Madagascar Vanilla Market – A Lesson in Development Economics

Arti­kel wurde zuerst in LinkedIn auf Englisch publi­ziert. Bitte Über­set­zungs-Funk­tion wählen für deut­schen Text.

I recently purcha­sed vanilla in a grocery store in Luxem­bourg and could not help wonde­ring about the price: 4 – 6 EUR for a single pod of vanilla. Fasci­na­ted by this very expen­sive and very lonely vanilla pod in a glass vial I star­ted to investigate…

Mada­gas­kar is one of the poorest coun­tries on earth. Only 1 out of 4 km of roads are paved, around 75% of the popu­la­tion were esti­ma­ted to live below the inter­na­tio­nal poverty line of 1.90 USD in 2019. For 150 years, Mada­gas­car has steadily been expor­ting Vanilla to the world, until it recently provi­ded over 80% of world market.

Poor subsis­tence farmers growing the vanilla orchid in a mixed culture (agro­fo­res­try) used to earn a few dollars per kg through a very indus­trious process of hand-polli­na­ting every single flower every single day for 3 months.

For a while, vanilla went the way of coffee. Little of the final price of 50 USD per kg remai­ned in the pockets of the farmers and big play­ers domi­na­ted the world market. Then came the end of price controls. Under pres­sure from the World Bank, Mada­gas­car was forced to aban­don price controls in the 1990s. What follo­wed were collap­sing prices brin­ging farmers to their knees. For long months of labor, farmers were paid only between 10 and 20 USD per kg of cured vanilla. Too little to survive and forcing them to heavily rely on self-grown food and relatives.

Deve­lo­p­ment orga­ni­sa­ti­ons came to Madagsa­car to do their magic with food secu­rity aid, bios­phere protec­tion, market systems deve­lo­p­ment, finan­cial inclu­sion, gender main­strea­ming, educa­tion deve­lo­p­ment, sustainable product labe­ling – you get the story. “While hund­reds of milli­ons of $ have been inves­ted in over 500 envi­ron­men­tal-based projects in Mada­gas­car during […] 1993–2008, defo­re­sta­tion remains unche­cked and none of the eight Mill­en­nium Deve­lo­p­ment Goals (MDGs) estab­lis­hed for 2000–2015 were likely be met. Efforts to achieve sustainable deve­lo­p­ment had failed to reduce poverty or deli­ver progress toward any of the MDGs.” wrote a PLOS ONE paper in 2016.

The market price for vanilla was still floa­ting freely and after a hurri­cane destroyed most of the vanilla plants in 2000, the prices spiked to a 100 USD in the early 2000s. Inter­na­tio­nal buyers repor­ted that local exporters were asking about 600 USD a kilo for cured vanilla on a Monday and roughly 20 USD by that Friday. Wareh­ouses were stuck with beans they could­n’t sell for anything close to what they’d paid for them, and a couple of the biggest, most well-estab­lis­hed vanilla dealers in the coun­try went out of busi­ness (Bloom­berg). Whate­ver farmer jumped on the band­wa­gon and star­ted to grow vanilla got a disap­point­ment. Prices went down again to the range of 20 to 30 USD per kg of cured vanilla for almost 10 years. An over­thrown government in 2009 did not help in any way.

In an attempt to better protect their inte­rest, the global vanilla buyers star­ted programs to incre­ase quality, tracea­bi­lity and ensure a level of sustainab­li­lity. Farmers were trai­ned, schools were built, agri­cul­tu­ral diver­si­fi­ca­tion was taught to streng­t­hen food secu­rity and to estab­lish alter­na­tive sources of reve­nue, and access to clean water was ensured.

Then the market went wild. Between 2016 and 2020 prices were in stra­to­s­phe­ric dimen­si­ons of over 200 USD per kg of cured vanilla. It became the second most expen­sive spice after safron and cost more than silver for a while. 2017 and 2018 repor­ted prices of 485 and 590$ per kg (Bloom­berg) and by Septem­ber 2020 the prices came down to 250$. Further defla­tion is expec­ted over the next few years.

