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Tanzania and Mozambique – November 2016

On the 1st November 2016, Tom Wigglesworth visited the agriculture projects of Obtala Limited (OBT) in Morogoro, Tanzania. Obtala manages two agricultural areas. The total amount of land cleared for production at Magole is 64 hectares (ha) and at Wami 30ha is cleared. Current production at Magole is 12ha of sweet melon and 4ha of cabbage. At Wami there are 5ha of sweet potato and the same area of butternut squash. Obtala’s total uncleared landbank in Morogoro is 1,735ha.

At Magole, there is also a dried fruit processing facility, where dried mango, pineapple and banana is produced and packaged under the Mama Jo’s brand.

The view across the Magole farm, showing a field planted with sweet melon.

The view across the Magole farm, showing a field planted with sweet melon.


Seeds that have germinated in the nursery, ready for hardening before planting.


Butternut squash being grown at Wami.


Sweet potatoes are also in production at Wami.


On the 3rd of November, Tom travelled to Mozambique to visit Argento’s forestry camp and one of their concessions. Argento has secured sustainable forestry leases of 50 years on 312,465 hectares in Northern Mozambique (10 separate concessions).


A truck being loaded at the forward cutting base in the Gile concession.


The main forestry camp at Uape.


Squared logs being processed into planks.


Planks are then graded into first, second or third grade timber before being transported to the port at Necala.

Raising The Bar

Academy of Chocolate 2016 Conference: Chocolate In A New Era

Academy of ChocolateFounded in 2005 by five of Britain’s leading chocolate professionals, the Academy of Chocolate campaigns for the highest standards in the production of chocolate and works to raise awareness about the core influences on the cocoa bean to chocolate bar value chain. This month, (13th October 2016) the Academy held its 4th conference, “Chocolate In A New Era”. Speakers and delegates debated three critical influences shaping the ‘bean to bar’ value chain: Sustainability, Innovation and Education. Speakers represented all points along that value chain, from producers and agronomists, to directors of sustainability programmes, leading grinders, outstanding chocolatiers, and owners of valuable brands, not to mention: an audience of chocolate consumers.

If the Conference was unique in presenting a whole value chain set of perspectives on the powerful influences put up for discussion, it was equally honest in its assessment of the serious challenges to be addressed, especially in respect of Sustainability. However, by pressing for transparency in the sourcing of cocoa beans and for socially fair, and environmentally sustainable production, as core elements in the production of superb chocolate, the Academy is a forceful agency in promoting best practice across the global value chain.

A singular statistic was able to knit together the diverse perspectives presented over the course of the day. Frank Homann, founder and CEO of Xoco, a Central American producer of flavour cocoa beans, noted that while 50% of coffee produced is now sold as a speciality product, and 10% of all wine, only 1% of chocolate could be defined as a speciality product. Given the explosion of premium brands right across the developed world, noting the success of AIM listed Hotel Chocolat (a sponsor of the conference) which has created some $348m of shareholder value in just 13 years, this seemed counter intuitive. But of the annual production of 4.0 – 4.4 million metric tonnes of cocoa beans, much fewer than 200,000 mt would support truly premium or speciality chocolate products. While the highly sophisticated downstream consumer cocoa derived consumer goods sector has annual sales of approximately $120bn annually and an estimated capital value of $0.3-$0.4 trillion, (about 0.4% of global gdp), (see Cocoa, The Midas Commodity) 95% of upstream production comes from the 1-5 hectare traditional farms of more than 5 million smallholder farmers across the tropical belt. The absence of a professional farming sector, makes it difficult for the downstream sector to certify the provenance of the cocoa that is so critical to its commercial offerings, it makes the setting of industry wide quality standards difficult, and it means that the producing orchards are populated with trees that can survive under the basic conditions of smallholder farming, rather than trees producing the best flavoured beans.

