Cocoa Beans
Cocoa

Olam?s $1.3 billion deal to buy rival Archer Dan?iels Midland?s cocoa processing business may reduce liquidity in the niche cocoa bean trade, raising con?cerns about volatile prices and a potential shake-up of customer relationships.

Cocoa Beans
Cocoa Beans

In the biggest deal to roil the cocoa trade in recent years, Olam scooped up a larger rival?s busi?ness and catapulted into the top league of cocoa merchants and processors behind Barry Calle?baut and Cargill.
For Olam, the reasons are clear: its vast bean sourcing operations stretching from Ivory Coast to In?donesia will feed newly acquired bean processing assets.
This gives it more control over prices of beans, the butter that gives chocolate a melt-in-the-mouth taste and the powder that goes into cookies and drinks such as hot cocoa.
For merchants and processors who buy beans from Olam in an already tight-knit market, the re?shuffling of the pack is unsettling as it removes a major supplier from the market.
Olam buys around 500,000 tonnes of cocoa annually, and it said it will increase its process?ing capacity to more than 700,000 tonnes, or 16 percent of world sup?ply, with this deal.
They worry that a big portion will likely go to feed its newly acquired eight processing plants that produce powder, butter and liquor as it becomes a net buyer in the 4-million-tonne market.
It could create opportunities for new dealers to fill the void left by the Singapore-based commodity trade house.
But the additional buying could add strain to prices.
This could force users supplied by Olam, including chocolate manufacturers like Mars and Nestle and processors such as Blommer, to look elsewhere for many of their beans.
?It puts the grinders in a sticky situation as they will have to buy larger quantities from smaller firms, thereby increasing their risk,? said John Palabrica, presi?dent of MJMB LLC, a private commodity trading company in Newark, Delaware, a supplier of ADM.
Still, the deal brings uncertain?ty to merchants such as MJMB, suppliers of beans to ADM?s pro?cessors, which will become part of what traders said would likely be a more self-sufficient opera?tion, Palabrica said.
Other industry sources noted Olam does not source enough beans to depend solely on its own supply.
Wooing ADM was an opportu?nity Olam could not miss, but con?vincing its executives who had only recently decided to hold onto the business, which had turned into profitable after a round of cost cutting, took some doing, ac?cording to Gerald Manley, Olam?s managing director and global head of cocoa.
ADM sold its chocolate busi?ness to Cargill, which had also been interested in its cocoa pro?cessing operations, in September.
The deal underscores the bull?ish outlook for cocoa, with more market participants moving downstream.
Some say it is a risky business with margins often squeezed by volatile bean prices and competi?tion increasing on a boon in ca?pacity in Asia.
The deal is the latest in a con?solidation spree that has seen vol?atile prices squeeze margins for dealers, raising questions about the viability of a cocoa trading business lacking any downstream processing or production assets.
?On a combined business, we can even out the volatility,? said A. Shekar, Olam executive direc?tor in finance and business devel?opment.

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