Food and beverage manufacturers face a high-demand, low-supply, rising-cost scenario for vanilla in 2016.

As a family-owned leader and innovator in the food flavor industry, David Michael & Co., began to anticipate this issue and took steps—as far back as 2010—to protect its customers. For example, when vanilla prices were at a historic low, David Michael committed to long-term supply contracts.

Today, David Michael believes it’s vitally important to inform, educate and prepare manufacturers for what lies ahead in terms of vanilla pricing and availability. Skip Rosskam, president and COO, David Michael & Co., believes the term "significant crisis" is best used to describe current market conditions.

“There are a number of factors driving the market on the path it is headed, but the bottom line is the bottom line,” he says. “These factors have managed the market from as low as $60/kg in April of 2015, to $185-$200/kg as of mid-December – that's upwards of $140/kg in just eight months' time. Crops are smaller, demand is higher, and there is even a crime component weighing in – all making it fairly certain that the current rise may get worse before it improves.”

Here's a quick look at the key influencers driving the situation:

•Smaller crop size due to poor flowering. Vanilla grown in Madagascar accounts for 85% of the world supply. Poor flowering of the Madagascar vines in 2015 means that 1,100-1,300 tons will be available in 2016 vs. the average yield of 2,000 tons.

•Historically low prices from 2010 to 2013. Many growing regions have moved away from vanilla into more lucrative crops resulting in a decreased supply. They are pushing other growing regions away from vanilla and its low-income potential, decreasing supply.

•Higher desired return for those keeping skin in the game. Those farmers, curers, and distributors, who have remained in the vanilla business are looking to get the most out of their investment. Speculators in Madagascar are holding back from the market up to 400 tons from previous year's crops to reduce supply and impact prices.

•Increased sale of green vanilla beans to produce what is called “green bean extract.” This refers to the sale of green, uncured vanilla beans is decreasing supply and increasing prices. This issue is making less high-quality cured beans available on the market.

•Increased trend toward vacuum packing partially-cured beans. In an effort to hold beans until prices rise, many growers are vacuum packing partially cured beans, however, this process compromises the quality of the bean, bringing out an undesirable phenolic note that stays with the bean throughout additional curing.

•Extract manufacturers have depleted their long positions. They are now buying up the limited vanilla supply at a premium price to remain in business.

•Rosewood Mafia. Traffickers are quickly purchasing vanilla beans (regardless of quality) as a means of laundering money accumulated through illegal rosewood harvesting and trade.

David Michael's Long, Rich History in Vanilla

David Michael has been involved in the vanilla market since the 1890s. That’s why today’s company has the history, familiarity, contacts and position in vanilla to give customers powerful insights and resources needed to navigate through the crisis. The company has cultivated relationships with three generations of growers, who are loyal to selling to them in the face of shorter supplies.

Moreover, David Michael is "on the ground" in terms of vanilla growing, processing and sales, with solid relationships throughout the supply chain. The company has labs, flavor chemists and other resources dedicated to vanilla; they were the first to market many ground breaking vanilla products, including Organic & Fair Trade certified vanilla, and continue to innovate vanilla products – all with a sense of social responsibility that further sets them apart.

“We are a flavor company. You can't be one of those – at the level we are – without being fully immersed in vanilla—from its growth and harvest, to its curing, processing, packaging, marketing and that final end-user experience,” says Steve Rosskam, executive vice president. "We started selling vanilla in the 1890s, and in the 1930-1950s, we ran our own plantation. We've been through three vanilla crises and every time – even at the worst times – we've been able to supply our customers.

Going Long, Staying the Course

When David Michael combined the historically low prices in 2010 with their foresight of the issues that loomed ahead, they decided to go long and buy forward. Customers were offered the opportunity to lock in at the lower prices and contract for two to three years of vanilla purchases.

With each subsequent year that showed stable prices, David Michael purchased another year ahead, offering customers contract extensions. Consequently, they currently have vanilla inventory to take clients through 2016, regardless of whether they were contracted, because they were convinced the market was rising and they knew their clients would be thankful.

"We are very proud – not so much of our own foresight and ability to buy at lower costs – but of our clients," adds Steve Rosskam. "David Michael takes great pride in the trust our clients have in us. That so many of them recognized what we were telling them over the past several years, trusted their own instincts as well as ours, and took action to protect their own businesses by contracting with us at lower prices, is a testament to their business savvy. We will do everything possible to keep them supplied at fair prices, and where there are 'gaps,' you can be sure we are ready to help them stay the course with other solutions."

David Michael offers a range of proven vanilla solutions designed to help food and beverage companies manage costs and extend supply. During the current vanilla crises, the company offers the following solutions for clients:

•Vanguard® – A proprietary technology developed in 1965, this non-characterizing natural flavor smooth’s mix notes which allow flavor to come through more easily and allows for elimination of the portion of vanilla that covers the base. Used in countless applications, it allows for reduced vanilla extract usage while not impacting the label.

•Intensified Technology Vanilla Extractions – DM has developed a series of unique, proprietary, technology-based vanilla extraction processes. More complete extractions of the vanilla bean result in intensified products that show a savings on a cost/use basis, along with a signature profile. Products manufactured via this method are called Supreme®, Super Supreme®, Premier Process® and David Michael's Superb® vanillas.

David Michael understands there is no one size fits all solution to the challenging vanilla market. They evaluate the vanilla usage, labeling, and taste profiles of each of their customer’s product lines to propose a customized suite of solutions.

Skip Rosskam concludes, “Since we’ve been down this road before we’re in the enviable situation of possessing a stockpile of solutions amassed from years of development. Our technologies have improved and solutions have evolved. In fact, during the last vanilla crisis, the clients that changed to our technologies didn’t even switch back to their pre-crisis vanilla bean buying levels when prices came back down."

David Michael is on the ground in Madagascar evaluating vanilla market conditions as they continue to evolve to assure customers of the guaranteed supply at the best possible price. While the David Michael team does not see the vanilla market bouncing back any time soon, they have confidence in the staying power of the flavor industry, its own research, development and expertise in vanilla, and the resiliency of their clients and potential clients.

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