In terms of sustainability the problem is even more acute: average yields are low in cocoa production, less than 0.5mt/ha across the global producer sector. Modern, well capitalised farms boast professional / trained management teams and high quality planting material. These estates can achieve yields of up to 2.5 mt/ha, five times the world average. In the first 15 years of this century more than 2.5m hectares of new land have been planted to cocoa, for an increase of nearly 33%: this is not sustainable (see Destruction By Chocolate). Growth in yields, rather than land in production, must become the norm if cocoa production is to be sustainable. Speakers including Bill Guyton, founder, and for 15 years until 2015, President of the World Cocoa Foundation, detailed the significant work undertaken by the Foundation and its members, many of whom are global names, in seeking to improve sustainability under the smallholder system. While data for investment in cocoa sustainability initiatives are not available, it is commonly assumed that hundreds of millions of US$ have been directed to this challenge. Yet progress as measured by average yields, has been negligible. The challenge is to reach millions of smallholder farmers, who are often poorly educated, ageing, and facing existential challenges. The conference heard how one major engagement programme in Ivory Coast and Ghana failed to reach more than 2.5% of farmers. More worryingly, speakers noted that even with training and the provision of support: of those surveyed, 61% of farmers did not use fertilisers, 50% did not use crop protection and 57% declined to use available micro-finance credit.

At Hardman Agribusiness, we note that in the quest for sustainably produced cocoa, a second front is opening in Latin America, where an innovative cocoa culture is promulgating new technologies and new methodologies to produce high quality, sustainable cocoa. It is encouraging to note, for example, that Mars Inc has begun acquiring technologically innovative cocoa farms and the brand states that it proposes to promulgate the technologies proven on these farms, where possible, across the smallholder producer sector (see Straw In the Wind).
While it is true to say that cocoa production is being ‘re-imagined’ in countries like Ecuador, with the African producing countries making up more than 70% of the global cocoa crop, the downstream sector and the billions of consumers of cocoa products throughout the world, will continue to rely on the output of millions of African smallholder farmers. It was strongly evident in speaker addresses and audience responses, that there is unwavering support for the smallholder sector across the value chain and a commitment to providing innovative technologies (including planting material) and further education to this critical segment in order to boost the sustainability of supply. One example of such technology was detailed to the conference: GeoTraceability Ltd, a Canadian company founded in 2011, is able to collect data on smallholder farmer activities, efficiently, economically and reliably using wireless technologies, in order to strengthen farming practices and improve traceability of cocoa: literally putting smallholders on the map!

In the ‘new era’ of the conference title, (the Anthropocene; see Disruptive Technologies) the human population has breached 7bn, on course, some say, for 12 bn before the end of this century. Christopher Reeves, of PwC told the conference that in this new era, human society will consume 35% more food, 40% more water and 50% more energy, and within 10 years another 1m mt of cocoa will be required. These realities underscored the central themes of the conference: sustainability, innovation and education.

The Academy of Chocolate works to educate consumers about the varieties of cocoa beans, their origins, the fermentation process, the roasting and grinding phases, and the subtle recipes and methodologies that produce the alchemy that is fine chocolate. The Academy also supports innovation in the creation of sublime chocolate with the provision of annual awards for excellence and innovation. The 2016 conference: ‘Chocolate In A New Era’ voiced the Academy’s support for greater innovation and education in strengthening the sustainability of upstream cocoa production, and for the expansion of the flavour cocoa segment, for the benefit of farmers and consumers alike.

Super Cocoa: Why Is Everyone Talking About Sacha Gold?

August 29th this year, Confectionery News published an article about Sacha Gold, a cocoa cultivar that is being touted as high yielding, disease tolerant and fine flavour.

The article notes that Sacha Gold began commercial cultivation in Ecuador in 2008 and according to George Loquvam, CEO of Cimarron Cocoa Estates, the cultivar has the potential to produce 4mt/ha of dry cocoa beans under commercial cultivation. Cimarron Cocoa Estates operates two 40 hectare cocoa plantations in the Ecuadorian Amazon. The group is the owner of the Sacha Gold IPR. The cultivar is believed to be a segregation of CCN-51, a sexually reproduced line of trees derived from CCN-51. These trees were cloned by Cimarron, to provide a new source of planting material for commercial cocoa plantations. George Loquvam reports finding that some of Cimarron’s Sacha Gold trees have exhibited ‘stronger disease tolerance against Witches’ Broom and Frosty Pod.



