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May 2020

05 June

VANILLA MARKET UPDATE – MAY 2020

bet356游戏As COVID-19 wreaks havoc across the world, we will attempt to assess the current vanilla market in the most objective way possible under the circumstances. It is important to point out from the outset that unlike other aspects of the economy which have been devastated by the virus, the industrial vanilla market, which makes up about 80% of the worldwide vanilla trade has actually benefitted. This is due to the surge in grocery shopping and home meal preparation brought on by the various lockdown measures and closures implemented around the world.  On the other hand, the food service and institutional sectors, where much of the black/gourmet quality vanilla is sold and represents about 20% of the worldwide trade, have been decimated. The onset of the virus in tandem with certain trade measures imposed by the government of Madagascar have thus far prevented an outright crash in prices like we saw in 2004. Nevertheless, the downward trend continues for vanilla prices and we are now more than 50% below the highs set in 2018. In spite of the unexpected increase in industrial vanilla demand we are still very bearish on vanilla prices and expect significant price erosion in the near term and the possibility of a collapse over the medium term.

bet356游戏Although demand has spiked as a result of the virus, globally we are still far behind what would be considered normal consumption levels for natural vanilla. Generally speaking, qualities are improving but this varies from one origin to the other and we are still not at optimum levels of quality for vanilla beans. In 2020 most origins will produce mature vanilla harvests so the trend of higher quality should continue. As always there are many variables to consider when assessing vanilla markets. One such variable is the increased involvement of the Madagascar government in the managing and policing of the local vanilla trade whether it be by setting a minimum export price, banning vanilla exports outright or limiting the amount of licensed vanilla exporters. Some of these measures have already impacted the evolution of the market quite significantly.

bet356游戏Herewith are our most up to date expectations for the major vanilla producing regions:

Papua New Guinea staying relevant

Although PNG is heavily dependent on the foodservice sector (gourmet vanilla), there have been signs that extraction grade PNG vanilla is becoming more viable on an industrial scale, especially when blended with vanilla of Indonesian origin just across the border.  More and more coverage is being initiated by several major global flavor companies, undoubtedly attracted by the competitive nature of both origins. Lessening dependency on one origin for vanilla makes good sense. It remains to be seen if others will follow and if the trend continues when Madagascar prices fall even lower.  The PNG market is still hampered by many weaknesses included lack of logistical options for shipping (especially highlighted during the current crisis), the complete market dominance of one exporting company and the continued smuggling of PNG vanilla across the border to Indonesia. Nevertheless, we still expect this region to produce around 200mt of vanilla in 2020.

Indonesia – growing

We are expecting a larger crop from Indonesia in 2020, probably also in the area of 200mt, perhaps more. As the green bean campaign gets underway, we are seeing less demand for EP (early picked) vanilla. Logically this would mean a more mature crop and better curing ratios leading to higher yields. Indonesia fills an important void at the lower end of the market where price trumps vanillin content. Traditional Madagascar cuts have diminished in availability in favor of grade 2 quality and this has increased demand for similar qualities from Indonesia. Blending with PNG vanilla for the extraction market is also increasing. We believe that with the continued fall in prices, smuggling PNG vanilla for further processing in Indonesia will become less economically attractive. COVID-19 has hampered logistics considerably in Indonesia causing lengthy delays in the execution of export shipments due to limited air cargo space availability as all outbound international air cargo shipments are diverted exclusively through Jakarta.

Uganda – slow to react

bet356游戏Although there have been pockets of improved quality originating in Uganda, there is still far too much immature vanilla circulating in our opinion. There is also a disconnect between Ugandan vanilla prices and other origins as farmers refuse to accept the reality of a falling vanilla market. The current price for green vanilla, approx. USD 30.00/kg, is not realistic in our opinion.

bet356游戏Until quality and production issues are resolved (and that may still take several harvests) we feel Ugandan vanilla prices should be discounted against Madagascar if their global market share is to be expanded. Local efforts to educate farmers and respect harvest dates have produced limited results.  We still maintain that Ugandan vanilla production will not increase significantly in 2020. Had Madagascar curtailed exports this may have provided an opportunity for Uganda. However, that no longer seems likely. If the Ugandan vanilla trade does not adapt quickly to market forces, they risk losing their share of what is becoming a highly competitive vanilla market. This would be a shame given the region’s proven ability of producing very high-quality bourbon type vanilla beans

