Introduction
This time of the year is an opportune moment to assess the state of the vanilla market as we are approaching the end of the season in Madagascar, which is still a trend setter as the largest vanilla exporting country.
Let’s reflect on the 2022 season and attempt to look ahead and anticipate a 2023 season landscape. Of particular importance, this upcoming season is poised to be dramatically affected by market dynamics that have built up over the past few years.
Aside from concerns about demand, carryover stock, expected production and their effect on price, we must also look at what kind of impact the current market conditions will have on farmers and overall sustainability, both of which remain a core focus for De Monchy Natural Products.
Madagascar
Year after year, Madagascar continues to be the leading exporting country by volume by a wide margin, which is why the market dynamics on the island have a ripple effect throughout the rest of the vanilla world.
Context
In an effort to stabilize the market price following several years of boom and bust, the Madagascar government established price control measures. As a result, the minimum export price for natural vanilla beans has been set at USD 250 per KG since 2020 after being set at 350 USD per KG the previous year. With this price level which was not in line with the cost of raw materials and the market demands, many exporters were forced to circumvent these rules, and even their associated tax and fund repatriation obligations.
Export volumes during the 2021/2022 season have been estimated as high as 3,000 MT or more, a significant increase from the previous year. Aside from a strong retail consumption during the Covid-19 pandemic, the demand was also artificially stimulated by long positions from the market in a context of complete uncertainty and a lack of geopolitical visibility.
A late opening of the 2022 season, regulatory signals from the government and stricter enforcements of price controls led to exports falling sharply since last November. Moreover, worldwide demand slowed down significantly. Aggravating the situation, vines also produced a large volume which added to the oversupply in Madagascar.
With growing stocks locally and dissatisfaction from local farmers, the government signed a decree in May which effectively lifts the minimum export price with some constraints related to cost price. The decree was intended to spur market activity on the island but has not been fruitful so far.
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Volumes & Quality
Due to the strong production year and low exports, the estimated carryover from the 2022 season will be 1,000-1,500 MT locally.
While the green campaign already started in Ambanja since the 25th of May, the opening date in the SAVA (which represents 80% of the market) and Analanjirofo has not officially been announced yet, our local teams estimate that the current crop may yield at least 2,000 MT.
Combined, this means that exports could open later this year with at least 3,000 to 3,500 MT available on the market in Madagascar. Considering that stocks are still relatively high in the United States, Europe and other areas, it is clear that the market is already oversupplied.
In addition, our teams have identified that most of the carryover stock is in the hands of farmers and collectors. With poor access to the necessary equipment to maintain ideal storage conditions, we expect the quality of the beans to decrease significantly, possibly to be mixed-in with the new crop in the “vrac” (wholesale) market later this year. We have concerns about the quality of higher grades of vanilla this upcoming season.
Further regulations in Madagascar?
Following several years with an unpopular minimum export price fixed at USD 250, which is above both market price and far from the cost price on the ground, the government has finally revised its policy by cancelling the floor export price. The efforts of the government to stimulate exports, however, appear to not have the expected success yet, although it is still too early to get a complete picture of export volumes. Only a month remains before the closing of the 2022 season on the 15th of July 2023, with large carryover volumes, low demand and prices already falling.
Fears of a repeat of the 2003-2004 situation where prepared vanilla prices fell from USD 500/KG to as low as USD 20/KG are justified. It would have a devastating impact on the livelihood of farming communities and small businesses unable to weather the storm, not only in Madagascar but in other vanilla producing countries.
In this context, in addition to the CNV (Conseil National de la Vanille or Vanilla National Council), there is now a new authority in place called the CVM (Comité de la Vanille Malgache or Malagasy Vanilla Committee). It appears that the CVM will influence policy related to the regulation of the vanilla market in Madagascar, and there is already some anticipation that new government policies will be in place before year-end.
Uncertainty
The current situation is clear: cheap and abundant vanilla is available to be exported, but the demand remains low. The potential threat of crashing prices with devastating consequences could impact all levels of the vanilla supply chain across all origins.
Yet, uncertainty remains. With the newly created CVM as well as presidential elections in November, there is still significant ambiguity about new policies the government could implement. However, confusion surrounding a possible delay of the presidential elections due to lack of funds appears to have dissipated. We can now expect the elections to be held according to schedule in November.
Although the government announced days ago that exports will close on the 15th of July 2023, there are still questions about the timing of the green campaign opening and the minimum price of green vanilla (if any.)
Market reaction
Major vanilla actors are in a holding pattern because it is difficult to predict what will happen next.
As a result, we already see prices dropping as both exporters and buyers anticipate further price decline amid low demand and oversupply.
This leads partly to some actors being in the uncomfortable position of holding stock outside of Madagascar on which they risk incurring losses.
On the other hand, the conditions are ripe for opportunistic speculating actors. Some traders are now active on the market although they hold no stock and have never supported the government policies on green and vrac market minimum prices. Unknown micro actors, without any know-how or history in the business, are now trying to take short positions on vanilla beans, making offers at ridiculously low prices, which contributes to bringing down the market.
