Pepper Crop Report

Presented by Alfons van Gulick at the ESA Annual Meeting 2014

Murcia, Spain, 2014

Since 1983 we have seen 4 bull markets and 3 bear

th
markets. Most of us are waiting for the 4 bear market
to start rather sooner than later, but this is far from
certain yet.
Black pepper prices have peaked during October 2011 at
around the $7,400 per ton level, but hesitated to follow
through with a downward trend. From January 2012
onward prices have been range bound at a lower level
for some 16 months only to move up again during JuneJuly 2013 to establish a new high at around $7,800 per
ton. What has happened here and is this new push for
higher prices justified? In other words Why do pepper
prices remain at the higher levels? To answer this
question we need to go back to basics first, which is the
underlying supply and demand situation.
Since 2006 world production has been increasing steadily
and is estimated at just over 400,000 tons for 2014.
When compared to the start of the current price cycle in
2006 world production increased by approximately
64,000 tons or some 19%. So apparently the higher
prices did motivate farmers to produce more pepper.
However, when looking at the individual producing
countries we can see significant differences. Indonesia
hardly increased its production when compared to 2006.
In fact production decreased significantly and is one of

the factors why pepper prices started to increase from

2006 onwards. Only from 2012 onwards production
moved back to just above the 2006 level and is now
estimated at around 60,000 tons for black and white
together. In general the area under cultivation in
Indonesia is fairly stable, but yields can fluctuate
significantly due to weather circumstances.
India produced 60,000 tons in 2006 and today is
estimated at 45,000 tons.
Brazil was at 50,000 tons in 2006 and currently only turns
out some 40,000 tons.
Only Vietnam saw its production increase significantly
from some 100,000 to 140,000 tons. So apparently the
price factor was not a big motivator for farmers to
increase production other than in Vietnam. This is
strange because during previous price cycles we did see
an increase in output in most of the producing countries
Why this difference in behaviour? There are a couple of
reasons that can be thought of. Most input cost like
labour, fertilizers and crop protecting chemicals did
increase considerably. The latter two are likely to be the
same in most producing countries. Differences are in
labour cost, with Vietnam and India probably being the
lowest. However, the most striking difference is in the

yield per hectare with Vietnam outperforming India and

Indonesia significantly. So the incentive for farmers to
invest in pepper in India and Indonesia is low when
compared to Vietnam and Brazil. The yields shown are
averages and the problem with averages is that they may
give a somewhat wrong picture. Yields in Vietnam and
Brazil seem OK, but when taking into consideration only
healthy vines and healthy plantations yields are likely to
be quite higher. Actually attracted by the high prices
considerable new plantings have been made both in
Vietnam as well as Brazil. However, these extra volumes
are off-set largely by dying vines due to disease and
exhaustion. In pursue of higher revenues farmers are
applying fertilizers and crop protecting chemicals, but in
doing so they shorten the life span of the vines
considerably. The need for crop alternation is often

disregarded as a result of which newly planted vines will

also have a shorter lifespan than when planted on virgin
land. It is estimated that in regions like Gia Lai, one of
the largest growing regions in Vietnam, annually some
10% of the planted acreage dies because of the over-use
of fertilizers and crop protecting chemicals.
Other factors that may come into play in deciding
whether or not to plant pepper are also the attractive
returns on competing crops like coffee, rubber, cashew,
etc.
The next graph provides a closer look at the production
for each origin country over the last 4 years with a
forecast for 2014. As can be seen Vietnam is still
increasing production to around 150,000 tons for 2014,
whilst Indonesia is expected to recuperate from its lower
output last year. Rumours have it that the 2014
Indonesian black pepper crop will be lower again, but
these rumours seem to be unsupported by facts so far.
Weather patterns have not been extraordinary different,
although rainfall was a bit heavy during the latter part of
2013. Normally Indonesia, all other factors to be equal,
will have a good harvest following a bad one.
The 2014 harvest in India is smaller at around 45,000
tons when compared to last years level of 54,000 tons.

China remains one of the big unknown factors. We know

that China is a net importer when considering the
substantial quantities of barter trade between Vietnam
and China. Estimates go as high as 25,000 tons that
disappear across the border into Chinese noodle
consumption. We will come back to this later when
discussing domestic consumption.
Overall global production is expected to be close to
404,000 tons, an increase of 14,000 ton when compared
to last year. Exports are estimated at 290,000 tons.
The table below gives the break down between black and
white pepper fundamentals. White pepper production in
Indonesia has been picking up well over recent years and

Indonesia
Vietnam
Brazil
India
Malaysia
China
Sri Lanka
Others
Total

Global consumption is estimated at 393,000 tons of

which some 238,000 tons is to be consumed in nonproducing countries.

