled “natural vanilla” where flavors are not derived from vanilla beans. Of particular concern are the premium and super premium dairy and beverage products where we often see “natural flavor” on ingredient declarations replacing “natural vanilla extract”! Based on our understanding of U.S. labeling laws and standards of identity, we believe in many instances the term “natural vanilla” is being misrepresented. Before the vanilla crisis of 2000 – 2003 this practice seemed limited, however, extreme pricing brought on by the crisis forced many to reformulate. Some abandoned natural vanilla altogether while others tested the parameters of the labeling laws in order to control costs and supply. When the crisis abated, many of these revised formulations were kept in place. We believe when other manufacturers realized no efforts were being made to enforce existing labeling laws they too chose the same ingredient strategy. We assume the goal is to eliminate the dependency on what is seen as a high risk ingredient given the extremely unpleasant experience during the crisis when the price of vanilla increased by a factor of 25 over a short period to time.

We have no doubts that recent follies such as the attempt to impose a minimum export price on the 2009 crop in Madagascar , or massive positions taken on vanilla purely for speculative purposes has also influenced the decision making process for many manufacturers. Nobody wants to re-live the nightmare scenario of 2000 – 2003.

Nevertheless, we feel the practice of pushing the limits of labeling laws or even the intentional misinterpretation of said laws are having a very negative impact on the consumption of natural vanilla beans. We believe there is potential for the reputation of the industry to be seriously harmed in this regard. Ultimately it is the consumer who is being deceived and certain brands could see their reputations compromised. We can only estimate how many tones of vanilla these actions have taken off the market but it is certainly very significant. Given normal growth trends we would expect to see U.S. consumption for vanilla beans at far higher levels than current import figures are indicating.

For better or worse the plight of the vanilla farmer has become a sensitive subject in this difficult market. Even news articles based on pure fiction, such as was published on the online version of the Sunday Times on March 19th suggesting child exploitation on the vanilla farms of Madagascar, can create serious headaches for the image of the vanilla industry. Some believe more “Fair Trade” vanilla could be an answer. We believe a stricter enforcement and respect of existing labeling laws would be far more beneficial for the vanilla farmers over the long run.

AUST & HACHMANN (CANADA) LTD/LTEE
May 4, 2010

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As the vanilla market works its way to the end of years of over-supply and depressed prices, we see many potentially disruptive trends emerging. Production is plummeting in regions outside Madagascar and there are a variety of factors in Madagascar itself that could have a profound effect on the market going forward. With global financial markets slowly recovering many of the liquidity constraints faced by buyers are slowly easing. It is our opinion that there is still a significant amount of vanilla coverage to be initiated for 2010 and early 2011. The following represents our current opinion on the world’s vanilla producing regions in order of importance.

Madagascar

Just as we issued our last report in October we were made aware of the now famous minimum pricing decree which was implemented in Madagascar and has been effective since August 1st 2009. Briefly, the decree states all vanilla, regardless of quality must be exported at a price no less than USD27.00/kg FOB. The decree also fixed minimum prices (in local currency) to be paid to farmers and collectors for green and semi-cured beans. Despite the opposition by a majority of vanilla exporters it was nevertheless adopted by the Government. The exporters who supported the decree claimed it was for the benefit and protection of vanilla farmers who have suffered enormously . Unfortunately, in our opinion, with the exception of the “vanilla famers suffering” nothing could have been further from the truth. Under the current scenario exporters are buying from vanilla farmers at market prices while importers and end-users are asked to pay a much higher minimum export price.

In our opinion, the parties supporting the decree are engaged in speculation and are simply trying to manipulate the market in their favor as they are unable to compete in a free market. We believe the goal is to block exports as long as possible while inexpensive vanilla is accumulated on the ground. To the best of our knowledge no exporters have respected the decree with regard to local prices. In fact over half the 2009 crop has already changed hands at prices significantly lower than last season (for the farmer). Naturally, it is up to the Malgache to decide (for them) how they want to protect the local vanilla industry. However, the fact the government ignored the wishes of the majority of vanilla exporters suggest a troublesome impartiality on their part.
When asked, our opinion has always been the same. We have never supported this decree or any other market intervention or manipulation. Our company owes its existence to a free and open vanilla market. The fact we share a similar name to the exporter in Madagascar who was the most aggressive in pushing for a fixed minimum. export price is unfortunate and has caused some confusion. We therefore feel compelled to reiterate our position formally.

