Locust Bean Gum Update

Morristown, NJ ………………………………………………………………….………….August 3, 2005

Every ten years the nerves and tolerance of all LBG industry participants are severely tested by a dramatic price increase and uncertain supply. Suppliers, intermediaries, and international buyers agonize over the damage to their budgets, the obvious and significant manipulation of supplies and prices, and the respective merits and risks of “toughing it out” or reformulating to either a gum blend or another gum. The credibility of powder suppliers was damaged most severely this year, because market reports from different suppliers, explanations of prices, and actual selling prices differed very dramatically, even for sales made during the same period.

The leading supplier was widely reported to have allowed inventories to drop dramatically at the end of the 2003-2004 season in anticipation of a very good crop year. They, and the rest of the seed buyers, were made to pay dearly for this as supplies were severely rationed by the biggest kibblers when the new crop arrived. The 2004-2005 campaign became particularly painful for the U.S.A. clients for the nearly 3000 MT  LBG market, because the Euro appreciated substantially against the dollar during the second half of 2005 at the same time that the seed price escalation, from Euros 2.10 / kg in July ’04  to as high as 4+ occurred. Seed prices then continued to rise after January to 5.50 even as the Euro subsided, but LBG prices remained stuck at the highest levels as there was competition for supplies. Clients buying and selling in Euro or yen markets had a buying advantage, because their customers did not feel the negative dollar currency translation.

The impact of the 250% increase has been quite powerful, with dramatic consumption declines in all markets, but especially in Asia and South America. Gum blends (Konjac, Tara, Xanthan and Guar) with reduced percentages of LBG or even absolute replacement significant reduced purchases. U.S.A. importations are normally heavy early in the year in anticipation of ice cream season, but imports through May 2005 were under 1000 MT, as compared to over 2900 MT imported during 2004. 

The crop outlook is average to a little below average. 30,000+ MT of seeds is average, and estimates we have heard now range from 22,000 to 26,000 MT. the crop has been delayed 30 – 60 days by cold spring weather. Earlier concerns about a shortage between now and November/December have been mitigated by reports of reduced consumption. Powder suppliers want to sell now, better deals on seeds are now appearing, and the price trend is definitely downward. However, nobody can possibly predict what will be the seed price and powder price equilibria, and therefore where LBG prices will settle. We are told that seed suppliers have earned a lot of money last year and this year, and they have “stamina” to continue allocating supplies and other ways of productively allocating their labor force if seed prices are unattractive.

The “pipeline” of supplies is not filled, because all rungs of the distribution chain do not want to be left holding overpriced stocks. Consumption is definitely down now, but nobody really knows what will be the true price elasticity of demand.  In our discussions, we have heard buyers and sellers comment that a level of $4.50 to $5.00 per lb. is sustainable over the longer term and might facilitate recovery of some users. We do not know how many buyers will abandon LBG for the upcoming season.

RECOMMENDATIONS: we suggest that larger buyers should maintain 50% to 75% of their normal inventory levels but pay especially close attention to market developments. The price trend is downward, but it is most important to be able to wait for a better offer during this uncertain period rather than having to buy to keep the production lines running.  It is very important to get a diversity of market reports, because there can be very significant differences among what particular regions in Spain, Italy, and Morocco are reporting.  For buyers who are particularly risk averse, PLT has the strong encouragement from Idea to work closely with you to guarantee at any time a maximum price on future supplies, while nevertheless providing significant protection against market declines; we encourage you let us try to customize a plan that meets your objectives.

Paul Flowerman, President