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Cocoa deficit may nurture new sector to invest in

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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 said.

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 financial investors".

Nascent sector

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.

Profitability prospects

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."


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