Not at all plain, the vanilla market has turned volatile again. Five years ago prices for vanilla beans were hovering at about $20 a kilogram. This January, industry sources reported prices above $200 a kilogram. In turn, manufacturers of foods and beverages such as ice cream and cookies should brace for continuing high vanilla flavor prices.

Skip Rosskam, president and chief operating officer of David Michael & Co., Philadelphia, said he is advising his customers to find ways to use less vanilla, which would improve the supply-demand situation.

“Can you imagine somebody who sells vanilla for a living telling his customers that we’re all going to be better off if you use less?” he said. “But it’s true. That is what has to happen. We have to create more supply than there is demand.”

Josephine Lochhead, president of Cook Flavoring Co., Paso Robles, Calif., also gives advice to her customers who buy vanilla flavor for their foods and beverages.

“No. 1 is not to stock up,” she said. “When (the food and beverage companies) see these prices going up, they want to order four times what they normally do, and that just exacerbates the problem. Have patience. Don’t panic.”

The market has even seen higher prices. Vanilla beans went over $500 per kilogram in 2004, said David Vanderwalde, director of Aust & Hachmann, a vanilla bean buyer based in Pointe-Claire, Que., that sells to flavor houses. Growers in other countries besides global leader Madagascar then entered the market, leading to a glut, he said. The market crashed. Prices plunged. Vanilla beans sold for about $20 a kilogram from 2008-10, Mr. Vanderwalde said.

Only Madagascar growing regions could support such low prices for vanilla beans, a labor-intensive crop, Ms. Lochhead said. Cook Flavoring Co. grows its own vanilla beans in South Pacific regions and also buys vanilla beans from Madagascar. Wages in Madagascar run about $1.50 per day while wages in other regions average about $10 per day, she said.

Since vanilla prices are high again, growers in other countries may consider getting back into the vanilla market, but it’s not that easy. After planting vanilla beans, it will take four years to develop a commercial crop, Mr. Rosskam said.

“It’s not a quick fix anywhere,” he said. “It’s not like we can expand production next year.”

David Michael & Co. locked into long-term vanilla bean contracts in 2010, which proved wise. The company bought three years’ worth of inventory in 2010 and then suggested to its customers that they contract with David Michael & Co. for three years, Mr. Rosskam said. After every year, the contracts were rolled over for another year.

David Michael & Co. and the customers who took contracts now are covered through 2016. Those customers are paying about $30 to $50 per fold for David Michael & Co.’s vanilla, Mr. Rosskam said. Without the long-term contracts, and with vanilla beans selling for more than $200 a kilogram in 2016, the price would be more like $120 to $125 per fold, Mr. Rosskam said.

Vanilla milkshakes
Madagascar vanilla beans have the sweet, creamy flavor associated with classic vanilla, according to Nielsen-Massey Vanillas.

Quality is also an issue

While vanilla beans are costing more, quality has become a problem. Quality is best at $20 a kilogram and worst at $600 a kilogram, Ms. Lochhead said.

“There’s always an inverse relationship between price and quality,” she said. “When prices are high, it gives farmers an incentive to pick the beans before they reach maturity. Immature beans lack flavor.”

A practice called vacuum packing is affecting quality as well.

“The recent practice of vacuum packing has had a significant detrimental effect on the quality of the vanilla beans as they attempt to stop the curing process until a later date,” said Craig Nielsen, chief executive officer of Nielsen-Massey Vanillas, Inc., Waukegan, Ill. “Unfortunately, this retards the flavor development within the bean, and that development cannot be made up at a later date. Utilizing this practice means they are asking exorbitant prices for inferior quality beans under today’s market conditions.”

The combination of high vanilla bean prices and poor quality might have food and beverage manufacturers seeking alternatives to pure and natural vanilla flavors. When price reaches a certain limit, companies may opt for synthetic vanillin, Ms. Lochhead said. Synthetic vanillin might work better in baked foods than in ice cream, which is more sensitive, she said.

SLIDESHOW: Strategies for managing vanilla flavor costs

“That pure vanilla flavor is a lot more important and distinguishable in an ice cream product than in a bakery product like a high-temperature cookie that has other ingredients in it,” she said.

In previous periods of high vanilla prices, some food and beverage companies switched to synthetic vanilla such as vanillin to save on costs. They may be less likely to do so in 2016 as more food and beverage companies move toward natural ingredients and “clean” labels, Mr. Rosskam said.