Comoros – isolated

A country that produces some of the finest bourbon quality vanilla has been unable to capitalize on the higher prices of recent years.  Like Uganda, farmers and preparers stubbornly believe patience will be rewarded with higher prices, however this logic does not apply in the context of the current market. Production has been stagnant at around 50mt and we only expect that to increase marginally in 2020. New exporters have emerged in recent years breaking the multi-decade stranglehold maintained by 2 dominant vanilla companies. Even before the COVID-19 crisis, logistics were a challenge from the Comoros. Today it is even more difficult, in particular shipping to North America. Very shortly the green vanilla harvest will begin and it remains to be seen how the government will set the price. We are hopeful Comorian Bourbon Vanilla remains competitive with Madagascar as annual production could easily double within a few years with just a little more initiative on the ground.

Madagascar – a perfect storm of vanilla

Although the initial projections for the 2019 Madagascar crop were in the 1100 – 1200mt range we believe the actual number is higher, probably closer to 1500mt. Quality and vanilla maturity were much better than expected. Early picking and theft were kept to a minimum and the demand for quick curing was soft. As a result, curing ratios were better than expected and thus produced a better overall yield. The green campaign has already started in the north and will continue across all regions in the months ahead. It is far too early to try and estimate an export price in the 4thbet356游戏 quarter based on available information. Suffice it to say prices will be significantly lower than the fall of 2019. The 2020 crop will be large, perhaps eclipsing 2000mt. The crop will be mature and in theory this should mean a large percentage of split vanilla beans. Quality and vanillin contents should surpass 2019. Vanilla theft and early picking have been negligible thus far.

The Madagascar government has taken a renewed interest in the vanilla sector. Opening and closing dates for harvesting and exporting are more strictly enforced.  Initially, a May 31st export ban on vanilla had been decreed. Then the government asked that exporters declare their unsold inventories and on June 3rd, they announced an extension on the last export date for Vanilla from May 31st to June 30th .  Allowing exporters to declare stocks without proper verification and control could open the door for early exports of the 2020 crop. It is feasible that 2020 grade 3 vanilla, or cuts, will be shipped from Madagascar as early as the end of June and be declared as 2019 crop at a heavily discounted price. Cuts can be prepared very quickly, albeit sometimes at a great detriment to quality. If such offerings materialize, we believe flavor houses who cater to the price driven retail markets will be targeted.

Thankfully it looks like harvest dates will be respected. Vanilla maturity is the single most important determining factor for the quality of finished vanilla beans.  An opening export date for the 2020 crop (which has yet to be confirmed) of October 15th will discourage the quick curing of vanilla but not eliminate it, unfortunately.

bet356游戏Hopefully the government will see the practice of quick cured vanilla for what it really is. Namely, in our opinion, a severe detriment to the vanilla communities of Madagascar as well as the Madagascar “brand” as the best and most varied vanilla quality in the world. Our understanding is that the government is looking closely at this practice. We feel that the practice of quick cured vanilla runs counter to the goal of sustainability within the vanilla trade.

bet356游戏Earlier this year, and for the first time in decades, a minimum export price was set in an attempt to stave off a market crash which seemed imminent at the time. COVID-19 appeared shortly thereafter and suddenly there was a significant uptick in global demand for industrial vanilla as a direct result of confinement and an explosion in supermarket food sales. That trend continues. The minimum price, set at USD 350.00/kg, was arbitrary with no specification for quality, type etc.  Since exporters are obliged to repatriate the equivalent amount per shipped kilogram of vanilla into local currency, those with foreign currency reserves were easily able to legally respect the minimum export price and still discount their offerings to buyers. If, for example a vanilla exporter sold below the official price of USD 350.00/kg, the difference in price converted to Ariary was simply used for local operating expenses, such as buying green vanilla.  

bet356游戏Exporters normally do not like to keep cash reserves in local currency due to the historic volatility of the Ariary. However, lately exchange rates have been very favorable and the currency has been stable. 

