Friday, December 7, 2007

Vanilla and the World Market

Vanilla: Spicy Beans Gone Sour

By N P Chekkutty

Vanilla is a spicy bean that brings back the memories of the foolish peasant who killed the goose that laid golden eggs: as the vanilla prices skyrocketed, peasants everywhere in South India took to it in a big way, even cutting off their rich traditional crops, only to be rudely shocked as they took a beating in the next season.

Vanilla is grown in the lush green tropical lands of South India, mainly in Kerala and the Nilgiri region of Tamil Nadu and Karnataka, and it was hailed as a magic plant that would bring instant riches as the price of the raw beans reached as high as Rs. 3850 a kg during the 2002-03 season. In the season before, it had fetched around Rs, 130 a kg, and owing to sudden increase in international demand, the prices soared many times. This spice, grown in Madagascar and Indonesia, is an essential ingredient for ice-creams,
cakes, biscuits and beverages, giving them the mouth-watering flavours. The vanilla
prices shot up when the crops in Madagascar failed almost completely late in 2001. As
supplies went short, the international buyers who have a monopoly over extraction of vanilla flavours from dry beans, sent their agents scurrying all over the South and South-East Asian countries, widely known for their variety of spices. It was then the peasants in Kerala and other South Indian States had a windfall of profits.

But the dream turned sour and shockwaves started coming in when the price of
vanilla beans slumped to as low as Rs. 50 a kg in the last season, driving many farmers to a debt trap. There were thousands of small and medium farmers who had completely shifted to vanilla as a monocrop, abandoning their traditional varieties of crops like rubber, coconut, cocoa, tea and coffee, hoping to reap a rich harvest.

This collective shift to the vanilla bandwagon was not confined only to growers. There were many banks, including a number of pubic sector banks, who abandoned all caution and pumped in huge amounts of money to the vanilla business, handing over massive loans as advance to the growers who needed cash to cut off their ripe plants of other varieties to make way for vanilla. In fact some banks sent their representatives to remote villages pursuading farmers to take loans and plant vanilla, resulting in a massive increase in their non-performing assets in some areas of Kerala.

“It was foolish to nure such unrealistic hopes about a single crop, which were bound to crash,” points out Abhay Jacob, a senior farm journalist in Kerala, who had warned against the en-masse shifting of cropping pattern, as prices had often showed such huge fluctuations in international markets. He said that thousands of hectares of ripe crops were pulled out to make way for vanilla in the 2002-03 season as farmers were hoping that the prices would go higher and higher. He said that there were rumours then that the use of synthetic vanilla, a substitute for the organic variety, would be banned on health grounds and as a result, the demand for vanilla beans from the international food industry would only go up.

But the market reacted differently. As the price of natural vanilla went absurdly high, the multinational food, beverages and ice-cream companies, who are its main consumers, turned to synthetic and semi-organic varieties for flavours. That saw the dmand for naturl vanilla showing a sharp decline in the next season.

“It was a case of wrong understanding of the global market trends,” says P S Sreekantan Thampy, senior officer at the Spices Board, Kochi, which is the national agency for the promotion of spices trade in India. He said that right from the beginning the Spices Board had warned the farmers against shifting en-masse to vanilla as it was a risky move. Vanilla is a plant that is best as an intercrop along with other crops, and it would give handsome returns in three years.

Thampy said the current market price of vanilla was not really bad as they ensured a decent profit to cultivators. What has been shattered is the unrealistic dreams of easy money. With a proper marketing system and fresh investments for developing new value added products from the spice, it could bring excellent profits to the growers and investors, he said.

Traditionally, the farmers were planting vanilla as an intercrop with rubber, coconut, and vegetables. With a low investment of around Rs. 30 a plant, it fetched a comfortable return of around Rs. 130-150. These leafy plants need good shade, plenty of water and natural manures, no need for much pesticides and fertilizers and the real effort on the part of the farmer is during the season of pollination, as the plants need artificial pollination. Each plant has to be individually pollinated early in the day and each healthy plant could give as much as two to three kg of ripe beans during a season in three years time.

As the farmers burnt their fingers with huge unsold stocks last season, there was a hue and cry about the farmers being let down by the authorities. The Central Government even urged the Spices Trading Corporation of India, a public sector undertaking, to absorb the stocks.

“But we can’t absorb all those unsold stocks as we cannot incur losses beyond a point,” said an official at the Corporation who said that they could step into the market only when the prices go dangerously below the normal level threatening the entire agricultural sector.

“But the case with vanilla was different,” points out Abhay Jacob. It was a deliberately engineered hysteria that misled the growers to disaster. It was also a case of drying the haysack while the sun shone: during those days there were firms who sold planting material --saplings of one metre-- for as high as Rs. 135 while it had cost only Rs. 2 to 8 in the previous years.

It was sheer madness in the heydays of vanilla craze. There were plantation-owners who kept a round-the-clock watch as thieves roamed about the villages to carry off with plants as even the saplings could fetch a fortune. “There were some people who even put up electric barbs around their farms simply to protect this green diamond in their backyard,” recalls Abhay Jacob who hails from a rich farming village near Kottayam.

But vanilla remains a good and profitable crop for growers and investors. With a long-term stratgey and proper investments, it could be a money-spinner as Vanilco, a producer-promoted company, has proved in the past one year.

The Vanilla India Producers Company Ltd, (Vanilco) was registered at Kochi in October last year with individual farmers and their primary societies as members. Vanilco is the first experiment in farm-level marketing and processing, under a new legislation introduced by the Union Government in 2002. Vanilco is involved in the procurement and processing of vanilla beans and is exploring new ways to develop value-added producuts for Indian markets.

“In the last season, when we had just entered the market, we procured around 50 tonnes of vanilla beans at Rs. 250 a kg,” said M C Saju, an official with Vanilco. Vanilco has started processing the beans at its factories in Kerala and Tamil Nadu, and has tied up with Indian Institute of Technology, Mumbai, to develop new methods for extraction of flavours. It has also found bulk buyers for the flavours with Amul and Milma who are using the natural vanilla for their ice-creams and other products.

Saju said the domestic market itself is growing. What was needed were new technologies for development of value added products in India, as Madagascar offers over a dozen different items for various segments of buyers, both commercial and household. For this, fresh investment has to be directed to this spice. In such a scenario, India will have to import vanilla beans as its produce will not be sufficient to meet the huge market demands, he pointed out.

The rising demand is reflected in the procurement charts at Vanilco. Compared to last year’s 50 tonnes, Vanilco has already procured 130 tonnes in the first two months of the season. This year they target to procure 200 tonnes.

The market intervention by Vanilco has proved that vanilla growers need not be at the mercy of international agents who used to control the markets. With a strategy of deferred payments, Vanilco was able to offer a price of Rs. 250 while the open market rates (cash down) offered by the global buyers were around Rs 150.With new researches on for developing more value-added products in India , vanilla could be the bean that will offer a spicy taste, both for consumers as well as growers.

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