Production
47.000
145.000
39.000
54.000
23.000
35.000
23.000
24.000
390.000

2013-2014
Consumption
9.988
5.614
6.519
57.193
8.323
45.679
3.708
12.360
149.383

Imports
0
15.074
0
17.344
1.021
11.000
0
0
44.439

Exports
55.045
139.200
33.050
16.000
15.000
3.000
17.000
10.200
288.495

Ending stock
7.638
28.123
6.486
5.930
8.487
9.719
2.835
5.565
74.782

Production Consumption
60.000
10.188
150.000
5.810
39.000
6.675
45.000
58.251
23.000
8.490
37.000
47.374
24.000
3.801
26.000
12.731
404.000
153.319

2014-2015
Imports
0
6.050
0
26.500
1.021
13.000
0
0
46.571

Exports Ending stock

46.021
11.430
155.000
23.363
33.050
5.761
10.000
9.179
15.000
9.018
3.000
9.345
17.500
5.534
10.200
8.634
289.771
82.263

Beginning stock
23.752
11.737
6.101
7.779
5.335
5.525
543
4.125
64.897

Production
29.500
122.000
37.000
54.000
20.000
2.000
23.000
24.000
311.500

2013-2014
Consumption
6.804
5.614
6.394
57.193
7.843
14.124
3.708
12.360
114.040

Imports
0
15.074
0
17.344
1.021
11.000
0
0
44.439

Exports
41.592
116.478
31.050
16.000
12.113
0
17.000
10.200
244.433

Ending stock
4.856
26.719
5.657
5.930
6.400
4.401
2.835
5.565
62.363

Production Consumption
42.000
6.940
126.500
5.810
37.000
6.550
45.000
58.251
20.000
8.010
2.000
14.873
24.000
3.801
26.000
12.731
322.500
116.966

2014-2015
Imports
0
6.050
0
26.500
1.021
13.000
0
0
46.571

Exports Ending stock

32.568
7.348
132.278
21.181
31.050
5.058
10.000
9.179
12.113
7.298
0
4.528
17.500
5.534
10.200
8.634
245.709
68.759

Beginning stock
1.919
1.126
953
2.454
6.873
13.325

Production
17.500
23.000
2.000
3.000
33.000
78.500

2013-2014
Consumption
3.184
0
125
480
31.554
35.343

Imports
0
0
0
0
0
0

Exports
13.453
22.722
2.000
2.887
3.000
44.062

Ending stock
2.782
1.404
828
2.087
5.318
12.420

Production Consumption
18.000
3.247
23.500
0
2.000
125
3.000
480
35.000
32.501
81.500
36.353

2014-2015
Imports
0
0
0
0
0
0

Exports Ending stock

13.453
4.082
22.722
2.182
2.000
703
2.887
1.720
3.000
4.817
44.062
13.504

White pepper
Indonesia
Vietnam
Brazil
Malaysia
China
Total

Global consumption

Beginning stock
25.671
12.863
7.054
7.779
7.789
12.398
543
4.125
78.222

Black pepper
Indonesia
Vietnam
Brazil
India
Malaysia
China
Sri Lanka
Others
Total

is now estimated at some 18.000 tons, which mainly

represents production at the isle of Bangka and some
smaller regions like Kalimantan. Possibly production is
higher because there is uncertainty about the level of the
domestic consumption. China is considered to be the
largest producer, but most of this is consumed
domestically. Vietnam is filling the gap as white pepper is
produced by decorticating black pepper; this as opposed
to the other origins where the traditional method
through fermentation is applied. So in theory Vietnams
capacity to produce white pepper is substantial.
Normally the average loss on decorticating black into
white is some 25-30%. This also explained the increase in
price difference between black and white pepper when
the general price trend is upward. Skins were seen as
production losses. However lately we see that skins are
sold as by-products generating some revenue. This in
theory should reduce the gap between black and white.
Also it increases the output of pepper as the conversion
losses are reduced.

Consensus has it that global consumption is growing by

2-3 % per annum, of which emerging markets take the
lions share. Possibly that with the slowdown of the
economic growth in these emerging countries also the
growth in pepper consumption will be less. Future will
tell, but assuming a conservative 2% growth means that
consumption will increase by almost 8,000 tons per year.
The world needs some 33,000 tons of pepper per month
to satisfy demand.

at around 32,000 tons, which is 23 grams per person.