While it is still early days in the commercial exploitation of Sacha Gold, Cimarron argue that the cultivar is a step up from CCN-51, being both more productive and with a better flavour. Some fans of Sacha Gold have even postulated that it will “slowly, slowly replace the Arriba Nacional in the fine aroma niche”. One HAB client noted that “when we visited the Cimarron plantation a couple years ago, the cultivar seemed to be performing well in the Ecuadorian Amazon climate, but there were only a few years of data so we could not form a view about the long term yield curve. Undoubtedly interesting…”. Yet another HAB client, United Cacao Ltd SEZC, has planted 40% of its plantation in the Peruvian Amazon with Sacha Gold, persuaded by the cultivar’s reputation for robustness, yield and flavour. Dennis Melka, interviewing 5th September, 2016 with the UK corporate information service: Directors Talk, commented: “we are delighted to have that crop, it’s growing incredibly well, we think it is a game-changer in the industry…”

Sacha Gold is frequently referred to as a ‘super tree’, a term that is thought to derive from the use of so called ‘super trees’ on a USAID programme in 2003. The ARD Pronorte programme in the north of Ecuador, sought to provide alternative incomes for the rural poor impacted by the cocaine trade. The ARD programme selected the best cacao trees calling them ‘Super Trees’ because they demonstrated productivity capacity 10 times greater than the traditional (and very low) average for Latin American small holder farmers 0.25 mt/ha.

Commercial cocoa estates, using Sacha Gold, hope to exceed the 2.5mt/ha target. If they do, then Sacha Gold will turn out to be ‘a game changer’ as described by UCL’s Dennis Melka. Yields of 2.5mt/ha of dry cocoa beans, is the targeted yield outcome for modern cocoa plantations, but with these plantations mostly still immature, and with cocoa being a relatively novel commercial crop since the early twentieth century, there are virtually no supportive data available.

What the interest in Sacha Gold underlines, is the still relatively unevolved commercial breeding segment for the cocoa sector. The continuous development of new commercial varieties is a critical component for the evolution of the commercial cocoa sector, as is true with any crop. As one leading plantation director responded on this observation: “You make the analysis! No increase in cacao yields in 100 years, and staggering increases in corn yields…”

Coconut Craze

Every so often a new dietary fashion, a ‘craze’ even, captures the popular imagination.  Whether it is blueberries, kale, goji berries, or high cocoa content dark chocolate, health and dietary commentators have a history of ‘bigging-up’ the qualities of one fruit or vegetable to elevate its desirability in the minds of consumers. The latest such ‘craze’, a phenomenon of the second decade of this century, has been coconut water:

  • “Rich in nutrients. Unlike any other beverage on the market, coconut water contains five essential electrolytes that are present in the human body. These include: calcium, magnesium, phosphorous, potassium and sodium”.
  • “Naturally refreshing, coconut water has a sweet, nutty taste. It contains easily digested carbohydrate in the form of sugar and electrolytes. Not to be confused with high-fat coconut milk or oil, coconut water is a clear liquid in the fruit’s center that is tapped from young, green coconuts…”.

The ‘craze’ for coconut water has generated a $1bn pa drinks segment – and outside the source countries, this has been an almost entirely new development. The growth in demand, which is still expanding, has prompted the entry into the market of the largest beverage brand owners in the world: Coca Cola and Pepsi. These global brands have acquired two of the leading names in the coconut water sector:

  • Zico (No. 2 brand in USA; owned by Coca Cola)
  • N.E (No. 3 brand in USA; controlled by Pepsi).

The growing appetite of populations around the developed and developing worlds for coconut water has transformed the status of this ‘tree’ crop. Consumers’ engagement with coconuts has traditionally taken one of four principal forms:

  1. Fresh coconuts as a fruit, predominantly in source countries
  2. Desiccated coconut for use in baking and food preparation – a global product
  3. Coconut oil as a dietary product (and not without some controversy as detailed in the paragraph below)
  4. Coconut oil as the principal oil in body care products and cosmetics.

