Photographer: Jose Cendon/Bloomberg

Cocoa's Reign as World's Best Commodity Lures Corporate Cash

  • United Cacao, KKO International investing in cocoa plantations
  • Cocoa heading for a fourth year of gains on shortage concerns

In a year that’s spelled disaster for commodities from oil to coffee, cocoa stands out the best performer, and companies are taking notice.

United Cacao Ltd. and KKO International SA are among those investing in plantations as production shortfalls boost prices. United Cacao, a Peruvian grower, is expanding in the country by planting 3,250 hectares (8,030 acres). KKO, which went public in Brussels last month, is working on farms spanning an initial 3,500 hectares in Ivory Coast, the world’s biggest supplier.

While the industry has historically been dominated by millions of small farmers in Africa, some companies are looking to industrialize cocoa growing after prices soared almost 50 percent since 2012 and Asia’s rising middle class demands more chocolate. This year’s El Nino weather pattern is pushing prices even higher by threatening to reduce output from Ecuador to Indonesia, just as most raw materials like crude oil tumble on surplus supply.

"All commodities ran up from 2000 to 2008 and then they are basically back down again where they started 15 years ago, with the exception of cocoa,” said Dennis Melka, chief executive officer of United Cacao. “It’s really because of the underinvestment in the production side."

Cocoa is up 15 percent this year at $3,359 a metric ton in New York and earlier Monday reached the highest in more than a year. Among the 24 raw materials tracked by the S&P GSCI index, nothing has done better than cocoa this year.

Market Shortage

Supplies will fall short of demand by 150,000 tons in the season started last month, according to Olam International Ltd., the world’s third-biggest bean processor. The International Cocoa Organization estimates last season’s deficit at 15,000 tons.

United Cacao plans to produce about 10,000 tons in Peru annually at its peak in 2021-22, Melka said. KKO, which also trades in Paris, is targeting 15,000 tons by 2022, the company said.

There are a handful of companies that process cocoa beans and about 4 million to 6 million small farmers organized at the cooperative level at most, said Benoit Villers, a KKO board member and former executive at chocolate maker Barry Callebaut.

Large companies are still cautious about investing in the sector partly because cocoa crops take a long time to develop and are prone to disease, Yingheng Chen, an analyst at London-based Hardman & Co., said by phone. About 40 percent of all the cocoa produced annually is lost to pests and disease, according to the ICCO.

Ebola Outbreak

There are also the risks of doing business in countries like Sierra Leone, where Agriterra Ltd. had to reconsider its 3,200 hectares of cocoa plantations after last year’s Ebola outbreak.

United Cacao is investing in plantations in Peru because the climate is good for growing cocoa, there’s freehold land available and the country has stable taxes and fiscal policy, Melka said. He called Peru the lowest-cost producer. The company is also extending financing to local growers to plant cocoa on another 3,250 hectares by 2020, and then it would purchase the beans.

Ivory Coast is an attractive bet for KKO because farmers are getting more for their crop under a government system that sets a price based on forward sales. The system, started in 2012, has seen prices increase annually. The nation sells as much as 80 percent of the crop before it’s harvested. 

Cocoa farms in West Africa, which account for about 70 percent of global supplies, have been threatened by higher returns in other crops such as palm oil and rubber. In Asia, large corporate-style plantations, especially in Malaysia, disappeared in the 1980s due to competition with palm oil.

"Historically, this was a corporate-type business," Melka said, referring to cocoa plantations in Asia. "Corporate capital got out of it and it really fell in the domain of the small farmers, now predominantly in Africa.” Corporate capital is “coming back to it because the returns are there to justify that investment,” he said.

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