Olam to Become One of Top Three Global Cocoa Processors

As the year ends on a major acquisition in ingredients, we ask what is driving this and does it make good business sense? Archer Daniel Midlands (ADM) announced plans to dispose of its cocoa business in July 2013 – a decision driven by volatility in the cocoa market. Cargill purchased the chocolate business in September 2014 but steered clear of cocoa processing due to potential competition issues. This week Olam broke the news of a US$1.3 billion purchase of ADM’s cocoa business – a deal that will catapult Olam to become one of the top three global cocoa processors.

There is no doubt that there is growing demand for cocoa ingredients globally.  Asia-Pacific is currently the third-largest region for cocoa ingredients (liquor, butter and powder) worldwide after Western Europe and North America; however, it is set to become the second-largest region, overtaking North America by 2017, with consumption exceeding 688,000 tonnes. Regional sales are dominated by China, which accounted for 40% of volume sales in 2013, while the second-largest market is India, with 11% of volume.

However, there has been considerable discussion recently on several issues impacting current cocoa supply and speculation of a worsening situation in coming years. Major African cocoa suppliers, such as Ivory Coast, Ghana, and Nigeria are susceptible to drought, plant disease, political instability and a potential outbreak of Ebola. It is no coincidence that cocoa prices have doubled over the past decade.

The acquisition of ADM’s cocoa business by Olam stems from its recognition of a shortfall of processing capacity due to increasing demand, and puts it in a strong position to take advantage of the situation. The deal is expected to be completed in the second quarter of 2015, and certainly appears to be the right move, enabling Olam to compete strongly with Barry Callebaut and Cargill.

 

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