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Pepper Crop Report 2017
Alfons van Gulick
ESA Conference
1 June 2017
Bordeaux, France
Review of fundamental market forces
Price DemandSupply
Production
Stock
2
Acreage
Plantings
Survival rate
Yield
Region
Cost price
Substitutes
Information
Knowhow
Weather
ChemicalsFertilizer
Holding power
SpeculatorsKnowledge
Culture
Holding costs
EfficiencyDecay
Culture
GDP growth
Population growth
Inflation
Food trends
New applications
Innovation
Local consumption
Export
Middle class
Healthcare
Sustainability
Organic
TraceabilityRegulations
Regulations
Import tariffs
Tax
FX
M&A
Size
Speculators
85
69
40
32
25
22 244
249 255
261 267
273
2012 2013 2014 2015 2016 2017
19%
15%
9%7%6%
5%
14%
12%
2%11%
Demand remains resilient, with consumption in producing countriesand emerging economies becoming increasingly important
3
Source: Nedspice research
62
53
11
9
39 152
156 160
164 168
173
2012 2013 2014 2015 2016 2017
Ind
ia
Ch
ina
Oth
ers
Malaysia
Indonesia
2.6%
2.7%
2.0%
2.0%
3.7%
1.9%
CAGR'12-'17
Producing countries (KMT) (39% total)
KMT KMT
Consuming countries (KMT) (61% total)
CAGR'12-'17
66%
2.3%
1.2%
2.9%
3.2%
3.4%
2.1%
1.8%
Eu
rope
Nor
th A
me
rica
Mid
dle
E
ast
Africa
Asia
Others
Total demand:
c. 446 KMT
Annual growth:
c. 2.4% p.a.
c. 10 KMT p.a.
135 142 147 165
130
165
210
–10%20%30%40%50%60%70%80%90%100%
0.0
50.0
100.0
150.0
200.0
2011 2012 2013 2014 2015 2016 2017
KM
T
Local demandExportNew plantings (%)
Vietnam production is at an all time high and is expected to increase further over the next years
4
Source: Nedspice research
Vietnam production is at an all time high
Vietnam production by region
Average: 16%
Total: 210 KMT
Laos
− Vietnam production more than doubled in the last decade and represents c. 40% of global production
− After a c. 20% drop in 2015, production is expected to increase to an all time high of c. 210 KMT this year
− Production is concentrated along the Cambodian border
− Dak Lak is currently the largest production region (23% of total), showing a CAGR of 21% since 2012
− Other regions showing strong growth are Dong Nai and Dak Nong, with a 27% and 24% CAGR since 2015 respectively
− New plantings have been at c. 16% annually since 2011 on average, and were relatively high over the last 3 years (18-28%)
− Though the % new plantings are expected to be below death ratios of c. 12% this year, they were well above over the last years, implying substantial increase in production over the next years
− Production is export focused, as domestic consumption is c. 6 KMT
− Yield ratios are at c. 2.4 MT/ha
− Quality control and the use of agrochemicals remain an important topic in Vietnam
Cambodia
Commentary
Dak Lak 23%
Dak Nong 17%
Dong Nai 16%
Gia Lai 15%
Binh Phuoc 11%
Ba Ria Vung Tau 10%
Others8%
Ho Chi Minh
1
5 6 8
10 13
21
–
50%
100%
150%
200%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2011 2012 2013 2014 2015 2016 2017
KM
T
Local demandExportNew plantings (%)
Cambodia production is becoming more significant and is important for Vietnam price dynamics
5
Source: Nedspice research, IPC, Phnom Penh Post
Cambodia production is increasing rapidly..
