Agricultural commodity watchers may be about to get a new sector
to invest in - cocoa bean production – which could prove a highly
lucrative sector, to judge by comparison with palm oil.
Investors seeking exposure to cocoa are currently limited to
processors, such as Barry Callebaut, which also makes chocolate under licence
for groups such as Kraft and Nestle, or to confectionery brand owners, which
also include the likes of US-based Hershey or the UK's Thorntons.
However, that may be about to change, as the prospect of
long-term structural deficit in world cocoa production, estimated by chocolate
groups at 1m tonnes a year by 2020, lures the growth of larger-scale plantation
groups already seen in sectors such as palm oil, London broker Hardman & Co
Cocoa vs palm oil
"Today there are no listed producers of cocoa beans," Hardman
analyst Doug Hawkins said, although London-listed Agriterra has a 4,000-hectare
plantation in Sierra Leone under way.
"This all contrasts with the palm oil production sector," in
which investors have a choice of more than 50 listed plantation groups, with a
combined market capitalisation of about $100bn.
However, there is "evidence to suggest" that the dearth of investment
opportunities in cocoa "is about to change", Mr Hawkins said.
"A number of new estates are now in planning or being
commissioned and some of these are likely to invite equity subscription from
Hardman named as larger scale cocoa operators in operation
or on the drawing board United Cacao, a privately-owned group operating in Peru
with plans for some 3,000-4,000 hectares of trees, mixed with hardwood species.
In Nicaragua, privately-owned Agro Nica Holdings has plans
to expand to 8,000-9,000 hectares, while in the Dominican Republic,
family-owned ROIG Agro-Cacao controls 3,000 hectares of organic cocoa plantations.
The broker also said it was aware of "significant" projects
in development in Indonesia, the Philippines and West Africa.
Producers were being lured by the potential for returns
enhanced by new cocoa tree varieties developed in Ecuador, and by the prospect
of continued shortfalls in production in a sector currently dominated by
smallholder farmers, of less than 5 hectares, with little access to credit, nor
education in husbandry.
Indeed, financial prospects could be greater than for palm
oil operators, for which Hardman estimated operating profit margins for
efficient operators at more than 30%, equivalent to $1,500 or more per hectare.
For cocoa, some operators are talking of "very high"
operating profit margins, even compared with palm oil, at up to 66% at maturity,
assuming a cocoa price of $2,700-2,800 a tonne, below today's spot futures
price of $3,139 a tonne in New York.
However, even using a 33% margin would produce an operating
profit of $2,574 a hectare.
Producers vs processors
The prospects for profits contrasts with the pressure on
margins that processors and chocolate makers may face if the structural deficit
in cocoa, in which production has "plateaued" at about 4m tonnes a year, while
consumption is being spurred in particular by growth in emerging markets.
"The prospect of a supply shortfall of 1m tonnes a year raises
concerns for margin erosion for the confectionery brands and impaired consumer
experiences as products are reformulated with lower percentages of cocoa/cocoa
butter," Mr Hawkins said.
"This fear of a shortfall marries surging demand growth in
the BRICs [Brazil, Russia, India and China] with fragility in the upstream
sector, and in West Africa in particular."