De Monchy Natural Products' position
Based on our research on the ground and our direct connection with the farmers, we can see that the situation in Madagascar is tense. Farmers are stuck between desperation and unrest. Like the rest of the market, they are also awaiting further communication from the government while they are sitting on large unsold prepared stock from last year, as well as an upcoming green harvest in a few weeks. The opening of the green campaign will be a critical time for all involved.
The situation overseas is also dire, with some major buyers holding significant stock with prices falling.
All factors seem to be in place for a vanilla market crash as experienced in 2003-2004: large unsold stock inside and outside of Madagascar, a large upcoming crop, low demand and economic crisis looming in the West.
Will history repeat? We are not convinced that the writing is on the wall for several reasons.
First, it is clear that the Madagascar government is trying to learn from lessons of the past and is preparing to intervene on the market, as illustrated by the CNV and the newly created CVM. We can already see that with no control on prices, there is very little demand for green in Ambanja where the season is already open. This tells us that we should expect low prices when the green market opens in the SAVA. The government could implement new policies, in line with the market while also protecting the livelihood of farmers. A minimum export price commensurate with a set minimum green purchase price relative to a living income reference price, along with strict control on the green market, could be a first step towards protecting the market.
Second, the global economic conditions also differ significantly compared to during the last vanilla crash. While farmers may have been able to survive on incredibly low prices nearly 20 years ago, their economic situation is vastly different today. Inflation in Madagascar is high for an economy which still relies on imports for critical staples such as wheat, a commodity with a price that has been heavily affected by the war in Ukraine, negatively affecting the economy and the purchasing power of the population. With heavy reliance on imports for staples, the Ariary continues to weaken against the US Dollar, further worsening the conditions locally.
Food security is still a concern, especially when considering the impact of Cyclone Freddy on Madagascar food security, as outlined in a report by the Food and Agriculture Organization of the United Nations (source). Is it reasonable to expect farmers to survive with export prices as low as seen in 2003-2004 in these economic conditions?
Third, tighter regulations are coming to the European Union on Nicotine Minimum Residue Limits (MRL) for spice products, which include Vanilla. Regulation (EU) 2023/377, going into effect in September 2023, sets the Nicotine MRL to 0.02 mg/kg (down from 0.3 mg/kg in the currently applicable Regulation (EU) 2022/1290). However, it appears that it will be revised to 0.05 mg/kg, as this is the highest measuring sensitivity available in standard methods employed by laboratories. While most vanilla has tested below the threshold of the current MRL, it appears that a substantial proportion will not be able to pass the new proposed values. This move would have deep ramifications to any company selling vanilla and other spices to customers in Europe. The industry is now scrambling to appeal to the European Commission to delay the implementation until further studies are conducted, as currently there exists no published research on naturally occurring nicotine in vanilla. Such study, if conclusive, could help to determine how much nicotine naturally occurs versus external contamination, and establish an informed MRL based on these results.
We have seen through De Monchy Natural Products’ own production coming out of the green market that properly prepared vanilla can be in line with the new MRL. However, questions remain on the vrac market where preparation standards are less controlled, and the beans lack traceability.
Fourth, the “wait and see” approach can only last so long. Most buyers have sufficient stock to last them through the end of 2023, but they will need to replenish in 2024. Will the demand be enough to absorb the current production and carryover stock? Perhaps not, but a decent green vanilla price and matching export price could be enough to alleviate some of the pressure on the market and, more specifically, the farmers.
And last, but not least, a topic which is not supported by enough actors on the market: sustainability. As we know, Sustainable Development is at the intersection of three spheres: social, environmental, and economic. Never has it been more obvious how market conditions impact all three spheres.
From a social perspective, many farmers sustain their families through the cultivation and sale of vanilla beans, some carrying on the tradition for generations from their ancestors. These farming communities have a voice and will vote in the upcoming election, which is only one of the many reasons why their well-being should be at the center of considerations from all stakeholders. Furthermore, tremendous efforts have been made to prevent child labour. These efforts could be severely impaired in a shattered vanilla market.
From an environmental perspective, due to the current vanilla crisis, we can already see that some farmers must turn to other crops for sustenance, rice being the preferred choice. Unfortunately, planting new rice fields often comes at the cost of deforestation, a major issue around the world and particularly so in Madagascar.
And at the crossroads between the social and environmental spheres, El Niño could have a devastating impact on the island’s most vulnerable communities. As a reminder, this climate phenomenon was the cause of widespread famine in the south of the country back in 2016, a time when vanilla was on its way to the all-time high price of USD 600 per KG. The administration continues to struggle with this issue today.
And from an economic perspective, sustainable development must be economically viable for all actors in the supply chain. Certifications such as Fairtrade® and Rainforest AllianceTM are trendy with consumers, but one must question the true purpose and motivation of certified buyers. Is it to appeal to consumer needs in search of higher profit margins and market share, or is there truly a motive to improve the sustainability of the natural vanilla industry?
