Pearls

Back in the 1990s, while working as a flight attendant, Jeremy Shepherd made an impulsive purchase that would change the course of his life.

SHEPHERD: I was on layover in China, and there is a market there, the Hongqiao Sherchang in Beijing. It’s a market where flight attendants used to go to buy anything from knockoff purses to clothing. There was an entire floor of pearls. And not knowing anything about jewelry or really being much of a shopper, I went to buy a strand of pearls for my girlfriend back home. Long story short: the pearls were appraised at about $600 — and I think I had paid about $25 for it. 

Shepherd sensed an opportunity. And on his next flight to China, he decided to go all-in.

SHEPHERD: I cashed my paycheck, I went to the bank, I took all the cash I could out of my credit cards. And I had another flight attendant friend of mine write a letter in Chinese to the same person that I had purchased the first strand from, and it said, “I want to buy exactly what I bought last time, as many of them as I can. And I went home with about $3,000 of pearls in my bag. 

He sold all of these pearls on eBay, more than doubling his investment. And so began his second career as a pearl entrepreneur.

SHEPHERD: I started importing pearls on layovers, and on my days off I went on the jump seat, flew to China, stayed at the crew hotel, collected pearls, and I brought back suitcases of pearls every month. Within a couple of months, you know, my pearl business was outpacing the flight attendant job significantly.

Today, Shepherd is the C.E.O. of PearlParadise.com, a large online retailer of pearls based in the U.S.

SHEPHERD: Last year, we broke $6 million just in direct retail. And our biggest year ever was over $20 million dollars.

For retailers like Shepherd, pearls are a relatively easy sell. The global market for them is more than $10 billion dollars a year — and is only on the rise. But for the oyster farmers who cultivate them, there’s no guarantee of a big payday.

BROWN: The night before you start harvest, it’s very difficult to get any sleep, I can assure you of that. Because as a farmer you’ve invested millions of dollars into these crops and you really don’t know what you’re going to get.

For the Freakonomics Radio Network, this is The Economics of Everyday Things. I’m Zachary Crockett. Today: pearls.

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For many of us, the simple strand, like the one Jeremy Shepherd first bought his girlfriend, is still our touchstone for pearls today.

SHEPHERD: You know, your grandmother’s pearls — this all came from these pearls being imported into the U.S. after World War II. And that’s when the U.S. really got to know Japanese Akoya pearls. G.I.s started bringing in the small, graduated strands. 

Shepherd says that today’s pearls come in a range of sizes and colors. But one characteristic stands out.

SHEPHERD: The most important factor is always going to be luster. If all factors are equal — size determines the value. But luster is really that inner glow that gives pearls their beauty. 

The surface of a pearl is composed of microscopic crystals that overlap, almost like fish scales. A thick layer of orderly crystals results in a beautiful sheen. And better luster means richer colors.

Pearls are gemstones, but unlike diamonds and sapphires, they’re made by a living organism — usually an oyster. And luster depends on the health of the oyster.

BROWN: We often say, “Happy oysters, great pearls.”

That’s James Brown, owner of Cygnet Bay Pearl Farm in Western Australia. He’s the third-generation proprietor of the family business.

BROWN: We have been running and operating for 79 years.

The pearl process begins when a foreign body — a parasite, or an irritant — burrows into an oyster shell.

That’s when the oyster’s defense systems kick in and encapsulate the intruder in nacre — the material we know as “mother of pearl.” Over time, thousands of layers of nacre build up to form a pearl. This is not something that happens to every oyster.

BROWN: You’ll be lucky to get one natural pearl out of every 10,000 pearl oysters. No one’s really crunched those numbers, but you imagine it’s five to 10 to 15,000 pearl oysters to get one natural pearl. Very, very rare. 

For centuries, natural pearls were harvested by divers who would open thousands of oysters to find one pearl. Their rarity made them valuable, and they became a fixture in the wardrobes of royal figures, from Cleopatra to Marie Antoinette. But the market changed at the turn of the 20th century, when a Japanese pearl farmer named Kokichi Mikimoto developed a repeatable method for encouraging oysters to create pearls. The pearl industry could create a reliable supply of so-called cultured pearls, rather than rely on chance. Today, the pearl industry is dominated by pearl farms, like Cygnet Bay, that collectively produce millions of cultured pearls every year. But it’s still an imperfect art.

BROWN: There are so few perfect pearls. Probably like somewhere in the order of four or five perfect round pearls in every thousand pearls that you actually harvest. 

