Welcome to the world of Big Chocolate

Olam’s purchase of Archer Daniels Midland’s cocoa processing business announced this week catapults the company into the premier league of chocolate. It also leaves the sector in the grip of three companies.

Three companies will dominate processing sector

Barry Callebaut, the Swiss-based cocoa and chocolate group, Cargill, the US privately owned commodities trader, and Olam’s newly expanded cocoa business will account for about 60 per cent of the world’s cocoa processing — once the deal with ADM is completed. It is the world of Big Chocolate.

dark chocolates image www.www-globalcommodities.com

The sector, which “grinds” cocoa beans into butter, powder and liquor used to make chocolate and flavourings for confectionery and desserts, has become increasingly concentrated over the past few decades due to the capital intensive nature of the business.

Many of the deals can be traced back to the merger between Belgian industrial chocolate maker Callebaut and Cacao Barry of France in 1996, which kick-started the sector’s consolidation.

At the start of the 1990s there were about 40 or so significant grinders. In just a decade that figure stood at nine, with ADM, Barry Callebaut and Cargill dominating the sector ever since. According to the United Nations Conference on Trade and Development, the “ABC” of cocoa accounted for 41 per cent of the world’s processing capacity in 2006.

ADM, along with Cargill, changed the nature of cocoa trading and processing in the 1990s when they bought their knowledge of grain trading into the sector.

Since then, the bigger companies have grown even more powerful by adding new capacity. In 2013, Barry Callebaut bought the processing business of Asian group Petra Foods, cementing its position at the top of the table.

Gerry Manley, Olam’s global head of cocoa, made clear that the company needed to be a leading player in processing to remain “strong” as the company announced its deal with ADM.

Arguably, the cocoa traders and processors are playing catch up with their customers — the chocolate makers. The sector has also seen rapid consolidation, with the top five manufacturers, including Mars, Mondelez and Nestlé, accounting for more than 65 per cent of total confectionery sales.

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The importance of global brands and rising research and development and marketing costs in an increasingly international and competitive market has pushed consolidation.

According to Ecobank, 70 per cent of the value of the chocolate bar goes to cocoa and chocolate companies reflecting investing R&D and marketing, 17 per cent goes to retailer, 7 per cent goes to intermediaries such as traders.

But as Big Chocolate gets bigger, cocoa farmers are finding themselves increasingly squeezed.

Growers only get 6 per cent of the chocolate bar, down from 16 per cent in 1980, says Edward George at Ecobank. “So little of the value goes into the raw material,” he says.

Leading cocoa and chocolate companies have now united in an action plan to try to support growers to encourage “sustainable” sources of cocoa beans. But, unless that value share changes or the whole pie gets bigger, farmers will find little incentive to continue growing cocoa.

The Commodities Note is an online commentary on the industry from the Financial Times

Henry Sapiecha

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