..with largest production regions along the Vietnam border
Average: 40%
Tbong Khmum /Kampong Cham
ThailandLaos
− Cambodia has a long history in pepper, but production never really exceeded c. 3,000 MT until recently
− Historically, cultivation was concentrated in the Kampot province
− Production decreased dramatically during the civil war (‘70-’79)
− The Kampot pepper has always been recognized as a high quality pepper in Europe, also due to the French cultural heritage, and was granted Geographic Indicator status in 2010
− With the consistent increase in prices since 2005, farmers slowly regained confidence in the crop, increasing plantings since c. 2008
− Cambodia is now the 6th largest production country (4%), and takes the 4th place in terms of exportable production
− Most of the Cambodian production is for export purposes as the local consumption is only c. 1,000 MT
− Over 75% is estimated to be exported to Vietnam, c. 20% to Thailand and the remainder directly to consuming countries
− The Tbong Khmum province currently produces the vast majority of Cambodian pepper (70%+)
− Yield is relatively high at c. 4.5 – 7.2 MT/ha
− Generally, Cambodian farmers do not hold any stock and sell 1-2 months after harvesting, which impacts price dynamics for Vietnam
Vietnam
Commentary
Phnom Penh
10 10 10 10 10 11 11
15
60
37 47
60 45
54 25
70
47 57
70
56 65
0
102030405060708090
100
2011 2012 2013 2014 2015 2016 2017
KM
T
12% of global production
Other than Vietnam and Cambodia, only Brazil has meaningfully increased production
Indonesia India
Brazil Sri Lanka
1) Net export (import) defined as production minus local demand, i.e. assumes no local stocksSource: Nedspice research
6
'12-’17 CAGR (1%)'15-’17 CAGR (4%)
55 56 57 58 59 60 62
(5) (6) (3)(13)
26
(7)
3 50 50 54 45
85
53 65
(20)
0
20
40
60
80
100
2011 2012 2013 2014 2015 2016 2017
KM
T
'12-’17 CAGR 5%'15-’17 CAGR (13%)
6 6 7 7 7 7 7
30 32 32 32 44 45
57 36 38 39 39
51 52
64
0102030405060708090
100
2011 2012 2013 2014 2015 2016 2017
KM
T
'12-’17 CAGR 11%'15-’17 CAGR 12%
4 4 4 4 4 4 4 13 14 19 16 16 13 13
17 18 23 20 20 17 17
0102030405060708090
100
2011 2012 2013 2014 2015 2016 2017
KM
T
'12-’17 CAGR (1%)'15-’17 CAGR (8%)
Local demand Net export / (import)1
12% of global production
12% of global production
3% of global production
248 239
252 281 265
350
2012 2013 2014 2015 2016 2017
400 395 412
445 434
523
2012 2013 2014 2015 2016 2017
Vietnam and Brazil have been driving growth in supply, with Cambodia becoming more important rapidly
7
1) Excludes imports and exports between producing countries.Source: Nedspice research
Global pepper production – L5Y (KMT) Exportable production1 – L5Y (KMT)
CAGR
'12-'17 '15-'17
5.5% 8.4%
(0.3%) (0.8%)
31.0% 45.8%
2.2% –
11.0% 12.0%
5.4% (12.6%)
(1.5%) (3.6%)
8.1% 27.1% Vietnam
Indonesia
India
Brazil
China
Others
CAGR
'12-'17 '15-'17
7.1% 11.7%
(3.1%) (4.3%)
34.7% 50.2% 8.2% 15.6%
12.4% 13.4%
(189.1%) (63.3%)
(2.1%) (4.7%)
8.3% 28.1%
─ Vietnam continues to dominate supply for export purposes
─ Brazil strengthens growth in exports, while China and India remain less important
─ Cambodia is rapidly increasing its position
─ Vietnam and Brazil show strongest growth among leading production countries
58% of total
Cambodia
Despite relatively strong and growing position of Indonesia in white pepper, Vietnam remains the determining factor
8
Source: Nedspice research
Black versus white pepper production – L5Y (KMT) Global pepper production by country – 2017F
Total: 523 KMT
Vietnam 40%
Indonesia 13%
India 12%
Brazil 12%
China 7%
Cambodia 4%
Others12%
Vietnam 43%
India 15%
Brazil 14%
Indonesia 9%
Cambodia 5%
Others14% China
40%
Indonesia 27%
Vietnam 28%
Malaysia 3%
Brazil 2%
Total: 432 KMT (83% of total) Total: 91 KMT (17% of total)
Indonesia production by regionBlack pepper White pepper
323 317 330 365 349 432
78 78 81 80 85
91 400 395 412 445 434
523
2012 2013 2014 2015 2016 2017
Black pepper White pepper CAGR '12-'17 '15-'17
5.5% 8.4%
3.1% 6.5%
6.0% 8.8%
Lampung 87%
Kalimantan 5%
Others8%
Banka 76%
Kalimantan 20%
Others4%
Total: 40 KMT (62% of total) Total: 25 KMT (38% of total)
Indonesia @ 6.8%
19%
15%
9%7%6%
5%
14%
12%
2%11%
Europe
North America
Middle East
Africa
Asia
S&C America
India
China
Indonesia
Others
96 101 89 132 146
205 81 65 73
50 35
52 177 167 163
182 180
257
2012 2013 2014 2015 2016 2017
400
396
395
405
412
415 44
5
425
434
436
523
446
2012 2013 2014 2015 2016 2017
Producingcountries__
39%___
Supply is starting to exceed demand meaningfully, increasing stock levels especially in producing countries
Global pepper production – 2017F
9
Global consumption – 2017F
Source: Nedspice research
Total: 523 KMT Total: 446 KMT
Consuming countries
61%
Global stock development – L5Y (KMT)Global production vs consumption – L5Y (KMT)
2012 2013 2014 2015 2016 2017
Pro
du
cing
co
un
tries
Co
nsu
min
gco
un
tries
‘12-'17 CAGR Producing countries 16.5% Consuming countries (8.6)%Total 7.8%
‘12-'17 CAGR Production 5.5% Consumption 2.4%
Reasonable pipeline stock: 100
Vietnam 40%
Indonesia 13%
India 12%
Brazil 12%
China 7%
Cambodia 4%
Others12%
c. 10 MT+ p.a.
