Vanilla: From Concern, to Crisis, to Creating Solutions

January 27, 2016

Vanilla BeansThis irony exists throughout the business world—when prices are low and supply is high, no one’s thinking, “Uh-oh, this is trouble,” but they should because underlying dynamics during such a market-favorable time can frequently turn the tide. Additionally, because these influences fly under the radar and work quietly amidst the noise made over low prices, when they hit, they can hit with major consequences.

This very dynamic was set in motion for the vanilla market five years ago. Prices reached a historic low, allowing food and beverage companies that use vanilla to enjoy a stable vanilla flavor cost of goods. While everyone was “riding the wave” of low-cost vanilla, the market forces behind the scenes for what we are seeing now were building.

Currently, vanilla prices have already quadrupled in less than 10 months. Still, many ask, “Are skyrocketing prices reason enough to elevate the situation from cause for concern to a state of crisis?”

I answer that with “it’s looking more and more possible.” David Michael & Co. has more than 100 years of experience in the vanilla industry, many of them accompanied by volatile vanilla prices as the ebbs and flows of the market played out, so we’ve seen all kinds of forces at work affecting prices. Let’s take a look at the current factors at work taking vanilla prices into the high-demand, low-supply, rising-cost scenario. What is happening to vanilla is not just the rule of supply and demand. There are more forces at work keeping the supply low for the foreseeable future.

For starters, last year’s poor flowering season means potentially 300–500 fewer tons available in 2016. There are also a slew of “man-driven” actions that are keeping the vanilla supply low including: farmers’ switching to more lucrative crops, speculators holding back on current supplies until prices increase, a booming trend of making “green bean extract,” vacuum-packing partially cured beans for future sale at higher prices (compromising the quality while bringing out an undesirable phenolic note that stays with the bean), and even a mafia-type buy-up of vanilla beans for money laundering purposes.

I’d like to tell everyone to just hang tight for a few quarters—but it doesn’t seem the hand of supply-and-demand will balance things out that quickly. The good news is there are some solutions while we ride out the wave. Some suppliers, like us, saw this coming and secured quantities of vanilla during the low-cost era, offering customers the opportunity to lock in at lower prices. Additionally, technology exists that enables using a lower amount of vanilla extract while not impacting the label, and innovations in the extraction process allow for more complete extractions resulting in a more intensified product.

My family has been through three vanilla crises to date, and every time we’ve been able to maintain a supply for our customers. I have no doubt that as long as innovators keep innovating, and suppliers continue to work with their customers to manage costs and extend supply, the food industry will weather the crisis and emerge stronger.

Skip Rosskam

Skip Rosskam
President and Chief Operating Officer
David Michael & Co.

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