Brown’s farm is headquartered along the remote Kimberley Coast in Western Australia. He harvests South Sea cultured pearls, which grow in oysters called Pinctada maxima.

BROWN: They produce the largest, most valuable pearl. 

Brown says that occasionally they can get over 20 millimeters wide. And how much would one of those go for?

BROWN: If it’s perfectly round, white pearl on the open market, it would be worth anywhere between $20,000 and $100,000 wholesale. Retail, at least double, if not more. The pricing is very very complicated when you consider all the different factors that go into grading a pearl. 

The process of creating cultured pearls on a farm like Cygnet Bay starts with seeding the oysters.

BROWN: What we do is we take one oyster that has all of the characteristics of the color and luster on its shell that we want our pearls to have and we use it to create small graft pieces that we then graft into a whole range of host oysters. And then the host oyster is responsible for some characteristics of the pearl, like the size and shape and so on. But it’s the graft tissue that grows around what we insert next to it, that bead and create that cultured pearl.

Inserting a small bead into the oyster produces a rounder pearl, and speeds up the process. But it still takes a while.

BROWN: It’s generally two years from the seeding to harvest. 

That perfect, $100,000-dollar pearl could take even longer to reach 20-millimeters, the ideal size for a South Sea pearl. That increases the time investment into a single pearl. And there are many costs that eat into the pearl farmer’s margins. Today, most Australian pearl farms are far offshore, and that requires millions of dollars worth of heavy equipment.

BROWN: The anchors that we use on these long lines are like 10 tons of concrete. 

And most farms also have to pay the government a lease for the specific areas of the sea they operate in.

BROWN: There’s this balancing act between really high quality, high productive leases that produce just premium crops, but they are extraordinarily expensive to operate — versus other sort of lower-cost areas to operate, which will not produce the same type of really high luster or good growth rate and such.

But every oyster is a lottery ticket.

BROWN: To get a perfect pearl is really super exciting. Or even to get particularly large pearl, even if it’s not perfect, that’s also super exciting. Those are the types of pearls that a technician would often let out a bit of a “hoot,” — a bit of a stop-work moment, like, “Wow, look at that!” And then the flip side is, if your crop’s poor and you’re sitting there pulling out a whole range of suboptimal pearls, you feel like kind of curling up in the corner and crying yourself to sleep. 

So after all this time, money, energy, and planning, what do the financial realities of a pearl harvest look like?

BROWN: Let’s say we fish and seed 100,000 shell. You would hope that after two years, you might get one pearl from every two shell. And then out of that 50,000 crop, you would hope that one to five every thousand was a perfect round pearl. So it sounds impressive to say, “Oh, yeah, I’ve got, you know, 300,000 oysters on the farm. That doesn’t actually mean you’ve got 300,000 pearls. The reality is in Australia, not many pearl farmers have been profitable over the last 10 to 15 years.

That’s coming up.

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After making big money flipping pearls, Jeremy Shepherd quit his job as a flight attendant and launched PearlParadise.com in 2000.

SHEPHERD: What set us apart was that we had basically everything. You know, you go to a jewelry store, and you would maybe find one or two strands of Akoya or fresh water. We have tens of thousands of strands, possibly a million pearls. We’ve got a vault in Los Angeles that’s 1,300 cubic feet. And it’s completely filled with pearls.

Shepherd buys all these pearls from farmers like James Brown, or brokers and wholesalers in Japan, China, Australia, the Philippines, Indonesia, and Tahiti. At a jewelry store, the markup on a pearl necklace can be as high as 300 percent. But Pearl Paradise sells them directly to consumers, which results in lower prices.

SHEPHERD: The lowest markup we go is right around 15 percent. It depends on the product. 

Shepherd sells more freshwater pearls than any other kind, but the largest portion of his revenue comes from Akoya pearls — the “grandmother” kind that first became popular in the U.S. after World War II. But some months, Shepherd will get most of his revenue from one or two big sales.

SHEPHERD: We call it a V.I.P. experience, but it stands for very important pearls.

Shepherd keeps some of his most valuable items off the website, like an individual pearl selling for $70,000, and a necklace priced at $1.2 million. These, he sells to clients via virtual appointments. Buying pearls relies completely on trust.

SHEPHERD: There is no internationally recognized grading system for pearls. So, what that means is you cannot comparison shop by grade like you can with diamonds, because it’s meaningless.

Instead, Shepherd’s entire business is dependent on his eye for quality. He and his wife, who’s also a professional pearl buyer, travel to international pearl shows where wholesalers sell their pearls in something called hanks.