0
2
4
6
8
10
0
2,000
4,000
6,000
8,000
10,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
MT
US
$ /
MT
Cost (cumulative) Cost (marginal) Production (marginal)
It’s likely that supply will continue to exceed demand in the foreseeable future
Historically, there is a c. 3-6 years reversal period1
10
Planting estimates suggest supply will continue to outgrow demand
1) 2017 price level based on May-17, i.e. there is a timing mismatch.2) Weighted average of estimated increase in Vietnam, Cambodia and Brazil planted area.3) Concerns Robusta coffee and 33% TSC rubber. Source: Nedspice research, market data as per May-17
Pepper still looks relatively attractive versus alternatives..Illustrative cost price of pepper over years (Vietnam)
% C
hang
e in
pla
nted
are
a2
0
2,000
4,000
6,000
8,000
10,000
12,000
0
100
200
300
400
500
600
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
US
$ / MTK
MT
ProductionConsumptionBlack Pepper ASTA
─ Year 5 breakeven costs are at c. US$4,230 / MT
─ Marginal costs slightly above US$900 / MT
1
2
1
2
US$, 1 ha Pepper Coffee3 Rubber3
Investment before first production 38,973 17,725 15,739
Year of first production 3 3 6
Current price (US$ / MT) 4,000 1,900 443
Break-even costs / MT (year 5) 4,230 5,004 n.a.
Money multiple (5 years, cum.) 0.9x 0.4x n.a.
Break-even costs / MT (year 10) 1,840 2,254 739
Money multiple (10 years, cum.) 2.2x 0.8x 0.6x
Marginal costs / MT (year 6) 911 1,487 939
Money multiple (year 6, marg.) 4.4x 1.3x 0.5x
Current price
26%
12%
35%
11%
2014 2015 2016 2017
Current
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
US
$ /
MT
Black Pepper ASTA CFR NY White Pepper DW CFR NY
What can we expect from the current market? A purely technical approach
Black pepper peaks at US$10,908/MT in Jun-15, white
pepper at US$15,000MT in Jul-15
11
1) White pepper low was in Mar-02 at US$2,094. The rates shown here are versus the black pepper low in Jul-05. Source: Nedspice research, monthly price data as per 1-May-17
Black pepper low at US$1,565/MT in Jul-05
Current price~US$ 4,100
(May)
History tells us that a further downward price movement is not unthinkable..
Note: Green dotted line represents black pepper cycle high and low price levels. The percentage increase in white pepper (shown in orange) reflects differences in white pepper high and low price levels, i.e. this can differ from the period indicated by the green dotted line.
Source: Nedspice research, monthly price data as per 1-May-17
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
US
$ /
MT
Black Pepper ASTA CFR NY White Pepper DW CFR NY
+268%+301%
(79)%(81)%
+543%+494%
(77)%(76)%
+616%+597%
(48)%(50)%
─ Historically, the market dropped by an average of (78)% in a downward cycle versus the market top
─ This would imply a low of US$2,371/MT and US$3,334/MT for black and white pepper respectively
─ These levels would still be well above historical lows
12
US$1,565 in Jul-05
US$1,080 in Aug-92
6.4 years 7.3 years 5.7 years 9.9 years 1.9 years2.9 years
Current price~US$ 4,100
(May)
Pepper is no exception in showing strong price movementsversus other commodities (1/2)
Coffee Crude Oil WTI
Cocoa Rubber
0
50
100
150
200
250
300
350
1988 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
US
¢/ l
b
0
25
50
75
100
125
150
1988 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
US
$ / b
arre
l
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1988 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
US
$ / M
T
+603%
Source: www.investing.com, www.indexmundi.com, monthly price data as per Mar-17
(65)%
+147%
+1148%(76)%
+200%
+434%(48)%
+176%
+1169%(80)%
+150%
0
50
100
150
200
250
300
1988 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
US
¢/ l
b
1977 high at US$4,663
13
(Mar)
(Mar)
(Mar)
(Mar)
0
1,000
2,000
3,000
4,000
5,000
2005 2006 2007 2008 2009 2011 2012 2013 2014 2016 2017
US
$ / M
T
0
1000
2000
3000
4000
5000
6000
7000
8000
2011 2012 2012 2013 2013 2014 2014 2015 2016 2016 2017
US
$ / M
T
1,000
2,000
3,000
4,000
5,000
6,000
2005 2006 2007 2008 2009 2011 2012 2013 2014 2016 2017
