Vanilla Global Price Outlook Analysis June 2016

It is felt that the ideal scenario would be for prices to decline to a level which remains high enough to maintain farmers’ interest in cultivating the spice but is low enough to stimulate demand and discourage end users from reducing the percentage of vanilla in formulations or, where feasible, seeking a full replacement for vanilla in their applications.

In recent months there have various newspaper reports that end users have been switching from natural vanilla to lower cost synthetic substitutes, such as vanillin.

Industry sources acknowledge that while such instances have occurred – which is normal – there remains a good underlying demand for genuine, natural vanilla.

Emmanuel Nee of French trader Touton told The Public Ledger: “The market is much too high. Quite a few buyers now are trying to withdraw from the vanilla business and to not light the fire any more than it should be lit. In the meantime, there are quite some needs to be covered, because some buyers were expecting the market to decrease more quickly than it has been. Therefore, these people are still on the market trying to buy.”

This demand is not particularly strong but seems to be enough to maintain pressure on a market which needs quietness to cool down, he noted.

Francois Bernard of the Canadian office of Indonesian producer Tripper remarked: “Buyers have been placing orders only to cover immediate usage. Dealers have empty warehouses and are not expecting anything before late August.”

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Hopes could be thwarted

Nee felt that the recent spell of purchasing had raised hopes among exporters in Madagascar that demand will be strong, meaning that prices will not decrease. However, he believes they are wrong in this hope as the forthcoming crop will be massive. “The weather conditions are good and the blooming was good, and the production of beans is OK and therefore I really think production this year will be more than 2,000 tonnes,” Nee explained.

Touton estimates that total availability from Madagascar, including carry-over, will amount to around 2,400 tonnes. This will compare with a consuming market of about 2,200 tonnes.

“In such conditions there is no reason for the market to touch sky levels again,” Nee claimed.

David Van der Walde, director of Aust & Hachmann (Canada), agreed that a decline in prices looks possible for this season, based on expectations for a crop of at least 1,800 tonnes from Madagascar. “But the other question is what is the pent up demand, because there is definitely pent up demand that has to be relieved. There is no surplus or speculative inventories around the world, so we haven’t got those to fall back on,” he remarked.

On the other hand, there is a lot of stock coming out of Indonesia, which is helping to top up availability. “A lot of vanilla has been held there for years and now they are releasing it, because they like the pricing,” Van der Walde explained.

Bernard observed that Indonesia had exported a “huge amount of beans” in the last 12 months, all of which were old stocks from previous years, and now the country’s stocks are very low.

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Time to diversify

Bernard feels that most formulas – ice cream, beverage, desserts, bakery etc. – developed over the years are using exclusively Madagascar bourbon vanilla and rejecting other origins. “This would be fine in a perfect world if Madagascar always offered stable quality at stable prices but history has proved just the opposite. So why keep sticking to one origin? It’s time to diversify and use different origins,” he said.

Nee finds that most buyers are purchasing from traders rather than going direct to origin. The main reason for this is most of the exporters in Madagascar are already closing down for the summer holidays and not planning to return until the end of June or July, when the new season should be under way.

“All the parameters for a price decrease are there but we still have this kind of demand, which is bringing a little bit of risk on the price. The price could decrease less than we expect because quite a few big industries will have to cover some of their needs, once the campaign starts,” Nee said.

Recent price indications on good extraction quality vanilla were at USD200-220 per kilo fob and decent extraction quality organic vanilla was approaching USD300/kg fob.

Bernard of Tripper confirmed that he had already seen cured vanilla prices of more than USD200/kg from shippers in Madagascar. It was possible that cheaper offers would emerge later this summer, but the quality tends to be very bad when this happens, he warned.

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Risky scenario

Nee claimed: “Nobody is a buyer at this level. It is much too high. The offer is strong and the international buyers are tired of paying such high prices. The domestic supply chain in Madagascar is also tired with this kind of market, which is very risky with a lot of speculation and qualities that are not good.”

Nee suggested that everything is in place for the vanilla market to improve its standards of curing, deliveries, payments, etc this season. The only factor currently acting against this is the immediate demand, which some buyers might be compelled to fulfil just to keep the factories working.

Another factor to consider is that the exporters at the end of the supply chain in Madagascar are unwilling to buy what material is available in the bush. “They are also thinking that the market is going to decline and it’s too much of a risk to buy a product right now when the market is supposed to be much lower later this year,” Nee observed.

He believes prices could slide down to around USD70/kg by the final quarter of 2016.

However, Van der Walde viewed such a low end projection for late 2016 as totally unrealistic on the basis that demand remains solid. “It’s just not possible. I agree that the price of vanilla could eventually crash because it does tend to fall hard – like it did in 2004 when it went from USD500 to USD50 in a year – but this is not the same market at all, and there is a strong underlying demand. At USD200 per kilo (for cured beans) vanilla is expensive, but it is not stratospherically expensive like it was in 2004 and already there is a lot resistance. I am hoping to see an orderly decline of maybe 10-15% (this year) and then further declining into 2017 so everyone can manage the fall as opposed to a complete crash, which is a disaster for everybody – including the farmers,” he said.

Bernard revealed that he believes Madagascar vanilla exporters will try to push prices up to USD300/kg initially this season. “I’m not confident it will reach that level. Once buyers have covered and feel a little more confident we should go back under USD200/kg,” he added.

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