Going cuckoo for LatAm cocoa

Published by Financial Times

“Chocolate” and “shortage” should never appear in the same sentence.

But as the Chinese say, in every crisis, there is opportunity.

And as Chinese taste buds are one of the biggest new drivers of global cocoa demand, it’s apt that a merchant bank focused on trade between China and Latin America has identified cocoa as a “very good bet” for long-term investors.

“China consumes today something like 100g per person per year; Japan consumes 2,000g, and Switzerland consumes 12kg. It doesn’t take a lot to see that China and India and other countries are going to influence the demand of chocolate in the world for the next several decades,” Erik Bethel, partner and cofounder of SinoLatin Capital, told beyondbrics.

He says the dominance of Ivory Coast and Ghana in global cocoa production leaves supply extremely vulnerable to domestic political strife, natural disaster, or a disease such as the witch’s broom fungus, which devastated Brazil’s industry 20 years ago.

Latin America, which gave the world cocoa, is ripe for investment, he argues. Brazil, which produces the most bulk cocoa in the region, is a good option, although supply is driven by subsistence farmers with unreliable access to the latest technology and fertilizers. Ecuador, which now counts cocoa among its top five exports, is another desirable market. Its high-end cocoa varieties appeal to sophisticated buyers the world over, and production for the most part is driven by bigger operations better able to respond to disease or climate threats.

Thanks to the late Hugo Chavez, Venezuela, home to the fabled Criollo Porcelana variety, is still a dream for foreign investors as cocoa is a designated strategic national product, and sold via the government.

Peru and Colombia, both fast-growing economies with a plethora of free trade agreements, also have the right growing climates and conditions to take advantage for growing demand for organic, socially conscious and high flavour cocoa.

SinoLatin Capital also likes Central America. It is currently weighing up an investment in a Nicaragua-based startup to produce about 20,000 tonnes a year. The country’s investment agency has partnered with the World Bank and ECOM Agroindustrial, the third biggest cocoa trader by volume, to make Nicaragua a major cocoa producer.

Meanwhile, Bethel, a Shanghai resident, is cheered by the chocolate aisle of his local supermarket in China, which offers much more variety than a US store, including tiny, $20 bars of Venezuelan Amedei Porcelana chocolate.

“SinoLatin Capital’s team did an analysis of the implications of Chinese chocolate consumption growth on the cocoa market. While the analysis is imperfect – anything multiplied by 1.3bn people tends to skew the data – we believe that if China were at some point to consume even half of the per capita chocolate consumed in neighbouring Japan, the implications would be massive,” he says in a white paper.

“At one half of Japan’s consumption, China per capita numbers would jump from 100g today to around 1,100g… China’s chocolate consumption would grow to roughly 1.5m tons. Depending on the percentage of cocoa used in chocolate, demand for coca beans could rise by an additional 250,000-350,000 tons per year.”