US
$ / M
TPepper is no exception in showing strong price movementsversus other commodities (2/2)
Ginger Nutmeg
Turmeric Garlic
+328%
Source: Nedspice research, monthly price data as per May-17
(51)%
+109%
+409%(74)%
+33%
+536%
(27)%
14
0
5,000
10,000
15,000
20,000
25,000
2005 2006 2007 2008 2009 2011 2012 2013 2014 2016 2017
US
$ / M
T
+353%(68)%
+47%
(May)
(May)
(May)
(May)
Fundamental analysis (1/4): Stock ratio measures global stock level relative to demand. Despite an increase in global stocks, the stock ratio is still at a relatively low level…
15
1) Defined as global stock position / global demand.Source: Nedspice research
–
20%
40%
60%
80%
100%
120%
140%
160%
180%
0
50
100
150
200
250
300
350
400
450
500
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Stock ratio (%
) 1K
MT
Stock Demand Stock ratio
Global stock position versus demand
Fundamental analysis (2/4): Historically, cycles seem to bottom at stock ratio’s of between 100%-150%...
16
Note: 2017 price level based on May-17, i.e. there is a timing mismatch versus estimated year end stock.1) Defined as global stock position / global demand.Source: Nedspice research
0
2,000
4,000
6,000
8,000
10,000
12,000
–
20%
40%
60%
80%
100%
120%
140%
160%
180%
1989 1993 1997 2001 2005 2009 2013 2017
US
$ / MT
Sto
ck r
atio
(%
)1
Stock ratio Black Pepper ASTA CFR NY
Stock ratio versus price
Current price~US$ 4,100
Fundamental analysis (3/4): But last cycle bottom occurred at a lower stock ratio Cycle bottoms tend to occur at lower stock ratio levels
17
Note: 2017 price level based on May-17, i.e. there is a timing mismatch versus estimated year end stock.1) Defined as global stock position / global demand.Source: Nedspice research
0
2,000
4,000
6,000
8,000
10,000
12,000
–
20%
40%
60%
80%
100%
120%
140%
160%
180%
1989 1993 1997 2001 2005 2009 2013 2017
US
$ / MT
Sto
ck r
atio
(%
)1
Stock ratio Black Pepper ASTA CFR NY
Potential explanatory factors for price lows at lower stock ratio levels:
− Information technology
− Production / supply chain efficiency
− One-off effects: speculation, market sentiment, height / duration of previous market high, etc.
Stock ratio versus price
Current price~US$ 4,100
Fundamental analysis (4/4): Data suggests that stocks will have to increase significantly for prices to reach historical lows
18
Note: 2017 price level based on May-17, i.e. there is a timing mismatch versus estimated year end stock.1) Defined as global stock position / global demand.2) Based on estimated excess production in 2017. Note that no adjustment is made for expected increase in demand.Source: Nedspice research
Assumed stock ratio
60% 75% 100% 125%
Implied stock level 268 335 446 558
2017F stock level 257 257 257 257
Required increase(Delta vs 2017F level)
11 77 189 301
Years excess production(@ 77k MT p.a.2)
0.1 1.0 2.5 3.9
Current
Stock ratio versus price Illustrative stock increase required for price minimum
0
2,000
4,000
6,000
8,000
10,000
12,000
–
20%
40%
60%
80%
100%
120%
140%
160%
180%
1989 1993 1997 2001 2005 2009 2013 2017
US
$ / MT
Sto
ck r
atio
(%
)1
Stock ratio Black Pepper ASTA CFR NY
125%
100%
75%
100% 125%75%
Concluding summary
─ Growth in demand remains resilient at c. 2.5% p.a. (10 MT+), with consumption in
producing countries and emerging economies becoming increasingly important
─ Prices at farm level, although lower, are still attractive. Excess production is expected over
the coming years1, which will cause global stocks to increase
─ Technical Analysis: The current decrease in price has been strong, however it is not
extreme when compared to historical pepper bear markets and other commodities
─ Fundamental Analysis: To reach historical lows of previous cycles global stocks need to
increase by some 200,000 tons, which at current production levels can be reached in 2.5 -
3.0 years
19
1) Assumes no adverse climatic and / or economic events.Source: Nedspice research
20
Thank youfor your attention
Presentation can be downloaded from http://www.nedspice.com/company_downloads