Consumers take for granted just how expensive, laborious, and complex the ingredients in their food can be. Because everything is so readily available at an affordable price, we neglect to consider what took place, from when the crop was planted to the moment the meal is served to us. One of the best examples of this is vanilla. All we know about this agricultural good is that it is delicious, it is the superior ice cream flavor, and it derives from orchids of the genus Vanilla – OK, well, maybe that is not common knowledge. But this particular agricultural commodity is something else: A teacher in economics.
If you are in the vanilla business, then you are making a killing right now. With the spice trading at just $20 per kilogram in 2013, prices skyrocketed to as much as $600 three years later, eventually becoming more expensive than silver by weight. Today, vanilla is averaging around $500, and all the evidence points to this being the norm for the short- to medium-term.
But how could one ingredient cost so much?
Life is Sweet for Farmers
In recent years, one of the biggest consumer trends in North America has been to eat more naturally. As a result, food companies are shifting away from synthetic ingredients to more natural ones. This is why you will regularly see boxes inform shoppers that a product contains “all-natural ingredients.” So, instead of relying on high-fructose corn syrup and artificial sweeteners, brands are using items that you can easily recognize on the side of a box. That includes vanilla.
Approximately 80% of the world’s natural vanilla supply comes from Madagascar, a nation prone to cyclones, poachers, and volatility. In March 2017, Cyclone Enawo hit the island and destroyed most of the crop, leaving producers unable to keep up with global demand.
This is where the laws of supply and demand come in. With vanilla skyrocketing to all-time highs, the market signaled that there was a huge requirement for it, so prices adjusted accordingly. The higher they went, the more farmers needed to recover quickly and ramp up output to take advantage of these prices, whether that involved working all hours of the day or fighting off criminals.
Until the market crashes, Madagascar residents are enjoying their lives by building houses, buying motorcycles, going to school, and putting money in the bank. Of course, the lucrative nature of vanilla has also led to farmers abandoning other essential crops, which will prove disastrous when the market inevitably craters.
Show Us Your Marx
In 1847, writing in The Poverty of Philosophy, Karl Marx coined the term Law of Value, better known as the Labor Theory of Value. The idea contends that all value is created by physical labor. But is an iPhone’s cost defined in a Chinese plant on the assembly line or it is established by demand? Steve Jobs could have spent his life constructing a smartphone and charging obscene amounts of money, but if nobody wanted it, then it would have very little worth. It is the subjective value placed on the item by the consumer that trumps everything else.
Cultivating vanilla is a laborious task – during the harvest and after.
It is an orchid that needs to be hand pollinated in the middle of the rainforest. It can take about six months to grow. Then, once it has been picked, the beans take another six months of manual attention post-harvest. Indeed, there is a lot of work that goes into growing the ingredient. According to The Economist, some farmers try to go the easy route and pick the bean pods before they are ripe, but this deteriorates the quality and pushes down the price.
Under Marx’s LTV, vanilla should cost $500 per kilogram because of the work that goes into it. But this is an absurd way to consider its astronomical worth, mainly because it would diminish something’s true value.
Let’s say you’re in your basement manufacturing a pair of shoes that automatically heats your feet when you’re outside in the winter weather. It is an intricate task that mandates physical and mental labor 23 hours a day. Because of the amount of work that went into it, you’re charging $2,000 a pair. This would discourage customers from buying your shoes; though they may think you have a great product, they are likely to just wear three layers of socks instead. Therefore, nobody is purchasing your product, and what could have been a successful item is now sitting in your basement with zero value.
Crude oil is another prime example of this. There is a lot of work that goes into drilling, shipping, refining, and transporting oil. But if the consumer landscape favors natural gas or wind to oil, then Texas Tea doesn’t have much worth, despite the incredible labor involved.
The same law applies to vanilla. You could grow these orchids to sell, but there first needs to be a market for it.
Innovation and Comparative Advantage
When the cost of something is high, innovation will inevitably bring the price down. This standard practice in the private sector is unfolding in the vanilla industry, where famous brands like Haagen Dazs and Ben and Jerry’s are working to improve quality and make production more cost-efficient. They may use different equipment, they might utilize automation for a certain part of the process, or they could look to other markets.
In the coming years, Madagascar may lose its comparative advantage – the ability to carry out an economic activity at a lower opportunity cost than other trading partners – because other markets are getting in on the action. Indonesia, the Netherlands, and Uganda are starting to grow this crop, and it is possible that these territories may cultivate vanilla better than Madagascar.
Will the cost stay high forever? Not if the food companies have their way.
If you want to see the principles of economics and the benefits of free-market capitalism at play, then look no further than the supermarket. Grocery stores can provide us with stupendous Econ 101 lessons, from the price of fruit and vegetables to the brand packaging of your favorite cookies. Vanilla isn’t just another commodity that tastes delicious – New York-style vanilla cheesecake must be descended from heaven – but it can also educate us about supply and demand, global trade, and subjective value.
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