Compared to its GDP this seems extraordinary low. We
maintain 35 grams per capita leading to a domestic
consumption of 47,000 tons, which may still be on the
conservative side. Anyhow, estimates of domestic
consumption used by various reporting bodies are highly
debatable and should be studied in more detail.

Consumption in producing countries

For the last two years production did fall marginally

short of consumption.

Stock levels

Approximately 38% of global production is consumed in

the producing countries, which for 2014 is close to
153,000 tons, with the majority taken by India and China.
When comparing the consumption per capita to the GDP
per capita one can see remarkable differences, which can
possibly be explained by different habits in spicing up
ones food.

As a result the global inventory position has been

declining steadily since its peak level in 2006. We
estimate combined stocks in producing and consuming
countries around 121,000 tons at the end of the
imaginary global crop season. The stock ratio (global
stocks divided by global demand) is decreasing to
worrying low levels of some 30% or 16 weeks of demand.
The first impression may be that a global stock level of
121,000 is more than adequate , but considering the fact
that in order to fill the pipeline between origin and the
end consumer some 92,500 tons is needed a global stock
position of 121,000 tons is not that much.
So, we cannot escape the conclusion that the global
supply and demand situation is in a delicate balance.
Prices
Malaysias per capita consumption is quite high, even
considering that its GDP per capita is high. As a
comparison the per capita consumption in more
developed countries like USA and Europe is around 190
grams. Then there is China with a domestic consumption
estimated by the IPC (International Pepper Community)

The following graph shows the relationship between

price and stock ratio. Clearly can bee seen that prices
move opposite to the stock ratio, meaning that when the
stock ratio is lower prices tend to move higher. Coming
back to the question at the beginning of this paper of

whether or not the current high prices are justified, from

the above analysis and the stock ratio versus pricegraph we can safely say that they most likely are.
Current price levels seem to be defendable and are likely
to rule higher as the stress between supply and demand
will get more severe. As long as stock ratios continue
along a declining path it is unrealitic to expect prices to
decrease.

That does not mean to say that prices cannot fluctuate.

Earlier on reference was made to the imaginary global
crop season. A global crop season is a phenomenon
that does not exist. Crops are being harvested during
different periods of the year and therefore the supply
and demand balance will not be the same during the

entire year. Prices may fluctuate with crops being

harvested or stocks being liquidated or build. This
provides the zig-saw pattern in the supply graph. In any
given year there is a difference of 70,000-90,000 tons
between the lowest point and the highest point.
However by keeping an eye on the global supply and
demand balance one can make at least an educated
guess of what to expect for the medium to long term.

An important point to note is that during the last 5-10

years or so the structure of the market has changed quite
significantly. The number of international trade houses
with the capability to move the market has reduced. In
stead origin players have become more sophisticated
and financially more strong. So the control has shifted
clearly to origin, of course helped by the tight supply and
demand situation. More specifically in Vietnam, the most
important origin, farmers have acquired the financial
strength to hold on to their pepper, giving them a
possibility to play the market and, more ofther than not,
hold the collectors, warehouses and exporters at their
mercy. At the moment an additional factor is that
interest rates in Vietnam have come down and collectors
are able to take bank borrowings to finance inventory
positions.
With current price levels for products like pepper, but
certainly also coffee, farmers make at least good double
their costs. This should continue to motivate them to
plant more pepper. But, as mentioned before, they are
also likely to continue to boost their yields through more
intensive use of fertilizers and crop protecting measures.
In conclusion we can say that despite the increase in
global production the supply and demand balance is still
tight. Consumption growth is estimated at 8,000 tons
per annum but farmers net growth in output seems only
to be just enough to cater for this. In theory there is
enough pepper to satisfy global demand. But with global
stocks at historically low levels for a couple of years now
on the one hand and strong holding capacity in
producing countries on the other hand we seem to have
a coctail that can be quite explosive. Current price levels
seem to be justified and we would need to see a
significant jump in production for prices to drop to lower
levels. Barring any adverse weather circumstamces
Vietnam will no doubt continue to grow its acreage, so
will Brazil. India may produce a normal crop again and
Indonesia, as we have seen in the past, can go back to
60-70,000 output. New growing areas in Cambodia,
China, Thailand, etc may also add some volume.
Compared to 2014 supply this can make a difference of
some 50-60,000 tons or just over 15%, which should be
enough to put a lid on prices going forward. However this
would leave 2014 still exposed. Future will tell.