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November 12, 2013

The rise of big chocolate

WASHINGTON — It's an industry that's largely invisible to consumers, yet central to feeding the world's sweet tooth. Cocoa processing - the process of turning raw cocoa beans into powder, liquor and butter - is a major step in creating the candy bars and truffles that line store shelves. And thanks to a recent pair of recent business deals, it's an industry that may never be the same.

Big chocolate is about to get even bigger.

Earlier this month, Reuters reported that commodity behemoth Cargill plans to spend up to $2 billion to buy agribusiness giant Archer Daniels Midland's (ADM's) cocoa business. If the deal goes through, it'll be the second massive industry tie-up of the year: in July, Switzerland-based chocolate manufacturer Barry Callebaut scooped up the cocoa unit of Petra Foods for $860 million, becoming the world's largest cocoa processor.

Once fully completed, the two deals will bring more than 60 percent of the world market for cocoa processing under the control of two companies - the latest step in a slow consolidation of the industry that has been ongoing for decades.

While the big companies who buy from these processors - Hershey's, Mars - don't have much to fear, independent chocolatiers around the world are anxious that the deals could not only result in higher prices, but also sap diversity, as these new choco-superpowers no longer have to cater to the special taste and texture requests of smaller producers. But the deals have also got experts worried about the well-being of the people who sell the raw materials to companies like Cargill and Callebaut: cocoa bean farmers, often from the world's poorest countries, who now may face even lower prices for their products.

"It's quite a concentrated market already, and [this deal] may give the big players even more market power," says Laurent Pipitone, director of the economics and statistics division at International Cocoa Organization.

With its purchase, Cargill would end up with 35 percent of the global cocoa processing market, putting it ahead of Callebaut's 25 percent. Many experts say the market for cocoa processing was excessively consolidated even before the latest deals; if the Cargill deal goes through, it will mark the reduction of what was once more than 10 independent firms into two mega-players.

Cargill entered the business in 1987 by buying up General Cocoa Company and Gerkens Cocoa. It has since purchased Wilbur Chocolate Company, OCG Cacao, and Toshoku, as well as a couple of cocoa processing plants from Nestle. ADM snagged some sizable companies of its own before the sale: in 1997, it purchased the Grace Cocoa Company, and in 2009 bought up Schokinag, a prominent German producer. Barry Callebaut, meanwhile, was itself formed through a 1996 merger between Cacao Barry and Callebaut.

Chocolatiers say these mergers mean a further reduction in their sourcing options. Santi Falcone, owner of the independent Dante Confections in North Billerica, Mass., says he relies exclusively on Cargill and ADM for his chocolate. He currently has a six-month contract with Cargill but frequently relies on supplies from ADM if there's a sudden shortage or delay, as he experienced in late October when orders spiked and he had to buy additional cocoa for immediate delivery on short-notice. If the takeover goes through, he said, he'll have no alternative sources: Cargill also bought out his previous supplier, Peter's Chocolate.

"I don't know another company," he said. "There used to be a lot of companies in New York, New Jersey, but they all got gobbled up."

The biggest processors often have long-term partnerships with the biggest confectioners, said Christophe Van Riet, a Boston distributor for mid-sized Belgian chocolate companies. Barry Callebaut, for example, has a long-term contract with Hershey's, which means, Van Riet says, "they don't have to be responsive to the smaller Small and mid-size confectioners have traditionally been able to request specific blends and recipe mixtures from cocoa processors. But as the number of sellers has thinned, chocolatiers struggle to procure these specialties. "When it comes to Belgian chocolate, there is not that much variety anymore," says Van Riet. He explains that his customers "are very nervous" as the consolidation in the industry continues.

By bulking up, Barry Callebaut and Cargill are positioning themselves for a booming market. Retail chocolate prices in the United States have risen by 7 percent over the last year, while wholesale prices have increased by 45 percent since 2007. Euromonitor International estimates chocolate sales will rise 6 percent next year, and cocoa traders say that wholesale prices could reach a record high by the holidays.

Cocoa bean prices have soared partly due to bad weather in West Africa and growing demand from Western Europe, Latin America and Asia. Speculative investors have also poured money into cocoa contracts, boosting futures prices. On Friday, the Commodities Futures Trading Commission reported that money managers held 99,871 of these bullish bets, the largest amount since 2006.

For years, development experts have urged poor nations to climb their way out of poverty by selling their goods in open markets. But even before the recent mergers, a U.N. report from 2008 noted "oligopsonistic structures in cocoa purchasing" that deprived cocoa growers of bargaining power and made collusive behavior among the big companies more likely. The report also observed that growers in three of the major cocoa-producing countries in Africa - Cameroon, Ivory Coast and Nigeria - saw the prices they received for their beans fall relative to world cocoa prices between 1985 and 2005, a period over which processing companies and exporters consolidated and increased their buyer power.

The cocoa production industry has been under scrutiny since a series of articles in the early 2000s documented widespread abuse of child labor and trafficking on West African cocoa farms, where 70 percent of the world's cocoa is produced. Since then, governments and industry have brokered international agreements and donated millions of dollars to ending such exploitation, and last year Cargill outlined its commitment to improving farmers' well-being, and ensuring a sustainable cocoa chain through the "Cargill Cocoa Promise," including running agricultural training programs for growers.

 But so far, no independent studies have documented whether such efforts to ensure corporate social responsibility counterbalance the effects of diminished competition. It remains to be seen whether even less pricing power for African growers could lead to a return to past forms of labor exploitation, as tight margins grow even tighter.

         

Analysts believe regulators may attempt to restrain big chocolate's growth. When the European Commission approved the July deal between Barry Callebaut and Petra, regulators said they were assured that competition from ADM and Cargill would provide sufficient alternatives. The European Commission might, for instance, only permit Cargill to buy up only some of ADM's operations, or require that it divest some existing operations before it proceeds. Analysts predict regulators are especially likely to scrutinize overlapping facilities in the Netherlands, Germany, and Belgium, and possibly in Brazil.

But these decisions will be made at E.U. headquarters, not by consumers or producers. Will the voices of West African farmers be heard all the way in Brussels? Will your favorite chocolate bar never be the same? With the rise of Big Chocolate, it may be the little guy who pays the biggest price.

           

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