Not so Sweet

Ingmar Empson

August 16th, 2017



Vanilla prices have reached the highest level in nearly two decades, a result of increased demand and decreased supply. However, market trends, natural disasters and lack of diversification mean prices aren’t likely to break until at least 2019.


The vanilla bean market is fascinating in a number of ways including its rich history. According to studies, the vanilla market has been fraught with volatility for centuries. The bean has been valued for hundreds of years, dating back to the pre-Columbian Mayan Totonac civilization who used the spice in beverages. Following their conquest by the Aztec Empire, the bean again gained popularity among Aztec nobility as an ingredient in chocolatl, a drink similar to hot chocolate. It wasn’t until 1519 that Europeans got a hold of the bean. Excited by its unique and rich taste, Europeans planted vanilla throughout the continent and England. Much to their frustration, the plant would grow but couldn’t produce the valuable beans. The source of the problem wasn’t discovered for another three hundred years. In 1836 a horticulturist by the name of Charles Morren discovered that the vanilla plant was absolutely unique. It was pollinated by a single insect, the stingless Melipona Bee, which didn’t live in Europe. This meant that vanilla had to be hand pollinated in order to produce beans. This fact remains true to this day. The plant’s range is also highly restricted. Vanilla can only produce high-quality beans within a narrow band 10 to 20 degrees north and south of the equator. This severely limits its potential growth area. These factors help explain some of the commodity’s high relative price but don’t account for its recent volatility.


Source: Bloomberg

Source: Bloomberg

The vanilla market’s current volatility stems from a wide array of factors. Vanilla is a time and labor intensive crop. Once planted, it takes a minimum of three years to produce beans. Before 2005 prices and demand for vanilla was high. Many farmers switched from cocoa production to vanilla production to take advantage of these high prices. Because of the lag in producing beans, farmers over-entered the market. The result was an oversaturated market and the price of vanilla beans dropped significantly. Between 2004 and 2011 the price of vanilla remained fairly constant around $20 per kilogram. This is shown in the Bloomberg graph above.


Because of the price drop, it was more profitable for farmers to produce cocoa beans. As a result, come 2012 there was a shortage of vanilla beans. This started the price move upward.


Natural factors have also played a role. High-quality vanilla beans can grow in only a handful of locations, including Madagascar, Mexico and Indonesia. According to Nielsen Massey, one of the world’s largest vanilla manufacturers, 80% of this year’s vanilla was produced in Madagascar. Vanilla has no diversification, meaning events in Madagascar affect the entire market. Madagascar recently underwent a severe drought that damaged the vanilla crop. The strongest cyclone in 13 years also hit the island nation in March 2017. The storm was the equivalent of a Category 4 hurricane. The storm killed at least 38 people and displaced over 53,000 according to the BBC. Cyclone Enawo also destroyed an estimated 30% of the vanilla crop. These disasters will support prior price jumps and may even push the price higher.


Madagascar’s deregulation of the vanilla industry in the 1990s has also shaped the volatile market. Middlemen now purchase vanilla from the farmers and hold onto the good to drive up prices. Once prices look to have peaked they will unload the beans onto the market. This drastic increase in supply bottoms out the value of the good.



These events are in combination with a dramatic increase in demand for natural vanilla. Consumers are demanding natural ingredients in a way never before seen. Amazon is set to buy Whole Foods, a grocer specializing in all-natural food products, for $13.4 billion according to the New York Times. Large companies are seeing the long-term benefits of entering this “green” market. Nestlé, including many other large manufacturers, pledged to use only all-natural vanilla in their products in 2015. This is instead of the artificial flavoring, vanillin. They must now uphold these promises. The move by big manufacturers to purchase natural vanilla greatly increases demand and prices.


The government of Madagascar proposed initiatives to combat the whiplash of vanilla prices. Setting a date when producers nationwide can sell vanilla beans on the market could help solve the problem according to the Madagascan Ministry of Commerce. The ministry is also pushing for new laws that would require producers to document their vanilla, including grade, net weight and where it originates. Although potential solutions have been offered, Nielsen Massey writes that “it’s unclear whether the government has sufficient resources to make a difference.”


Because of these factors, it appears unlikely that vanilla prices will break anytime soon. Although accurate and detailed vanilla supply figures are difficult to come by, rough estimates show a continuation of increasing demand and decreasing supply. This will drive prices higher. These high prices will attract a number of producers. However, the crop planted within this past year will not harvest beans for at least three years. This is assuming there are no more natural disasters. Based on current information, we believe there is a 70% chance vanilla prices will not fall below $120/kilogram before 2019.




Almond V Vanilla.png

Almonds pose a unique investment opportunity given the vanilla market’s volatility. Although vanilla is the preferred luxury flavoring for many foods, almond extract is an affordable substitute. This is especially true in the production of non-artisan products. The price differential between the vanilla extract and almond extract is huge, even when vanilla prices are slumping and almond prices are surging. Large manufacturers would be able to maintain their promises to use natural flavoring, at a fraction of the cost. This is illustrated in the graph above.



Almond Production.png

Almond production is also significantly more diversified than vanilla. This hedges significant risk. Interference with one input in the total supply chain will have minimum effect on prices. This is important given the effect climate change has proven to have on crop production. As a result, prices are more stable. The market share is shown, without country labels, to the right.


The almond industry is also more sustainable. Almonds can be harvested by machines, which decreases the amount of child labor in the industry. Almonds also require significantly less water to grow. Vanilla takes 15,159 gallons/pound and almonds take 1,929 gallons/pound according to the Water Footprint Network. This makes production cheaper and less environmentally impactful.


For these reasons, a significant switch from vanilla to almond extract is likely within the decade. This will also be influenced by consumers taste preferences.  We expect a price swing, similar to the current rise in prices to set the transition in motion. The price of vanilla will push small dairy producers out of the market and incur high costs by large scale manufacturers. This switch will prove positive for consumers and will ultimately mitigate environmental costs.


Investing involves risk, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Opinions reflect the market conditions when written.