HERB INDUSTRY COMMENTARY

What Happened to the Herbal Markets?

By Richard Alan Miller

Lack of new products and low consumer confidence in product quality has impacted the growth of our industry. Our future success will be driven by the creation of innovative, effective products with proven clinical support and patent protection. This is not a raw material industry as much as it is one best suited for cottage industries.

There are several factors confusing the issues regarding the new and growing markets for specialty crops (like the herb and spice trade). The first is that a number of new growers entered these newly developing markets, creating surpluses on specific crops such as ginseng and echinacea. Ginseng was done for the bankers and the Vancouver Stock Exchange, and tobacco growers used echinacea for tax breaks.

With echinacea, the problem was that everyone was acting like "K-Mart shoppers following the "Blue Concourse." Most did not have a business plan or their marketing set in place. Most crops fall into two categories: storable and non-storable. Non-storable crops tend to be niche markets, or areas for cottage industries to develop. When there are surpluses, however, crops are no longer controlled by the farm, but by bankers and warehousing.

The second, and probably more difficult situation is that the pharmaceutical trade essentially "shot itself in the foot." There were so many new companies wanting shelf space in local supermarkets, no one cared what was put inside the bottle or capsule. The buzzword for the industry at the time was "What’s new?" If the media (like CBS) was going to recommend St. John’s Wort on national news, a new company felt it "must have" that product.

At first there was not enough echinacea root, so companies then used herb [the above ground foliage]. Some labels do not distinguish whether root or herb is used as the ingredient. So, they have a place to "cheat." Of course, the herb part of echinacea has no real chemistry to write home about, so the labeling was misleading, and products often did not deliver claims made from the mass media.

St. John’s Wort was the same. At it’s height, more than 1,000 ton was used by domestic manufacturers. However, there were (and are) many different ideas as to "how it works." One market claims hypericins levels, while another looks for hyperforin (or even volatile flavonoids). The industry is so new; it does not yet have standards, or even protocols for testing. That aspect of the industry is still a mess, and stories involving payola will probably emerge.

Last year, FDA ordered 42 different manufacturers of St. John’s Wort Herb off the shelves. Why? Because they did not have inside their bottle what was said on their label. What happened next is from classic marketing situations. A person is "depressed," hears about this new drug from a major network, decided to try St. John’s Wort, buys the cheapest brand (to save money, and "just in case"), and then gets a product that does not deliver. Is he going to go back and buy again? Probably not.

That is why the market dropped to only 300 ton this year. Martin Bauer, probably the largest pharmaceutical buyer in the world, was now holding more than 1,300,000 lbs. from last year’s harvest. This is also true for most of the mid-sized manufacturers in North America. They all hold last year’s ("old") inventory. To make things worse, the pharmaceutical trade will probably use up "old" inventory before they repurchase new.

This means that every farm that grew St. John’s Wort this last year has not been able to sell any of their crops from this year. Surpluses and old inventory will be used first (because of investments), further damaging credibility of the herb. Of course, the new farmer is still holding current inventory, and is now willing to give it away to cut their losses. When it does finally reach manufacturers (next year), it also will be "old" inventory. Quality is now lost (again).

The pharmaceutical trade is not a fad industry like Nike shoes. It must deliver chemistry if it is to experience "re-buy" and loyal customers. If feverfew does not stop a migraine, why would anyone buy a second bottle? It’s the same with anything like this. Everyone is trying to survive this loss of sales and marketing, while perpetuating the problem further with their own survival needs.

It becomes a vicious circle, with no real relief. Worse, St. John’s Wort actually does help depression. But our way of going about the marketing of it will only further delay the credibility of these new sources of medicine, unfortunately. This is why I recommend diversification, and that the markets for these crops will probably be soft for next two years. This industry is about a lifestyle, not about making money. Only rural farmers need apply.

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The Changing Financial Styles of American Agriculture

In a normal capitalistic system it would work this way. The farmer has two cows. He sells one cow and buys a bull. His herd multiplies, and his economy grows. The end picture is that he sell his herd and retires on the income.

However, in light of the Enron Venture Capitalism Style, Farm Agriculture would work this way. The Texas farmer has two cows. He sells three of them to his publicly listed company, using letters of credit opened by his brother-in-law at the bank.

Then he executes a debt/equity swap with an associated general offer so that he now gets all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company.

The Cayman Island company is secretly owned by the majority shareholder who sells the rights to all seven cows back to the farmers original listed company. The annual report says the company owns eight cows, with an option on one more.

This is how Enron, a company with $62 billion in assets, is declaring bankruptcy.



Richard Alan Miller is herb industry consultant, herb broker and author. For more information about Richard Alan Miller’s writings see www.herbfarminfo.com and www.nwbotanicals.org. © 2002 Richard Alan Miller.
 
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