Unique Aspects of the Vanilla Market MARKET + OUTLOOK MARKET + OUTLOOK
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MARKET MARKET OUTLOOK OUTLOOK Unique Aspects of the Vanilla Market MARKET + OUTLOOK MARKET + OUTLOOK + Daniel Aviles Commodity Information Analyst McKeany-Flavell Commodities. Ingredients. Intelligence. McKeany-Flavell © 2018 McKeany-Flavell Company, Inc. All rights reserved. Commodities. Ingredients. Intelligence. Distribution is prohibited without written permission from McKeany-Flavell. McKeany-Flavell Unique Aspects of the Vanilla Market Commodities. Ingredients. Intelligence. Unique Aspects of the Vanilla Market “Money is the best fertilizer” and “the cure for high prices is high prices” may sound like commodity clichés, but they are not mere truisms. Every market will eventually return to these rules, a lesson we advise our clients to remember. Yet there is always an exception: For vanilla, it often seems that the rules are reversed, and price shifts have counterintuitive effects. This ingredient is a challenge for all players, from growers through processors to end users, but understanding vanilla’s supply cycle and pricing dynamics may at least partially demystify this market. What sets the vanilla market apart: + Difficulty: Cultivation is extremely labor Vanilla fruit, pod, or bean with closeup of seeds intensive, and a high degree of expertise is needed to grow the plants and process the pods (beans). + Vulnerability: Production is significantly What Is Vanilla? concentrated in one origin, Madagascar, which has in the past crowded out A quick introduction: Vanilla is a flavor made from the pod-like competing origins. The natural food trend fruit of some members of the vanilla genus of the orchid family, has now made demand less elastic, and pricing may follow suit. the only orchid that yields an edible fruit commercially cultivated for food use; vanilla fruit is widely referred to as a “bean,” a + Price pressures: Early harvest is commercially viable and is encouraged convention that we follow here. Like chocolate, vanilla was first by various factors but reduces eventual used by pre-Columbian Mesoamerican peoples. In the food and production. beverage industry, vanilla extract can be used to increase a food’s + Technological “advances”: Innovations may perceived sweetness and to round out certain flavors, such as not be helping quality or sustainability. chocolate, nuts, and certain fruits. 2 McKeany-Flavell Unique Aspects of the Vanilla Market Commodities. Ingredients. Intelligence. Growing Vanilla The vanilla plant may take 30 to 36 months to begin yielding fruit. Commercially significant yields may be seen at the four-year mark; output peaks around year seven. By its tenth year, yields will be down about a third from that peak. By comparison, cocoa trees take between three and five years to mature enough for commercial production; depending on the variety, their output peaks at about year ten, and viable commercial production can continue for another 15 years after that. + Some of the details discussed may vary by vanilla variety or by country of cultivation. The Art of Growing Green vanilla bean Those familiar with gardening would not be surprised that vanilla plants require careful husbandry. Manuals for vanilla growers extensively discuss managing shade at different periods of the year: Too much exposure to sunlight, and vanilla plants will literally sunburn. Too much shade will cause the vine to weaken. In addition to vanilla orchids, growers must plant the shade and tutor trees that protect and hold up the vanilla vines, respectively, and prepare the soil carefully. Roots can be damaged by a careless footfall, and damage to the stems must also be avoided. Mulching is a complex subject all its own. Pest management is a must, naturally. Famously, each vanilla orchid flower must be pollinated by hand within a day (36 hours) of opening. Blooming can occur in two or even three stages or phases. And each separate hand-pollination yields a single bean that matures six to nine months later and must be carefully picked by hand, as well. (While cocoa can be hand-pollinated, boosting yields, the mechanism known as cherelle wilting naturally caps the potential gains in cocoa pod production per tree.) 3 McKeany-Flavell Unique Aspects of the Vanilla Market Commodities. Ingredients. Intelligence. Vanilla Cultivation, 20° North & South of the Equator World Vanilla Calendar Source: McKeany-Flavell 4 McKeany-Flavell Unique Aspects of the Vanilla Market Commodities. Ingredients. Intelligence. Vanilla Terminology Vanillin Major component of vanilla extract Solution of vanilla compounds and ethyl alcohol; Vanilla Extract commercial varieties may also include glycerin, propylene glycol, sugar, dextrose, and corn syrup Black Vanilla Top-quality, premium beans Red Vanilla So-called “extraction-grade” beans Immature beans, may be sold in the vrac Green Vanilla (semicured) bulk market Madagascar’s Central Position in the Vanilla Industry There are numerous factors that allow Madagascar to return, boom-and-bust cycle after cycle, to a market leader position, such as geography