For example, Nestle S.A. in February 2015 said it planned to remove artificial flavors and F.D.A.-certified colors from all of its chocolate candy products. Other companies such as General Mills, Inc. and The Kellogg Co. have followed with their own plans to remove such ingredients.

“They’re making this decision at the worst possible time (for vanilla) because that’s going to create more demand,” Mr. Rosskam said of the move away from synthetic ingredients.

Waiting on this year’s crop

This year’s Madagascar crop may offer some relief to the high prices. A decent vanilla bean crop in Madagascar is about 2,000 tonnes, Mr. Vanderwalde said. The 2015 crop was 1,300 to 1,400 tonnes, he added.

Mr. Nielsen said the 2016 harvest in Madagascar should begin in June or July. The 2016 crop, after being cured, should be ready for shipment about November or December.

“Although this is a time of fluctuation in the vanilla market, it is expected the current situation will be short-lived,” Mr. Nielsen said. “The flowering for (the 2016 crop) was good, and prices may start to drop in the fourth quarter of 2016.”

Ms. Lochhead said that, depending on the 2016 Madagascar crop, prices might start leveling later this year.

Mr. Vanderwalde said the vanilla market could be a tough one for 6 to 12 months. He said eventually the market will soften and prices will fall.

“When they fall, they tend to fall fast,” he said.

|||READ MORE: Other growing areas need time to boost vanilla supply|||

Other growing areas need time to boost vanilla supply

Madagascar’s poverty helps to prop up the country as the global leader in vanilla bean production, said Josephine Lochhead, president of Cook Flavoring Co., Paso Robles, Calif.

“Madagascar wages ($1.50 per day) make it impossible for other countries to compete when the prices are below $20 a kilo,” she said. “Wages in other regions average about $10 a day. Low prices land Madagascar the world market. Madagascar has been handed a virtual monopoly due to almost a decade of unsustainably low prices.”

A decent vanilla bean crop in Madagascar may reach 2,000 tonnes, said David Vanderwalde, director of Aust & Hachmann, Pointe-Claire, Que. No other country currently reaches 300 tonnes, according to a vanilla market report issued Oct. 16, 2015, by Aust & Hachmann, a vanilla bean buyer that sells to flavor houses. As vanilla bean prices have jumped to more than $200 a kilogram this year from about $20 a kilogram about five years ago, other global growing regions may increase supply.

“Alternative vanilla regions are continuing to show signs of recovery, but we doubt this will impact the short or even medium-term market,” the report said.

Imports of Indonesian vanilla into the U.S. market were at almost 185 tonnes through the first eight months of 2015, according to the report. In 2016, vanilla production in Papua New Guinea could reach 150 tonnes.  India is increasing vanilla production, but volume probably will not exceed 100 tonnes in 2016. The following years could see India produce 200 to 250 tonnes.

“As Madagascar sets its price, the other countries slot themselves around that price,” said Craig Nielsen, chief executive officer of Nielsen-Massey Vanillas, Inc., Waukegan, Ill. “Mexico and Tahiti have suffered from two poor crops in a row. So their supply is more limited than normal. Papua New Guinea has not been a large supplier of vanilla beans for the last two to three years.

“Indonesia’s crop size has steadily decreased over the last 10 years. India and Uganda have potential to further expand their production, but both face challenges in doing so. This leaves Madagascar in a dominant market position.”

David Michael & Co., Philadelphia, has been in the vanilla business for 120 years. During that time the company has bought vanilla beans from such places as Madagascar, Reunion, the Comoro Islands, Mexico, Uganda, India, Indonesia, Papua New Guinea and Tahiti, said Skip Rosskam, president and chief operating officer.

Madagascar currently supplies 85% of the global supply of vanilla beans, he said. Growers in other countries have gotten out of vanilla beans because they had other commodity options that paid better.

“As vanilla got so inexpensive for a long period of time, it provided very little financial incentive to other parts of the world, to either continue growing and planting vanilla or to expand their vanilla,” Mr. Rosskam said.

Since vanilla prices are high again, growers in other countries might consider getting back into the vanilla market, but it’s not that easy. After planting vanilla beans, it will take four years to develop a commercial crop, Mr. Rosskam said.

“It’s not a quick fix anywhere,” he said. “It’s not like we can expand production next year.”