To find a bubble, one does not need to dive into the world of Bitcoin, but only to lift the lid of the cookie jar in the kitchen. The price of this valuable spice has been rather salty lately. At the current state, vanilla is more expensive than silver, and second only to saffron.
Madagascar is the main producer of vanilla, with nearly 80 percent of the market share. Since the liberalisation of the market in 1989, the business has boomed. Disaster struck in March 2017, when Cyclone Enawo devastated the country’s vanilla orchid crops. Even though only 10 percent of the land was destroyed, Enawo was the worst storm to hit Madagascar since 2004 and inflicted $400 million damage, about 4 percent of the country’s annual GDP.
Although markets reacted to the external shock of the destruction caused by the cyclone, the true threats to vanilla harvests are unrelated to the weather. In particular, a rise in criminality has directly impacted the farmers. As theft of crops has increased, growers of vanilla crops have been forced to permanently supervise their fields. Also, rosewood smugglers buy huge amounts of green pods, irrespective of the quality, to launder the money from their illegal business and turn their illegal proceeds into legally generated money.
Another reason for skyrocketing prices is the deterioration of the quality of harvests: farmers gather their crops before maturity due to the fear of theft and the belief that prices may fall right before harvesting season.
Even though the increasing trend towards natural ingredients has driven up the demand for pure vanilla, the sharp increase in prices for the scarce good has led to a decrease in demand by 30%. Many producers of ice cream, candy and fragrances have increased their spending for Research and Development to create artificial vanilla with an authentic flavour. Despite the consumers’ desire for pure vanilla, 90% of vanilla flavours are still artificial. The most common substitute, vanillin, is gained from raw oil. Whereas real vanilla yields prices up to $1500 per kg on the world market, vanillin prices amount to $10 to $20 per kg.
Naturally, local producers have reacted to the shifts in the market. Large exporters from whom the flavour houses buy vanilla beans do not rush into selling their stocks, as they have lean inventories, but rather demand 50% of the payment in advance. In addition, farmers use vacuum packages to keep their beans moisturized and thus heavy. However, the local Malagasy government banned this practice as it yields poor quality beans with low flavour. The traditional method of curing and drying requires several months of work but results in supple beans with a high flavour profile. By abolishing traditional practices, Madagascar’s reputation as producer of high-quality vanilla would suffer. Furthermore, farmers withhold their beans to earn at least $800 per kg. This drives up prices even further as extract manufacturers pay ridiculously high prices to fulfil their contracts with international food companies. Some end-users have chosen to endure the period of hardship, some others are reformulating recipes, while others are trying to cut costs. Secondary vanilla products such as vanilla seeds are also in high demand and selling at record high prices. Neither of these products imparts any flavour nor fragrance.
The vanilla market follows the classic pattern of a bubble. Small players on the market start speculating and even experienced participants in the market do not see prices coming down which might indicate an impending crash. The last time Madagascar experienced a similar crisis in the vanilla market was 2001, when storms destroyed large parts of the annual harvest. In less than three years, the prices increased by 1500%, from $20 to $500 per kg. The low quality of Malagasy beans forced international companies to turn to other producers, such as Indonesia or Papua New Guinea. However, these countries are less experienced with the growth of the spice, and they are yet to challenge Madagascar’s reputation as the world leader in gourmet vanilla. With respect to this development, one might wonder: Why does this happen with vanilla but not chocolate or coffee?
There are viable alternatives to vanilla beans such as imitations and “natural flavours”. Vanilla is a far smaller industry than chocolate or coffee. These are traded in millions of containers each year; vanilla comes in at roughly 2300 – 3000 tons in a successful year. Consequently, vanilla is not traded on the international commodity market. There are no protections for vanilla farmers and no rules or sanctions on the industry.
Although the vanilla market remains as volatile as ever, the likelihood of a price collapse in the near term is low. The demand is extremely difficult to quantify. There is little doubt that global consumption has dropped, but the exact figure is hard to determine. However, the figure has not been sufficient to reverse current pricing trends. In conclusion, making a clear prediction about the vanilla market remains impossible.
By Jacqueline Seufert
The TSEconomist 