It is possible that the 2009 vanilla crop in Madagascar will yield as much as 2000 MT. Quality will be as good as or even better than 2008. Pricing on the ground has increased but to date the effect has been negated by the continued weakness in the local currency. This is due to ongoing fragility of the political landscape. We believe this political instability will continue until full and formal elections are completed. In the meantime the exposure to possible civil unrest is very high.

So far the outlook for the 2010 vanilla crop is quite negative. The first of phase of flowering is over and by most accounts produced 50% fewer flowers than last year. The second phase, which is usually weaker, will be completed by the end of the year. The emerging consensus is that the 2010 vanilla crop will be significantly smaller than 2009. To what degree remains to be seen.

Finally, there is the Fusarium or vine disease issue. Always present in the vanilla plantations, the disease seems to have gained traction over the past few years and could be spreading. As farmers cut corners on plantation maintenance to save costs they inadvertently create a healthy environment for the disease to thrive. It is very difficult to try and ascertain exactly how badly production may be affected going forward. Plantations that are affected by this disease rarely recover. Older plantations are especially vulnerable. There are over 60,000 vanilla farmers in Madagascar covering tens of thousands of square kilometers. If the market recovers sooner than later we believe the disease can be contained.

Uganda

Ugandan vanilla production continues to suffer as a result of the depressed market and we doubt very much that the combined crops of 2009 will yield more than 150 mt. However, on a positive note, qualities for the winter and summer crops have been excellent with vanillin contents well above average. A high percentage of split vanilla beans are a key factor. There has been little buying pressure during the green campaigns and as a result beans are left on the vines until maximum maturity. Uganda also experienced an intense period of civil unrest this past summer. Although the government seems to be making sincere efforts to resolve the crisis, Uganda is also exposed to a higher level of political risk than usual.

We believe Uganda could end up being a net beneficiary of the Madagascar vanilla pricing decree as many buyers do not appreciate the interventionist tactics being used in Madagascar. Although this would be welcomed what is actually needed, at the very least, is a moderate recovery in prices. It is unlikely that production will recover until this happens. More farmers will turn away from this crop and 2010 production will decrease again in all likelihood.

Indonesia & Papua New Guinea Vanilla prospects in these regions are very bleak. Indonesian production, at one time well over 500 mt , is now somewhere between 100 – 150 mt. Furthermore, most of what is being produced is grade 3 or EP quality. We believe it will take much more than just a moderate recovery in prices for this market to recover. Market conditions over the past years have been very difficult for Indonesia as they are a slightly higher cost producing origin. Unfortunately there seems to be very little high grade vanilla available. The situation is far worse in Papua New Guinea where this year it is unlikely that production will exceed 50 mt and qualities will be very poor this year. Despite the advantage of being a very low cost producer of vanilla there simply is not enough incentive for farmers to continue planting and pollinating vanilla. The vanilla industry in PNG should survive in the long run and we expect that there will be a consolidation of sorts between Indonesia and PNG over the long run which will help. In our opinion PNG must be consistent in their grading methods for both industrial and food service vanilla if they are to gain significant market share.

India and other Regions

India was well on its way to becoming a major producer of vanilla with production exceeding over 400 mt just a few years ago. Unfortunately, this year we doubt the number will be half that amount. Fusarium or Vine disease has already had a major impact on Indian Vanilla Plantations due mainly to the intensive cultivation techniques. We expect this situation to be remedied as the Indian vanilla farmer becomes more experienced and adapts. It is important to keep in mind that India is a relative new comer to the vanilla world and this period represents the first time they have faced a prolonged depressed market. To their credit India is trying to protect and support their vanilla industry by developing the local market for finished vanilla products. Naturally, this will help to ensure long viability. In fact vanilla prices on the ground have already started to rise in reflecting a bullish sentiment.

Mexico and French Polynesia have both managed to maintain their respective “boutique” vanilla productions through very difficult times. Both areas will produce between 25 – 50 mt of vanilla beans this year. Given the similarity in profile to Madagascar Vanilla, we are still concerned about the long term feasibility of Mexican Vanilla if prices do not recover soon. Prices from both origins have dropped; Mexico somewhat, French Polynesia more significantly.

