WASHINGTON – Its an industry thats largely invisible to consumers, yet central to feeding the worlds 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 pair of recent business deals, its an industry that may never be the same.
Big chocolate is about to get even bigger.
This month, Reuters reported that commodity behemoth Cargill plans to spend up to $2 billion to buy agribusiness giant Archer Daniels Midlands cocoa business. If the deal goes through, itll be the second massive industry tie-up of the year: in July, Switzerland chocolate manufacturer Barry Callebaut scooped up the cocoa unit of Petra Foods for $860 million, becoming the worlds 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 – Hersheys, Mars – dont have much to fear, independent chocolatiers around the world worry 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 worlds poorest countries, who now may face even lower prices for their products.
Its 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 Callebauts 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 Co. and Gerkens Cocoa.
It has since bought Wilbur Chocolate Co., 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 bought 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 theres 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, hell have no alternative sources: Cargill also bought out his previous supplier, Peters Chocolate.
I dont 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 Hersheys, which means, Van Riet says, they dont 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 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.