A bitter taste for now, but cocoa grower should rise
UPDATE 1
IT MAY seem hard to believe today of all days, but the world is heading towards a chocolate crisis. Cocoa is the essential ingredient behind every chocolate bar or Easter egg in the world and production is falling, even as consumption is rising. Less cocoa is produced now than five years ago and the outlook is pretty grim. Ghana, Indonesia and Ivory Coast dominate the market and of these three countries, only the last is increasing production – and that at a very low rate.
Meanwhile, West African cocoa-farming practices have come under sustained criticism, with some parts of the industry accused of using child labour and chronic underpayment of small-scale farmers.
Against this backdrop, United Cacao should be a stock market darling. The company owns a cocoa estate of more than 8,000 acres in Peru, of which almost 5,000 acres have been planted. Production will start by early next year and the aim is to increase tonnage steadily, reaching a peak of more than 8,000 tons a year by 2022.
Cocoa currently sells for around $3,125 (£2,188) a ton, implying healthy revenues for United once it finally starts to harvest its fruit. Costs are low and the firm will not have to pay corporation tax, so profits should be pretty high.
United also prides itself on ethical practices, paying farmers a decent wage and even setting up a scheme to provide finance for smallholders around the estate.
And yet the shares have performed abysmally. Midas recommended them at 159p in December 2014 just after they floated. Today they have almost halved to 80p. Why?
Most obviously, the company has yet to make any money and will need to borrow some cash from the bank to take it to production. Chairman and founder Dennis Melka is in talks with local banks and is confident the money will be found, but the uncertainty has clearly prompted a degree of nervousness.
The rout in commodity markets late last year affected cocoa and the price fell from a high of $3,400 to about $2,700. It has since recovered most of those losses and the outlook is good, given that supplies are falling and demand is rising. But the sudden price slump at the end of the year gave some investors the jitters.
United was also accused of illegally clearing Peruvian rain forest to plant its crops. In truth, the area had been decreed an agricultural zone since 1997 and last month the company won a legal case to this effect.
The situation was particularly frustrating for Melka, who claims that he is trying to create better conditions for farmers and lift locals out of unemployment. Now that the Supreme Court of Peru has ruled in United’s favour, the company should be able to put the saga behind it. However, it has caused some unwelcome publicity.
Finally, Peru has presidential elections next month and this had added to the uncertainty.
Melka, a US-educated Czech national who previously worked as an investment banker, has spent the past ten years in the plantation crop market, most recently founding and successfully selling palm oil producer Asian Plantations. He owns 28 per cent of United, with another 38 per cent owned by wealthy supporters and professional agricultural investors.
Midas verdict: Melka’s own stake in United Cacao and the faith invested in him by large shareholders should certainly motivate him to make the business a success. Long-term trends in the cocoa market also suggest the company should ultimately do well.
But, as with any earlystage commodity stock, there are risks. Nervous investors should sell now. Patient investors should hold. The intrepid could buy a few at today’s cheap price.
Traded on: AIM Ticker: CHOC Contact: unitedcacao.com or 001 345 815 2710