Global Outlook

Black pepper will literally be the king of spices

Contributed by Nirmal Bang

By Nirmal Bang

We have seen a spectacular rally in most spices complex ranging from turmeric to cuminseed (jeera) to cardamom. Apart from these, spices such as nutmeg, mace, cloves, star aniseed, cassia rallied sharply in the spot markets in the last quarter of 2009. However, it has been a muted year for black pepper. Due to the arrival of new crop, markets have remained under pressure.

Due to rising population and stable production, the carry forward stocks of most of these spices are depleting at an alarming rate. Steady uptick in exports and gradual improvement in demand are the main reasons for a sharp upside in this complex.

The best example was turmeric was in the year 2009. Between 2002 and 2007, India’s turmeric exports moved up exponentially but domestic production was not rising at the same pace. In 2008-09 we saw a spectacular rally in the yellow spice with prices moving up to Rs 14,000/quintal from Rs 2,200/quintal, a rise of more than 600% in a year.

It all started with a drop in carry forward stocks followed by a drop in production and acute mismatch between demand and supply led to a bull run. In the past five years, the global carry forward stocks of black pepper have been declining. Any drop in production by key pepper producers could have a major impact on prices. Vietnam is the largest pepper producer in the world. Inventories have depleted sharply in the last two years. Black pepper will literally be the king of spices as a bull run in this commodity is expected to begin in the coming months Erratic weather concerns may lead to a drop in production or a delay in harvesting this year could set the stage for a bull run in pepper this year.

The area under cultivation of black pepper has been growing due to strong export demand. The cultivation area has moved up to 10,800 hectares in 2009 from 9,851 hectares in 2008 in Binh Phuoc, which is the largest pepper-producing region in Vietnam.

Pepper production has also moved up from 90,000 tonnes to 1,00,000 tonnes. Of this the production of white pepper has risen by 10,000 tonnes. Overall the production of black pepper is still stagnant at 80,000 tonnes.

Overall the carry forward stock of world’s largest pepper producer was 20,000 tonnes at the start of 2009. Exports in 2009 were at a record high of 1,20,000 as Indian production was down in 2009 and lack of availability of ASTA grade pepper resulted in excellent exports. Going forward, in 2010 the carry forward stock of Vietnam is expected to be only 1,500 tonnes from 20,000 tonnes. This is the main reason why we believe this spice has the potential to shoot up as any delay in harvesting in Vietnam and a spurt in demand could trigger a sharp bull run in the spice. Vietnam is running out of pepper. Stocks have also depleted sharply making us believe that the bull run in spices is on the cards. Add to this, the production of pepper in Vietnam that is expected to decline by 10,000 tonnes in 2010 due to erratic weather conditions and this can further fuel bullish sentiments.

Drop in carry forward stock is not only the case with Vietnam but India too is facing the same problem. Indian pepper carry forward stocks have depleted considerably over last few years.

Indian pepper stocks at the start of year 2007 were estimated around 37,225 tonnes due to low prices prevailing in the country and good exports since the last three years. The carry forward stocks have fallen to 9,500 tonnes from 37,225 tonnes.

In the last three years the carry forward stocks of pepper have also gone down to 8,995 tonnes from 19,921 tonnes in Brazil like other global pepper-producing countries.

Indonesia’s carry forward stocks have also dropped from 26,228 tonnes to 10,728 tonnes over the last two years. This is indicative of the silence before the storm. The carry forward stocks of major pepper-producing countries like India, Vietnam, Brazil and Indonesia have been depleting at an alarming rate.

India is the only country where pepper is traded on the electronic exchange. Despite bullish scenario, prices are continuously under pressure. We have found some reasons as to why markets are under pressure despite bullish fundamentals.

Indian pepper exports during April-December ’09 were 14,750 tonnes as compared to 19,450 tonnes during the same period in 2008, down by almost 24%. The availability of ASTA grade of pepper has been low due to a drop in production in Kerala and also due to low price tag in Vietnam.

Cash v/s Futures arbitrage tends to give attractive returns to investors. Hence, this community tends to short pepper futures against physical shorting and tends to get 12% to 18% per annum returns on the same depending on the spread. Selling pressure from this community tends to weigh on prices in the futures markets. The total stocks in NCDEX warehouse is 5,173 tonnes, out of which 2,524 tonnes of pepper will be expired material by March ’10.

So selling pressure will moderate over the next one-anda- half months. And from the month of March, we can expect a bull run to begin in the king of spices.

India’s pepper production is expected to be between 50,000 tonnes and 52,000 tonnes in 2010, slightly higher than last year. Even if Vietnam manages to produce a huge crop of 90,000 tonnes, we feel that the drop in the carry forward stock will matter a lot in the global pepper mart. Any major export order from the US or Europe would result in a spike.

In A Nutshell

We are of the view that a bull run in black pepper may start in the coming months. The main reason to support our argument is a sharp drop in carry forward stocks of major pepper producing nations. Irrespective of the marginal rise in pepper production, pepper is set to catch up with other spices, which have been making headlines since the last few quarters. The global demand for black pepper is rising at 2% due to changing food habits in several South-east Asian countries.

On the supply side, stocks are depleting at an alarming pace. The long-term outlook of pepper remains very bright. Going ahead in 2010, we expect pepper prices to touch Rs 16,000/quintal. If arrivals from Vietnam are delayed by more than one month, then prices can even touch Rs 17,500/quintal.