Coconut oil is about 90% saturated fat, which is a higher percentage than butter (about 64% saturated fat), beef fat (40%), or even lard (also 40%). Coconut oil is considered to be very effective at boosting levels of “good” HDL cholesterol. But dietary advisors in the late 20th Century and into this century have argued for the sparing use of coconut oil in the diet citing concerns about its possible contribution to heart disease and promoting as more ‘healthful’ vegetable oils such as olive oil and soybean oil, which are mainly unsaturated fat and which lower the LDL and increase the HDL forms of cholesterol. “Coconut oil’s special HDL-boosting effect may make it “less bad” than the high saturated fat content would indicate, but it’s still probably not the best choice among the many available oils to reduce the risk of heart disease” (

From an economic perspective, the production of coconut oil from copra, and its co-product, coconut meal, has been described by Vinay Chand of Vinay Chand Associates (VCA), as “a pursuit to keep farmers in poverty”. Now after decades of disinterest, consumers, brand owners, government agencies (across the tropics), and investors, are all reviewing the crop as a wealth of new coconut derived consumer products, led by Coconut Water, are gaining in popularity.

  1. Green Coconut Water – the ‘Miracle Drink’
    • derived from 6-7months old coconuts which must be drunk within 10 days of harvesting or packaged in Tetrapak containers
    • VCA estimates that the green water segment has an annual value of circa $600m at retail:

The majority of these coconuts are consumed in the source countries as part of the ordinary diet. The market is mostly relatively informal and these nuts (sold for drinking) are typically significantly cheaper than packaged mature coconut water products, notwithstanding that green coconut water is considered to be very much superior to water from mature nuts. VCA estimates that if this segment was to be priced at global retail market levels, the combined segment of mature packaged water products and green water / fresh immature nuts for drinking, would be equivalent to circa $5bn.

  1. Packaged Coconut Water
    • derived from mature coconuts of 10 months or older
    • typically a by-product of desiccated coconut production
    • this product represents the bulk of the current coconut water market and is considered by experts in the field to be much inferior as a consumer experience to green coconut water
    • $1.2bn market at retail value
  2. Coconut Milk
    • The processing of mature coconuts for the production of coconut milk is dominated by consumption within the source countries where it has traditionally been used for culinary purposes and as a drink (packaged whole coconut milk and skimmed milk)
    • Coconut milk is also highly suitable for the production of coconut ice cream and coconut yoghurt. After conducting extensive market research, VCA believes that these product segments have good growth prospects.
    • The international market for packaged coconut milk products is relatively mature with an estimated (VCA) retail value of $400m pa
    • The market for fresh coconut milk products (in the source countries) may be 10x larger than the packaged segment according to Vinay Chand. This is a relatively informal sector and accessing reliable data is not possible
  3. Virgin Coconut Oil
    • This is a relatively new product segment and VCA reports that it is growing at some 35% pa.
    • A small new segment made from fresh coconuts and not dried coconut flesh/copra
    • Current value FOB (Philippines and Indonesia) $150m annually
  4. Rubberised Coir
    • Derived from the husks of mature coconuts, coir can be rubberized for use in mattresses for which there is strong demand in Asia
    • A factory gate value of circa $1bn annually and a retail value of perhaps $2bn
    • Only 17% of the annual crop of coconuts is currently having the husks used in the manufacture of coir
      1. VCA estimates that in the period 2012-2015 demand for coir has been expanding at circa 50%
      2. VCA estimates that over 60% of usable husks are not being commercially exploited.

Bad Economics – An Opportunity

According to the lifetime student of coconut sector economics, Vinay Chand, the coconut sector’s most traditional product segment, copra, should be reviewed and its production downscaled. VCA asserts that copra is a product that will keep producers poor:

The value chain results in an average farm gate price of 2-3 US cents per coconut and, while it may just cover costs of production, it depresses farmer livelihoods and results in a low rate of return on land use. VCA estimates that the production of copra generates revenues (on average) of less than $200 per ha”.

The dried flesh of the coconut is used for the production of coconut oil and coconut meal, but the profile and economics of both commodities render them less competitive than palm oil and soyabean meal.

Under Investment in Processing

Vinay Chand notes that the coconut sector has been under investing in processing facilities for much of the past 25 years and now that there appears to be a sustainable upsurge in demand for coconut related products (in particular coconut water, coconut milk derived products and rubberized coir), Vinay argues that there is an opportunity to invest in processing plant to supply these markets, aggregating supply from producers supplying traditional low value at source markets and the copra industry.

The major high value coconut products enjoying robust market growth and yet supply constrained by a lack of processing capacity include:

  • green coconut water
  • mature coconut water
  • virgin coconut oil (VCO)
  • rubberised coir
  • coconut sugar is a new niche market that is attracting interest from food brands and investors.

