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Cocoa turns to coffee sector for answers to demand questions

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Can the cocoa industry learn a trick or two from its rival in hot beverages, coffee?

Coffee big wigs last week heard how they might take a leaf out of cocoa's book, though paying a sustainability premium, in spurring production needed to meet demand growth ahead.

Now cocoa industry leaders have heard how they might turn to the coffee sector on the issue of demand which is for chocolate "facing a tipping point" according to Alan Rownan, an analyst at market research giant Euromonitor International.

Millennials market

"In coffee, smallholder farmers are proving themselves to be excellent in doing this," he said, referring to their apparent prowess in marketing their beans - in particular to the important so-called "millennials" customer segment.

Millennials by the way, are according to Mr Rownan, aged 18-35, "tech savvy, environmentally aware, and their wallet has politics" - that is, their spending patterns are determined by issues beyond value for money, straying into issues such as fair wages and sustainability.

And coffee smallholders are good at "telling their story" in a way which taps into millennials' ethical seam, he told the ICCO's cocoa market outlook conference in London.

They make better use than cocoa groups of what Mr Rownan termed the "real estate of packaging" to get an appealing message across.

'Battle for beans'

The coffee industry appears to be better too than cocoa in other area of demand too - selling its produce in the same country where beans are grown.

Edward George, the head of group research at Ecobank, flagged the example of Ethiopia, Africa's top coffee producer – and most enthusiastic consumer too, with 40% of the nation's harvest being drunk domestically.

Given the strong demand for beans from Ethiopians themselves, "sometimes traders have to fight for supplies to export", Mr George said.

By contrast, in cocoa, there were many growers who have never tasted chocolate, or other products based on the beans.

Dr George urged the promotion of "grandmothers' recipes" based on cocoa.

"We should develop cocoa products for African consumers," even if it was "maybe soup" rather than the confectionery Westerners are more used to.

Lost value

This is more than a matter of simply finding new markets for cocoa.

Cote d'Ivoire cocoa export tax rates

Beans: 14.6%

Cocoa mass: 13.2%

Butter: 11%

Powder 9.6%

Chocolate: 0.0%

Source: Rabobank

For a start, extra local demand, coupled with local production would support capacity use, underpinning efficiencies and margins, at grinding plants which in West Africa and Indonesia have struggled in particular in 2015-16 with the knock-on effects of poor harvests.

Cocoa processing volumes in Cote d'Ivoire have tumbled potentially below 470,000 tonnes this season, from 559,000 tonnes in 2014-15, Ecobank believes.

Bigger local demand for the likes of chocolate would also encourage grinders in bean-growing nations to expand their activities further down the processing chain than the simple products such as cocoa powder, allowing them to keep more value in-country.

"Africa fails to capture the full value of its cocoa," Dr George said, noting that "just 1.5% of chocolate is actually produced" in the continent.

'What is chocolate?'

It was a point echoed by Laurent Pipitone, the ICCO's director of economics and statistics, who said that "Africa should process more cocoa – not only semi-finished products but chocolate as well".

And, to be fair, it is an idea which the Cote d'Ivoire government appears to have cottoned on to, in an export tax regime which puts a relatively penal 14.6% levy on shipments of beans themselves, and 11% on butter - while making what Rabobank analyst Carlos Mera called a "quantum leap" to a 0% duty on chocolate itself.

This sliding tax scale may, in encouraging domestic output of refined products, prove the solution to Cote d'Ivoire's dearth of chocolate output.

But it throws up a somewhat philosophical query too. "It leads to the question 'what is chocolate'," Mr Mera said.

One answer is apparently "cocoa liquor and sugar", functional though that may sound to consumers more used to ideas of "melt-in-the-mouth sensations" and "exotic taste experiences".

It is certainly not the kind of story line that smallholder coffee farmers would be promoting on their packaging real estate.

Edward George will also be speaking at the Agri Risk Forum on November 29 and 30. His session will be on De-risking the value chain - a look at the Ethiopian Commodity Exchange.

By Mike Verdin at the ICCO cocoa

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