April 20, 2015

Bill Randall Managing Director Pacific Agri-Capital

The cacao industry is in crisis. Soaring demand from emerging market consumers and western appetites for darker chocolate coupled with a structural decline in West African production, where 70% of cacao is produced, have driven cacao prices up 90% since 2005. Mars Inc. and Barry Callebaut, the world’s largest chocolate maker, expect a continued demand/supply imbalance over the medium-term with demand potentially outstripping supply by over 1 million tonnes by 2020. Given this backdrop of growing consumption, and flattened supply, is now the time to invest in the cacao plantation space? We think so.

Who doesn’t like chocolate?

Not many of us apparently… However, liking and buying chocolate products are two different things. Chocolate is a luxury product and its consumption is driven by the increases in income – as gross domestic product (GDP) per capita rises, so does per-capita cacao consumption. The chart below quantifies this relationship.

Chocolate Consumption per Capita vs. GDP per Capita

Given the significant correlation between chocolate consumption growth and GDP per capita growth, the largest factor supporting sustained levels of demand is the continued global economic growth driven primarily by emerging markets. According to Mondelez (formerly Kraft), eight countries, all considered emerging (Brazil, China, Colombia, India, Russia, South Africa, Turkey and Vietnam), drive 70% of the world’s confectionary growth. As can be seen on the chart below, estimated chocolate consumption growth over the next five years will be driven by emerging markets with Africa leading consumption growth per annum at 5% followed by Asia and Oceania at ~4.7% and Latin America at ~3.8%.

Estimated Chocolate Consumption Growth 2015 to 2019 by Region

In addition to GDP per capita growth, cacao demand growth is supported by shifts in consumer tastes towards darker “healthier” chocolate. In the United States, the share of dark chocolate sales increased from 18% in 2008 to 20% in 2013. In Switzerland, the proportion is estimated to have increased from 22% to 30% over the same period of time. This trend is likely to continue as consumers become more aware of the health benefits higher flavanol levels in dark chocolate provide such as improved blood circulation and improved blood pressure levels.

If you believe, as we do, that emerging market growth will continue over the medium and long-term and that consumers will eat more darker and healthier chocolate, then you have to believe that cacao demand will grow meaningfully over that time period.
 

Supply just won’t keep up…

Even at current prices, West African small farmers, which account for 70% of world cacao production are living in destitute poverty. These farmers have extremely low average productivity (due to old and aging cacao trees, low planting densities, and little to no fertilizer application) and a low farmgate price after a margin of 30-50% is taken by government-run industry associations and middlemen. This poverty is a driving cause for many related problems, including poor working conditions, child labor and trafficking, illiteracy and malnutrition. As such, it is no surprise that younger generations are leaving cacao farming all together and moving to urban areas while remaining farmers are planting their lands with other, more profitable crops such as palm oil. In addition, the average cacao crop age has reached a point where replanting is necessary to guarantee yields – and farmers are not replanting. When supply isn’t growing in countries where 70% of cacao is produced, you have a problem.
 

Seizing the opportunity

Pacific Agri Capital is capitalizing on this unique opportunity by developing greenfield cacao plantations in both Colombia and Peru. These two countries offer ideal cacao growing conditions with the perfect levels of rainfall, humidity and sunshine. In addition, both countries allow foreign investors to acquire freehold titled land and have superior infrastructure compared to peer cacao growing countries. In Peru, Pacific Agri Capital was the lead investor in a 3,000 hectare cacao plantation that should, at maturity, generate more than US$7,000 in revenue per hectare and have an operating margin of between 50-60%. The plantation will provide more than 700 stable, full-time, and relatively well-paying jobs in poor rural region of Peru. In Colombia, we are developing a 1,500 hectare plantation for the production of single-origin cacao for export. For us, this is just the start, a 1 million tonne deficit in cacao by 2020 will need to be filled by over 400,000 hectares of high-yielding, well-managed cacao fields or 2 million hectares of cacao grown by small farmers. As cacao plantation investors, we have a long way to go.

Bill Randall is a member of the speaking faculty of Global AgInvesting 2015, April 27-30 at the Waldorf Astoria New York City.

The opinions expressed in this editorial are the author's own and do not reflect the views of GAI News.