Furthermore, with the onset of COVID-19, the government has relaxed some of the stricter regulations for the repatriation of foreign currencies helping to mitigate the constraints of an official minimum export price. We are not big fans of price fixing for vanilla but under the circumstances this may turn out to have been a very shrewd move by the government. They see the minimum price as a great success given the surge in exports brought on by COVID-19. Although we have no evidence to date, we would not be surprised to see another minimum export price set for the 2020 vanilla crop.

With the extreme prices of the previous seasons, buyers looked for lower grades in order to cut costs. As a result, demand for traditional grade 1 long split or whole beans diminished. In order to mitigate this grade 2 vanilla offerings were increased dramatically by exporters. Whereas in the past grade 2 vanilla was usually available in limited quantities, often comprised of short vanilla below 12cm or broken, frayed or slightly sickly vanilla beans,  the new grade 2 was a combination of grade 3 and grade 1 vanilla blended in bulk, split and whole vanilla combined and often referred to as “loose beans”. This quality enabled collectors to move all grades simultaneously, thus reducing exposure to an overstock position of grade 1 vanilla beans. The grade 2 quality proved very popular with most buyers but it did reduce the availability of grade 3 vanilla or traditional “cuts quality”. With a large and less expensive crop in the pipeline, ideally we would like to see Madagascar maintain all three grades for extraction quality giving industrial clients more choice and flexibility when considering their costs and formulation options.

Conclusion

bet356游戏Thus far COVID-19 has not impacted Madagascar nor most of the African continent as feared initially. However, recently there has been a major spike in infections in the Tamatave region, which is extremely worrisome considering the amount of traffic that goes back and forth from the country’s main port.  It is not hard to envision a nightmare scenario given the regions very fragile health care systems and lack of resources. A younger and less mobile population in Madagascar may have contributed to containing the disease thus far. There is no reliable information regarding the virus and we are not confident that the situation is by any measure under control.  Indonesia also faces challenges in containing the virus through a territory containing thousands of islands.  

We try to remain cautiously optimistic that the greater populations of these countries will be spared, but COVID-19 has still wreaked economic hardships. Tourism, a vital industry, has collapsed. Imports and exports are fraught with logistical challenges given the scarcity of air and sea freight options. Similar challenges exist in other vanilla growing origins as well. These are difficult market conditions for vanilla that have little to do with availability or price.

The onset of COVID-19 and the resulting explosion in the supermarket trade has helped stave off a collapse in vanilla prices, however we do not feel this renewed demand will be sufficient to deal with the potential flood of vanilla that will hit the global market by the 4thbet356游戏 quarter of 2020.

Furthermore, we do not expect vanilla demand from the food service or hospitality sector to recover in the near term. It is important to keep in mind that although vanilla prices have fallen 50% off their highs, even if another 50% drop occurred, prices would still be on the “historical” high side. Those who have not experienced the collapse of the vanilla bean market in 2004 may find it difficult to grasp how far down the vanilla market could potentially fall over a relatively short period of time.

Many manufacturers continue to bend the rules in their ingredient declarations and many more class action lawsuits in the U.S. have been filed in this regard. A highly publicized lawsuit could boost demand for industrial vanilla considerably but we expect it will ultimately be prices that are impossible to ignore that will bring most manufacturers back in the fold as they did in the years that followed after the last vanilla crisis ended.

bet356游戏We would suggest that vanilla buyers cover only immediate short term needs in order to take full advantage of falling vanilla prices. We believe that we are still a long way from the bottom unless the Madagascar government intervenes drastically. Government policies can delay the inevitable but they cannot prevent it. Eventually, we believe the law of supply and demand will prevail. We remember clearly being told by an experienced multi-generational vanilla exporter some years back as vanilla prices ticked upwards that it would be impossible to return to the USD+500.00/kg level reached in 2003. Not only did the market reach USD 500.00/kg, it surpassed it significantly. Now, as the pricing pendulum swings the other way, we cannot discount the possibility of vanilla reaching new lows in the years ahead.

Aust & Hachmann (Canada) Ltd

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