and climate, the depth of Malagasy tradition and experience with vanilla cultivation and processing, and the vaunted flavor, aroma, and vanillin content of its beans. But not least is a basic fact: The country’s low wages, averaging less than US$2 a day, allow cultivation to continue when world vanilla prices collapse to lows that discourage growers in other countries. Madagascar is ranked 158 of 188 on the Human Development Index (UN, 2017) and 179 of 187 in per capita GDP (IMF, 2017 PPP). Other options for making a living are limited, and perhaps growers in Madagascar trust, not without reason, that higher prices and even the next price boom are always ahead. Tradition aside, inexpensive labor allows Madagascar growers to stay in vanilla. But Madagascar isn’t just the low-cost origin: Its vanilla also regularly fetches a premium over other major origins. Bids for Ugandan beans, for example, are often reported 10 to 15 percent lower. With Madagascar’s limited resources and infrastructure, cyclones can Prior to 2000, Madagascar was have outsize effects. producing about 70 percent of the world’s vanilla, though this share In January 2018, Cyclone Ava spared vanilla growing regions of Madagascar, but fluctuated as other origins entered over 50 deaths were reported, and tens of thousands were displaced. and exited the market. More recently, For comparison, more than 360 deaths were attributed to Cyclone Gafilo (2004), Madagascar alone produced an still the region’s most intense tropical cyclone on record. estimated 80 percent or more of the More than 80 deaths were linked to 2017’s Cyclone Enawo. world’s output. This concentration of supply makes vanilla pricing highly susceptible to elevated volatility. By comparison, the top two cocoa origins have produced only around 60 percent of the world’s supply in recent years. And for a commodity crop like sugar, in most years the cumulative out- put of the top five countries falls several Source: NASA points short of half of global output. 5 McKeany-Flavell Commodities. Ingredients. Intelligence. Market Dynamics While we will be discussing the idiosyncrasies of the vanilla market, some basic economics still hold. Price changes still push the market to adjust, as the vanilla market in the early 2000s showed: Difficult weather, including several damaging MADAGASCAR VANILLA tropical cyclones (2000 and 2004) and cool, wet conditions during the 2002 bloom period depressed vanilla production in Madagascar. Prices reported for Madagascar vanilla climbed from $20 per kg and under in 1999 to above $550 at the end of 2003. Predictably, prices for vanilla from other origins rose in response, above $300 for Papua New Guinea and above $400 for Uganda and Indonesia, according to trade sources. Bourbon vanilla drying in an Antalaha factory. Madagascar accounts for more than 75% of the world’s vanilla fields. Madagascar & Vanilla Price History *Estimate Source: Trade sources 6 McKeany-Flavell Unique Aspects of the Vanilla Market Commodities. Ingredients. Intelligence. Vanilla Market Dynamics During the supply crunch of the early 2000s, elevated pricing had the expected effect of encouraging supply growth: Other origin countries like Indonesia, Uganda, and India expanded planted hectarage. Vanilla output peaked around 2008, rising by about two-thirds from earlier levels. As it takes vanilla 30 to 36 months to mature enough for commercial production, new growers enticed by the early-2000s market missed out on those elevated prices. By the time the new entrants’ vanilla made it to the market, Madagascar production had returned to norm, and vanilla pricing was down below $25 and even $20 per kg. Supply had grown, while some demand had left the market. Pressured by the 2002- 2004 price runup, demand for vanilla dropped drastically, falling an estimated 40 to 45 percent. Many food manufacturers switched to vanilla alternatives, and the grow- ing popularity of vanilla flavors since then has been facilitated by the wide availabil- ity of less expensive synthetic vanillin. In response to the fickle demand of those years, vanilla pricing fell from its highs by an estimated 90 percent in the second half of 2004. Those with experience in other commodities might think that $25 or even $20 per kg compares rather favorably with other crops, like coffee or cocoa. However, because vanilla cultivation is exceedingly— almost farcically—exacting and labor intensive, there is little room for grower profit at such low prices, even in Madagascar. The newly depressed prices did eventually encourage demand to grow. According to Mintel GNPD, 20,517 new vanilla products of note were introduced between 2010 and 2016, including 3,275 products in the North American market. “Dutch chocolate” moved over to make space for “French vanilla” in the consumer’s lexicon. Synthetic Vanillin The widely popular Nutella, for example, uses synthetic vanillin. Vanilla alternatives used in food are not, as is still sometimes reported, derived from castoreum harvested from the glands of beavers. This would be far more expensive than vanillin that can be synthesized from any number of other, non-animal sources.