The Rise of Big Chocolate

Two mega-companies are trying to seize control of the world's cocoa supply. What that means for poor African farmers and your favorite chocolate bar.

It's an industry that's largely invisible to consumers, yet central to feeding the world's sweet tooth. Cocoa processing -- the process of turning raw cocoa beans into powder, liquor, and butter -- is a major step in creating the candy bars and truffles that line store shelves. And thanks to a recent pair of recent business deals, it's an industry that may never be the same.

Big chocolate is about to get even bigger.

Earlier this month, Reuters reported that commodity behemoth Cargill plans to spend up to $2 billion to buy agribusiness giant Archer Daniels Midland's (ADM's) cocoa business. If the deal goes through, it'll be the second massive industry tie-up of the year: in July, Switzerland-based chocolate manufacturer Barry Callebaut scooped up the cocoa unit of Petra Foods for $860 million, becoming the world's largest cocoa processor.

Once fully completed, the two deals will bring more than 60 percent of the world market for cocoa processing under the control of two companies -- the latest step in a slow consolidation of the industry that has been ongoing for decades.

While the big companies who buy from these processors -- Hershey's, Mars -- don't have much to fear, independent chocolatiers around the world are anxious that the deals could not only result in higher prices, but also sap diversity, as these new choco-superpowers no longer have to cater to the special taste and texture requests of smaller producers. But the deals have also got experts worried about the well-being of the people who sell the raw materials to companies like Cargill and Callebaut: cocoa bean farmers, often from the world's poorest countries, who now may face even lower prices for their products.

"It's quite a concentrated market already, and [this deal] may give the big players even more market power," says Laurent Pipitone, director of the economics and statistics division at International Cocoa Organization.

With its purchase, Cargill would end up with 35 percent of the global cocoa processing market, putting it ahead of Callebaut's 25 percent. Many experts say the market for cocoa processing was excessively consolidated even before the latest deals; if the Cargill deal goes through, it will mark the reduction of what was once more than 10 independent firms into two mega-players.

Cargill entered the business in 1987 by buying up General Cocoa Company and Gerkens Cocoa. It has since purchased Wilbur Chocolate Company, OCG Cacao, and Toshoku, as well as a couple of cocoa processing plants from Nestle. ADM snagged some sizable companies of its own before the sale: in 1997, it purchased the Grace Cocoa Company, and in 2009 bought up Schokinag, a prominent German producer. Barry Callebaut, meanwhile, was itself formed through a 1996 merger between Cacao Barry and Callebaut.

Chocolatiers say these mergers mean a further reduction in their sourcing options. Santi Falcone, owner of the independent Dante Confections in North Billerica, Massachusetts says he relies exclusively on Cargill and ADM for his chocolate. He currently has a six-month contract with Cargill but frequently relies on supplies from ADM if there's a sudden shortage or delay, as he experienced in late October when orders spiked and he had to buy additional cocoa for immediate delivery on short-notice. If the takeover goes through, he said, he'll have no alternative sources: Cargill also bought out his previous supplier, Peter's Chocolate.

"I don't know another company," he said. "There used to be a lot of companies in New York, New Jersey, but they all got gobbled up."

The biggest processors often have long-term partnerships with the biggest confectioners, said Christophe Van Riet, a Boston distributor for mid-sized Belgian chocolate companies. Barry Callebaut, for example, has a long-term contract with Hershey's, which means, Van Riet says, "they don't have to be responsive to the smaller people."

Small and mid-size confectioners have traditionally been able to request specific blends and recipe mixtures from cocoa processors. But as the number of sellers has thinned, chocolatiers struggle to procure these specialties. "When it comes to Belgian chocolate, there is not that much variety anymore," says Van Riet. He explains that his customers "are very nervous" as the consolidation in the industry continues.

By bulking up, Barry Callebaut and Cargill are positioning themselves for a booming market. Retail chocolate prices in the United States have risen by 7 percent over the last year, while wholesale prices have increased by 45 percent since 2007. Euromonitor International estimates chocolate sales will rise 6 percent next year, and cocoa traders say that wholesale prices could reach a record high by the holidays.

Cocoa bean prices have soared partly due to bad weather in West Africa and growing demand from Western Europe, Latin America, and Asia. Speculative investors have also poured money into cocoa contracts, boosting futures prices. On Friday, the Commodities Futures Trading Commission reported that money managers held 99,871 of these bullish bets, the largest amount since 2006.

For years, development experts have urged poor nations to climb their way out of poverty by selling their goods in open markets. But even before the recent mergers, a U.N. report from 2008 noted "oligopsonistic structures in cocoa purchasing" that deprived cocoa growers of bargaining power and made collusive behavior among the big companies more likely. The report also observed that growers in three of the major cocoa-producing countries in Africa -- Cameroon, Ivory Coast, and Nigeria -- saw the prices they received for their beans fall relative to world cocoa prices between 1985 and 2005, a period over which processing companies and exporters consolidated and increased their buyer power.

The cocoa production industry has been under scrutiny since a series of articles in the early 2000s documented widespread abuse of child labor and trafficking on West African cocoa farms, where 70 percent of the world's cocoa is produced. Since then, governments and industry have brokered international agreements and donated millions of dollars to ending such exploitation, and last year Cargill outlined its commitment to improving farmers' well-being, and ensuring a sustainable cocoa chain through the "Cargill Cocoa Promise," including running agricultural training programs for growers.