Summary

It is difficult for us to imagine why any buyer of vanilla would at least try to initiate maximum coverage given current market conditions. Prices are still at historical lows; production is falling in all regions and is more than likely to fall in Madagascar next year. Vine disease and Vine fatigue could cut production number drastically next year and political tensions exist in two major producing areas. As liquidity returns to the market we expect buying to accelerate towards the end of the year and into 2010. The big question everybody in this industry would like to know is how much of the vanilla already exported from origins is unsold? We know of over 700 MT sitting in a warehouse in Northern Europe waiting for higher prices. A pure speculative play unrelated to the flavor and fragrance industry but still about involving almost one third of the world’s annual vanilla consumption! How much more unsold vanilla exists in other parts of the world can only be estimated. Regardless, we feel these inventories may help protect buyers from any sudden violent prices increases as like we experienced from 2000 – 2003. However, we also know that normal less speculative inventories have already been correcting the imbalance that exists today between the supply and demand for industrial vanilla. Surely as the gap between supply and demand widens, regular inventories will be depleted. As a result we firmly believe the days of inexpensive vanilla are numbered.

AUST & HACHMANN (CANADA) LTD/LTEE
October 27, 2009

The post October 2009 appeared first on Aust&Hachmann.

Objectively, when one looks at the current state of the global vanilla market and the producing countries that support it, one would think that in the minds of those who work with vanilla red flags would be popping up in quick succession. Vanilla bean production is falling in all regions. Madagascar, still the world’s dominant supplier with at least 60% market share, is beset with a variety of serious problems, all of which could grievously impact the vanilla trade. In addition the “global financial crisis” started to cast a very dark shadow on the market in the second half of 2008. The manufacturing sector is slowly realizing the vanilla business (with the exception of the food service and retail markets) remains stable and poised for growth not only locally, but even more significantly on a global level. The following is our outlook for the major producing origins:

Madagascar

A severe political crisis continues to plague the country resulting in untold economic and personal hardships. There have been security issues at the various ports resulting in widespread looting and pilferage. Many vanilla shipments have been adversely affected. The local currency has weakened considerably putting further downward pressure on vanilla prices. This is really an unfortunate tragedy for Madagascar as the already fragile economy (having made significant progress over the last 5 years) has virtually collapsed. Of particular concern is the prospect of a major famine in the southern part of the country.

Officially, the harvest in Madagascar begins in early June in the North of the Sava region but this year it has already unofficially started. This is due to the very early and profuse flowering for this crop which took place from July through November of 2008. We feel this rare premature occurrence could be a tell tale sign that the vanilla vines are stressed. It is believed that the vines, as a means of survival, flower abundantly in anticipation of weaker blossoming ahead. Usually when vanilla vines flower copiously not all are pollinated intentionally to ensure the vines are not stressed by having to support so many maturing green vanilla beans. Unfortunately, during the flowering period in 2008, the local market in Madagascar was in a very “bullish” state of mind and farmers were encouraged to over pollinate. As we all know, higher prices did not come to pass. We are quite convinced the vines were further stressed by this unwarranted pollination.
Finally, there is the ongoing story of vine disease or Fusarium posing an imminent threat to vanilla plantations in Madagascar. Vine disease is a common problem in the vanilla regions of the world and Madagascar is no different. To date we have not been able to gather any hard evidence to support the many stories we see and hear about the imminent destruction of the Madagascar vanilla crop due to vine disease. However, we do believe that the right conditions exist to see an accelerated spread of the disease. These factors include stressed and overcrowded plantations, lack of proper maintenance of vanilla vines, and shortage of the materials required for the processing of vanilla to name but a few.

There is still abundant vanilla from the 2008 crop in Madagascar; probably well over 600 mt. This was the same scenario we saw at the end of the 1990’s when the vanilla market was depressed and large carryover stocks were quite common. We are estimating this year’s crop at 1500 mt in Madagascar.

Uganda

If things are bad for the vanilla market in Madagascar they are most certainly worse in Uganda where the vanilla industry struggles to survive. With inexpensive vanilla available from Madagascar, the Ugandan vendors are in a very difficult position; they have no choice but to discount their offerings.

In 2008 Ugandan production fell to about 150 mt from over 200 mt in 2007. This tonnage was derived from two harvests, one approximately mid-year and one at the end of the year. We believe that production will fall further in 2009 to about 120 mt and may not recover before 2011. Some action has been taken to try and preserve Uganda’s share of the world vanilla market including extensive organic certification of vanilla plantations and a push to offer more fair trade vanilla.

Indonesia & Papua New Guinea

These two vanilla producing regions have in many ways melded together over the past five years so in this report we will view them as one. Indonesian vanilla dealers are heavily implicated in Papua New Guinea given the common border and considering how difficult it can be to export vanilla directly from Papua New Guinea.

