The World Vanilla Market is Anything but Vanilla

The World Vanilla Market is Anything but Vanilla

Vanilla strikes most consumers as a rather standard commodity. However, the story of how vanilla makes it from the farm to your ice cream cone is a complex mess. Vanilla is the second most expensive spice in the world, after saffron, due to highly labor-intensive methods of cultivation.

It is also only grown in a few places, such as Madagascar, Mexico, Indonesia and China. It requires a warm tropical climate, making it vulnerable to disease and natural disasters. All of this combines to make the global vanilla market one of the world’s most volatile.

World vanilla prices experienced a massive spike after a 2000 cyclone devastated much of the East Asia crop. The sudden drop in supply pushed vanilla prices to nearly $500 per kilogram and led to a rush of new market entrants hoping to take advantage of the now lucrative crop. Too many farmers had the same idea, however, and the market quickly swung back into oversupply. By 2010, prices had dropped to as low as $25 per kg and there was worry about market collapse as farmers could barely earn enough to get by. Today, vanilla prices are surging upwards again due to drought, fungal attacks and low prices driving many producers out of the market. Vanilla now sells for $80-$120 per kg, and there are concerns about hoarding and a lack of supply.

All of this leaves many consumers and producers scratching their heads about the future of such a volatile market. Year-to-year prices are nearly impossible to predict, but some long-term trends can help companies navigate the market better. First, a market prone to frequent price crashes will tend to favor the producers with the lowest costs of production, as they are better able to weather tough times. Given the labor-intensive nature of vanilla production, this dynamic favors countries with the lowest labor costs. Ironically, places with lower growth rates like Madagascar and Uganda  probably have a long-run advantage in the vanilla market. Countries such as China and Indonesia could quickly be priced out of the market as they continue to grow and workers demand higher incomes.

Second, those best insulated from environmental disasters and the changing climate will have an advantage. Vanilla is principally grown in tropical regions that are prone to violent storms. As the oceans warm, such super storms will become increasingly frequent. This creates vulnerability for coastal producers such as Madagascar and Indonesia. Countries that are able to grow their crop further inland may have to pay high transport costs, but they will be protected from losing their crop to severe weather events. In this regard, places like Uganda and Mexico should win out.

Finally, the market will be affected by the demand for synthetic vanilla. Synthetic vanilla is now used in a majority of vanilla products and is significantly cheaper to produce than natural vanilla, though it lacks the same quality of flavor. The rising popularity of the synthetic product has been a major contributor to falling prices in the natural market. However, recent years have given rise to consumer concern over the chemicals used in synthetic vanilla and a desire for organic or pure products. How the growing “natural v. synthetic” debate plays out in the years to come will be a key market determinant.

Categories: Economics, International

About Author

Evan Abrams

Evan was previously a strategy consultant with Anant Corporation, where he helped companies streamline and grow their online operations. He has interned at the United States Senate, the U.S. Department of Commerce, and SRI World Group. He is particularly interested in international monetary and trade policy. Evan also closely follows the private space sector, on which he completed a master’s thesis. He is currently pursuing a Juris Doctor at the Georgetown University Law Center. He holds a master’s degree in international relations from the London School of Economics and a bachelor’s from Georgetown University’s School of Foreign Service.