But so far, no independent studies have documented whether such efforts to ensure corporate social responsibility counterbalance the effects of diminished competition. It remains to be seen whether even less pricing power for African growers could lead to a return to past forms of labor exploitation, as tight margins grow even tighter.

Analysts believe regulators may attempt to restrain big chocolate's growth. When the European Commission approved the July deal between Barry Callebaut and Petra, regulators said they were assured that competition from ADM and Cargill would provide sufficient alternatives. The European Commission might, for instance, only permit Cargill to buy up only some of ADM's operations, or require that it divest some existing operations before it proceeds. Analysts predict regulators are especially likely to scrutinize overlapping facilities in the Netherlands, Germany, and Belgium, and possibly in Brazil.

But these decisions will be made at E.U. headquarters, not by consumers or producers. Will the voices of West African farmers be heard all the way in Brussels? Will your favorite chocolate bar never be the same? With the rise of Big Chocolate, it may be the little guy who  pays the biggest price.



How the Beer Lobby Fought Wall Street... and Won

Even Goldman Sachs had to change its ways, once Joe Sixpack got himself some Washington handlers.

If you can make a complex disagreement over commodity pricing about beer, you probably should. That's what beer lobbyists proved this year with a successful campaign that translated a fight about obscure commodities markets into something everyone can understand: the price of a can of beer.

In the spring, the Beer Institute, a trade group that represents big brewers including Anheuser-Busch and MillerCoors, ramped up their lobbying in Washington, in an effort to draw attention to the vagaries of the global aluminum market, claiming that big Wall Street firms were taking advantage of obscure metals regulations to drive up the prices.

"Wall Street megabanks should not be able to levy hidden taxes on Main Street beer drinkers," as Sen. Sherrod Brown (D-Ohio) put it in August.

In the months since, lawmakers have called for banks to divest their commodities holdings, regulators and law enforcement agencies have opened investigations, and the Federal Reserve floated the idea of making it more expensive for banks to own physical commodities. Now, the London exchange that runs the aluminum market is changing its policies to address concerns from beer makers and others. It's a case study in how a few American businesses with long-standing household names, and their D.C. lobbyists, can set in motion changes to a global market and cause some of the planet's biggest financial institutions to alter their operations.

So, the aluminum market is a complicated place involving an exchange in London, warehouses all over the world, and buyers with disparate interests -- some are investors, others are using the metal to make stuff. Most of the aluminum bought and sold around the world keys off the price of derivative contracts on the London Metals Exchange, even though the exchange represents a relatively small portion of the market used mostly by bankers and investors. The metal tied to those contracts is stored in a system of warehouses, some of which are owned by banks like Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. Until now, the LME has only required the warehouses to move a relatively small amount of metal out every day, creating long waits that drive up the overall price.

Metal users have complained for years about banks' and trading firms' role in the London Metal Exchange's warehouse system, arguing that storage owners create bottlenecks and artificially raise the prices they pay for metals like aluminum, but they failed to gain traction. Representatives from other companies that use aluminum had met with regulators who oversee derivatives markets at the Commodity Futures Trading Commission and were told the CFTC couldn't help, in part because the exchange was based in London.

But that was before the metal users broke out the big guns -- the Beer lobby.

In the spring, the Beer Institute ramped up pressure on the LME to change its rules and started meeting with Senate staffers, catching the attention of Sen. Brown. On July 9, representatives from the Beer Institute, Miller Coors, the American Beverage Association and others met with different staffers at the CFTC. Suddenly they were told the agency did have some oversight over the LME after all, through a 2001 letter allowing the exchange to trade with U.S. customers.

The following week, the CFTC sent out letters to some warehouse owners telling them to preserve documents, in what turned out to be the beginning stages of an investigation. The Department of Justice later joined in.

At a hearing on July 23, Tim Weiner, a global risk manager with brewer MillerCoors, testified that the lengthy waits to get metal out of LME warehouses in Detroit added $3 billion to the cost of aluminum last year. Sen. Brown and Sen. Elizabeth Warren (D-Mass) used the hearing to raise broader questions about whether banks should own oil pipelines and metals warehouses.

Amid this scrutiny, J.P. Morgan Chase & Co. said on July 27 it was putting its physical commodities operation up for sale. And on July 31, Goldman Sachs Group Inc. conceded to complaints from brewers and others, saying that it would provide immediate delivery of aluminum to warehouse customers.

Sen. Brown praised the move, but said he would continue to push for further changes. On Oct. 24, he and sent a letter to the LME urging it to consider deeper changes to resolve consumers' issues and "avoid further regulatory or Congressional intervention."

On Thursday, LME announced it would change its rules in an effort to shorten the wait time for aluminum users, going further than it had earlier proposed.

"The LME will now have a greater power to investigate and to act to prevent warehouse companies unreasonably incentivizing the formation of queues," Garry Jones, LME's Chief Executive said in a video announcing the changes

Of course, there are forces other than the American beer lobby at work here, including the global commodities market. Part of the reason banks have moved to sell commodities businesses they loaded up on during the financial crisis has to do with falling prices.

And it's unclear whether LME's changes will be enough to appease aluminum users. Big Beer has yet to declare victory.

"The LME announced rule changes today are a move in the right direction, but we believe further reforms could be immediately implemented to return the LME to a proper, free-market function of global aluminum price discovery," a spokeswoman for the Beer Institute said in a statement.

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