Supply of all the products bulleted above tends to be from South-East and South Asia. In the case of green and mature water and VCO, the products are most attractive in the more affluent developed regions and countries including:

  • Europe
  • The Americas
  • Japan
  • Australasia.

The liquid range of coconut products has good stowage factors and thus freight rates. What matters is abundant coconut supply, affordable labour, and effective cost competitive logistics.

Rubberised coir, in contrast to the liquid products, is bulky and needs to be positioned to supply specific markets or produced in those markets using imported coir and latex. It is mainly used for mattresses and vehicle upholstery (Daimler Benz and Volkswagen are major users). Any coconut producing country with significant domestic demand potential may be a suitable investment destination, including:

  • Indonesia
  • Philippines
  • Vietnam
  • Nigeria
  • Mexico

Supplying Japan and Australia could be undertaken from South-East Asia or the Pacific. USA and Europe are best supplied with the materials for processing.

Origins & History

The history of mankind in the tropics and the history of the coconut (Cocos nucifera L) are deeply entwined. The origin of the plant is the subject of debate: based on its current-day worldwide distribution it has been hypothesized that the coconut originated in the Americas, however there is evidence providing support for an Indo-Pacific origin either around Melanesia and Malesia or the Indian Ocean. Current thinking is that the coconut originated in the coral atoll ecosystem — without human intervention — and required a thick husk and slow germination to survive and disperse. However the palms could not reach inland locations without human intervention. Human cultivation of the coconut selected, not for larger size, but for thinner husks and increased volume of endosperm, the solid “meat” or liquid “water” that provides the fruit its food value. Although these modifications for domestication would reduce the fruit’s ability to float and to disperse naturally, this ability became irrelevant to a cultivated population.

Among modern C. nucifera, two major types or variants: a thick-husked, angular fruit and a thin-husked, spherical fruit with a higher proportion of endosperm reflect a trend of cultivation in C. nucifera: the first coconuts were of the ‘niu kafa’ type, (a classification introduced by the botanical scientist Hugh Harries), with thick husks to protect the seed, an angular, highly ridged shape to promote buoyancy during ocean dispersal, and a pointed base that allowed fruits to dig into the sand, preventing them from being washed away during germination on a new island. As early human communities began to harvest coconuts for eating and planting, they are presumed to have selected for a larger endosperm to husk ratio and a broader, spherical base, which rendered the fruit useful as a cup or bowl, thus creating what is known as the ‘niu vai’ type (a classification introduced by the botanical scientist Hugh Harries). The decreased buoyancy and increased fragility of this spherical, thin-husked fruit would not matter for a species that had started to be dispersed by humans and grown in plantations. Harries’ adoption of the Polynesian terms niu kafa and niu vai has now passed into general scientific discourse, and his hypothesis is generally accepted.

A Tale of Two Choc Related Share Prices

BREXIT vs Mondelez/Hershey: two potentially significant events for UK Choc related share prices. In the case of Hotel Chocolat (HOTC) it seems that BREXIT fears have won out over Hershey related sector consolidation speculation, while United Cacao Ltd (CHOC), the AIM listed Peruvian cocoa plantation company, with no exposure to the UK economy, appears to have been swept upwards by the rise in the UK cocoa contract, rather than the Hershey related sharp uptick in the Hardman Agribusiness Choc Index.

Share Price Chart

While HOTC represents an obvious target for any brand consolidator in the premium segment of the chocolate confectionery sector (Lindt for example) looking for store frontage and brand quality, the BREXIT effect looks to have had the greater effect. As we see the patterns around the globe, specialist chocolate retail outlets are evolving from marketing loss leaders to winning strategies: Hotel Chocolate and Royce being good examples. Note also that both Ferrero and Lindt have been developing their retail space – Ferrero notably by acquiring UK Thorntons and its portfolio of some 250 stores in 2015. On this basis HOTC shares might have been expected to have joined in the Hershey related ‘fun’. Instead the HOTC share slide looks to have been driven by BREXIT fears for the UK economy to which HOTC is highly exposed: imported materials will be more expensive, see chart for UK contract below for London Cocoa Contract vs Hotel Chocolat share price performance.

HOTC & cocoa futures

Moreover HOTC will also be impacted by the deteriorating outlook for UK GDP growth: demand for chocolate products is linked (everywhere) to GDP growth.

