BITTER CHOCOLATE
Consolidation in the cocoa processing industry is hard to swallow,
WASHINGTON— It’s an industry that’s largely invisible to consumers, yet central to feeding the world’s sweet tooth. Cocoa processing — 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 pair of recent business deals, it’s an industry that may never be the same. Big chocolate is about to get even bigger. Cargill plans to spend up to $2 billion to buy agribusiness giant Archer Daniels Midland’s cocoa business, Reuters reports. 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, becoming the world’s largest cocoa processor. Once fully completed, the two deals will bring more than 60 per cent 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 that buy from these processors — Hershey’s, Mars — don’t have much to fear, independent chocolatiers around the world are anxious that the deals could result in higher prices and 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 also have experts worried about the well-being of the people who sell the raw materials: 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 per cent of the global cocoa processing market, putting it ahead of Callebaut’s 25 per cent. Many experts say the market for cocoa processing was excessively consolidated even before the latest deals; if the Cargill purchase goes through, it will mark the reduction of what was once more than 10 independent firms into two mega-players.
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 longterm partnerships with the biggest confectioners, said Christophe Van Riet, a Boston distributor for mid-sized Belgian
“It’s quite a concentrated market already, and (this deal) may give the big players even more market power.” LAURENT PIPITONE OF THE INTERNATIONAL COCOA ORGANIZATION
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 people.”
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 per cent over the last year, while wholesale prices have increased by 45 per cent since 2007. Euromonitor International esti- mates chocolate sales will rise 6 per cent next year.
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. The Commodities Futures Trading Commission recently 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 UN report from 2008 noted “oligopsonistic structures in cocoa purchasing” that deprived cocoa growers of bargaining power and made collusive behaviour 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 labour and trafficking on West African cocoa farms, where 70 per cent 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.
But so far, no independent studies have documented whether such efforts work. It remains to be seen whether labour exploitation might return as African growers find themselves with even less pricing power against the shrinking number of members in Big Chocolate.