Since the last vanilla crisis Indonesia has reverted to producing mostly lower grade qualities including the classic EP or early pick quality. The Indonesian vanilla farmers have deduced, quite correctly, that theirs is a unique product not available anywhere else so there is no need to discount so heavily. Black and extraction grade PNG Tahitensis type vanilla have rapidly gained acceptance in North American and European markets. Since these qualities are unique to PNG, we believe they both have long term viability in the vanilla trade. Production for both countries has fallen for the past few years and we are very doubtful that combined they will produce more than 300 mt in 2009.
Dealers in this part of the world tend to speculate heavily with vanilla and since the political crisis has evolved in Madagascar we have seen prices on the ground rise quite significantly over the past months.

India & other origins

Indian vanilla production is declining primarily due to weak demand, low prices and vine disease. Nevertheless we are confident that India will play an increasingly significant role in the world vanilla trade going forward. Although production this year will probably not exceed 200 mt, we expect this number to increase as the market recovers. India is supporting their vanilla trade with various initiatives including the possibility of changing local ingredient laws in order to encourage end users to use natural vanilla extracts as opposed to synthetic alternatives.
Boutique vanilla production from Mexico and French Polynesia has been hurt by the current market; Mexico in particular where production costs are high and vanilla plantations have been sorely damaged due to meteorological conditions. Mexican vanilla, although quite different than vanilla from Madagascar, Uganda or India, still falls into the category of Bourbon type vanilla. World prices for vanilla are depressed and production costs in Mexico can be prohibitive when compared to other origins. We estimate current production in Mexico to be no greater than 50 mt.

On the other hand, vanilla from French Polynesia – although almost ten times the current price of vanilla from Madagascar – still has a loyal following of clients mostly in the food service and fragrance industries. This can be attributed entirely to the fact that vanilla from this origin is unique both in terms of flavor and fragrance when compared to vanilla of other origins. Our estimate for production in French Polynesia is 25 – 35 mt.

Summary

We estimate that in 2009 global vanilla bean production will be 2000 mt on the low side and 2500 mt on the high side. We believe worldwide demand to be in the area of 2200 – 2500 mt, and growing steadily. It is very possible that we are already in a shortfall position as far as supply and demand are concerned. Existing inventories are acting as a buffer between market complacency and market reality. This quantity is probably significant but also very difficult to estimate; it sits in warehouses throughout North America, Europe and Asia. Some say inventories could exceed 2000 mt. – less than one year’s global usage, however, insignificant industrial buying over the past nine months leads us to believe that these inventories are already diminishing.
Production has already fallen in other vanilla producing areas and is poised to fall in Madagascar as well. The flowering of the vanilla vines in the second half of this year for the 2010 crop in Madagascar will be one of the most monitored flowerings ever and, if there should be any signs of weakness, which is highly possible, this could be the catalyst. Even if the 2010 crop is plentiful in Madagascar, we believe it will be offset by the recovering and growing demand.

Emerging markets like China and India are potentially massive for the vanilla trade. Prices for vanilla today are at levels that haven’t been seen for over forty years – production is falling and consumption is recovering or intensifying in all markets. The liquidity crisis may be easing and new markets are continually being established for vanilla. Given all of the previously mentioned factors that could negatively affect the vanilla market going forward, it would seem there is only one course of action end users of vanilla should be considering.
That would be to buy and cover as much inventory as possible as far out into the future as possible. With practically no downside risk, and everything to lose on the up side, we cannot imagine any other strategy. We are confident this period in time will one day be viewed as one of the greatest buying opportunities in the history of the vanilla trade.

ADDENDUM TO VANILLA REPORT #34 – MAY 6, 2009

It has just come to our attention that a delegation of major vanilla exporters from Madagascar is requesting an audience with the Prime Minister of the country; it appears this has been granted and will be taking place this Friday, May 8, 2009. From our understanding, the objective of the meeting is to try to convince the government to intervene in the vanilla market in order to try to control and increase pricing. The methods being proposed are as follows:
1. Fixing prices of the green beans at 25,000 FMG/kilo (approx. USD 2.50 kilo)
2. Fixing prices of bulk beans (Vrac) at 200,000 FMG/kilo (approx. USD 20.00 kilo)
3. Not permitting the exportation of vanilla below US$30.00 kilo
4. Not permitting the export of cuts or low grade beans early in the campaign.
Aust & Hachmann is against any such market manipulation or intervention. These initiatives have been tried in the past and have never been successful; however, there is a new government in Madagascar and we cannot be sure that this government will not be influenced by the vanilla exporters who are requesting this intervention.