GDP Cocoa Grindings

Meanwhile UCL has flipped up smartly, more likely in tandem with the London Cocoa Contract, than with the HAB Choc Index Hershey related activity.UCL & cocoa futures

Cocoa Imperia – Implications of the Mondelez /Hershey Bid

The Romans had a word for it: “imperium”, to hold sway over large territories. This might be achieved through colonization of a territory, or by conquest. The Imperia of the Romans, the Mongols and then the British, amassed vast territories across the globe in an earlier form of globalization.

Last week Mondelez sought to extend its “imperium” to include the USA, where today its products are distributed by Hershey, bidding $23bn for Hershey Co (HSY.N). Hershey shares are up by 23% since mid-May and circa 17% on the news. And the fun for Hershey shareholders may not be over: both Ferrero and Nestle are thought to have entertained a similar ambition for some years. In 2011 Ferrero and Hershey established a joint logistics operation for handling confectionery products in North America. The Mondelez (MDLZ.O) assault on Hershey could possibly also prompt Nestle (NESN.S) to respond with a counter offer, in a clash of the leading “Cocoa Imperia”. US based Mars Inc, is likely excluded on antitrust grounds. But Hershey is well fortified: empire expansion will have to overcome the Hershey Trust, established by Milton Hershey for philanthropic purposes, and which has stopped previous takeover attempts on the US chocolate and confectionery company. With a reported 81% of Hershey’s voting rights, the Trust is a powerful voting block to be persuaded. In 2002 the Trust was widely seen to prevent Wrigley’s from acquiring Hershey. To date the Hershey board has responded negatively to the Mondelez initiative, unanimously rejecting the bid on the basis “that it provided no basis for further discussion between Mondelez and the company“.

Hershey Price Chart

If Hershey is intent on retaining its independence, it may in turn seek alliances of its own, Ferrero would be one obvious candidate, the Italian company’s product range adding a premium element to Hershey’s larger mass offering, or further afield it could seek to penetrate the growth markets of Near and Middle East tying up with a company like Ulker, or Arcor in South America.

The word “imperium” is highly appropriate for these huge confectionery brands, especially in the chocolate segment of confectionery. They hold sway over huge slices of market share and have territorial dominance in key markets. A Hershey plus Mondelez combine would create the world’s largest confectioner, both are already within the top 5 globally. The merged entity would reportedly consume some 650,000 mt of cocoa beans equivalent annually, about 15% of the world crop (the ‘Cocoa Barometer’ published by non-profit industry watchdog VOICE Network). According to Euromonitor International Ltd, a Hershey Mondelez combine would surge ahead of Mars Inc to become the world’s top confectionery company with market share of circa 18%. Mars is thought to have market share of circa 13% in global confectionery and by our estimates, circa 12% of the $100bn global chocolate confectionery sector.

Choc Brand TableSource: Company reports, Hardman Agribusiness, Reuters

Marc Donaldson, Senior Partner of ‘On The Ball Consulting’ (a Hardman Agribusiness (HAB) partner organisation in the food & beverages sector, based in Singapore) opines that “the most likely motivation for the Mondelez bid, will be the desire to acquire North American based production facilities, and to achieve effective distribution of its product range in the USA”. With Hershey in its stable, Mondelez would gain control over the production and distribution of Cadbury brand chocolates in the United States, for which Hershey currently holds the licence. According to Marc Donaldson “Mondelez would likely wish to use Hershey distribution for all their brands in the USA, just as the company has used the Cadbury’s infrastructure in India”. Donaldson notes that with foodstuffs requiring complex temperature management, such as chocolate, “good quality distribution is critical for success”.

A secondary factor motivating the move on Hershey could be the pressure from activist Mondelez shareholders who are pushing for greater value creation from the company’s management. Sales growth for the past three years has been negative. In 2015, William Ackman’s activist hedge fund, Pershing Square, announced that it had taken a position worth circa $5.5 billion in Mondelez. Media reports suggest that Ackman and another activist, Nelson Peltz, were pressing the company to either ramp up earnings or sell itself.

