Vietnam: Leading The Pack Through Value Chain Integration
By Nitin Bansal, Vice President, Olam Spices Vietnam
We started our pepper operations in Vietnam in 2001 as a one-step adjacency to our coffee operations as pepper and coffee are grown in similar areas. Initially, Olam was primarily an aggregator of raw pepper from Vietnam exporting to processors and grinders overseas, who would clean, sterilise and grind it. Fifteen years on, Olam has successfully migrated from a raw material aggregator to an integrated processor supplying sterilised ground pepper and tropical spices to buyers globally who use our ingredients directly in their food recipes, seasonings mixes or spice packs. Today we are a leading processor and exporter of pepper and tropical spices out of Vietnam.
Traditionally pepper grinding has been dominated in destination markets by buyers either having captive in-house grinding for pepper or sourcing from grinders closer to home who provide consistent quality and product integrity. This model had been a characteristic of the pepper supply chain for centuries.
However, we have witnessed a huge growth in pepper grind exports from origins over the past several years. Many buyers have become less sensitive to supplier proximity and are increasingly seeking spices that are ground in the origins. They see a greater economic advantage in setting up their ground pepper supply chain directly from origins.
Origin grinding has a significant intrinsic advantage over destination grinding due to market structure and cost. While the USA and EU are the largest pepper export markets, these markets have different preferences on particle size – the USA market prefers the coarser grain whereas the EU prefers finer particles. Both are willing to pay the best price for the grade.
As the grinding process generates both coarser and finer particles, an origin grinder is able to secure premiums by placing both course and fine grades at best prices in both markets, achieving higher realisation compared to a destination grinder who has to sell co-products at a hefty discount due to the lack of liquidity in the local market for those grades. In addition, lower costs of processing and access to multiple sources of raw materials enable origin grinders to tap lower production costs.
With this trend, the share of grinds in export volumes from origins has been increasing faster than that of wholes and is projected to more than double from 43,000 MT in 2015 to 90,000 MT in 2022.
Olam has been investing in Vietnam which is the largest producer of pepper globally – Vietnam’s pepper constitutes 40% of global production and 70% of global trade. Our sourcing network extends beyond Vietnam to India, Indonesia, Cambodia and Brazil. Our model enhances our ability to optimise our cost of purchase and seek out the best raw materials for our customers, while also providing optionality to maximise trading returns through our in-depth understanding of the origins, and the supply and demand forces affecting the trade.
Our pepper grinding operation in Vietnam acts as a hub-and-spoke, gathering pepper from within the country as well as from other origins and grinding them all-year-round, which ensures our factories consistently run at optimal capacity. This also enables us to offer our buyers multi-origin optionality for processing in our facility in Vietnam. By doing so, we “out-origin” local players who only have access to local raw materials.
Olam Spices pioneered the process of steam sterilisation of black pepper in Vietnam and has been offering steam sterilised pepper to our customers since 2008. Over the last six years we have invested in state-of-the-art equipment with multiple milling configurations that enable us to handle steam sterilised pepper grinds, which is the method preferred by buyers due to its “cleaner” label. Our production process involving infrastructure, equipment and material flows is designed so that individual spices are processed separately to ensure zero cross-contamination and elimination of inefficiencies from product changeover due to time and material losses.
With subsequent capacity additions, Olam Spices is today one of the largest origin pepper grinders as well as the largest producer of steam sterilised pepper globally with a scale that has enabled us to achieve high capacity utilisation rates and correspondingly low unit manufacturing costs.
With production differentiation as our core strength and growing prospects for origin grinding, Olam is well-poised to capitalise on continuing market growth.
Backward integration: from ingredients to farming
As the largest producer and exporter of pepper in the world, Vietnam clearly stands out as a prominent origin for pepper. Its market position has been driven by increased acreage and significant improvement in yields as growing has shifted from traditional intercropping with coffee and rubber to mono-culture cropping. Yields from mono-crop cultivation range from 3.5 to 5.0 MT per hectare compared with those from inter-crop yields of 0.5 to 1.5 MT per hectare. The range is wide in both cases due to differing initial planting costs and annual operating costs among small growers.
The costs of mono-cropping are 50-65% of those for inter-crop production in India or Indonesia. With more than half of global production still coming from inter-crop production, Vietnam’s mono-crop cultivation of pepper will remain cost-competitive compared to other origins in the near to medium term.
With low-cost and high-yield pepper production and grinding on the rise in Vietnam, we see further growth potential for Olam to participate in upstream pepper there. Since 2016, we have embarked on developing 325 hectares of greenfield, sustainable pepper plantation in Gia Lai province in Vietnam. In order to serve markets all year round and to mitigate our upstream risks, we are also developing a 400-hectare pepper plantation in Brazil.
Our pepper plantations combine the best farming and pepper growing practices from all key growing origins across the world. These include land selection, in-house development of good varietal mix, drip-irrigated farming and improved cultural practices that ensure judicious fertigation, water and chemical usage and traceability back to every planted block of pepper in order to achieve a consistent profile in our crops.
Planting in both countries is scheduled to be completed in 2018, yielding approximately 3,000 MT of annual crop at maturity in 2022. With this development, Olam will become the largest pepper grower globally and we will be fully integrated from pepper farms to pepper ground ingredients, with full control over our supply chain.
By being an integrated player we will be able to create a differentiated offering for our customers who value traceable and sustainable products. This will generate attractive margins for Olam.
From upstream pepper farming to midstream processing, Olam Spices is participating in Vietnam's comparative advantage in pepper production and the...