The expectations are not good for my muesli

I make muesli. It’s my mum’s recipe with a twist. Take a whole bunch of nuts, chopped, and mix in coconut flakes, some pepitas, black chia seeds, coconut oil and cinnamon. Plus, a bit of vanilla (that’s the twist). Put it in the oven for about 40 minutes for a gentle roast and serve with yoghurt and blueberries. Great, keto-friendly way to start the day.

No, you have not inadvertently stumbled onto 5 Minutes: The Julia Childs edition (idea patent pending), this is still very much 5 Minute Finance. And it’s not because the muesli costs the Gross National Product of Azerbaijan to make.  It’s because of Vanilla. This one deliciously wonderful ingredient has gotten crazily expensive of late and it’s all to do with a cyclone in Madagascar nearly two years ago. A seemingly unrelated event, which is going to have huge ramifications for the price of vanilla beans for years to come.

Ready? Let’s go.

The Vanilla Bean
First and foremost, you have to understand how mind-bogglingly difficult it is to cultivate the vanilla bean. It starts with a flower. One which blooms literally once a year and only for about 24 hours when it does. If it isn’t pollinated over that period, the flower simply falls off. If it is pollinated, which I might add, can only be done by handone flower at a time, from it will grow a fruit, the almighty Vanilla Bean.

Assuming this happens, famers must wait for exactly the right time. Picking the produce before it has ripened, but only after it has grown to full maturity. The picking window is small.  From there it’s doused in hot water and sweated and dried for anywhere between 2 and 6 months. And then its aged. For about two years. Packed, shipped and sent to your supermarket.

From pollination to muesli, the whole process takes about 4 years.

Cyclone Enawo
On the 3rd of March, 2016 a 230kmph cyclone ravaged the east cost of Madagascar for three straight days. 81 people were killed and millions of dollars’ worth of property and farmland damaged in the process. Farmland including Madagascar’s vanilla bean crops, which account for, wait for it, nearly 80% of the world’s total production of vanilla beans.

80%. That’s a lot.

Cyclone Enawo has created a severe shortage in the future supply of vanilla beans and the cost of them has promptly surged in response. Back in 2011 a kilo of vanilla beans on the wholesale market would set you back about 25 dollars. Today that same kilogram will cost you around 600 dollars. Farmers are obviously responding to this by re-planting their crops. But as we mentioned above, this takes time. A lot of time.

Don’t expect to see prices falling until at least 2020.

The pedants among you will probably be thinking “well hang on, from picking to shipping, it takes about two and half years. The crops were destroyed by the cyclone less than 2 years ago. Therefore, the vanilla beans we are buying today would have already been picked back in March of 2016 and so right now at least, there is no shortage and therefore there should be no change in price.” 

It’s a fair point. But here’s the thing and it relates to investing and how shares are priced on the stock market: The reason the price of vanilla beans is going up today is because people are EXPECTING a shortage of them in the future. They are buying them now as they EXPECT the price to increase in the future.

The price of vanilla beans reflects all of the  information currently available to both the buyers and seller 
The stock market works the same way. The price of a stock does not just represent what a company is earning today, but instead what investors think a company is going to be earning in the future. If they think it will be earning more in the future, they will buy the stock now (pushing its price up). If they think it will be earning less, they’ll sell it, pushing its price down.

The stock market, just like vanilla bean prices, is all about investors’ expectations for the future. And right now, the expectations are not good for my muesli.

Anyway, that’s 5 minutes. Hope it helped.

Categories: Macro Economics


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