Rev CARGSource: Company reports, Hardman Agribusiness, Reuters

Then there is Nestle. The Swiss food and confectionery giant manufactures Kit Kat worldwide. HAB partner Donaldson argues that Kit Kat is “one of the most popular chocolate brands in the world”. In the USA, Hershey has the rights to manufacture and distribute Kit Kat, paying Nestle royalties from sales, but on a change of ownership it is believed that the licence would revert to Nestle…apparently without compensation to the new owner. Mondelez’s bid for Hershey could therefore encourage Nestle to consider its own bid for the US company.

However, it is the implications for another Swiss based giant of the chocolate confectionery sector for whom a successful bid for Hershey could have significant and possibly negative implications. In 2007, Barry Callebaut reached a deal to supply Hershey with chocolate through to 2022. Three years later, it agreed to supply Kraft Foods – which spun off Mondelez in 2012. While Marc Donaldson notes that Barry Callebaut’s margins on supply of chocolate to Mondelez are likely very low, Barry Callebaut could find supplying a combined Hershey/Mondelez a challenge in the USA.

Mergers in the chocolate confectionery sector have a pattern of altering supply arrangements: when Kraft acquired Cote D’Or, Callebaut was the sole supplier, but Kraft took manufacture in-house.  Similarly, when Cacao Barry and Callebaut merged, Ferrero shifted to in-house production. Donaldson draws attention to Hershey’s cocoa processing and manufacturing capacity in the USA, in China and soon also in Malaysia where the company is just completing a significant production facility. These are all markets in which Mondelez is likely heavily dependent on Barry Callebaut which has a commanding global footprint. If the Mondelez bid for Hershey can be concluded successfully, then it is likely that there will be significant risk for Barry Callebaut. Mondelez may be tempted to produce more chocolate in-house and will likely look to improve further on pricing in its arrangements with the Swiss company.

As the cocoa imperia extend their market reach so their buying power increases: cocoa traders, cocoa processors, sugar and milk suppliers, can all expect to feel the growing weight of these leviathans bearing down on their margins…in return of course for huge off-take opportunities. Yet, as noted in our recent publication ‘Cocoa: The Midas Commodity’, there remains significant opportunity in the fast growing premium end of the chocolate confectionery sector for new, tightly focused brand formats like Hotel Chocolat in the UK, and Royce in Asia. These nimble, country or regionally focused brands can address segments of demand that the ‘Cocoa Imperia’ are too occupied to address in their quest for global supremacy. However, noting that Lindt & Sprungli enjoys a market valuation of 4.4x sales, in the premium segment too, growth by acquisition will likely be an attractive strategy for premium names with highly valued ‘paper’.

A Progressive Culture – ICCO World Cocoa Convention – Dominican Republic

Hardman Agribusiness presented at the ICCO World Cocoa Convention in Baravo, Dominican Republic, on 24th May, 2016.

Today 95% of the cocoa produced comes to the market thanks to the efforts of some 5 million subsistence smallholder farmers practising a form of agriculture that has changed little in centuries. Over many years, and continuing today, the downstream end of the cocoa value chain has instituted numerous initiatives to modernise farming practices with the goals of improving farmers’ lives and making cocoa production sustainable. The evidence that these initiatives have been successful, certainly in respect of the latter objective is slim. Dr Jean-Marc Anga, Executive Director of the International Cocoa Organisation (ICCO) speaking that the 3rd World Cocoa Convention in Bavaro, Dominican Republic observed that “the producers are the weakest link in the cocoa value chain”. Dr Anga noted that in 1960/61 cocoa produced globally averaged 0.29mt per hectare against 0.52mt in 2015. Progress, but not enough over 55 years. Today in parts of the Americas, innovative farmers are achieving up to 3.0mt/ha. Hardman Agribusiness reviewed the outlook for cocoa production in the Americas at the 3rd World Cocoa Convention in the presentation below.

Please click for our presentation: A Progressive Culture – Dominican Republic

‘Straw In The Wind’ – Rebalancing Cocoa Supply

Last week the professional end of the Latin American cocoa producer sector was excited by the news that Mars Inc was acquiring the Hacienda La Chola cocoa plantation developed under the guidance of leading cocoa planter and agronomist Roberto Mollison. La Chola is one of a group of ‘high tech’ cocoa farms, often referred to as the ‘Cerecita Cluster’ in Ecuador’s St Elena Peninsula region for which the city of Guayaquil is the main access point. See Mars press release at bottom of this note.

