As you can see, the risk profile on vanilla in the last few years has been close to non-existent. This may not always be the case, however: considering what happened in 2003, the net effect of this kind of movement could be massive to a business dependant on the positive benefits of using this natural vanilla product. At current prices the market shrink each year because producers leave the marketplace, we are in a finely balanced position where any natural production problems would send the market into the stratosphere again.
Natural vanilla is derived from a flower, the vanilla orchid. Vanilla is sold as whole vanilla pods (gourmet grade), as the essence (industrial grade) derived from them, or as a synthetic chemical compound that is identical to vanillin, the main chemical constituent of the vanilla flavor.
The majority of natural vanilla (65-80%) is produced in Madagascar; most of the rest comes from Indonesia (10-20%) with many minor producers making up the rest of the world production. On average the overall the world production only totals some 2500 Tonnes a year.
What does the future hold?
Rather than being an expert in Vanilla: The next section is an abbreviated version of the October 2011 market report produced by Aust & Hachmann (Canada) Ltd.
"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.
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.
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.
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.
This year 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 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.
In summary, we feel that worldwide demand for vanilla will be met by the current production estimates, but only just. 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 three years old) still sits in a Northern European warehouse. Overall surplus of vanilla has shrunk considerably over the last few years and at one time was probably well over 2000mt.
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."
From the standpoint of working with commodities on a day to day basis -- I would personally fix any contracts I have on this product -- the chances are that the market will go up, if not this year, maybe next year. But I would rather have a safe contract now compared to problems in the future.
- Nick Peksa, Mintec Ltd.