When it comes to baking with vanilla, there are choices: pure vanilla extract, vanilla paste, and vanilla beans. There's also vanilla sugar and infused vanilla syrups; the list goes on and on. So how best to wade through the choices?
Many people rely on good old-fashioned vanilla extract for their baking needs largely because it's easy to find and relatively affordable. Vanilla extract is made by macerating vanilla beans in a mixture of alcohol and water. When purchasing a bottle, avoid the imitation versions as they they tend to have a weaker, often tinny aftertaste. Splurge for the real stuff here.
Speaking of splurges, vanilla beans, while on the pricier side, are the ultimate in flavoring and scenting baked goods. Vanilla beans consist of an almost waxy dark brown pod filled with thousands of little brown flavorful specks. When purchasing them, you want to make sure the beans are plump and smooth, never dry. They should smell highly fragrant and have a slight shine to them. The big perk to using vanilla beans is the way the thousands of little black dots fleck throughout your batter. For lighter, fluffier desserts like white cakes, cupcakes, or muffins I'll always use a vanilla bean because the flavor is so intense and the visual component of being able to see the little black specks in the finished product is always satisfying.
What about vanilla paste? In many ways, vanilla paste could be thought of as a great in between option. It's essentially a small jar of the scraped-out vanilla pod, so you're going to get that super fragrant, sweet, speckled end product with the convenience of a quick scoop of the teaspoon. I don't find it all that much work to select, store, and use vanilla beans but some folks are less intimidated by the paste. I say whatever works and gets you excited about baking!
As far as conversions go, 1 teaspoon of vanilla extract is equal to one 2-inch piece of vanilla bean, so 1 typical vanilla bean will equal 3 teaspoons extract. As for vanilla paste, there are usually directions on each jar indicating proper equivalencies, so consult that first as the concentrations can differ.
Related: Making the Most of Vanilla Beans: Have you Tried This Trick?
(Image: Bon Appetit and Fine Cooking)
TW Salt Mill by Wil...

I bought these beans from Amazon and am making my own extracts... such a good deal, and the quality is perfect. I ended up selling the extras I had because there were too many for me to use up in a reasonable amount of time. (So far my best extract is in a bottle of Midnight Moon moonshine I was gifted... )
Avoid the imitation vanilla from Mexico and other places. They are made with chemicals and paper pulp residue. Pure vanilla is the way to go!!!
In Sweden the most common thing to use is "vanilla sugar" (vaniljsocker). I think it's basically like confectioner's sugar mixed with vanilla bean...things. It works really well though! But I prefer to use fresh vanilla beans. Vanilla extract, however, I've actually never used! But I've been thinking of making my own for a long time.
I store my vanilla bean pods in cognac or vodka (two bottles going at the moment), which makes vanilla extract as it ages, and when I really want seeds/paste I just split a pod and squeeze out the contents. I prefer this method to having extra/pods/paste in the house and because I buy the beans in bulk and split them with a couple serious baking friends we get great prices. As for paste, I found that much of the vanilla flavor dissipated during baking, it's important if you're going to buy paste that you buy the best brand you can (in my experience Nielsen-Massey's one of the better brands but some of the others were devoid of vanilla flavor entirely). In the end I prefer just buying the pods and keeping them hydrated in alcohol.
What's up with Castoreum? It's used as a vanilla flavoring, often under the title of "natural flavoring". It comes from the anal sacs of the beaver. It's approved for food use in the USA.
http://en.wikipedia.org/wiki/Castoreum Here's the wiki link, in case you think I'm making this up.
I'd love to know more about this, so I can avoid it.
I have no idea what CCP MBD is talking about with Mexican vanilla extract. It is all I will buy (but I would buy some beans if they ever showed up in my bulk foods section). You buy the one, most fragrant bottle, it's typically huge, and you use it over the next few years. No, you can't buy it in the tourist market, you have to go to the real market, where real people buy their groceries. You won't regret it. My vanilla flavored items are always the best.
What's the difference between vanilla extract and vanilla essence? All I found in the best supermarket where I live is a little bottle of vanilla essence, and it smells like cough syrup... (yuck). Should I chuck it?
Megan where do you buy your beans? I use to buy them at Wholefoods but they don't seem to have lately. Have been going for paste lately; which, I also love.
Maybe CCP MBD is referring to is this brand. I used to be devoted to it, because I like the label and it's so cheap...But after I realized it was made with vanillin, I switched to Penzey's. Pricey — but tastes so much better.
@Chezus: I know Penzey's also carries beans from Mexico and Madagascar.
Personally for me, I like the paste because you can skip the whole scrape the bean step in recipes. When you spend as much time as I do in the kitchen, it helps. Plus, you don't have that waste of tossing the bean.
@chezus: You know I buy them bulk here in Seattle from PCC (our coop) b/c they're so fresh and you can buy them in singles which I love. I do really dig vanilla paste though, too -- just happen to be out right now!
@Rucy: I've heard of storing vanilla beans in alcohol and always thought it would be a good way to store them AND make extract at the same time. Questions though: Do your beans lose flavor? Does the extract become overly flavored? Or at a certain point do they reach stasis and the beans and extract maintain a constant level of flavor? I've also heard that cheap vodka works just as well as expensive vodka for this--does it make a difference? Thanks!
@yellow coffee cup: I don't know what kind of vanilla essence was in your store, but I actually prefer vanilla essence to vanilla extract. The only difference is that vanilla essence has a lower alcohol content. Vanilla extract is 35% and vanilla essence is 5%. It goes farther, you only have to use 1/2 or a 1/4 of the amount that you would've used of the extract.