AUST & HACHMANN (CANADA) LTD/LTEE
May 6, 2009

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As the 2008 Madagascar crop slowly starts being exported, once again worldwide vanilla markets are in a state of flux as prices fall and inventories bulge. Despite a slight up turn in prices over the past 12 months, the next 12 hold little promise for vendors at origin. This, in spite of robust consumption that seems to have recovered from the pricing crisis early in the decade. However, looking beyond the next 12 months we believe a very good argument can be made for tightening supplies and higher prices. Nothing to be overly concerned about at this stage, but many indicators are pointing towards the potential for some significant changes that could adversely affect market sentiments by the end of 2009 or early into 2010. Such a scenario of course depends on the outcome of the vanilla crops in Madagascar where we begin our analysis.

Having just returned last week from a field trip to Madagascar and Uganda we are able to make the following observations. In our opinion the 2008 Madagascar vanilla crop will yield between 1100 – 1300 mt of cured vanilla beans as exports begin in earnest. This is well below the 2007 crop which more than likely yielded well over 2200 mt.

The 2008 crop will show a significant increase in quality over 2007 as the majority of vanilla was left to full maturity before harvest and for the most part growing and curing conditions were good. In fact, we are expecting over 60% of the crop to consist of split extraction grade beans commonly known as Red Foxies.

As recently as a few months ago the market seemed more bullish on prices and pessimistic about the 2009 crop yields. Today that sentiment seems to have changed. Worries about the possibilities of wide spread vine disease (Fusarium) have abated, but not disappeared from the market. We do not dismiss the Fusarium issue but up until now the impact on the over all market has been marginal.

As for a potentially short crop in 2009, these fears have been erased by unusually early and prolific flowering. Exporters in Madagascar with over 30 years experience told us they had never seen such a thing. Furthermore, a much higher amount of flowers per vanilla vine appeared. Since the market was quite bullish at this time farmers pollinated heavily. Ideally, some flowers are not pollinated as to not stress the vines to much. The fact that so many flowers appeared so early is clear indication that the vines, for reasons we are still trying to comprehend are already under a significant amount of duress.

It is still very early to pronounce on the 2009 crop in Madagascar as flowering is still underway.
Furthermore, recent weather conditions have not been ideal in the Sava region of Madagascar. Lack of rain and excessive heat are already having a negative affect and may contribute to some losses in production. There is also a general consensus developing that due to the higher than normal amount of flowers per vine having been pollinated, the crop will be inferior in quality when compared to 2008. It is almost certain that there will be a larger than normal percentage of short beans as the vines react to the burden of carrying too many green beans to maturity.

In Uganda we also observed a trend of diminishing crop yields. In the case of the 2nd harvest of 2008, it will probably yield no more than 80 mt of cured beans, meaning a total for both crops in Uganda for 2008 around 150 mt, well below 2007 totals of over 225 mt. Rumor mongering in Uganda resulted in some early harvesting in April and May and as a result, contrary to Madagascar, the quality in Uganda will not be as high as the previous harvest. Heavy rains during curing did not help. As a result we will see shorter and drier beans, phenol notes, and generally lower vanillin yields from the 2nd Ugandan crop. We are expecting quality to rebound in the December/January harvest as current market conditions discourage any early picking. Crop sizes should be about average for 2009.

Production in Papua New Guinea has fallen dramatically in 2008, probably below 150 mt, as farmers have little incentives with world prices for extraction grade beans still mired well below 20.00/kg. If not for the strong and growing demand for gourmet grade PNG vanilla, which commands more than double the extraction grade price, we doubt PNG could have survived thus far. Having said that we do believe that extraction grade PNG vanilla will continue to establish itself within the flavor and fragrance industry and expect 2009 production in PNG to creep back up slightly.

With most PNG vanilla being exported through Indonesia it is very difficult to say how much real Indonesian vanilla production still exists. It seems that the industrial demand for the traditional smoky Java beans and EP cuts has diminished and without this “niche” quality Indonesia may find the future difficult. There is heavy speculation within this market and we believe this has seriously undermined recovery possibilities. We doubt actual production is over 200 mt for real Indonesian for 2008.

We are not active within the Indian market but our contacts within the industry tell us that production has fallen there as well further supporting the overall trend. Production for 2009 should not exceed 250 mt.