SHEPHERD: Hanks are, say, five to 10 strands that the dealer, or processor, or farmer even has deemed all to be of the same value. Now, that’s subjective, and we strongly disagree with them every time.

Even though there isn’t a universal grading system, Shepherd has created his own standards for the pearls he’s purchasing and selling.

SHEPHERD: Say we need to find something like one of our most popular sizes, a seven and a half to eight millimeter white freshwater strand. Well, we are very specific in our grading and what we’re looking for — you know, specific shape, specific surface grade, specific luster. And so, we may select out of a thousand strands maybe 50, and those are all chosen, first typically by me, and then my wife does the second once over. She’s got even stronger eyes than I do. 

The most expensive necklace on PearlParadise.com is priced around $140,000.

SHEPHERD: It’s a golden South Sea necklace that is about 19 millimeters, gem quality, extraordinarily rare. And very difficult to put together. It takes years and years to put something like that together. 

Perfect pearls are exceedingly rare. Large perfect pearls are even rarer. But the holy grail is a set of perfect matching pearls — say two for a pair of earrings, or dozens for a necklace.

SHEPHERD: We consider anything at about 15 millimeters to be a substantial large size. Now, when you get above that size, unless the quality’s not there, the pearls are sold individually as loose. You may go to an auction and have thousands and thousands of pearls to choose from, lots of various sizes and qualities. And there may be one lot that has three pearls, and it’s got a 16.5, a 17.2, and an 18.1 or something like that. And collecting those types of pearls to make a strand is something that takes a long time. 

Pearl matching doesn’t just happen at the high end, like with that golden South Sea necklace. It happens with every pearl necklace sold.

SHEPHERD: In order for us to create strands, we need, you know, 50 kilos, 60 kilos, to do this. And so, it requires us to go to many different people and many different processors in order to find the volume that we need. 

For pearl farmers like James Brown, cultivating these large, perfectly round pearls has become harder over time — largely due to factors outside of their control.

BROWN: We went through a period where we were getting those quite consistently. As a family after we’d spent 50 years really honing our skills. And then the last 15 years have been extraordinarily difficult with the onset of climate change impacts. So our farms are not as productive and there’s much more variation. These days it’s extraordinarily hard to produce fine quality pearls.

Global pearl supplies can be affected by typhoons, disease, and pollution, because, unlike other gemstones, a pearl crop depends on the health of a living organism. Pearl farmers also can’t escape macroeconomic forces.

BROWN: Say I’m in the middle of ramping up, which we’re doing now. Let’s say the market then suddenly takes a downturn. We would probably do what we did 10, 15 years ago. Instead of taking that crop to market, we’d probably just put it all in the safe and we’d start to sort of reduce the biomass of the farm. “How can we create more value out of a smaller crop?” — that kind of thing. So you end up with basically a safe full of pearls. 

But Jeremy Shepherd says creating artificial scarcity is not a practical approach for most pearl farmers.

SHEPHERD: You know during Covid, prices were unsustainable for farmers. And when that does happen, the lucky farmers might put their pearls into a vault and not sell them. But that’s not reality for most because farms are ongoing operations. You’re not producing just one year and you’re done. You’ve got pearls in the water constantly, and you’ve got to keep it running, otherwise you’re bankrupt.

While warming temperatures or marine disease can have a significant effect on the supply of pearls, a single celebrity can have a similar effect on demand. In 2023, a Chinese influencer named Ni Ni posted a series of selfies while wearing a strand of Tahitian pearls. The impact was felt most acutely at a jewelry and gem fair in Hong Kong that happened shortly afterward.

SHEPHERD: The entire show basically got shut down in September. Not because there wasn’t any business. Because you couldn’t even get inside. The big Tahitian pearl auction at the end of the week was canceled because one Chinese buyer offered a premium for the entire thing. That’s never happened before. Prices were skyrocketing. I mean, it was up to 10x what we had just seen a few months prior. We could have brought our entire Pearl Paradise inventory to that show and sold it all probably above retail and would have sold out. Hindsight’s 20-20, right?

For The Economics of Everyday Things, I’m Zachary Crockett.

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This episode was produced by Morgan Levey and Sarah Lilley, and mixed by Jeremy Johnston. We had help from Daniel Moritz-Rabson.

SHEPHERD: And our office is Charlton Heston’s old office, believe it or not; all the windows are bulletproof. The security is pretty amazing.