In the biggest deal to roil the cocoa trade in recent years, Olam scooped up a larger rival’s business and catapulted into the top league of cocoa merchants and processors behind Barry Callebaut and Cargill.

For Olam, the reasons are clear: its vast bean sourcing operations stretching from Ivory Coast to Indonesia 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 reshuffling 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 processing capacity to more than 700,000 tonnes, or 16 percent of world supply, 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 four-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, president of MJMB LLC, a private commodity trading company in Newark, Delaware, a supplier of ADM.

Still, the deal brings uncertainty to merchants such as MJMB, suppliers of beans to ADM’s processors, which will become part of what traders said would likely be a more self-sufficient operation, Palabrica said.

Other industry sources noted Olam does not source enough beans to depend solely on its own supply.

“I don’t see Olam walking into that business and saying every supplier from ADM is no longer wanted. They will need much more cocoa than they used to,” a European industry source said.

Opportunity knocks

Wooing ADM was an opportunity Olam could not miss, but convincing 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, according to Gerald Manley, Olam’s managing director and global head of cocoa.

ADM sold its chocolate business to Cargill, which had also been interested in its cocoa processing operations, in September.

The deal underscores the bullish 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 competition increasing on a boon in capacity in Asia.

The deal is the latest in a consolidation spree that has seen volatile 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 director in finance and business development.

The merger widens the gap between these top three processors and the rest of the market. Dealers said such consolidation could reduce price transparency, but were pleased to see the business fall into Olam’s hands rather than Cargill.

The Minnesota-based trade house is already a major player in cocoa processing — and traders feared acquiring ADM’s business would have made it too big.

ADM’s global cocoa business includes a processing facility at Mississauga, Ont., plus two in the Netherlands and one each in Germany, Brazil, Cote d’Ivoire, Ghana and Singapore.

Most of about 1,550 employees in ADM’s cocoa business are to transfer to Olam with the sale, which is expected to close in the second quarter of 2015.

Olam has been open about its bullish forecasts for the cocoa market, projecting a global deficit of more than 120,000 tonnes in the 2014-15 crop year, despite surplus projections from Barry Callebaut and softs broker JSG Commodities.

It repeated those expectations in a briefing on Tuesday, arguing that growing emerging market demand for chocolate would necessitate additional grinding and pressing capacity, despite concerns about over-capacity as some bean processors have cut back on grinding amid high stocks of butter powder.

— Reporting for Reuters by Luc Cohen and Marcy Nicholson in New York. Includes files from AGCanada.com Network staff.

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Peru’s harvest kicked off in April at low-altitude plantations — the most vulnerable to the airborne fungus known as “roya” — and yields in those areas were dramatically lower, said Cesar Rivas, a producer and the former president of the major coffee association Junta Nacional del Cafe.

“Those are the places hit hardest by roya,” said Rivas. “They produced such little coffee that now everyone is waiting for the higher altitudes to make their shipments.”

U.S. importers blame roya for tight local supplies, which they say have lifted differentials for Peru’s “hard bean machine cleaned” coffee to an average of 10 cents over the benchmark contract freight on board, from 7.5 cents less than three weeks ago (all figures US$).

“Exporters are having problems fulfilling their shipment obligations,” said Jorge Figueroa, a coffee specialist with the agriculture ministry. “July shipments are going to be delayed somewhat.”

If the differential rises above 10 cents, it will reach the highest level since June 2011.

Ructions in deliveries, however, may be temporary as farmers harvest crops grown above 1,000 metres, which are less affected by the disease. In addition, the problems come during a seasonally quiet time for the U.S. coffee industry.

Even so, signs of slower deliveries will underscore concerns about supplies after the region’s years-long leaf-rust infestation and a months-long drought parched crops in Brazil, the world’s No. 1 coffee grower, earlier in the year that almost doubled prices in just months.

Beans from Peru, the world’s eighth-biggest coffee producer, are typically sought at this time of year as roasters seek fresh supplies to tide them over until the next harvest from Central American rivals hits the market.

This year those supplies are already running low after the region’s worst-ever roya outbreak.

Coffee exports from Peru plunged 67 per cent in the second quarter year-over-year and were just 3,200 tonnes in June, about a fifth of June 2013, export association Adex data showed.

Forecasts on the impact of roya have varied wildly, increasing uncertainty in the market.

In May, Peru’s government forecast 2014 coffee output would rise by up to 15 per cent this year compared with last year’s roya-hit crop that reached 260,000 tonnes, a 20 per cent drop from the prior year. A local coffee association has said it expects production to fall by 15 per cent this year.

— Mitra Taj and Marcy Nicholson report for Reuters from Lima and New York respectively.

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