When the boom happened, there was not much of a banking infra­st­ruc­ture, let alone finan­cial liter­acy to deal with the sudden wealth. A few farmers dispo­sed of their wealth in the way of nouveau-riches and ever­yone in the vanilla growing region has a story about “hot money” to tell. Chicken cost USD 10 all of a sudden and a lot of new 4x4 cars were queu­eing up at the gas station. The roads are still unpa­ved. Most farmers did not have a bank account or know how to save money, so they purcha­sed houses in town or stored money in their homes. Typi­cally the money was spent as soon as possi­ble, and the Mada­gas­car Ariary is not known as a strong currency. Since 2008 it lost 60% of value against the USD. With the largest deno­mi­na­tion, the 20’000-ariary note being worth about USD 5, the weight of money requi­red to buy the harvest is enorme­ous. In 2018, a buyer had to wait 3 days to settle a deal until the central bank had prin­ted more money.

All of a sudden, child­ren are sent to schools in town, better mattres­ses are purcha­sed, TVs and solar panels adorn houses. Nothing of it is the result of any deve­lo­p­ment acti­vi­ties, it’s pure coin­ci­dence – a whim of the free market. The farmers know that the end of high vanilla prices is near and they brace for impact. A sustainable price for green vanilla at the farmer’s gate is esti­ma­ted to be around 18 USD per kg. For cured vanilla it might be in the range of 100 – 150 USD per kg.

A farmer family of four can take care of 10’000 m2 of plan­ta­tion at the most (Fairtrade). A realistic assump­tion may be that a small­hol­der farmer family has 1’500 m2 plan­ted with vanilla. They might have around 370 vanilla plants at a distance of 200cm from each other. The first 3 years, there are no flowers and thus no vanilla pods. After 6 years, a full harvest of 1kg per plant can be picked. The life­time of a plant is about 15 years.

When vanilla is harve­s­ted ripe, the shrin­kage is a factor of 6 during the curing process. It can go as high as 7.5 when vanilla is harve­s­ted too early.

While market prices are much more compli­ca­ted in the way of fluc­tua­tions and by distin­guis­hing 5 diffe­rent quali­ties, the picture is clear: by curing green vanilla to Bour­bon gour­met grade, a farmer can earn more by spen­ding a full month swea­ting and drying the pods in a suita­ble loca­tion. Cured vanilla keeps longer, thus a farmer can time the market better and is not forced to sell at a low.

With a sustainable price of USD18 per kg green vanilla (as guaran­teed by Fairtrade), a farmer could earn USD 14 per day during 15 years, lifting a family of 4 above the poverty line of USD 1.90. The prices of 2014 on the contrary kept the farmer family below the poverty line.

There are still many pitfalls on the way to a sustainable life for vanilla farmers:

1. Income distri­bu­tion over time: for the first 3 years there is no harvest from a vanilla orchid. The money beco­mes avail­able when the produce is sold (typi­cally on 1 day in the year) and has to last for a full year. This requi­res saving and spen­ding discipline.
2. Skills and know­ledge influ­ence the size of the harvest and the quality of the product, be it green or cured vanilla
3. With sky-high market prices, thefts have gone up and farmers either sleep in their fields or pay for guards. Some thie­ves have been killed.
4. Natu­ral disas­ters may damage the deli­cate plants and intro­duce anot­her price spike. Dise­a­ses and pests may attack plants locally. Vanilla mono­cul­tures are at risk.
5. Guaran­teed mini­mum prices rely on consu­mers being willing to pay when the product is much chea­per on the free market. Synthe­tic vanil­lin is on the rise.
6. Compe­ti­tion from places like Indo­ne­sia, Papua New Guinea, Mexico (the home coun­try of vanilla), China, Turkey or Uganda might shift the market weight.
7. Vanilla prices are fluc­tua­ting and a matter of random coin­ci­dence for the small­hol­der farmers, loosely coupled with last year’s prices. They feel disen­fran­chised by the global market whims and need a stra­tegy and tools to even out the income spikes.

The current high prices are keeping farmers in Mada­gas­car happy – at least for a bit more, but the impact of the large size of the profit may have the same effect as a lottery win: it may leave the family in the same poor posi­tion after the straw fire of hot money has died down. Where farmers were able to convert the oppor­tu­nity of a life­time into a life­time of bene­fits, the whole family has been lifted out of poverty. All through the forces of the free market. Let the deve­lo­p­ment prac­ti­tio­ners fix the cracks and fill the gaps.

Foto von ritual auf Pixabay