The acquisition is likely to have been strongly motivated by a desire to have access to the innovative approach to cocoa cultivation and the agronomic techniques being developed by Roberto Mollison. The so called ‘Cerecita Cluster’ of cocoa farmers has grounds for claiming a global lead in the push to modernize cocoa production. While there are other serious innovators such as Graham McNally of AgMark in PNG, Angelo de Sa of Agricola Cantagalo and others in Brazil, and a number of forward thinking producers dispersed across Central America, the acquisition of La Chola is likely to be seen as confirmation of the innovation leadership within the ‘Cerecita Cluster’.

Some commentators have interpreted the development as evidence of the downstream sector seeking to take control of source production. We think this unlikely, but conversely we do expect to see the large cocoa processors and some of the global brands taking an increasingly active interest in the development of modern cocoa farming with a view to agreeing sourcing contracts from trustworthy producers /(partners) of sustainable cocoa.

The smallholder system is creaking, it has proven to be greedy with land and slow to improve efficiencies, and it is fraught with reputational risk.  As detailed in the chart below growth in land use has been climbing steeply since the mid 1990s – as the big economies of Asia began to expand strongly – but yields per ha have remained stubbornly low over the period. The production of cocoa has a way yet to go before yields in excess of 2.0mt/2.5mt ha at maturity (as targeted by high tech Ecuadorean and other Latam cocoa producers) can be assumed to be the norm for commercial plantations, but contrast this with the average global yield per ha: 0.4mt/ha.

Cocoa-World Harvested Area

The Mars acquisition of La Chola – at the very least – seems likely to reposition agricultural efficiency as a major theme in the sustainability debate, which to date has been dominated by concerns about farmer welfare and not land use efficiency.

Significant producers of sustainable cocoa have an opportunity to develop valuable businesses, especially if they have strong ‘brand’ associations with high quality, good flavour cocoa, with low cadmium content, produced without damage to the environment and with a positive impact on the local community.   In this context the Mars acquisition of La Chola may be heralding a rebalancing in the supply side relationship with the downstream sector, away from reliance on smallholders for 95% of the global crop, towards a future partnership with reliable professional producers of high quality sustainable cocoa.

See below for a cross section of cocoa sector views on the acquisition.

  1. A sector focused senior NGO executive
    • It is no secret that to Mars almost the whole solution to sustainable cocoa lies in increasing productivity: they are all for more efficiency.
    • I am deeply concerned about the use of fertigation and a dependency on irrigation.
  2. A foreign investor in the Ecuadorean cocoa sector
    • There is no question that such an acquisition in Ecuador, in Cerecita, will be a “game changer” for the “cocoa cluster” in this region.
    • We expect to see in the months/years ahead a leverage of innovation in agriculture and the maximization of cocoa’s potential.
    • Ecuador is affirming its cocoa leader position in LATAM/the world
    • That a big multinational chocolate group like Mars should acquire one of the best cocoa farms in the world is expected to be a positive development for knowledge transfer around the world.
  3. A regional cocoa plantation developer
    • Other Ecuadorian cocoa estates may now be unrealistically revaluing their farms based on the price level Mars is rumoured to have paid.

Please click here for Mars Inc official announcement.

Cocoa’s Latin Future – 2nd Cocoa Revolution Conference – Vietnam

Hardman Agribusiness presented at the 2nd Cocoa Revolution Conference in Ho Chi Minh City, Vietnam, on 11th March, 2016.

We discussed the supply chain risk represented by the global cocoa related consumer goods sector’s reliance on the production output of Ivory Coast and Ghana, noting that cocoa production, dominated as it is by small holder farmers (95% of total production) is one of the least evolved systems of agriculture in the world. Unlike the other large soft commodity categories, cocoa does not feature a significant professional production sector. With stock to use ratios consistently falling over this century and the cocoa price rising under demand pressure, there are real fears that supply deficits will impact over the next few years. In contrast to West Africa (72% of world production), Latin America (18% of world production) has the nucleus of a professional cocoa farming industry and unlike most of Asia, Latin America has a vibrant cocoa culture.

Please click for our presentation: Cocoa’s Latin Future – 2nd Cocoa Revolution Conference – Vietnam

Destruction by Chocolate


To read our report click photo above.