It would be foolish in our opinion, not to acknowledge the impact the recent run the U.S. dollar has had on vanilla prices. In the case of exporters who are stockpiling vanilla the effect is less pronounced as the carrying costs negates their ability to compete with exporter who simply work the market on a spot basis carrying little or no inventory. Just a month ago the local exchange rate on the ground versus the dollar in Madagascar was about 15% lower than it is today. That gives a very big advantage to vendors who are not encumbered with older more expensive inventory as long as currency rates remain favorable. We believe that foreign exchange rates, given the extreme volatility of recent weeks, are the single most influential factor on vanilla prices in the short term.

In summary, it is easy to see why even just a few months ago, there were many who believed a firming of the vanilla market was imminent. After all crop sizes are down in all regions by significant margins and demand is strong and continues to grow. However , we believe there is very large carryover inventory which continues to support the market.

We guesstimate the carryover from 2007 vanilla crops, to be at least 1200 mt. This will plug any holes in the market over the short term. However, with diminishing crop sizes on the horizon it is difficult to see how these carry over inventories will be sustained. We are also somewhat concerned with the health of the vanilla vines in Madagascar. Although most are quite young in age, they do seem to be many sure signs of stress. There is no other explanation for exceptionally early and profuse flowering. The vines may be giving one last push before a phase of fatigue sets in.

AUST & HACHMANN (CANADA) LTD/LTEE
October 30, 2008

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This report is the result of a recently completed on-site survey of the Madagascar vanilla market during the last week of January 2008.

It is now clear that the 2007-2008 vanilla crops in Madagascar yielded a very significant quantity of vanilla. Our very best estimate confirms a crop size of at least 1600 – 1800 M.T. As expected, qualities are superior to 2006-2007 with fewer short beans and higher average vanillin contents. However, for those who purchased early in the campaign (and there were many!) higher than normal levels of degradation occurred skewering ratios for low grade beans. This resulted in higher processing costs. Preparers/Exporters that entered the market later in the campaign enjoyed lower costs and less degradation as the vanilla stabilized and curing conditions improved. In our opinion, this aggressive early purchasing was a calculated risk taken by many preparers/exporters who felt that the latter part of 2007 would bring higher prices and a general upturn in the market. To date, this scenario has only partially come to pass.

Pricing has definitely increased over last year due mostly to the weakness of the dollar and the very poor returns yielded from the 2006 crop. However, the level of the increase is not sufficient to cover the costs incurred by preparers/exporters and there is, at least for now, disparity in pricing which is more significant than usual. This has caused a rift amongst preparers/exporters with some (who purchased early) pressuring those (who bought much later) not to sell their beans below a fixed price level. The market is vulnerable to this type of collusive behavior.

It is clear that exporters and importers are currently holding about 2000 M.T. of vanilla, a combination of carry-over stock from the 2006 and the 2007 crops. Plus we believe there are still several hundred tons still being held by farmers. The early guesstimates for the 2008 crop are between 800 – 1000 T.M. The drop in production can be attributed to a number of factors including vine fatigue and some vine disease in certain areas. That being said, barring a major unforeseen event (we are in the middle of cyclone season) we feel there is a sufficient supply of Madagascar vanilla with little risk of short falls.

Prices are evolving to the upside and we feel this is totally justifiable, even desirable, given the meager returns in the vanilla market over the last three campaigns. Growers must be motivated to produce and already we are seeing falling production in Uganda, India, and PNG. In our opinion, a collapse in production would have a very negative long term impact on the industry coming so soon after the pricing crisis of 2000 – 2004.

We feel it is in the market’s interest that prices are allowed to return to more profitable levels for all parties in the vanilla trade, from the farmer to the end user. However any attempts to artificially influence the market by hoarding stocks, intimidating smaller more aggressive preparers /exporters or simply by misstating facts will only serve to eliminate consumption gains made since the pricing crisis ended.

In our opinion buyers should continue to take advantage of what are still very favorable conditions for them. Sellers have still not found their footing for 2008 and pricing variants remain in the market. We would expect prices to streamline more as the season progresses. Prices today are about 15 – 20% higher than last season and the market should easily be able to absorb this. Unfortunately given the limited size and scope of the vanilla trade the market is still vulnerable to undue influence. We feel it is critical that pricing stability is maintained especially as prices trend upwards. International buyers can ensure this by maintaining a measured stance with regard to their own requirements for Madagascar vanilla.

AUST & HACHMANN (CANADA) LTD/LTEE
February 27, 2008

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