For years, some exporters and buyers have heavily invested in creating a more sustainable and traceable supply chain. The farming community played along, willingly making efforts to learn best cultivation practices, taking steps to get their plots certified, joining farmer associations and so on. Now they face the prospect of being abandoned by the industry. There is a huge risk to undo years of efforts on sustainability, traceability and the professionalisation of the sector at the source.
Today is the time to set a new standard, without waiting for government intervention, to avoid a repeat of the past. The alternative is allowing bad speculating actors to bring the market down. If the market has no control over government policies, it has control over the price at which it is ethically comfortable to operate; this is not for a lack of information. In 2021, the SVI (Sustainable Vanilla Initiative) renewed its study on the Living Income Reference Price, setting its recommendation at 60,000 Ariary (+/- $14) per kg for green vanilla. Last year, the government itself set the price for the green campaign at a minimum of 75,000 Ariary per kg. No buyers on the green vanilla market means that desperate farmers will be forced to sell at much lower prices to opportunistic speculators, pushing the farming community further into poverty.
Indonesia & Papua New Guinea
Indonesia and Papua New Guinea have been important players in the vanilla world, but have failed to truly cement their position amid unstable markets, speculating actors and lost know-how.
It is difficult to get exact data from these two origins because much of Papua New Guinea vanilla production is imported (sometimes illegally) into Indonesia to be exported as Indonesian Vanilla. Since 2021, export data is unavailable to the public.
That said, following the last boom of 2016-17, many farmers decided to plant new crops of vanilla. These vines are now at their optimal yield, and we already see an influx of green vanilla on offer locally. However, because of the current market conditions, some green beans are already being harvested and offered, even though the season should start in June/July, in the hope of being sold before further price decrease. On the other side, some farmers are letting their beans mature longer, with the goal of a better quality and hopes of fetching a better price in this downtrend market.
This year’s harvest is estimated at 200 to 300 MT in Indonesia, a significant amount for the archipelago. However, in the current climate, local farmers and collectors are starting to panic due to low demand, high stock, and price pressure.
In Papua New Guinea, the situation is mostly the same as Indonesia, with the new crop expected to reach 250 MT. However, we are seeing that more and more farmers are planting Planifolia vines, which may increase risks of blending with Tahitensis.
While exports remain low as the market is still in a “wait & see” stance, we are seeing speculation activity from some local players in both Papua New Guinea and Indonesia, in anticipation (perhaps misguided) of another bust and boom vanilla cycle.
Uganda
Uganda vanilla beans have grown in popularity on the market due to their attractive organoleptic profile, coming as a potential credible alternative to Bourbon vanilla in certain applications. Naturally, with slowly but steadily increasing demand, more producers have entered the market and more actors are involved.
Due to its unique weather conditions, the East Africa country benefits from 2 crops throughout the year, a smaller crop in January and a larger one in July.
Since vanilla is not on the priority crop list for the Ugandan government, there is no additional financial support for farmers and less need for government intervention. Nevertheless, vanilla has grown in popularity with farmers over the years, thanks to good profitability and increasing sales. Today the production capacity is estimated at 300 MT with further upside potential thanks to many new young vines.
In this context the situation is rather critical, with large volumes of green vanilla beans expected to sell at prices 3 to 4 times lower during the upcoming green campaign. This causes some farmers to illegally sell immature early picks, which will then be poorly prepared. It is still uncertain how the rest of the farming community will react. Various organizations, such as Vamex and the Sustainable Vanilla Initiative, are trying to convince the farmers to keep their vines, but the temptation is strong to change to a different crop under these conditions. To make matters worse, many collectors are still sitting on large unsold stock.
In the current market dynamics, we can see that Uganda, although a promising alternative origin is still depending on fluctuations in Madagascar. Uganda could become an origin affected by blending, damaging its image as a unique origin.
We believe the East Africa region to have good prospects, on the condition that there is strong support from the market, local actors, and organizations as well as the government.
Conclusion
With oversupply at all major origins, remaining stocks in importing countries, a tepid demand, deregulation and falling prices, the vanilla market is indeed in crisis.
The real question is: for how long? It is still too early to say if this is the beginning of a new bust and boom cycle with so much uncertainty: potential encumbering of further Madagascar government regulations, incoming presidential elections, tightening of food safety regulations in Europe.
Another highly volatile market period only benefits trading companies that hope for further decrease in prices to make up for their current overstock losses. It would also attract new actors on the market, looking to make a quick buck with little regard for the consequences on the farmers. If indeed this scenario develops, we will see a re-shuffle in the market, with some actors disappearing while others come out stronger. However, for stakeholders committed to a sustainable vanilla, the stakes are much higher, with the goal to protect the full supply chain by keeping some stability in the market. This requires clear, long-term effective government policy and ethical sourcing commitments from the major certified players.
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