Econ in the News: Vanilla Beans are more Expensive than Silver

The skyrocketing price of vanilla beans has led to shortages of vanilla-derived products across the world, to the dismay of all who enjoy making baked goods (myself included).  During the 2017-2018 season, black Madagascar vanilla bean prices peaked at $635 per kilogram ($18/ounce), a price that officially made it worth more than its weight in silver.

To understand why vanilla’s price is so high, let’s start off with a little economic history. During the 19th century, French colonists introduced Bourbon vanilla to the fertile grounds of Madagascar. Fast forward a couple centuries later, and the island now supplies 80% of the world’s natural vanilla, accounting for about 20% of its GDP. As a result, supply-side changes in Madagascar can dramatically affect market pricing, especially since vanilla crop yields take a good amount of time to increase. Vanilla plants reach maturity over two to four years, and a vanilla flower only blooms for one day, requiring hand-pollination to ensure fertility. It’s estimated that 600 blossoms are required to produce 6 kilograms of ripe green vanilla pods, which are then dried over the course of a few months down to 1 kilogram of black, dried vanilla beans ready for shipment.

The last time vanilla prices were high, Madagascar’s government was at fault. A vanilla cartel amongst three major exporters of vanilla led to sustained high prices in the 1980s. In the end, a combination of cheaper vanilla crops sold from Indonesia and large confectionary companies switching to synthetic vanilla broke the cartel.

This time, weather conditions have severely damaged crops, leading to a sharp reduction in available supply. Thanks to tropical cyclones, the supply of vanilla decreased by an estimated 30% in March 2017, contributing to the all-time peak in vanilla prices. Vanilla crops will continue to be planted thanks to the high prices inviting more farmers to plant the crop, but the rise of vanilla bean thieves means that farmers are beefing up their defenses. Security costs, coupled with the already high labor costs of hand pollination, further increase the marginal cost of supplying vanilla, thereby shifting the supply curve to the left.

On the demand side, natural vanilla has become more popular among consumers, stemming from health-conscious movements and the overall acknowledgement that products made from actual vanilla do taste better. Consumers’ demand for natural vanilla shifts the market demand curve rightward, as the degree of substitutability that synthetic vanilla once possessed has weakened. These changing preferences, combined with dramatic decreases in supply, helped create the skyrocketing vanilla prices seen in 2017.

With vanilla being so expensive nowadays, what’s a bakery, ice cream shop, or Trader Joe’s (from which I’ve often bought vanilla extract) to do? In the case of Trader Joe’s, costs were partially passed on, with a four-ounce bottle just about doubling from around $4.99 to $8.99 (as of September 2018). A simple solution for shops selling vanilla-based goods is to also to pass on the rising costs of vanilla to customers, but higher prices for treats may turn too many customers away. Vanilla has become synonymous with a “default” flavor, so customers might be additionally averse to paying a premium for it.

From the behavioral economics realm, a couple adjustments of choice can be beneficial to help move consumers’ choices away from expensive vanilla. I’ve noticed, for example, that the Palo Alto Trader Joe’s has moved its vanilla extract bottles from a prominent eye-level position to a tucked-away corner, all-but-hidden behind a floating rack of banana chips. Another local store that I now source my vanilla extract from has a small sign in the back, instructing anyone interested in buying vanilla to request it from the cashier at checkout. By moving these vanilla items away from plain view, people can still purchase vanilla if they are interested in it, but it’s less likely that people will pick up vanilla extract in passing, reducing the burden on the store to supply lot of vanilla extract. A similar adjustment can be made in ice cream shops and other places with vanilla-based treats: change consumers’ perceptions of “vanilla” as a default choice. By putting up signs featuring another (less-costly, but still delicious) flavor as the shop’s “featured flavor”, indecisive consumers can be nudged towards a different ice cream experience, while still retaining the choice to enjoy vanilla if they really want to.

Over the next few years, new sellers will likely continue to move into the vanilla market, potentially even creating a glut of vanilla that will depress prices. In the meantime, I’ll just have to cut back a little on my baked goods.

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